COMPENSATION MANAGEMENT

COMPENSATION MANAGEMENT (MBA)

COURSE OVERVIEW

Accurate and updated information is the primary need of any management practice. Study offers one such means of gathering realistic information. A detail Study of such information and its accuracy presents the usefulness of the information. The study of essentials of management thus forms the basis of all organization designs and is one singular most important subject of study for all managers. It also develops an understanding of the built-in errors of common practice.

The aim of this subject is to develop students’ understanding of the concepts of management and practice. In particular the subject is designed to develop the underpinning knowledge and skills required to perform complex management functions and the roles. This subject introduces the student to the basics of management. It familiarizes the students with the practice of various management techniques and it’s expected results. The learner is apprised about the basic principles of management, organization design and structure, strategic management, the theory of leadership, control, decision-making and various aspects of human resource etc.

The students on completion of the course shall develop the following skills and competencies: a. Should know the nature and scope of management b. Knowledge about Planning and Strategic Planning c. Appraisal of the different types of organization structure d. Practice of controlling in organizations e. The role of human resource function f. Role of leadership in organizations

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COMPENSATION MANAGEMENT

SYLLABUS

Unit : Compensation Management
Unit Value: 4 credits Unit Level: S4 Unit Code: MBAHRM-(ii)

Description of Unit
This module will develop a conceptual framework and the issues related to Compensation Management. It reviews the benefits given to the employees and highlights the latest trends in Compensation Management.The module is aimed at developing a greater understanding of its importance in today’s dynamic human resource management environment. fair living wage, basic kinds of wage plans, wage differentials, elements of a good wage plan, , institutional mechanism for wage determination, legalistic framework for wage determination, importance of wage differentials, executive compensation, components of remuneration. Job evaluation and internal equity: nature and objectives of job evaluation, principles of job evaluation program, procedure of job evaluation, basic job evaluation methods, systems, packaged point plans, implementation of evaluated job structure. Principles of External and Internal Differentials Rewards and incentives: determinants of incentives, classification of rewards, incentive payments, objectives of wage incentive schemes, wage incentives in India, types of wage incentive plans, prevalent systems, guidelines for effective incentive plans, non monetary incentives, cafetaria style of compensation, problems of equity; bonus, profit sharing and stock options. Fringe benefits: features of fringe benefits, objectives of fringe benefits and services programme, history and growth factors, coverage of benefits, employee services, fringe benefits in India, benefit programmes for management, administration of benefits and services. Latest Trends in Compensation Compensation surveys, introduction and methodology, uses of compensation surveys, planning compensation for executives and knowledge workers, tax planning, comparative international compensation, downsizing and voluntary retirement scheme, pay restructuring in mergers acquisitions.

Summary of Outcomes
To achieve this unit a student must:
• Examine concepts and issues in employee compensation • Explain essential elements of a sound compensation

structure.
• Summarise principles of external and internal

differentials of compensation
• Analyse latest trends in compensation on national and

international level

Contents
Concept and Issues Role of compensation and rewards in the organisation, objectives of compensation and rewards in the organization, framework of compensation policy, labour market characteristics and pay relatives. Essential Elements Compensation structure and differentials: compensation, reward, wage levels and wage structures, wage determination process, wage administration rules, factors influencing wage and salary structure, principles of wage and salaries administration, theory of wages; subsistence theory, wages fund theory, surplus value theory, residual claimant theory, marginal productivity theory, bargaining theory, behavioural theories, minimum and

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Outcomes and Assessment Criteria
Outcomes 1 Examine concepts and issues in employee compensation Assessment criteria To achieve each outcome a student must demonstrate the ability to: Define key concepts related to compensation in a given organisation Distinguish between the economic and behavioural issues related to compensation Compare compensation policies of two different organisation Define key elements of compensation structure Relate job evaluation to ‘internal equity’ Analyse the role of regulatory bodies associated with wage determination 3 Summarise principles of external and internal differentials of compensation Explain the effect of ‘external equity’ on employee compensation in business organisations Analyse determination of incentives paid to employees Design performance-linked reward system for service organisation Explain effect of tax planning on compensation administration Analyse socio -economic implications of current compensation trends Assess role of M&A on compensation revisions in MNCs

COMPENSATION MANAGEMENT

Academy of Management Executive, Industrial Relations Journal, International Journal of Manpower, California Management Review, Sloan Management Review, Administrative Science Quarterly, Journal of Strategic Information Systems, International Labour Review, Journal of European Industrial Training, Human Relations, British Journal of Management, Journal of Management Development, Journal of Managerial Psychology A variety of videos, which may be useful in covering business communication topics. The business press can be a significant source of information. Companies such as Video Arts However, one of the best sources for information is the World Wide Web sites that can be used for providing information and case studies (eg http://www.bized.ac.uk/ which provides business case studies appropriate for educational purposes). Others are http:// www.businesscases.org/ www.hrmguide.net.

2 Explain essential elements of a sound compensation structure

Suggested Reading
Armstrong, M, Reward Management, Kogan Page Ltd., U.K. Bergman.T.J, Scarpello.V.G, and Hills.F.S., Compensation Decision Making, Dryden Press (1998) Bungess, L.R., Wage and Salary Administration, Charles E.Merril Pub.Co.Columbus (1984) David.B.W, Wage and Salary administration, Prentice Hall, Eaglewood Cliffs (1972) Dunn, J. D., & Rachel, F. M. Wage and Salary Administration: Total Compensation Systems. New York: McGraw-Hill. (1971) Englewood Cliff, New Jersey: Prentice Hall.(1989) Henderson, R, Compensation Management: Rewarding Performance, Prentice Hall (1996) Henderson, R. I. Compensation Management Rewarding Performance, 5th Ed. Kanungo, R N & Mendonca, M, Compensation: Effective Reward Management, 2nd ed., John Wiley & sons (1997) Mamoria.C.B., Gankar.S.V., Personnel Management Text and Cases, Himalaya Publishing House (2002) Martocchio, J. J. Strategic compensation: a human resource management approach. Milkovich, G. T., & Newman, J.M. Compensation, 6th Ed. McGraw- Hill. (1999) New Jersey: Prentice-Hall. (2000)

4 Analyse latest trends in compensation on national and international level

Guidance
Generating Evidence Evidence of outcomes may be in the form of written or oral assignments or tests. The assignments may focus on real problems or case studies. Learning and assessment can be across units, at unit level or at outcome level. Evidence could be at outcome level although opportunities exist for covering more than one outcome in an assignment.

Links
The unit is part of personnel pathway and forms a direct link with other HRM units in the MBA programme, such as, Essentials of Management, Organisational Behaviour, HRM , and other specialisation modules.. Links are also to be found with labour laws

Resources
Journals are a valuable source of information, such as: Harvard Business Review, Human Resource Management Journal, Journal of Management Studies, Personnel Review, International Journal of Human Resource Management, Organisational Dynamics, Journal of Management Sciences,

Delivery
A mixture of lectures to cover basic theory and case studies for class discussion will be used as reinforcement of key concepts
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CONTENT
Unit No. Lesson No. Topic Lesson Plan Course Requirments 1 Lesson 1 Lesson 2 Lesson 3 Lesson 4 2 Lesson 5 Lesson 6 Lesson 7 Lesson 8 Lesson 9 Lesson 10 Lesson 11 Lesson 12 Lesson 13 Lesson 14 Lesson 15 Lesson 16 Lesson 17 Lesson 18 Lesson 19 Lesson 20 Lesson 21 Introduction To Compensation, Rewards, Wage Levels and Wage Structures Introduction to Wage Determination Process and Wage Administration Rules Introduction to Factors Influencing Wage and Salary Structure and Principles of Wage and Salaries Administration Introduction to the Theory of Wages Introduction To Minimum, Fair And Living Wage Introduction To The Minimum Wage Introduction To Basic kinds of Wage Plans Introduction to Wage Differentials & Elements of a Good Wage Plan Introduction to Institutional Mechanism for Wage Determination Legalistic framework for wage determination Introduction to the Importance of Wage differentials and Wage Differentials in India Introduction to Executive Compensation and Components of Remuneration Introduction To Nature and Objectives of Job Evaluation Introduction to Principles and Procedure of job evaluation program Introduction to Basic Job Evaluation Methods/Systems & Packaged Point Plans Introduction To Implementation of Evaluated Job Introduction To Determinants Of Incentives
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Introduction to Compensation and Rewards Objectives of Compensation and Rewards Introduction to framework of Compensation Policy labor market characteristics and pay relatives

3 7 12 20

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

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CONTENT
Lesson 22 3 Lesson 23 Lesson 24 Lesson 25 Lesson 26 Lesson 27 Lesson 28 Lesson 29 Lesson 30 Lesson 31 Lesson 32 Lesson 33 Lesson 34 Lesson 35 4 Lesson 36 Lesson 37 Lesson 38 Lesson 39 Lesson 40 Introduction to Tax Planning Comparative International Compensation Introduction to Downsizing Voluntary Retirement Scheme Pay Restructuring in Mergers and Acquisitions 222 228 236 243 249 Introduction to Wage incentives in India Introduction to Types of Wage Incentive Plans Introduction to Prevalent systems & Guidelines for Effective Incentive Plans Introduction to Non-Monetary Incentives Introduction to Cafetaria Style of Compensation Introduction to Problems of Equity & Bonus Profit Sharing and Stock Options Introduction To Features of fringe benefits, Objectives of fringe benefits and Services Programme Introduction to History and Growth Factors, Coverage of Benefits Introduction to Employee services & Fringe Benefits in India Introduction to Benefit Programs for Management & Administration of Benefits and Services Introduction to Compensation surveys and Methodology Introduction to Planning Compensation for Executives and Knowledge Workers 216 203 211 193 197 188 162 168 174 178 183 146 154 Introduction to Classification of Rewards, Incentive payments and it’s Objectives 138

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Wage Levels and Wage Structures Introduction to Wage Determination Process and Wage Administration Rules Introduction to Factors Influencing Wage and Salary Structure and Principles of Wage and Salaries Administration Introduction To The Theory of wages Introduction To Minimum.5 1.5 Course Pack 2 1. Remarks L* T* S 1 Lesson 1 Role of Compensation and Rewards in the organisation Objectives of Compensation and Rewards Introduction to framework of Compensation Policy Labor Market Characteristics And Pay Relatives Introduction To Compensation.5 1.RAI UNIVERSITY RAI BUSINESS SCHOOL COMPENSATION MANAGEMENT LESSON PLAN Program: MBA Session Year 2 Semester 3 Subject Title : Compensation Management Reference Number of Hours Daily Lesson Schedule Name of the topic as given in RU Syllabus L O A ss ig n. 459. Rewards.5 1.5 - - vi © Copy Right: Rai University 11.5 - Lesson 8 Lesson 9 4 Lesson 10 Lesson 11 Lesson 12 1 2 1 2 2 1.5 2 1. 433.5 1.5 Personnel Management by CB Mamoria/ SVGankar 432. 490 & 491 Lesson 2 Lesson 3 2 Lesson 4 1 1 1.5 Personnel Management by CB Mamoria/ SVGankar Pg 432-458 - - Lesson 5 1 1.622.1 . Fair And Living Wage Tutorial Activity Introduction To Basic kinds of Wage Plans Introduction to Wage Differentials & Elements of a Good Wage Plan 1 1.5 Lesson 6 3 Lesson 7 1 1.5 1. P * G D T T L Title Name of the Book & Author Page no.

P * G D T T L Title Name of the Book & Author Page no.5 2 1.5 1.5 Personnel Management by CB Mamoria SVGankar Pg 403-431 Lesson 17 7 Lesson 18 2 1.5 Course Pack 3 1.5 Introduction To Institutional mechanism for wage determination Legalistic framework for wage determination 2 2 1.5 - 2 1.COMPENSATION MANAGEMENT Reference Number of Hours Daily Lesson Schedule Name of the topic as given in RU Syllabus L O A ss ig n.5 3 3 3 1. Remarks L* T* S 5 Lesson 13 Lesson 14 6 Lesson 15 Introduction to the Importance of Wage differentials and Wage Differentials in India Introduction to Executive Compensation and Components of Remuneration Introduction To Nature and Objectives of Job Evaluation Introduction to Principles and Procedure of job evaluation program Introduction to Basic Job Evaluation Methods/Systems &Packaged Point Plans Introduction To Implementation of Evaluated Job Structure Introduction To Determinants Of Incentives Introduction To Classification of Rewards.1 © Copy Right: Rai University vii .5 - - Lesson 30 3 1.5 1.5 1.5 1.5 Lesson 19 2 1.5 1.5 Course Pack Course Pack Lesson 16 2 1.622. Objectives of fringe benefits and Services Programme 2 1.5 Personnel Management by CB Mamoria SVGankar Pg 459-489 - Lesson 22 9 Lesson 23 Lesson 24 Lesson 25 10 Lesson 26 Lesson 27 Lesson 28 11 Lesson 29 3 1.5 3 3 3 1. Incentive payments and it’s Objectives Introduction To Wage incentives in India Introduction To Types of Wage Incentive Plans Introduction To Prevalent systems & Guidelines for Effective Incentive Plans Introduction To NonMonetary incentives Introduction To Cafetaria style of compensation Introduction To Problems of Equity & Bonus Profit sharing and Stock options Introduction To Features of fringe benefits.5 - Course Pack 11.5 - Lesson 20 8 Lesson 21 2 1.

5 Course Pack 4 4 4 1.5 Lesson 34 13 Lesson 35 Lesson 36 3 1.5 1.5 - 1.5 1.5 T* = Tutorials Hours P* = Practical/Studio Hours viii © Copy Right: Rai University 11.5 - Tutorial Revision Revision Revision Preparatory Leave End term exams 1.5 1. P * G D T T L Title Name of the Book & Author Page no.5 1. Remarks L* T* S Lesson 31 12 Lesson 32 Tutorial Introduction To History And Growth factors.5 1.1 .5 Lesson 33 3 1.5 1.5 Handbook of Reward Management By Michael Armstrong & Helen Murlis Pg 520-524 Lesson 42 16 Lesson 43 Lesson 44 Lesson 45 17 Lesson 46 18 19 -L* = Lecture Hours 1.COMPENSATION MANAGEMENT Reference Number of Hours Daily Lesson Schedule Name of the topic as given in RU Syllabus L O A ss ig n.5 1.5 - Lesson 37 14 Lesson 38 Lesson 39 15 Lesson 40 Lesson 41 4 1.622.5 - 4 4 1. Coverage Of Benefits Introduction To Employee services & Fringe Benefits in India Introduction To Benefit Programs For Management & Administration Of Benefits And Services Tutorial Introduction to Compensation surveys and Methodology Introduction To Planning compensation for executives and knowledge workers Introduction To Tax Planning Comparative International Compensation Introduction To Downsizing Voluntary Retirement Scheme Pay Restructuring in Mergers and Acquisitions 3 1.5 Personnel Management by CB Mamoria/ SVGankar Pg 490-502 - 3 1.

While they are expected to present common solution. highlighting their advantages and defects. etc. All students of the syndicate are expected to submit the assignment individually. They shall be prepared to answer queries raised by the students as well as the faculty members. analysis. and their critical analysis. they have the opportunity to express themselves as individuals and demonstrate their exceptional ability. The Syndicate accomplishes the assignment as under: a. to gain significant knowledge. b. It also helps those who are not as good in the subject as some of their other colleagues are. correctness. e. Presentation. b. d. Completion of the assigned job within the allocated time frame. Different assignment is given to different Syndicate. Research on existing practices. Suggested Solutions. Approach adopted to find solution to a given problem. practicability. use of technology and application of statistical tools. In our system the assignments are executed by the Syndicates. Syndicate It refers to the group of students who are assigned same tasks to be performed. The students may correct the error committed by them while submitting the assignment at the presentation stage. We visualize that the quantum and quality of learning through discussion would be much superior to simple delivery of the course material in the classroom. The team members shall get together to decide at the share of the work. f. © Copy Right: Rai University ix . Communication skills. Group Presentation Most professional courses train their students in developing presentation skills. Commitment to learning. Students may furnish additional data / information downloaded from the Internet/other literature and put up diverse views away from to syndicate solution. Each member of the team gathers the desired data. The students are expected to have gone through the pre-study material and come prepared for discussion. Assignments Each student is expected to submit two assignments per subject during the semester. Ability to take criticism. Regularity to attend classes.622.1 End Semester Examination These examinations are conducted in the usual manner. d. 11. They may recommend deletion/modification/ addition to the syndicate solution. d. All the members of the syndicate are expected to share the presentation of the assignment executed by them. This is a confidential document between the students submitting the assignment and the faculty member. Each member of the Syndicate is expected to participate equally to solve the given problem. which is integrated together to form the project. Each student is expected to meet the attendance requirement of 75% in aggregate. clarity of concept. ability to respond to queries. Ability to present his point view systematically/logically. Recommendation. c. g. Net. The process is intended to identify the following aspects in a student: a. The project report is evaluated for the following: a. Desire to studiously go through the study material and research books. Each student is required to make self and peer evaluation in accordance with a format. b. if any. This helps in inculcating the culture of team work. quality of presentation (Slide / Power point presentation / OHP Film). Integration of the inputs to an unified Syndicate solution Group Project This activity is also aimed at developing the culture of teamwork. etc.COMPENSATION MANAGEMENT COURSE REQUIREMENTS Class Participation It forms the backbone of the system of Continuous evaluation. The system of assignment follows the procedure given below: a. The evaluation is made on the basis of the project report and presentation. c. e. b. Initial discussion to identify the job description. e. Statement of the problem / issues (correctness / quality). c.

though arguably the most risky reason. total quality management. we will initially address the professional. is to provide a supplementary motivating drive for a student to do a particular task. regret or guilt. what we mean to say is “this task is so important that I am giving you something special to ensure that you do it”. lie detectors. The cognitive map which we will jointly pursue has several critical areas: (1) the managerial environment. articles and books have been published which call into question even our most accepted uses of incentives. So most of us who use rewards do so with a hint of reluctance. The most obvious. whistle blowing as well as more traditional management concerns. sexual harassment. Our objective will be to examine a framework for understanding the management of human resources. in the single largest portion of the class. historical. We might use a reward to publicly recognize or draw attention to good work. Recently good studies. This is an exciting and dynamic topic area that encompasses such issues as workforce diversity. if we use a reward to supplement motivation. drug testing. strategies can be developed to meet the human resource management challenge presented by reinvention initiatives. and Second. And. It might be that we wish to draw the student’s own attention to the magnitude of what he has accomplished. we should think about the why we are using our reward. Instead. some bonus must be included to make it worthwhile”. and (3) change and the future. And similarly. in addition. we can avoid many of the most common pitfalls. Do we all need rewards and incentives to be motivated for work? Ask teachers and parents what role rewards and incentives would play in the ideal teaching situation and most of them would admit that ideally they wouldn’t need them at all: that their students would be so motivated to learn and so excited by the process that rewards would be entirely beside the point. By gaining an understanding of appropriate principles and procedures. Finally. We could also use rewards to express respect for the child and our appreciation of exceptionally good work. and sanction of human resources. change and the future of human resource management in government will be probed. and sanction). We wish they weren’t necessary. what we want to say is “this student has accomplished something wonderful”.1 The music itself would provide more than enough satisfaction. video display terminals. First. If we use a sticker-chart to quantify progress as a beginning student polishes up her first “Twinkle Variation”.COMPENSATITION MANAGEMENT INTRODUCTION Human Resource Management The most important “products” in today’s economy are services provided by people. it is important to realize that the message we intend to send with our reward and the message which is actually received by the student might be very different. 11. secondary smoke. But what might be understood by the student and others is “students who have not completed this repertoire are not doing anything worthy of recognition”. Those looking for neat answers to complex questions are likely to be disappointed by any source they consult. However. we are hoping to show the student that although daily improvement might be too slight to see. allocation. development. there is. Are we reducing the enjoyment of the music and the learning process by distracting our students with extrinsic rewards? Are the children going to become more interested in the reward than the musical task undertaken to earn it? Are we turning everything. Next. even the wonderful gift of music-making. allocation. These all seem like perfectly reasonable reasons to consider rewarding a student. AIDS. there are accepted approaches to the subject. it has been called the “last frontier” of management. scholastic goals which include the acquisition of a set of human resource concepts and their application to contemporary issues. This course will be an integrative learning experience by emphasizing two related goals: First. Subjects such as these will be briefly addressed in this course and examined in greater detail in “Issues in Human Resource Management” next year. or objectify. as though he has scaled a mountain and we are encouraging him to enjoy the view. comparable worth. and work context within which human resources are managed. the process of learning. For instance. the © Copy Right: Rai University 1 . development. a graduation award) to call public attention to an accomplishment. some of us worry about the message we are sending with our rewards. (2) the acquisition. In this endeavor it is well to remember that managing human resources is both a science and an art. And we might use a reward system to make tangible.622. But by thoughtfully considering the way in which we use rewards. considerable interest in the field of human resources. Indeed. But it is very easy for the child to get the message that “this task is not worth doing on its own merit. if we use a reward (say. personnel management will be explored as the performance of systemic functions in organizations (acquisition. as the stickers add up real learning is taking place and long-term progress will result. but no single right way. personal career goals which encompass the development of the human resources of this class as well as individual career plans. Accordingly. into a carefully measured economy where every effort and accomplishment is purchased with a sticker? There is good reason to be wary of the role rewards and incentives are used. therefore.

and to his ultimate progress on the instrument. Second. rather than the gimmick used to achieve it. make sure other things are systematically being done to recognize employee performance in the workplace on a daily basis. They are as mentioned belowFirst. month and year of the award to wear as long as he/she works for the company. they may not be the best for motivating today’s employees. At Gregson’s Foods.she already received it earlier this year”. rather than the learning that this is symbolizing. I also learned it was a great administrative burden for managers to nominate someone for the program and a humiliating experience for both the manager and employee if “corporate” subsequently rejected the application. perhaps a reserved parking place and/or a small cash bonus. A program’s reputation can also be tarnished. Motivation is very personal and stems primarily from the interaction between an employee and his or her manager.employee-of-the-month programs still have a place in motivating today’s employees. the honoree also gets a paid day off. over time much of the thrill is often lost. At Acapulco Restaurants in Long Beach. or if we find that interest is primarily in the reward rather than the process which earns it. Even young students can benefit from the explanation that although they will receive a Book 1 graduation ribbon at the recital.1 . and can now play with a beautiful legato style. which many felt was ineffective. and examples and comments concerning individual experiences. not just management. When new. 2 © Copy Right: Rai University 11. for best results. COMPENSATITION MANAGEMENT Many Companies use employee-of-the-month awards.not something that occurs once a month for a single employee. Read on! Do companies really motivate their employees in the real sense for target achievements? If yes then how ? Beware of the Employee of the Month Programs The best motivation comes from daily positive reinforcement by management of desired performance with as many employees as possible . But if used in conjunction with other techniques . and overheard are such things as “Let’s give it to someone in Accounting-they never get it” or “Sally can’t get it . What is motivating to an individual also varies from person to person. Or it might very well help a seven-year-old to hear that a proper bow-hold is SO important to you. that you would be willing to pay him for it for a couple of weeks. but that they struggled to overcome the difficulties they were having with tone.student may get the idea that the repetition and the accumulation of rewards is the primary objective. prevents any misunderstandings. Getting More from a Program If you have to have an employee-of-the-month program. Programs are often too distant and formal to get excited about. a retail grocery chain in Cadlsden. an Employee of the Month program can stimulate much excitement.whenever that happens. In one company I consulted with. Oftentimes the selection criteria for the program aren’t clear. worked very hard at this.622. what you are most proud of is not that they have finished Book 1. and make changes in the program as it begins to feel stale to targeted employees. Variation on employee-of-the-month programs are almost endless.so as to seem like a quota . morale. In other instances the program reaches a saturation point where so many employees have received the award that it no longer seems special. there are more effective ways to improve employee motivation. Probably the easiest way to avoid sending the wrong message is to be aware of the possibility. AL. we need to change tactics quickly! And it certainly wouldn’t hurt to be quite open and up-front with students about why we are using a reward. In the remainder of this newsletter we will look at some of the controversies involved in the use of rewards.and with an awareness of the potential pitfalls . hovever. management was seeking to improve the employee-of-the-month award. Third. By talking with employees. a program can be further improved if it’s not limited to being given one a month . What’s Wrong with Them? It’s difficult to motivate employees through a “program”. We need to be receptive to the student’s possible misinterpretation of our goals in giving rewards. This keeps the program from being biased to favor employees who have greater visibility with management. If we find ourselves bargaining with the student about the reward. I quickly learned that some employees who received the award were not considered deserving by other employees. Fourth. there are some things that can help it be more successful. In summary. This award may include a photograph of the honoree with an engraved nameplate in the lobby of the business. the ways in which many of us are using rewards and incentives. employee-of-the-month programs can be improved if nominations are open to everyone. and encourages him to stay focused on the skill in question. As popular as these programs are. CA. This tells him why you are using the reward. the employee receives a silver name tag inscribed with the title. strive to keep the program fresh and flexible. and initiative than are typically obtained from employee-of-the-month programs.

indirect compensation. i. gross pay) where the individual is entitled to for his job. but may also include a variety of non-monetary rewards or prizes. and affects his ability to recruit and retain a labor force of quality. 2. They can systematically plan for and control their labor costs. as for a service or loss. accident. While the basic wage or pay is the main component of compensation. direct compensation and 2. Its secondary objective is the establishment and maintenance of an equitable labor-cost structure. On the other hand.e. highly skilled jobs are paid more compensation than low skilled jobs.1 © Copy Right: Rai University 3 . An incentive scheme is a plan or a programme to motivate individual or group performance. To the employer because it represents a significant part of his costs. the word Reward or Incentive means anything that attracts an employees’ attention and stimulates him to work. and employer’s required payments for employee welfare as social security. i. The tendency now is towards an increasing mix of pay element of executive compensation has substantially increased in recent years. While benefits come under indirect compensation. To the government because it affects aspects of macroeconomic stability such as employment.622. the employer’s contribution to retirement (pensions). On the other hand. is increasingly important to his employee’s performance and to competitiveness. plus the many kinds of benefits and services that organizations provide their employees. 4. The chances of favoritism (which creep in when wage rates are assigned) are greatly minimized. b. Over-time payments. To the employee because it is fundamental to his standard of living and is a measure of the value of his services or performance.. Money is included under direct compensation (popularly known as basic salary or wage. overtime-work and holiday premium. Compensation represents 11. given or received as payment or reparation.e. This eliminates inequalities. profit sharing and opportunities to purchase stock options. 2. Job sequences and lines of promotion are established wherever they are applicable. fringe benefits and cash and non-cash benefits influence the level of wages or pay because the employer is concerned more about labor costs than wage rates per se. An incentive programme is most frequently built on monetary rewards (incentive pay or monetary bonus). all payments which could be considered incentives to perform work at undesirable times. It is related with wage payment plans which tie wages directly or indirectly to standards of productivity or to the profitability of the organization or to both criteria. inflation. 3. A sound wage and salary administration tries to achieve these objectives: 1. Employees’ morale and motivation are increased because a wage programme can be explained and is based upon facts.e. such as money. 3. and may consist of life. While French says. and health insurance. Compensation or rewards (incentives) can be classified into: 1. To employers: 1. The word Compensation may be defined as money received in the performance of work. 2. Wage and salary payments and merit pay. Premium pay for performing danger tasks. or to work up to or beyond acceptable standards. bonuses based on performance. pay for vacation or illness. purchasing power and socio – economic development in general. the word Reward means something given or received in recompense for worthy behavior or in retribution for evil acts. For employees: Employees are paid according to requirements of their jobs. employee and government. pay for holiday work or differential according to shift. It does not include: 1. an optimal balancing of conflicting personnel interests so that the satisfaction of employees and employers is maximized and conflicts minimized. COMPENSATITION MANAGEMENT In a layman’s language the word Compensation means something.LESSON 1: INTRODUCTION TO COMPENSATION AND REWARDS Learning Objective • • • • UNIT I Understand the meaning of Compensation and Rewards Know the role of Compensation and Rewards Types of Compensation and Rewards Importance and purpose of Compensation and Rewards management in organisations by far the most important and contentious element in the employment relationship. and 3. Basic purpose for establishment of a sound Compensation and Reward administration The basic purpose of establishment of a sound compensation and reward administration is to establish and maintain an equitable compensation structure. i. the term “ Incentive system” has a limited meaning that excludes many kinds of inducements offered to people to perform work. 1. and is of equal interest to the employer.

internal capacity. Tutorial Activity 1. with an emphasis on children’s environment. To recruit persons for a firm. private health care organizations) and improve environmental health conditions in the United States. In addition. in Disease Control Priorities in Developing Countries. they can explain the basis of their wage programme because it is based upon a systematic analysis of job and wage facts. Remain knowledgeable of your employees’ salaries. It attracts qualified employees by ensuring and adequate payment for all the jobs. To control payroll costs. insurance. In dealing with a trade union. and flex schedules. level of autonomy. pizza parties. 5. According to Beach.2 What is the basic purpose behind the establishment of a sound Compensation and Reward administration system in the organizations? Tutorial Activity 1. It enhances an employee’s morale and motivation because adequate and fairly administered wages are basic to his wants and needs. cakes. system capacity. and fractions over pay and iv. NEETF has initiated a healthy schools program to reduce environmental pollutants in schools. To satisfy people to reduce the incidence of quitting grievances. productivity. Familiarize yourself with non-base salary benefits such as paid leave.2.0: The Nature and Role of Health Care Providers in Disease Control This section will focus on the following issues: 1. The National Environmental Education & Training Foundation’s (NEETF) Health & Environment Program provides environmental education and training for health professionals to improve health care and public health. Reward employees with non-monetary rewards such as sincere praise. for achieving milestones. etc. second (DCP2) Charles Hongoro and Charles Normand Section 1. medical and nursing schools. Ensure the job descriptions are current and accurate. Health care system’s response to health care provider problemshealth sector reforms? Common solutions to disparate issues? Where are we getting it wrong? Section 2: Health care provider incentives Tutorial Activity 1. unless the generic job description is a very close match. 4 © Copy Right: Rai University 11. and lunches.1 . The education and experience requirements of the job description must match the generic job description. Develop desk or departmental job descriptions to more clearly define what is done in your particular area. A wage and salary administration reduces the likelihood of friction and grievances over wage inequities. Throw light on the validity of this statement with the help of a corporate example.622. wage and salary programmes have four major purposes: i. and 3. iii. When a job changes significantly or you need to develop a new job.4 Let us study the role of the Supervisor in Compensation Supervisors must be actively involved in discussing the institution’s compensation program with employees. skills and experience.1 Discuss the role and importance of Compensation and Rewards.g. remuneration. funding arrangements. Health system level-issues related to the level of decentralisation. recreational facilities. we believe it is also critical to form partnerships with managed care organizations to incorporate environmental measures into mainstream health care delivery systems. continuing education programs. Respond to employee questions to clarify and resolve issues quickly and efficiently.. Direct your questions to the Benefits Department. 2. Conduct a formal performance review once a year.1 A brief description of health care providers and their role in health systems Health care provider problems. To further protect children’s health. Individual health worker level-issues related to morale/ motivation. etc. “Health Care Providers: The Role of Compensation and Incentives”.5 Let us understand from the case below the role of Compensation and Rewards management with regard to HEALTH CARE PROVIDERS. These will be analysed at three levels: 1. a compensation analyst can assist you to determine if an existing job title/description is suitable. NEETF’s Health & Environment Programs are designed to integrate environmental health into health care provider education and practice settings (e. Review your staff’s salaries at least once every fiscal year in order to determine and make salary changes. Organisational level (including independent individual providers)-issues related to funding methods. regulations. salary range and responsibilities. with a special emphasis on protecting children and other populations disproportionately effected by environmental pollutants. thanks for a job well-done. accountability structures. COMPENSATITION MANAGEMENT Tutorial Activity 1. Use the Job Changes/ Salary Actions and Merit Program guidelines for assistance. Given current trends in the American health care system. To motivate people to perform better. The supervisor’s role in compensation encompasses the following: Ensure employees know their job title.3 Knowledge of the importance of compensation management makes you in becoming a hard core Human Resource manager. informal activities. you should communicate your expectations when employees are promoted or transferred into a new job. 3. etc. Tutorial Activity 1. etc. in addition to working with health care providers. ii. 4. referral hierarchy (role). work environment. retirement.

organisational and individual incentives. flat rate (bonus payment). and the problems associated with doing so will be highlighted. The health system should on one hand be able to support the attainment of positive outcomes of organisational and individual incentives. work environment. implementation.What are Incentives? This will address definitional issues based on a thorough review of literature. Problems associated with each method will be highlighted for example paying for group effort (will draw on concepts of cooperative behaviour. Formal classification (based on theory and evidence) provider compensations.1 © Copy Right: Rai University 5 .g. The focus will be on developing a common view and understanding of the meaning of incentives at both theoretical and operational levels. The need for aligning health system. bonus payments Rationale Increase productivity Design Based on quantitative outputs Incentives Increase volume of activity and not quality Empirical evidence E. accountability. labor migration etc. customs. predicted and observed behaviour. health systems organisation Incentives in practice: This section will draw on empirical evidence of what matters to health care providers in developing countries. Vertical versus integrated programmes. Theoretical and practical arguments for and against use of such methods will be discussed. salary. design. religion. case payments (e. The dimensions of analysis will include rationale. General Practitioners. relationship with other public sector workers.g. Implications of increased demand for health workers in the context of scaling up to MDGs Need for different approaches for different contexts. and traditional healers) 3. Section 3: Health care provider compensations The section will include a description of health care provider compensations in developing countries focussing on individuals (public health workers). The key question to be addressed here is how the design of a diseases control programme influences health care provider incentives and behaviour particularly looking at effects of compensation methods. Two boxes highlighting a success story and a failure will be included in this section. DRGs.0 Is there an optimal combination of health care provider compensation and incentives for DCs? This section will focus on the following issues: Cross cutting issues: linking compensation to performance. and the “prisoner’s dilemma”) This section will highlight what seems to work and what does not -and why using specific examples from both developing and developed countries where appropriate. markets or hierarchies for what types of disease control activities. Formal classification of incentives: to include health system. Example Type of compensatio n E. and a technical paper focusing on a country (Bangladesh) or region. and private) and independent individuals (e. etc. organisational and individual incentives. managerial autonomy over health care providers. culture. Material from this section will draw from literature. per diem. emphasis on strengthening health system incentives that promote appropriate health care provider behaviour.g. The links between types of incentives and disease control priorities will be explored% incentive and objective alignment. global budget. Performance related compensations: This section will be devoted to an analysis of health care compensation methods based on some form of contractual arrangement. input procurement (as a micro-system analysis of the system).1 Current practices on health care provider compensations: types of payments for individuals and organisations or independent private practitioners% fee-for service. A discussion of health system’s capacity to sustain different types of compensation methods. politics and the economy. Each package should include the core elements (see cross-cutting issues) for promoting desired performance behaviour. For example. impact on incentives (incentive alignment issues) and ultimately health care provider behaviour. Examples of vertical and integrated programmes that introduced innovative compensation and incentive structures will be used to demonstrate possible effects of programme design and implementation on health care provider behaviour and draw implications for disease control. 11. management regimes. organisations (public. Compensation methods and sustainability issues.funding arrangements. What Governments Must do and not do To adapt and not to imitate: To put health care provider compensation and incentives to the fore in designing disease control strategies and programmes. capitation. The source of information will be published and unpublished material. This will include issues on working culture. Contextual issues: The context is defined here from an individual and /or organisational view point. The interplay of mechanisms and incentives will be discussed. promoting dual practice as an incentive to public health workers in a poorly monitored or regulated system might not help achieve public health goals.g. and on the other suppress negative or unintended outcomes. and the cost implications of suggested solutions to current provider compensation and payment problems. The distinction between monetary and non-monetary incentives will be made for each of these categories. NGOs. norms and regulations. The notion of different compensation and incentive packages for different contexts.622. This will include a box highlighting a success story or failure in using incentives. regulations. confirmatory evidence but risk of opportunistic COMPENSATITION MANAGEMENT 4. National issues: diversity of perceptions of incentives coloured by contextual issues such as norms.

1 .622. Questions: (1) Discuss the case analysis with respect to compensation and Rewards management. The foregoing will form the basis for suggesting a research agenda that will help further our understanding of the role of health care provider compensation and incentives in disease control in developing countries. COMPENSATITION MANAGEMENT 6 © Copy Right: Rai University 11.The R & D Agenda Based on the literature review and analysis above. this section will devoted to highlighting areas where information is absent or incomplete.

When employees move from declining to growing industries. Effective compensation plans reward performance. or tradition or contract. 2. Objectives of Compensation 1. increasing the wages of the lowest paid employees. 3. skills to benefit form the higher wages paid for skills. pay be related to the relative worth of a job so that similar jobs get similar pay. experience. The provision or availability of financial incentives causes such movement. of instance.a sound wage and salary system considers the legal challenges imposed by the government and ensures the employer’s compliance.a rational compensation system helps the organization obtain and retain workers at a reasonable cost. acquisition and application of skills and so on. Efficiency objectives are reflected in attempts to link to link a part of wages to productivity or profit. Retain current employees. Control costs. protecting real wages (purchasing power). an efficient allocation of labor due to structural changes takes place. Premium wages are sometimes needed to attract applicants already working for others.wage and salary programs should be designed to be managed efficiently. workers could be over paid or under paid. Without effective compensation management. rewards should be regarded as a “payoff” for performance. such movement may be form one geographical location to another or form on job to another (within or outside an enterprise). An incentive plan may consist of both ‘monetary’ and ‘nonmonetary’ elements. which may take several forms. which may often be in conflict with each other.the compensation management system should be easily understood buy human resource specialists. though at what level this consequence would occur is a matter of debate. When it is above market rates the employer attracts job applicants. resulting in higher turnover. Comply with legal regulations. 3. Pay levels must respond to the supply and demand of workers in the labor market since employers compete for workers. Facilitate understanding. They include income distribution through narrowing of inequalities. 2.Employees may quit when compensation levels are not competitive. The objectives can be classified under four broad headings. ij this chapter we will study the objectives of rewards. they do contribute to (or impede) balanced and sustainable economic development. responsibility. An Incentive Plan has the Following Important Objectives 1. Though compensation and compensation policies are only one of the factors which impinge on macro-economic stability. Other Objectives of Compensation: 1. group or individual performance. When an employer’s wages are below market rates employee turnover increases.COMPENSATITION MANAGEMENT LESSON 2: OBJECTIVES OF COMPENSATION AND REWARDS Learning Objective • • Objectives of Compensation and Rewards Determinants of Incentives Introduction to Objectives of Compensation and Rewards After having discussed in the first Chapter the role of compensation and rewards. 7 © Copy Right: Rai University . Efficient allocation of labor in the labor market.1 Objectives of Rewards The use of Incentives or Rewards assumes that people’s actions are related to their skills and ability to achieve important longer-run goals. They may acquire new 11. Arrangements to achieve efficiency may be seen also as being equitable (if they fairly reward performance) or inequitable (if the reward is viewed as unfair). 5. workers may move form a labor surplus or low wage area to a high wage area. Efficiency which is often closely related to equity because the two concepts are not antithetical. 4. Further administrative efficiency. the concept of equal pay for work of equal value compensation management strives for internal and external equity. an inordinately high minimum wage would have an adverse impact on levels of employment. loyalty. Even compensation differentials based on differences in skills or contribution are all related to the concept of equity. 4. Macro economic stability through high employment levels and low inflation. Compensation and Rewards determination may have one or more objectives. allocate rewards on non-performance criteria.pay should reinforce desired behaviors and act as an incentive for those behaviors to occur in the future. Mixed elements can provide the diversity needed to match the needs of individual employees. making optimal use of the HRIS . by choice. Acquire qualified personnel – compensation needs to be high enough to attract applicants. and other behaviors. Reward desired behaviour. External equity means paying workers what comparable workers are paid by other firms in the labor market. The first is equity. although this objective should be a secondary consideration compared with other objectives. Internal equity requires that. Even though many organizations. 2. This implies that employees would move to wherever they receive a net gain. For example.622. operating managers and employees.

praises. What is the minimum amount of opportunity that must be paid to attract and retain employees both in boom and bust times? b. even though employee reaction to incentives vary greatly. non-monetary incentives involve internal motivation. Flow from the business process 2. (ii) The Work Situation: This is made up of four important elements: Technology machine or work system. Discuss the determinants of compensation and Rewards. How much is to be shared is a company-by-company (or business-unit-bybusiness-unit) judgment based on three factors: a. Although this may be seen as “administration savings” or “being competitive in our industry”. and. in general. 4. Determinants of Incentives These feature are contingencies. Tutorial Activity 1. Equity. “ COMPENSATITION MANAGEMENT Tutorial Activity 1.” He makes the following generalizations: i. iv. satisfying value of the goal objects. Incentives. bonuses. work situation. or number of salary points. The timing. greater flexibility in hours worked. a workers’ job may incorporate a number of activities that he finds satisfying. preference value. and incentive plan. Both are important. those creating the compensation system must understand the customer chain. the work process. incentives must have some redeeming merits. marital status. (I and Ill) The Individual and the Incentives: Different people value things differently. However. prizes or trips. are important motivators.2 Let Us Study The Reason That Why Doesn’t Pay Motivate? Most companies have some form of incentive plan. ii. and often all four of these rules: 1. accuracy and frequency of incentives are the very basis of a successful incentive plans. Employees view these things differently because of age. The higher the position of a person in an organization’s hierarchy. tend to increase the level of motivation in a person. Non-financial incentives are linked more closely with higher motivation.3. However. extended vacation time and other privileges that an individual values. non-financial incentives involve only human ingenuity as investment and also insure a relatively stable acceleration in output. whether they are monetary or non-monetary. which affect the suitability and design of incentives to varying degrees. a worker needs to be able to see the connection between his work and rewards. iii. or where we base our pay on what everyone else is doing. Provide sufficient opportunity to retain attention 3. Business Process Whether it is manufacturing the proverbial widget. or merit pay are of the continuous parade of promotion. Directly link actor and the action 4.622. 2. worker considers fairness or reasonableness as part of the exchange (or his work) Incentives.1 . the greater is his vulnerability to non-financial incentives. Money. it really means we are accepting a competitive disadvantage we are actively forgoing a tool of competitive advantage. the reverse holds true. employees are a drain on capital. “While budgetary restrictions and’ temporary improvements in performance place a limit on the potency of money as a motivator. there might be a number of monetary and nonmonetary incentive programmes to motivate employees. Am I wasting my money?” Chances are you are. it can establish range of the incentive. if speed of equipment operation can be varied. the ultimate determinant of the pay opportunity is the value created by the job. gift certificates. These responses provide important reinforcement. economic need and future objectives. The extent to which value is added (or lost) should be shared with employees to provide motivation. How much compensation is necessary to provide a meaningful link between the employee and the business goals? 8 © Copy Right: Rai University 11. Below the subsistence level. Failure to do so results in a “one size fits all” mentality where all employees are treated similarly. It is a judicious mix-up of the two that tends to cement incentives with motivation. Pay Opportunity Although people talk about competitive pay based on scope of job. becoming needs (selfactualization needs) possess greater preference value and are more satisfying than deficiency needs (which are necessary for survival). To the extent a job does not create value. Misra says: “Beyond subsistence level. processing credit card charges or overseeing a multi-product line business. or becoming needs. however. Monetary incentive imply’ external motivation. Be timely Most plans out there violate at least one. incentives must: 1. To provide effective motivation. The effective use of incentives depends on three variables-the individual. Incentives may take the form of earned time-off. provide feedback and encourage redirection. Enlightened managers realize that all people do not attach the same value to monetary incentives. The plan requires that it should be properly communicated to the employees to encourage individual performance. For example. Discuss the objectives of compensation and Rewards. (b) Satisfying job assignments. Feedback. and how and where employees add value.1 1. Financial incentives relate more effectively with basic motivation or deficiency needs. Their effectiveness depends upon three factors: drives. one of the most frequent comments heard is that “my employees aren’t performing any better with the incentive plan than they were before. 2.

Timeliness As Pavlov demonstrated. Ted Buyniski is a Principal with iQuantic. or even.. He manages the East Coast practice from Chester. which removes the employment conditions divide between some of our staff. 3. at worst. Situation One of the mechanisms to support this move has been our approach to pay strategy. monthly. regardless of business cycle.000 staff. a work group which is rewarded based on the number of units shipped. this rapidity is not possible because the process is both uncertain and long – for example a researcher working on a new drug.1 © Copy Right: Rai University .e.”). but which are measurable in a one-year time frame (e. the less useful the reward. because of variable pay systems linked to the value created by the system. In these cases. Buyniski COMPENSATITION MANAGEMENT Tutorial Activity 1. However. Base pay for most employees is less than “competitive” market levels. 4. Unfortunately.c. Theodore R.g. Link the Employee and the Action By tying compensation directly to these the controllable employee actions we provide a critical feedback link. with a six month life. FDA approval. feedback can still be provided on a milestone basis – rewards linked to clinical trials. one-year segments. what 9 Conclusion Pay has the potential to drive performance – in the best companies. the area where there is historically the least timeliness is executive pay. The cornerstone of our approach was to develop the Essex Competency Framework. For example. It is simple and consistent 2.the money spent is.i. As a rule of thumb.g. An annual award cycle eliminates the opportunity to provide feedback on every edition of the product. wasted.622. with a minimum of administrative delay. the actions of a soda truck driver and the price of the company’s stock. measurable link between. Nucor’s employees are both paid above the “market” and receive constant feedback as to their. The Agreement and the approach we used affected our 9. sub optimized. How much of the value added can we afford to share while maintaining a viable business with adequate shareholder return? An example of how incentives have consistently worked to the good is the steel maker Nucor. it does.) the company or the actions employees can actually control to achieve those goals. from free telephone advice and specialist guides to tailor made consultancy services. If there is no clear linkage—no “line of sight” . weekly. then. pay is designed in a vacuum. a compensation and strategic HR consulting firm headquartered in San Francisco. It is based on four Broad Band Grades that have been determined by using the National Job Evaluation Scheme. It fits with the service planning cycle 4. at best... for example. we release a new edition of the product every six months. We also wanted to implement the Single Status Agreement. The principles of the approach are: 1. or measuring financial results without regard to product cycles (e. Depending upon the structure of the plan. meaningful. the longer the delay. We are seeking to move the organisation to a much more customer focused and facing organisation. the feedback will reinforce the actors to align with the business. Process The new system for these staff moves away from automatic service based increments. this results in executives either setting goals which do not clearly relate to adding value. sales past a profitability milestone. This is the flaw in program such as all employee stock options or company wide profit sharing plans. too often. This provides rapid reinforcement feedback. There is no direct. In come situations. In many broad-based incentive plans. We then incorporated this into our individual performance management system. timeliness is critical to rewards. As results become measurable. payout happens quarterly. A member of staff meeting the objectives of their job and their competency statements can expect pay progression 3. less a holdback for defective widgets returned will (ideally): seek ways to speed throughput and shipping. Staff at their maximum pay point undergo performance review and competency development so that further development opportunities can be explored. Essex – Our Approach to Pay Progression Essex County Council has been going through radical change. We offer a range of services to local authorities. as at Nucor. Inc.3 From the case below let us understand the Reward system of this organization: The Employers’ Organization Company Background The Employers’ Organisation for local government’s (EO) role is to help councils achieve the high standards of people management needed to ensure the continuous improvement of services. without focus on either the underlying objectives of 11. “by November create a training program for 1995 implementation. provide feedback to earlier teams to eliminate defects and. then performance is assessed against delivery of objectives . Some of that change has been structural but the more important aspect of the change is cultural. However. feedback pay should follow. although it still uses the national pay spine up to point thirty-four. and their company’s performance. NJ. Within each Band the first increment is automatic. If these are in line with the business process and the goals of the business are communicated. seek product improvements which will increase demand. This sets out the skills and abilities that our staff need to deliver best quality services for the Council. Executive pay is historically focused on “annual incentives: requiring executives to categorize their performance into discrete. This formed the foundation on which we could build our new approach. Development opportunities are available 5. Compensation must be seen as part of the total business process to be successful. etc.

622. An international leader in business relationship software for nearly 15 years. is a privately held company. Each year. We provide guidance and training for managers and staff on how to do this effectively. the service and support solution from FrontRange. social workers. Each of the generic competencies has a defined and prescribed statement for every spinal column point. but most become more demanding the higher the spinal column point. profit or cash flow. This statement comes under the Competency Heading 2 “Customer/Client Orientation” and is the appropriate statement for spinal column point twenty two. Short and long-term incentives for achieving strategic business objectives. Objectives come from the job profile for the individual and the service objectives for the service area.needs to be delivered . FrontRange Solutions Inc. merit pay). how it needs to be delivered. And FrontRange puts its knowledge into practice by providing outstanding customer service to the over 100. A statement from the Competency Framework sets out what needs to be demonstrated by the individual in their role. Call Center Solutions Product of the Year. The professional technical statements are not prescribed because they relate directly to the area of work and the manager will draft these with the individual. motivate and retain the best talent available in the marketplace: Compensation FrontRange Solutions offers its employees a competitive pay package that provides: • • • • Compensation for satisfactory work (base salary. WinMag. Total compensation for an individual employee is determined by four considerations: Internal value of an individual’s position. RealWare Award for CRM. Around six objectives are required for each job and they need to be constructed in a way that is easily measurable.and the demonstration of competencies . as determined through the position evaluation process. the manager will identify the spinal column point for their member of staff as at the first of April. including: Software Magazine “Hot 500. Rewarding Strategy of FrontRange FrontRange Solutions rewards its employees… FrontRange Solutions’ Total Rewards Strategy contains four key components to attract.4 Let us understand the rewarding strategy of another company below- 10 © Copy Right: Rai University 11. which identifies individuals who should be considered for higher levels of responsibility and pay.g. awards). integrated software solutions for the complete lifecycle of business relationships. Individual performance. Rewards for specific individual or team achievements (bonuses. One result: HEAT. FrontRange has earned more than 60 major industry awards. We have a reputation for providing big-company solutions at prices that don’t exclude small organizations. FrontRange’s expertise lies in delivering the highest value. FrontRange Solutions’ products address the needs of customer service and support (help desk). A few of the statements remain the same at all spinal column points. External competitiveness.000 customers and one million plus users.” Call Center CRM Solutions Magazine Editor’s Choice. To ensure internal equity. as measured through strategic business goals.i. Entrepreneur Magazine Best Software. FrontRange Solutions employs more than 500 people worldwide. Front Range Solutions Company Information COMPENSATITION MANAGEMENT Founded in 1989. for example. delivering software that facilitates extraordinary relationship solutions. Questions: (1) What do you understand by the term People Management.e. There is also a Competency Heading entitled Professional and Technical so that job specific competencies are included e. These will be recorded on the appropriate form for the individual together with their agreed objectives for the year. has a 98% customer satisfaction rating as indicated by an independent survey. Local Tutorial Activity 1. (2) What is pay progression and discuss it’s relevance to this case.com WinList Award. For jobs above spinal column point thirty-four and for Members the Competency Framework is used in a different way. although there is general guidance in place to assist the process. Business performance. The objectives are set at the beginning of each review year and can be reviewed and amended. We also use statements from the appropriate four Competency Headings from the Competency Framework plus the Technical Professional Competency. those around equality and diversity. such as earnings per share.” Windows Magazine “Win 100. as established through market surveys of companies we compete with for customers and talent. industry-specific.1 . A database will produce all of the appropriate statements under the selected Competency Heading for that spinal column point. An example is: “Seeks regular feedback from customers about services provided and uses this to recommend continuous improvements to the service”. The selection of the Competency Headings from the Essex Competency Framework may be for individual posts where there are no other similar posts but job families have commonly agreed Competency Headings across the organisation in order that we have consistent levels of service delivery for that function. and InformationWeek Top 50 Application Service Providers. This framework is flexible enough to cover all jobs and roles within the Council including the Member role. positions of similar or equal responsibility will be grouped in the same salary range or band. knowledge management and customer relationship management. as measured by the annual Performance Development Process (PDP). sales force automation (SFA).

Our programs serve two main objectives: 1. Performance is measured in ways that encourage reasonable risk-taking. Employment with our company is an enriching experience that enables employees to achieve their highest potential. Discuss the importance of Workplace Environment with regard to reward management. We also foster diversity among our employees and value the broad spectrum of thought and skills each person brings to FrontRange Solutions. or create an offer or contract of employment. economical manner. retiree health care) that offer economic security after employment. Overall. To provide employees with retirement benefits (pension plans. and support standards and competencies consistent with FrontRange Solutions’ basic values. 4. Questions: 1. Development We believe in helping employees develop to their utmost potential. 2. FrontRange Solutions recognizes that only when a company truly values people can it expect to be prized as an employer. ambitious people. excellence and innovation. the relationship between our company and our employees is governed by respect for the individual and a sense of personal integrity. we will recognize and reward teamwork. COMPENSATITION MANAGEMENT 11. and will provide opportunities consistent with these contributions. Nothing in this website is intended to alter an employee’s at-will status. To protect employees from risks (sickness. Benefits FrontRange Solutions aims to provide private benefits programs that supplement or enhance mandatory plans available in the various locations where we do business. we cannot rely on external recruiting as a primary source of talent.1 © Copy Right: Rai University 11 . Workplace Environment FrontRange Solutions is committed to creating an environment that attracts and rewards talented. What do you understand by the term employee benefits and throw light on the nature of benefits provided by FrontRange to it’s employees. Discuss on the nature of pay package offered by FrontRange. To that end. and 2. To the extent permitted by applicable law. Given the unique nature of FrontRange Solutions’ business. accidents. Our goal is to give employees a variety of benefits choices and to deliver these benefits in a tax-effective. 3. FrontRange Solutions retains employees on an at-will basis. savings plans. Discuss the Rewarding Strategy of FrontRange. disability) that may result in substantial economic loss. foster an awareness of personal accountability.622.programs should complement FrontRange Solutions overall pay philosophy and avoid duplication of global initiatives.so we have developed those critical skills internally.

will provide the needed direction. Many are also seeking more balance in their life. This is the equity issue. A motivated employee will achieve a great deal.COMPENSATITION MANAGEMENT LESSON 3: INTRODUCTION TO FRAMEWORK OF COMPENSATION POLICY Learning Objective • • Introduction to the concept of Framework Understanding the Framework of a Compensation Policy Introduction to Compensation Framework and Classification A compensation framework that supports a long term strategic vision for compensation and implements new initiatives. And Emphasize transparency. It is possible to develop a simple structure that overcomes the difficulties of the past. yet is simple enough for everyone in the organisation to understand. or receipt of either financial or non-financial rewards may also influence motivation. Sometimes this is shown in employee turnover. have had a big impact. Senior managers will also have authority to approve the classification levels of pre-identified jobs within their organization. non-financially in terms of recognition. particularly where job requirements can change rapidly. Move from being highly centralized to a decentralized approach whereby deputy ministers and senior mangers will have increased authority to make decisions. including better performance appraisal mechanisms. a multitude of different salary and pay arrangements exist.622. Employees want the rewards to be shared fairly and equitably. leading organisations will need to establish an improved salary administration structure. Rewards and remuneration must be scrutinised.In some organisations. It needs to be seen by both the employee and organisation as fair and equitable. in relation to the overall contribution made. Constant change and high expectations are taking their toll in some organisations. the status of full private use of a motor vehicle. Senior mangers will approve. It is time to bring these different systems into a new framework. The best performance appraisal system in the world will not work if it is linked to a rewards and remuneration system that employees do not trust or support. ‘promise of’. based on sound business decisions. focus on a long term approach to compensation management. If they are not. Tutorial Activity 1. reporting and accountability. It involves matching remuneration with the contribution made. This performance management article applies to all organisations. Some industry’s remuneration systems have been dominated by the industrial relations system. Good salary administration requires that 11. status and esteem.Motivation influences performance. This structure can be tied to a completely new performance management approach. Employee motivation and performance are critical. financially and otherwise. The new system will have increased delegation to managers and will be driven by the business needs of Government and ministries.Many employees make a New Year’s resolution to seek other employment. If they haven’t done so already. exceptional compensation changes. A good rewards and remuneration system ensures that each person receives appropriate financial and nonfinancial recognition to account for the personal contribution they are making and the overall value of their position to the organisation. It also suggests that the ‘lack of’. A demotivated employee will be slow. Sometimes it is hidden because of job insecurity. Recognising and rewarding individual and team performance. with each potentially impacting the other.2 Achieving Fair financial and Non-Financial Rewards Employee motivation and performance management depend on good systems that offer both financial and non-financial rewards (non-monetary rewards). systems and support. and will be profiled with the required tools. This includes: Creating and maintaining an organisational structure and culture that facilitates both employee and organisational performance. more efficient and eliminate duplication. in terms of cash and benefits received. Enterprise bargaining and local area work agreements. regardless of their level within the organisation. e. dissatisfaction can cause severe morale and performance problems. Implementing compensation systems that fairly treat and recognise all employees. within the framework. It will be faster. Tutorial Activity 1. changes will involve moving towards solving special salary problems using innovative concepts. Integrate compensation with the other areas of human resource management. and the effect of competition on organisational structures.g. Non-monetary rewards can be as important as monetary rewards. prone to error and not likely to achieve. as well as in industry and government generally. Remuneration is a component of both financial and non-financial reward.1 What do you understand by the term Framework of Compensation Policy and discuss the variables determining the framework of a compensation policy. Managers will have more accountability for the compensation of their employees. Job evaluation is a process to determine the contribution of a position to an organisation. A feedback loop between motivation and performance exists.1 12 © Copy Right: Rai University . The way we do compensation is undergoing major change towards a more flexible and timely corporate compensation systems. Employees at all levels need to have confidence in the salary administration system. monitoring. individual performance based contracts. The vision for compensation will assist the pubic service in attracting and retaining key employees. financially.

annual base salary is augmented through internal sources. If the current system is not working as intended. University of Minnesota Approved by the : Faculty Senate on February 18. the impact on the employee is significant. Position value and remuneration is fairly evaluated and nearly all are well compensated. However. a work ethic exists and they do some work. 3 Employees are unhappy and comment frequently about the remuneration system that is supposed to be in place but doesn’t work. 6 Employees believe the remuneration system only works for ‘management’. Past pay systems often paid little attention to incentives.The concept of fair incentives should be on the agenda. 5 Employees are aware of a remuneration system but do not see it working for them. 7 Some employees believe the remuneration system is working.considered along with financial rewards? The system should not be bureaucratic. If organisations handle this incorrectly. research and scholarship. then the organisation has a real problem. Derek Stockley employees should receive financial recognition for the contribution that they make. Where do you rate your system on a scale of 1 to 10? 1 Employees are showing their total disenchantment by leaving as quickly as they can. 2 Employees are unhappy and grumble frequently about the non-existence of a remuneration system. but they do not like it.3 Let us study the case below with regard to framework of compensation policy at University at Minnesota. Higher achievement will come from better implementation. comprehensive description of each position? Is the evaluation system used soundly based and rigorously applied? Is consideration given to market competitiveness in setting the remuneration range? Is the performance appraisal system well designed and accepted by all employees? Is the review process conducted fairly and within agreed time limits? As well as checking goal achievement.622. 1993 Accepted and Implemented by the: Administration on April 26. It also has to be actually administered fairly. 4 Employees believe that ‘management’ controls and manipulates the system. health and dental coverage. The system is reviewed regularly. and that positions of equal value should be entitled to equal compensation. Position value and remuneration is fairly evaluated and most are well compensated. Perception is the reality. and life and disability insurance. Morale and motivation are nonexistent. Individual and team contributions are recognised. 8 A comprehensive system is in place. 1993 Action by the: Board of Regents . 10 Everyone from the CEO down believes that the remuneration system is working well and being equitably administered. They continue on regardless.1 © Copy Right: Rai University 13 . Individual and team contributions are recognised and rewarded accordingly. but it has to be perceived as fair.An integrated system is required such as the following diagram represents. They openly talk about the problems instead of getting on with their work. Although some would like more pay. Areas for improvement are recognising individual and team contributions fairly. including retirement. In some instances. and service to the institution and the state/region/nation/other nations. Total compensation includes annual base salary plus fringe benefits. 9 A comprehensive system is in place. Some key questions: Does the documentation give a full. It causes some dissatisfaction. It is only in recent years that some systems have provided for differentiation based on performance.no approval required Faculty Compensation Policy Background On Compensation At The University Of Minnesota Faculty are compensated for their contributions to teaching and advising. such 11. or manipulate it in some way. no one is unhappy with the system. others believe it could be better targeted to their particular situation. They are motivated and productive. as well as their professions. does the review reconsider the job and changes that may have occurred? Are non-financial rewards COMPENSATITION MANAGEMENT Tutorial Activity 1.

Allocation Format Each year the annual salary increase pool for meritorious performance received by the unit will be distributed based on the criteria specified in the University’s Regulations Concerning Faculty Tenure and appropriate departmental faculty evaluation documents. and service over the course of the faculty member’s academic career. CalPERS feels it will benefit shareowners in the long-term if shareowners can provide an enhanced level of oversight in relation to Compensation Committee actions. annual base salary is supplemented with summer school or other internal summer employment. The dean will set aside. outstanding discipline-related service contributions will also be taken into account where they are an integral part of the mission of the academic unit. formats. The criteria for determining salary increases must be similar to those used for promotion and tenure. to review his or her performance. should be rewarded by the compensation system. Normally. color. sex. Unsatisfactory performance. Increases to annual base salary for faculty occur in the following ways: through annually determined merit increases. Company Background The purpose of CalPERS’ policies on executive compensation is to raise the level of accountability of Boards and Compensation Committees to shareowners. © Copy Right: Rai University 11. the appropriate vice president. This process must include the provision that the department chair (unit leader) meet with each faculty member individually.1 . It is understood that the dean may also set aside funds from this overall pool to address special merit or retention purposes. salary disparity among units. Faculty Involvement Faculty input into the discussions surrounding criteria and procedures for salary increase determination is essential to maintaining an equitable and collegial environment. the faculty must have the opportunity to develop the criteria for. with floors establish for the instructor and assistant professor ranks only. but each of the criteria must be considered in every decision. Initial salary offers. and the format of. The tenure and promotion regulations of the University. where appropriate.g. veteran status. from those funds provided to his/her unit for salary increase distribution. The primary criteria for demonstrating this potential are effectiveness in teaching and professional distinction in research.500 increase in base salary and promotion from associate professor to professor will be accompanied by an extraordinary $2. Initial annual base salary is negotiated at the time of hire. Annual base salary may also be supplemented internally during one’s contract period through means such as extension teaching.The documents that describe these criteria. Criteria for Annual Salary Increases and Promotion Any salary determination process at the University of Minnesota must be nondiscriminatory. For many faculty. With the administrator of each unit. 4 or 5 years) that would include outside evaluations. sexual preference. or from external sources in the case of approved external consulting. adopted in 1985. through an augmentation attached to an administrative title or a set of administrative duties. and processes 14 shall be shared with the college dean. creed. This results in more shareowner friendly compensation programs. It is intended that this promotion increment will receive inflation-related increases in future years. minimum salary levels for associate and full professors. and retention offers may not be based on considerations related to the race. religion.000 increase in base salary. Other Recommendations A standing administrative and faculty compensation committee (including representatives of the Senate Faculty Affairs Committee) will examine and make recommendations on policies such as salary levels in the University as a whole. which shall be documented and communicated to the individual involved. It is intended that these promotional increments will be in addition to the annual salary increase award related to meritorious performance. shall serve as justification for withholding an individual’s increase. The relative importance of the criteria may vary in different academic units.622. national origin. public assistance status. The process must encourage continued good or improved performance. and finally the Senior Vice President for Academic Affairs. Promotion Increases Beginning with the 1993-94 salary year. Units may choose to conduct more in depth evaluations on a periodic basis (e. the process through which annual salary increases are determined. The sessions shall review the past year’s performance and offer suggestions for enhancing productivity. sufficient funds to cover these promotional increments. such as grant research. new salaries go into effect for A base faculty on July 1 and for B base faculty on September 16 of each year. periodic increases. or age of the person being considered. through acceptance of a retention offer that includes an increase.4 Calipers” Let us analyse the Executive Compensation Framework policy with regard to the organization CALIPERS’. COMPENSATITION MANAGEMENT Tutorial Activity 1. in conjunction with a promotion in rank and/or the awarding of indefinite tenure. which in turn. The salary determination process must provide an objective unbiased evaluation of each faculty member following a thorough review of his/her work. at least once per year.as overload teaching. and salary compression. promotion from assistant professor to associate professor will be accompanied by an extraordinary $1. research. provide the following instructions which form the framework within which salary decisions must be made: General Criteria The basis for awarding indefinite tenure is the determination that the achievements of an individual have demonstrated the individual’s potential to continue to contribute significantly to the mission of the University and to its programs of teaching. marital status.

The policy should clearly articulate how the company ensures optimal alignment of interests with shareowners through the design and implementation of its executive compensation program. In addition to the relative mix of base salary and any form of incentive compensation. CalPERS believes shareowners should provide stronger oversight of executive compensation programs. Companies under new SEC guidelines must provide shareowners the opportunity to vote on any material revisions to these plans. with adequate information to judge the “drivers” of incentive components of compensation packages. for the NYSE and NASDAQ. 2003 as listing standards. companies must give shareowners the opportunity to vote on all equity compensation plans and material revisions (with limited exemptions). This section should include adequate detail to shareowners regarding the company’s philosophy of base pay components versus “pay at risk” components of the program. CalPERS believes that optimal plan design will utilize multiple performance metrics in a fashion that will tie small portions of vesting to individual metrics or larger portions of vesting to multiple metrics. The policy should include the company’s philosophy related to the major components of incentive compensation. Since SEC’s Release #34-48108. Executive contracts should be fully disclosed. as well as align their interests with those of shareowners. including severance packages. premium-priced options and performance targets tied to company-specific metrics.CalPERS believes that in the case of option plans and restricted stock. adopted on June 30. In recognition of this. CalPERS developed a model policy guideline designed to assist companies in formulating executive compensation policies. and the relative mix of how performance metrics will be weighted. Overall targets of total compensation should also be provided. CalPERS suggests using metrics such as Return on Invested Capital (ROIC). retain and motivate key employees. This also provides a framework by which interested parties may gauge the quality of company specific executive compensation programs and practices. executive compensation policies should contain. including the strengths and weaknesses of each and how the overall incentive component of the plan provides optimal alignment of interests with shareowners. yet broad enough to permit the Compensation Committee flexibility in implementing the policy. key methodologies to ensure alignment of interest.The policy should include the specific drivers the company will use in constructing the performancebased components of the plan.This section should also provide an overview of how the company intends to structure the compensation program. Timeaccelerated vesting is not considered a meaningful performance-based hurdle. Details should include reasonable ranges based on total compensation within which the company will target base salary as well as other components of total compensation.Compensation programs are one of the most powerful tools available to companies to attract. The company’s intended forms of incentive and bonus compensation. 2. the targeted mix of base compensation and “at risk” compensation. and should include provisions by which options will not vest if hurdles are not obtained. and Return on Equity (ROE). the following components: 1. the plan should require that each component be satisfied to achieve vesting as opposed to one of several that must be achieved. including what types of measures will be used to drive incentive compensation. The company’s desired mix of base. Return on Assets (ROA). With this in mind companies should design executive compensation policies to be comprehensive enough to provide shareowners with oversight of how the company will design and implement compensation programs. 3. well-designed compensation packages may help align management with owners and drive long-term superior performance. Executive compensation should be comprised of a combination of cash and equity-based compensation. CalPERS does not believe that it is optimal for shareowners to approve individual contracts at the company specific level.622. at a minimum. General Policy Guidelines Executive compensation programs should be designed and implemented to ensure alignment of interest of management with the long-term interest of shareowners. a significant portion of the overall program should consist of performance-based plans.1 © Copy Right: Rai University 15 . CalPERS’ believes that companies should formulate executive compensation policies and seek shareowner approval for those policies on a periodic basis. The policies should contain. Executive compensation policies should be transparent to shareowners. at a minimum. The ability to vote on these plans provides the checks and balances on the potential dilution resulting from earmarking shares for equity-based awards. bonus and long-term incentive compensation. compensation philosophy. Conversely. Since equity owners have a strong interest in longterm performance and are the party whose interests are diluted by stock option plans. and parameters for guidance of employment contract provisions. the company should provide a breakdown of the types of incentive compensation and reasonable ranges based on total compensation targets for each type of incentive compensation within the program. These include index-based options. CalPERS believes that if metrics are used in combination. Direct ownership should be strongly encouraged. Poorly designed compensation packages may have disastrous impacts on the company and its shareowners by incentivising short-term oriented and self -interested behavior. Performance-based plans should be constructed to reward true out-performance. such as how much of overall compensation is based on peer relative analysis and how much of it is based on other criteria. Executive Compensation Policies In particular. The company’s intended distribution of equity-based compensation COMPENSATITION MANAGEMENT 11.

The policy should provide broad guidelines by which the company will use alternative forms of compensation. 4.(e) a clear description of what would and would not constitute termination for cause. such as how much of overall compensation is based on peer relative analysis and how much of it is based on other criteria. For example. 6. Direct ownership should be strongly encouraged. at a minimum. Executive compensation policies should be transparent to shareowners. and the relative weight in relation to overall compensation if “other” forms of compensation will be utilized. the company should provide a breakdown of the types of incentive compensation and reasonable ranges based on total compensation targets for each type of incentive compensation within the program. Other forms of compensation include but are not limited to pension benefits. The policy should include the company’s philosophy related to the major components of incentive compensation. In some cases. CalPERS is strongly opposed to severance agreements that allow management to benefit from under performance.The term and length for “other” forms of compensation should be disclosed. (d) any hurdles or triggers that will affect the agreements. compensation philosophy. the following components: 1. The company’s intended forms of incentive and bonus compensation. bonus and long-term incentive compensation. In cases where the company will consider severance agreements. Companies under new SEC guidelines must provide shareowners the opportunity to vote on any material revisions to these plans. Executive Compensation Policies In particular. key methodologies to ensure alignment of interest.1 . and (f) disclosure of where investors can view the entire text of severance agreements. The parameters by which the company will use severance packages. Executive contracts should be fully disclosed. it should clearly articulate its philosophy for utilizing these tools with specific treatment of how shareowners should expect to realize value from including these forms of compensation. The policy should include a definitive statement related to how the company views severance agreements. the policy should contain the overall parameters of how they will be used including:(a) specific detail regarding the positions within the company that may receive severance agreements. other forms of compensation can provide significant value to executives which are not readily comparable to more basic forms of compensation such as salary. Other forms of compensation are also more likely to be perceived by shareowners as not providing meaningful alignment of interests or incentive value. executive compensation policies should contain.This section should also provide an overview of how the company intends to structure the compensation program. perquisites and loans. including severance packages.The policy should include the company’s philosophy related to how equity-based compensation will be distributed within various levels of the company. This section should include adequate detail to shareowners regarding the company’s philosophy of base pay components versus “pay at risk” components of the program.CalPERS believes that in the case of option plans and restricted stock. The parameters by which the company will utilize “other” forms of compensation. 5. Executive compensation programs should be designed and implemented to ensure alignment of interest of management with the long-term interest of shareowners. The policy should clearly articulate how the company ensures optimal alignment of interests with shareowners through the design and implementation of its executive compensation program. The policies should contain. the targeted mix of base compensation and “at risk” compensation. The company’s philosophy relating to the dilution of existing equity owners In the event that the company uses equity-based tools in its compensation program. and should include provisions by which COMPENSATITION MANAGEMENT 16 © Copy Right: Rai University 11. if at all. with adequate information to judge the “drivers” of incentive components of compensation packages. the company should provide a detailed plan with each option program addressing the intended life of the plan and the yearly run rate. Overall targets of total compensation should also be provided. the plan should clearly articulate how the repurchase decision is made in relation to other capital allocation alternatives. These include index-based options. at a minimum.Executive compensation should be comprised of a combination of cash and equity-based compensation.622. If the company intends to repurchase equity in response to the issue of dilution. this should be clearly stated. If the company will not enter into severance agreements. CalPERS does not favorably view repurchase plans that are simply targeted to mitigate and obfuscate dilution caused by stock option plans. 2. In addition to the relative mix of base salary and any form of incentive compensation. a significant portion of the overall program should consist of performance-based plans. Details should include reasonable ranges based on total compensation within which the company will target base salary as well as other components of total compensation. the policy should articulate how the company will address the issue of dilution. and parameters for guidance of employment contract provisions. if at all. including the strengths and weaknesses of each and how the overall incentive component of the plan provides optimal alignment of interests with shareowners. deferred pay. To the degree that the company will provide other forms of compensation. Performance-based plans should be constructed to reward true out-performance. (c) provisions by which the agreements will be reviewed and renewed. including what types of measures will be used to drive incentive compensation. premium-priced options and performance targets tied to company-specific metrics.The policy should also include a definitive time frame in which the company will disclose any material amendments made to severance agreements.(b) the maximum periods covered by the agreements. bonus and incentive. The company’s desired mix of base.

The policy should include the specific drivers the company will use in constructing the performancebased components of the plan. d. Calipers does not favorably view repurchase plans that are simply targeted to mitigate and obfuscate dilution caused by stock option plans. The policy should also include a definitive time frame in which the company will disclose any material amendments made to severance agreements. The policy should provide broad guidelines by which the company will use alternative forms of compensation. which are not readily comparable to more basic forms of compensation such as salary. Direct ownership should be strongly encouraged. executive compensation policies should contain. the company should provide a detailed plan with each option program addressing the intended life of the plan and the yearly run rate. For example. and parameters for guidance of employment contract provisions. CalPERS are strongly opposed to severance agreements that allow management to benefit from under performance. and Return on Equity (ROE).Other forms of compensation are also more likely to be perceived by shareowners as not providing meaningful alignment of interests or incentive value. bonus and long-term incentive compensation. f. Executive contracts should be fully disclosed. compensation philosophy. Overall targets of total compensation should also be provided. the plan should clearly articulate how the repurchase decision is made in relation to other capital allocation alternatives. the policy should articulate how the company will address the issue of dilution. The company’s desired mix of base. The company’s philosophy relating to the dilution of existing equity owners In the event that the company uses equity-based tools in its compensation program. Other forms of compensation include but are not limited to pension benefits. the targeted mix of base compensation and “at risk” compensation. 6. the policy should contain the overall parameters of how they will be used including: a.This section should also provide an overview of how the company intends to structure the compensation program. In cases where the company will consider severance agreements. if at all. Companies under new SEC guidelines must provide shareowners the opportunity to vote on any material revisions to these plans. e. the following components: 1. and the relative mix of how performance metrics will be weighted. any hurdles or triggers that will affect the agreements.options will not vest if hurdles are not obtained. The company’s intended distribution of equity-based compensationThe policy should include the company’s philosophy related to how equity-based compensation will be distributed within various levels of the company. at a minimum. CalPERS believes that optimal plan design will utilize multiple performance metrics in a fashion that will tie small portions of vesting to individual metrics or larger portions of vesting to multiple metrics. 3. If the company will not enter into severance agreements. a clear description of what would and would not constitute termination for cause. including severance packages. perquisites and loans.The term and length for “other” forms of compensation should be disclosed. b.622. Details should include reasonable ranges based on total compensation within which the company will target base salary as well as other components of total compensation. it should clearly articulate its philosophy for utilizing these tools with specific treatment of how shareowners should expect to realize value from including these forms of compensation. and the relative weight in relation to overall compensation if “other” forms of compensation will be utilized. The parameters by which the company will utilize “other” forms of compensation.1 © Copy Right: Rai University 17 . CalPERS believes that if metrics are used in combination.Executive compensation should be comprised of a combination of cash and equity-based compensation. Executive compensation policies should be transparent to shareowners. other forms of compensation can provide significant value to executives. The parameters by which the company will use severance packages. Return on Assets (ROA). if at all. Executive compensation programs should be designed and implemented to ensure alignment of interest of management with the long-term interest of shareowners. COMPENSATITION MANAGEMENT 11. The policies should contain. c. the maximum periods covered by the agreements. Timeaccelerated vesting is not considered a meaningful performance-based hurdle. such as how much of overall compensation is based on peer relative analysis and how much of it is based on other criteria. The policy should include a definitive statement related to how the company views severance agreements. The policy should clearly articulate how the company ensures optimal alignment of interests with shareowners through the design and implementation of its executive compensation program. at a minimum. this should be clearly stated. Executive Compensation Policies In particular. provisions by which the agreements will be reviewed and renewed. bonus and incentive. In some cases. If the company intends to repurchase equity in response to the issue of dilution. specific detail regarding the positions within the company that may receive severance agreements. key methodologies to ensure alignment of interest. and disclosure of where investors can view the entire text of severance agreements. 5. 4. the plan should require that each component be satisfied to achieve vesting as opposed to one of several that must be achieved. with adequate information to judge the “drivers” of incentive components of compensation packages. This section should include adequate detail to shareowners regarding the company’s philosophy of base pay components versus “pay at risk” components of the program. To the degree that the company will provide other forms of compensation. CalPERS suggests using metrics such as Return on Invested Capital (ROIC). deferred pay.

The policy should include a definitive statement related to how the company views severance agreements. the company should provide a breakdown of the types of incentive compensation and reasonable ranges based on total compensation targets for each type of incentive compensation within the program. Executive compensation programs should be designed and implemented to ensure alignment of interest of management with the long-term interest of shareowners.2. other forms of compensation can provide significant value to executives. including the strengths and weaknesses of each and how the overall incentive component of the plan provides optimal alignment of interests with shareowners. perquisites and loans. provisions by which the agreements will be reviewed and renewed. Executive compensation policies should be transparent to shareowners. If the company intends to repurchase equity in response to the issue of dilution. f. key methodologies to ensure alignment of interest. including what types of measures will be used to drive incentive compensation. The policy should provide broad guidelines by which the company will use alternative forms of compensation. The policy should include the company’s philosophy related to the major components of incentive compensation. The company’s intended forms of incentive and bonus compensation. In addition to the relative mix of base salary and any form of incentive compensation. Calipers does not favorably view repurchase plans that are simply targeted to mitigate and obfuscate dilution caused by stock option plans. Timeaccelerated vesting is not considered a meaningful performance-based hurdle. c. 4. and should include provisions by which options will not vest if hurdles are not obtained. Other forms of compensation are also more likely to be perceived by shareowners as not providing meaningful alignment of interests or incentive value. 3. the maximum periods covered by the agreements.1 . a clear description of what would and would not constitute termination for cause. the company should provide a detailed plan with each option program addressing the intended life of the plan and the yearly run rate. at a minimum. specific detail regarding the positions within the company that may receive severance agreements. the plan should clearly articulate how the repurchase decision is made in relation to other capital allocation alternatives. and the relative mix of how performance metrics will be weighted. CalPERS believes that optimal plan design will utilize multiple performance metrics in a fashion that will tie small portions of vesting to individual metrics or larger portions of vesting to multiple metrics. and parameters for guidance of employment contract provisions. if at all. In cases where the company will consider severance agreements. The company’s intended distribution of equity-based compensation The policy should include the company’s philosophy related to how equity-based compensation will be distributed within various levels of the company. CalPERS suggests using metrics such as Return on Invested Capital (ROIC). including severance packages. To the degree that the company will provide other forms of compensation. e. In some cases. compensation philosophy. deferred pay.The policy should include the specific drivers the company will use in constructing the performancebased components of the plan. the policy should contain the overall parameters of how they will be used including: a. These include index-based options. 6. COMPENSATITION MANAGEMENT 18 © Copy Right: Rai University 11. it should clearly articulate its philosophy for utilizing these tools with specific treatment of how shareowners should expect to realize value from including these forms of compensation.622. The parameters by which the company will use severance packages. Other forms of compensation include but are not limited to pension benefits. 5.The policy should also include a definitive time frame in which the company will disclose any material amendments made to severance agreements. The parameters by which the company will utilize “other” forms of compensation. any hurdles or triggers that will affect the agreements. If the company will not enter into severance agreements. b. this should be clearly stated. a significant portion of the overall program should consist of performance-based plans.CalPERS believes that in the case of option plans and restricted stock. The term and length for “other” forms of compensation should be disclosed. The policies should contain. the plan should require that each component be satisfied to achieve vesting as opposed to one of several that must be achieved. bonus and incentive. CalPERS are strongly opposed to severance agreements that allow management to benefit from under performance. if at all. CalPERS believes that if metrics are used in combination. Executive compensation should be comprised of a combination of cash and equity-based compensation. and disclosure of where investors can view the entire text of severance agreements. and Return on Equity (ROE). Companies under new SEC guidelines must provide shareowners the opportunity to vote on any material revisions to these plans. Performance-based plans should be constructed to reward true out-performance. For example. d. the policy should articulate how the company will address the issue of dilution. which are not readily comparable to more basic forms of compensation such as salary. and the relative weight in relation to overall compensation if “other” forms of compensation will be utilized. premium-priced options and performance targets tied to company-specific metrics. The company’s philosophy relating to the dilution of existing equity owners In the event that the company uses equity-based tools in its compensation program. Return on Assets (ROA). Direct ownership should be strongly encouraged. the targeted mix of base compensation and “at risk” compensation.

premium-priced options and performance targets tied to company-specific metrics. These include index-based options. The policy should include the specific drivers the company will use in constructing the performance-based components of the plan. CalPERS believes that in the case of option plans and restricted stock. Timeaccelerated vesting is not considered a meaningful performance-based hurdle. the company should provide a breakdown of the types of incentive compensation and reasonable ranges based on total compensation targets for each type of incentive compensation within the program.1 © Copy Right: Rai University 19 . a significant portion of the overall program should consist of performance-based plans. and should include provisions by which options will not vest if hurdles are not obtained. and Return on Equity (ROE). including the strengths and weaknesses of each and how the overall incentive component of the plan provides optimal alignment of interests with shareowners. • 11. CalPERS believes that optimal plan design will utilize multiple performance metrics in a fashion that will tie small portions of vesting to individual metrics or larger portions of vesting to multiple metrics. The policy should include the company’s philosophy related to the major components of incentive compensation. the plan should require that each component be satisfied to achieve vesting as opposed to one of several that must be achieved. with adequate information to judge the “drivers” of incentive components of compensation packages. CalPERS believes that if metrics are used in combination. In addition to the relative mix of base salary and any form of incentive compensation.622. Return on Assets (ROA). Performance-based plans should be constructed to reward true out-performance. CalPERS suggests using metrics such as Return on Invested Capital (ROIC).Executive contracts should be fully disclosed. and the relative mix of how performance metrics will be weighted. Answer the questions below based on the above case study: • • COMPENSATITION MANAGEMENT What is the purpose behind CalPERS’ policies on executive compensation? Based on the above case study how can you say that compensation programs are one of the most powerful tools available to companies? Discuss the components of executive compensation.

20 © Copy Right: Rai University 11. and managerial occupations. All establishments and Labor Market A place where labor is exchanged for wages. allowing them to fire employees at a moment’s notice and leaving working feeling insecure. their willing ness to work. Machine operators.622. national. Service occupations To facilitate pay comparisons among major metropolitan areas. Handlers. Among the things that determine the supply of labor are the number of able people in the POPULATION. equipment cleaners. the evidence is that greater flexibility is associated with lower rates of UNWMPLOYMENT and higher GDP per head. for nine groups of occupations (as well as for all occupations combined) in each of 77 metropolitan areas. but the labor market is often far perfect. regional. Administrative support occupations. 3. 7. labor lows and regulations. Education. How do the earnings of workers in San Francisco or Houston compare with those of workers in the United States overall? The National Compensation Survey (NCS).COMPENSATITION MANAGEMENT LESSON 4: LABOR MARKET CHARACTERISTICS AND PAY RELATIVES Learning Objective • • • • To know Labor Market and Labour theory of value To understand Labour Market Characteristics To know Labour and Labour Welfare To understand Pay relatives Opponents of labor market flexibility claim that labor laws that make workers feel more secure encourage employees to invest in acquiring skills that enable them to do their current job better but that could not be taken with them to another firm if they were let go. Lead or Lag Policy: follow or exceed the market when adjusting pay structures. average. craft. administrative. arguing that the PRICE of something was independent of how much labor went into producing it and was instead determined solely by SUPPLY and DEMAND A flexible LABOUR market is one in which it is easy and inexpensive for FIRMS to vary the amount of labor they use. Industry. Wages can be less flexible than other prices in particular. 2. and inspectors. This wage rigidity can be a cause of UNEMPLOYMENT. Supporters claim that it improves economic EFFICIENCY BY leaving it to MARKET FORCES to decide the terms of employment. Occupational earnings from the NCS are published annually for more than 80 metropolitan areas and for the United States as a whole. Precision production. and laborers. For example. Transportation and material moving occupations. In the NCS. 8. Function or occupation. 3. Pay Relatives The pay relative for each occupational group in an area expresses its average pay as a percent of the pay for a comparable occupation group. and the health of the economy and firms.S. labor laws and regulations. samples of employer establishments and occupations are selected using a “probability proportionate to size” technique. the pay relative for all occupations in San Francisco was 119 in 1998. helpers. Geography (local. they rarely fall even when demand for labor declines or supply increases. say) and weak (or no) trade UNIONS. which was introduced in 1997. average. or 4 percent more than the U. The nine occupation groups used in pay relatives are: 1.S. Some neoclassical economists disagreed with this theory. CAPTIAL and ENTERPRISE. 6. Labour Theory of Value The notion that the value of any good or service depends on how much LABOUR it uses up. the Bureau of Labor Statistics has developed pay relatives. including by changing the hours worked by each employee and by changing the number of employees. First suggested by ADAM SMITH.1 . licensing or certification and 4. international). These places are identified and defined by a combination of the following factors: 1. meaning that workers in San Francisco earned 19 percent more than the U. Labour Market Flexibility LABOR. The pay relative for the United States as whole always equals 100. including clerical. One of the FACTORS OF PRODUCTION. and repair occupations. average for comparable workers. or ratios of pay. The pay relative for Houston was 104. Sales occupations. WAGES (the price of labor) would be determined by SUPPLY and demand. 2. WITH LAND. assemblers. it took a central place in the philosophy of KARL MARX. 5. and 9. as well as the PRICE and supply of other factors of production. Such flexibility is characterized by its opponents as giving firms all the power.S. Executive. This often means minimal REGULATION of the employment (no MINIMUM WAGE. In a perfect market. 1 These estimates are produced by surveying a randomly selected sample of occupations. collects earnings and other data on employee compensation covering 480 detailed occupations in 154 metropolitan and no metropolitan areas. 4. Professional specialty and technical occupations. Broadly speaking. The pay relatives for each area are expressed in terms of their relation to the U.

if architects are not found in the Denver survey. Workweeks In the National Compensation Survey. if level-13 architects in Denver work an average of 38 hours per week. average rates of pay are weighted by the number of weekly hours worked. data for each area are collected once per year. (2) executive. Similarly. then national data for architects are not used in the calculation of pay relatives for Denver. the occupations selected in one area will not be the same as those selected in another area. assemblers. but the publications are produced in “panels” every 3 months. Data for each NCS area are published once per year. For example. or ratios of pay. and reference dates are taken into account in the computation of pay relatives. In addition. The cumulative change in the wage index between August 1998 COMPENSATITION MANAGEMENT 11. Occupations. and (9) service occupations. wage level. To calculate the adjustment factor. including clerical. for nine groups of occupations (as well as for all occupations) in each of 77 major metropolitan areas and the United States as a whole. The pay relatives for each area are expressed in terms of their relation to the U. Table 1 presents 1998 pay relatives for each occupational group in 77 metropolitan areas. These weights reflect the relative size of the occupation within the establishment and the relative size of the establishment within the sample universe. This adjustment was based on published estimates of wage change from the Employment Cost Index (ECI).622. craft. this will be assumed to be the national average weekly hours for level-13 architects when calculating pay relatives. wage level. In order to maintain comparable workweeks. and inspectors. and other factors. (5) precision production. if the category level-13 architects are not found in the Denver survey. helpers. meaning that workers in San Francisco earned 19 percent more than the U. The pay relative for the United States as whole always equals 100.S. For example.S. and repair occupations. (3) sales occupations. the average rates of pay calculated for comparable occupations within the nine occupation groups reflect a comparable composition of occupation workweeks. average. the pay relative for all occupations in San Francisco was 119 in 1998. administrative. average for comparable workers. The nine occupation groups used in pay relatives are (1) professional specialty and technical occupations. the data used to produce the 1998 estimates for the United States as a whole were compiled from data collected from the 154 NCS localities between July 1997 and April 1999. the average weekly hours of work calculated for each occupation in the area are also used in the national calculation of average hourly rates of pay for pay relative purposes.1 © Copy Right: Rai University 21 . Occupations with lower weightssuch as sailors and deckhands in Phoenix-have less of an impact on the overall U. then level-13 architects are removed from the national estimates and are not used in the calculation of pay relatives for Denver. Before calculating the pay relatives for each area. For example. (6) machine operators. (4) administrative support occupations. while occupations with higher weights-such as elevator installers and repairers in New Yorkhave more of an impact on the overall U. and survey timing. occupational work levels as well as scheduled hours per week will differ between areas. the published average reference dates will usually differ between areas.S. For example. responsibility. an adjustment was made to the U. The average reference date for these 154 areas in the United States was August 1998. rates of pay associated with shorter workweeks will not count as much in the average as rates associated with longer workweeks. and managerial occupations.S. These levels reflect knowledge. levels. The hourly wages of full-time workers count more than those of part-time workers. BLS has developed pay relatives. or 4 percent more than the U. workweeks.3 Levels not observed within an area’s occupations are not used in the national database for calculating pay relatives. including the mix of occupations and work levels studied. differing workweeks. The pay relative for each occupational group in an area expresses its average pay2 as a percent of the pay for a comparable occupation group in the entire United States. That is. the working “levels” of incumbents within occupations are also comparable between the area and the national database when calculating pay relatives.S. (7) transportation and material moving occupations. and laborers. Thus. The reference date for each area differs depending on when the data were collected. Reference Month Adjustment In the National Compensation Survey. occupations found in the national database that are not found in the area database are not used in the calculation of pay relatives for that area. In order to facilitate comparisons of occupation pay levels across metropolitan areas. Comparability There are a number of occupational characteristics that the National Compensation Survey captures that can influence pay levels. That is. average. When calculating pay relatives BLS tries to decrease the effect of these different factors as much as possible. monthly indexes of wages were interpolated 4 from the published ECI quarterly indexes for all occupations and for each of the region occupation groups. equipment cleaners. For example. skills. Since the survey design calls for “probability proportionate to size” occupational sampling.occupations in the survey are assigned a weight to reflect the probability of their selection in the sample.S. wage rate to account for differences between the average reference month for each area and the reference month of August 1998 for the United States as a whole. When determining how area earnings compare with national earnings. Occupations and Levels The pay relative calculation for each area uses comparable jobs at both the area and national levels. The pay relative for Houston was 104. (8) handlers.

(The overall U. nonproduction bonuses. and the average reference periods would need to be adjusted. but only when the data collected for preselected occupations were judged sufficiently representative of all occupations in the area. Because the ECI is published quarterly (December.and the reference month for a specific area was used to adjust the national wage estimate. and service occupations-from four different metropolitan areas of the United States: Cleveland-Akron. to adjust the national estimate of comparable wages to reflect Denver’s May reference month. Parastou Karen Shahpoori Economist. 3.htm. see the National Compensation Survey (NCS) website on the Internet at http://www. Occupations surveyed for the NCS are selected using probability techniques from a list of all occupations present in each establishment.and part-time workers. pay relatives from the National Compensation Survey do not address nonwage compensation. including the effects on average wage rates from different methods of pay (time versus incentive). were limited to a preselected list of 38 occupations. collective bargaining status (union versus nonunion). The NCS classification system specifies up to 480 individual occupations. Division of Compensation Data Estimation. Thi etma eo c a g i t ea j s me t ECI factor. For example. 2.bls. Telephone: (202) 691-6290. area survey are too small to permit estimate pay relatives for each of these determinants. COMPENSATITION MANAGEMENT Comparing Wages in Four Cities Chart 1 compares four of the nine major occupational groups5professional specialty. There are many commonly recognized determinants of wages. the former survey did not use occupational sampling within an establishment. The NCS is designed to collect a representative sample of occupations in each area. The data used in this article are from 1998. Texas. The pay relative only includes the wage compensation. average. Orlando. they do not take into account some wage determinants. the interpolated wage index for all occupations in May is divided by the interpolated index for August to estimate wage change over the period.S.) In Orlando. 7 For example. the NCS covers all workers and provides information on a much broader range of occupations. the mix of occupations and work levels studied.gov/ncs/home.1 . To make precise pay relative comparisons. 1998. For example. Florida. the estimates for the months in between have to be interpolated to relate to the reference month of the area estimates. They exclude premium pay for overtime. national average comparable wages are decreased to reflect what they would have been in May. Florida. September 2000). s si t f h n e s h d u t n . Moreover. which represented only a small subset of all occupations in the economy. while an architect in Houston earning similar pay might not receive a health care benefit. As shown in chart.S. Limitations Pay relatives derived from the National Compensation Survey have certain limitations. the most recent data available when the article was completed. Furthermore. See National Compensation Survey: Occupational Wages in the United States. In the Occupational Compensation Survey. Hourly wages are defined as the straight-time earnings paid to employees before deductions of any type. Houston-Galveston-Brazoria. the pay relatives for all four occupational groups were below the U.o r applied to the national estimate of comparable average wages. including clerical. California. earnings in San Francisco were much higher than the national average for all four occupational groups. To compare each area to every other area would require thousands of additional calculations. Bulletin 2529 (Bureau of Labor Statistics. The adjusted national wage estimate was used to calculate the pay relative for the area. June and September).622.gov Notes 1. May. The sample sizes in the NCS © Copy Right: Rai University 22 11. the former survey collected data for full-time workers only. an architect in Denver may earn $25 per hour and have a health care benefit worth an additional $3 per hour. For more information. and industry. pay relatives were calculated. rate equals 100. such adjustments are made between each area and the United States as a whole. administrative support. on the other hand. and San Francisco-Oakland-San Jose. Differences Between the NCS and Earlier Surveys The locality wage data produced from the National Compensation Survey differ considerably from those of the survey’s predecessor-the Occupational Compensation Survey. Finally. Ohio. For example. Another limitation of pay relatives produced from the National Compensation Survey is that the pay relatives for two different areas are not strictly comparable. and tips. and the calculated pay relatives reflect this. Currently. E-mail: Shahpoori_K@bls. on the other hand. Average hourly wages also reflect the hours worked by surveyed occupations. executive. while the NCS collects data for both full. the differing workweeks. Data from the Occupational Compensation Survey. This adjusted estimate is used to calculate the pay relative for Denver and for any area with a May reference month. That is. Bureau of Labor Statistics. establishment size.

622. IN Bloomingto n-Normal. GA. National Compensation Survey. average pay for all industries = 100) COMPENSATITION MANAGEMENT Table 1. 94 AL Bloomingto 91 n. National Compensation Survey. TX Birmingham. TX Anchorage. Pay relatives for major occupational groups in metropolitan areas. Pay relatives for major occupational groups in metropolitan areas. 104 IL BostonWorcesterLawrence. 1998 (For each occupational group. TX BuffaloNiagra Falls.94 SC Austin-San 93 Marcos. MA-NHME-CT 109 93 91 88 95 92 91 92 106 106 104 105 98 101 108 103 95 108 108 112 BrownsvilleHarlingen82 San Benito.1 90 86 87 78 77 71 78 72 80 97 97 90 101 103 107 102 106 107 91 88 81 86 81 82 84 87 87 94 88 98 103 97 93 99 97 98 92 © Copy Right: Rai University 23 . SC CharlotteGastonia11. average pay for all industries = 100) White collar(1) Metropolitan Total area United States(2) Amarillo. 100 NY CharlestonNorth 87 Charleston.Table 1. AK Blue collar(1) Machi Transp ne Han Service ortatio operat dlers n ors 100 82 101 98 98 82 96 -117 100 83 102 96 87 93 79 81 131 100 100 92 84 Profe Executiv Sale Admini ssiona Precision e s strative l 100 84 105 99 95 90 89 91 93 100 89 109 103 102 96 106 95 -100 100 96 83 100 92 123 96 92 96 93 90 102 100 87 110 111 111 99 93 101 96 119 116 101 95 94 95 96 92 85 95 93 88 Atlanta. 1998 (For each occupational group. GA 99 AugustaAiken.

OH Corpus Christi. SC Hartford. CO Detroit-Ann Arbor-Flint.622.1 . CT Honolulu. OH Columbus. 110 MI Elkhart99 Goshen.COMPENSATITION MANAGEMENT 24 ChicagoGaryKenosha. TX Dallas-Fort Worth. MI GreensboroWinston97 Salem. IL-IN-WI 107 102 103 105 109 112 114 117 117 110 CincinnatiHamilton. 96 OH DenverBoulder97 Greeley. 88 CO Grand Rapids103 MuskegonHolland. IN Fort CollinsLoveland. 95 OH-KY-IN Cleveland103 Akron. 93 109 107 100 101 96 99 97 99 93 87 93 102 102 110 99 92 104 96 85 107 108 88 98 98 86 112 97 86 121 104 80 116 112 85 123 106 107 97 84 91 107 98 107 97 103 111 97 103 106 93 90 115 104 102 97 99 103 106 97 99 94 93 91 103 115 95 92 100 110 96 89 106 97 99 98 95 90 106 110 105 109 107 119 105 111 © Copy Right: Rai University 11. TX 96 89 95 92 101 94 89 94 94 95 104 92 111 99 91 95 94 93 103 100 90 93 101 94 107 95 93 93 109 99 109 96 75 95 102 103 99 108 104 104 101 82 95 82 93 105 100 93 96 91 95 98 82 98 93 DaytonSpringfield. NC Greenville.

AL 95 106 97 97 90 93 99 93 91 86 111 113 101 98 95 91 97 88 97 88 111 100 102 93 92 104 91 104 88 83 100 97 89 87 104 99 102 103 96 85 106 105 91 89 89 94 84 103 82 82 100 100 81 90 93 97 92 94 87 Indianapolis. TX Huntsville. FL Memphis. NE 88 Los AngelesRiverside107 Orange County. AL 89 New 94 Orleans. Paul. 101 MI Kansas City. 90 TN Lincoln. IA 92 106 97 88 82 96 85 86 85 93 86 102 92 87 85 104 98 91 89 95 97 Johnstown.COMPENSATITION MANAGEMENT HoustonGalveston.622. 99 IN Iowa City. 96 FL Milwaukee99 Racine. CA Louisville. 89 PA KalamazooBattle Creek. 93 MO-KS Knoxville.104 Brazoria. KY-IN 99 113 104 103 95 97 97 96 87 91 108 116 108 101 97 97 95 101 107 93 101 95 MelbourneTitusville86 Palm Bay. LA New York116 Northern New Jersey- 85 92 82 86 92 80 84 85 85 91 95 94 99 90 99 120 100 102 95 97 92 104 116 111 94 103 97 89 100 95 94 102 106 92 93 113 98 84 107 115 90 87 98 93 99 108 114 82 88 111 98 95 90 95 108 103 114 112 97 88 86 88 107 106 96 94 84 89 110 117 117 122 11. WI MinneapolisSt. 95 TN-AR-MS Miami-Fort Lauderdale. 104 MN-WI Mobile.1 © Copy Right: Rai University 25 .

108 PA-NJ-DEMD PhoenixMesa. RI-MA RaleighDurham95 Chapel Hill.101 WA ProvidenceFall River103 Warwick. WA RichmondPetersburg. NY 93 102 108 102 97 107 97 92 107 93 106 91 108 96 94 100 91 87 99 97 89 96 96 92 96 101 104 100 101 86 92 97 94 96 110 94 94 105 111 91 92 98 105 107 97 89 103 92 105 92 103 110 94 96 101 97 101 104 104 89 91 95 94 97 93 96 97 99 107 111 85 96 96 106 99 100 86 87 98 102 107 108 75 97 90 107 114 105 95 106 107 107 113 84 90 Rockford. PA 100 Reno. CA Salinas. PA 96 100 109 102 111 108 104 109 108 117 109 95 101 99 102 99 98 110 96 89 99 100 102 100 98 104 88 99 98 89 100 104 86 95 110 103 102 112 PortlandSalem. IL 96 Sacramento105 Yolo. OR. AZ Pittsburgh. 92 TX 120 105 121 101 96 90 © Copy Right: Rai University 11.1 . NC Reading.COMPENSATITION MANAGEMENT 26 NorfolkVirginia BeachNewport News. NV 95 RichlandKennewick. CA 108 San Antonio. FL 88 PhiladelphiaWilmingtonAtlantic City.99 Pasco.622. VANC Oklahoma City. VA Rochester. OK 90 89 99 91 90 89 96 77 82 87 92 88 86 95 92 97 91 88 89 93 89 103 84 103 80 91 88 85 87 Orlando.

including clerical. assemblers. FL 90 89 96 94 89 87 81 84 85 89 VisaliaTulare97 Porterville. executive. This survey covers all 50 States. and laborers. machine operators. craft. The full titles for the groups under the bluecollar category are precision production. transportation and material moving. WA Springfield. and handlers. MO-IL 105 122 114 111 121 118 100 116 119 124 105 96 105 106 107 105 108 104 112 105 88 96 104 87 94 81 103 91 95 84 95 91 99 82 106 81 93 81 94 89 99 78 113 94 100 83 105 92 96 72 103 114 92 87 109 96 77 83 Tallahassee. The full titles for the major occupational groups under the white-collar category are professional specialty and technical. 11. Note: Dashes indicate that no data were reported or that data did not meet publication criteria. MO St. and administrative support.COMPENSATITION MANAGEMENT San Diego. and repair. sales. The average reference period was August 1998.1 © Copy Right: Rai University 27 . Louis. 98 OH 105 98 97 93 89 90 88 92 103 102 101 101 105 103 106 102 111 103 96 101 100 93 98 106 99 99 101 Footnotes: 1. helpers. 2. and managerial. equipment cleaners. administrative. CA 100 105 99 101 104 97 83 95 94 102 San Francisco119 Oakland-San Jose. MA Springfield. PetersburgClearwater.622. 81 FL Tampa-St. CA SeattleTacomaBremerton. 103 DC-MDVA-WV Youngstown -Warren. CA WashingtonBaltimore. and inspectors. Collection was conducted between July 1997 and April 1999.

Incentive) Determining the right leverage (upside potential) for your incentive compensation Formula – Commission vs.So with regard to this statement let us analyse the latest compensation Package with regard to Sales position. This seminar will provide participants with the tools. senior sales. marketing executives. Markets have changed from being stable and predictable to being in constant flux. Alternate distribution and ecommerce channels have changed the role of sales. The program is ideal for business owners.622. this is an obsolete approach to sales compensation. If you are paying your sales reps a straight salary. Latest Incentive Compensation Strategies for Sales Positions How to Build Effective Pay for Performance Plans For Your Direct Sales Force and Other Emerging Customer-Facing Service Positions If you are currently paying your sales reps straight commission. Over the last decade. process and solutions to rethink their incentive compensation plans for the evolving sales and customer facing positions. we will identify and describe how to handle a broad range of challenging incentive compensation issues. Bonus Determining the plan qualifiers Linkage Between Sales Roles and Compensation Developing the best sales organization design Sales role definitions Factors that drive sales role changes Measuring cost of a sales contact Customer segmentation Customer value – The Engine of Change Types of selling and sales strategy Defining new sales roles Sales Performance Measurement Why performance measurement is critical to sales success Key sales compensation design factors Criteria for effective measurement of sales performance Traditional forms of measurement Defining performance measures Performance measures for new sales roles Designing Customized Compensation Plans to Meet Your Needs Creating a customized sales compensation model Organization of the compensation design team Corporate assessment of current plans and future needs Establishing guiding principles Compensation design factors Detailed plan design Plan documentation Communication and implementation considerations Incorporating sales incentive planning into your business planning process Design Issues for New or Specialized Sales Roles Emergence of new sales roles Types of new/specialized sales roles Compensating new sales roles – plans and measures that work Measurement and compensation for team selling Compensating Your Sales Management Team Types of sales management roles How should sales managers spend their time Sales manager performance measures Handling difficult issues affecting sales management compensation plans Challenging Sales Compensation Concepts The importance of target setting and tracking Pooled pre-set earnings distribution Rewarding profitability Dealing with long sales cycles Account management plans Team selling Customer satisfaction ratings Call centres Life cycle changes © Copy Right: Rai University COMPENSATITION MANAGEMENT 28 11. many factors have transformed the nature of selling.Tutorial Activity 1.What it is and what it is not Characteristics of a dynamic sales incentive plan Why sales compensation plans fail to deliver higher results Understanding the principles of Target Total Compensation (TTC) and Setting desired pay Mix (Base Salary vs.1 . As well. Content Effective Sales Force Management Key drivers of sales force effectiveness How to align sales execution components with business objectives & strategy Sales system execution components Aligning your company culture and business planning processes are with your sales system Sales Compensation Strategies: Determining the Right Options The purpose of sales compensation . you are also using an old approach that is likely costing your company business sales. HR and compensation specialists.1 We all know that the nature of compensation and rewards depends upon the nature of job. it is this new state of affairs that combine to create a climate where companies need to take a closer look at sales force effectiveness and their sales compensation plans. All in all. Mass market product development has given way to customized solutions for more demanding customer expectations.

strategies and the sales operational components? What are the major design factors for Incentive Compensation and how are they incorporated into the design process? How has the traditional role of sales been changing and what effect is that having on the selling system and compensation? What is changing in sales performance measurement? How to manage the redesign of your Incentive Compensation Plan(s).Competency-based sales compensation Managing e-Sales compensation What You Will Learn What are the key drivers and operational components of an effective sales systems? What can you reasonably expect from an Incentive Compensation Plan that is aligned with the corporate objectives. What is different about compensating the new emerging customer ‘facing’ positions related to CRM? Critical issues in designing Sales Manager compensation. How to tackle solving your most pressing sales compensation issue and understand a number of other challenging situations? COMPENSATITION MANAGEMENT 11.1 © Copy Right: Rai University 29 .622.

periodically to an employee/worker. Profit Sharing Payments A profit sharing plan. Money’ is included under direct compensation (popularly known as wages. A properly planned and administered’ salary system is one of the most important aspects of order management. Other Taxable Forms of Compensation Sometimes other payments to employees are required that are equivalent to wages. Below is given the different methods of compensation: Wages and Salaries Although we use the terms wages and salaries interchangeably. More dynamic aspects such as rate ranges.1 . Commission income is considered the same as wages or salaries for withholding and reporting purposes.622. 30 © Copy Right: Rai University 11. administrative and professional employees (“white-collar workers”). i. the employer’s contribution to retirement. Some bonuses are based on profitable operations of the business and are paid at year-end. pays managers if the yearly sales or profits reach a certain level. one that may be part of an employment agreement. gross pay). In this unit we shall pay special attention to the process offering salary levels. and designing salary structures. Deciding how and what people should be paid is what is covered under salary administration. like a bonus plan. plus the many kinds of benefits and services that organisations provide their employees. salary progression policies and procedures will also be examined. Draws will be subtracted from a salesperson’s commissions after any applicable taxes and deductions have been withheld. employers may choose to compensate their employees in a number of different ways. Draws Draws are often given to salespeople who work only for commission. sick pay. in payroll accounting. and may consist of life. REWARDS. while benefits come under indirect compensation. “Wages” usually refer to the hourly rate or daily rate paid to such groups as production and maintenance employees (“blue-collar workers”). An employer may elect to pay cash to employees. A draw is an advance given to a salesperson that will be collected when future sales transactions are closed. Commissions are usually computed on a certain percentage or commission rate. Piece-Rate Plan Workers paid on a piece-rate plan receive a certain amount for each item produced. and employer’s required payments for employee welfare as social security. The employer must determine the regular. bi-weekly.e. can be structured in a number of different ways. These include non-cash fringe benefits. but are generally based on the dollar amount of sales made during a payroll period. hourly rate for each non-exempt salesperson during the week and make sure this rate is at least equal to the current minimum wage. Compensation and Rewards Compensation may be defined as money received in the performance of work. ‘Salary’ normally refers to the weekly or monthly rates paid to clerical. Some commissioned employees may not be exempt from the minimum wage requirement. Commissions Sales commission plans vary greatly from company to company. the two terms have different definitions Wages refers to the earnings of employees whose pay is calculated on an hourly basis. A ‘wage’ (or pay) is the remuneration paid. Other Types of Earnings Bonuses Businesses offer bonuses in many different ways. The draw is subject to all payroll withholding taxes. pay for vacation or illness. Methods of Compensation The operating companies need to develop a compensation package for their employees depending on the size and type of business. A common type of bonus may be offered to salespeople for selling a specific item. accident. WAGE LEVELS AND WAGE STRUCTURES Learning Objective • • • • • UNIT II To further understand the concept of Compensation and Reward To understand Methods of Compensation To know the concept of Wage Level and Wage Rate To understand the concept of Wage Structure Determinants of the wage structure Salary refers to the earnings of employees whose pay is calculated on a weekly. On the other hand. supplemental unemployment COMPENSATITION MANAGEMENT Introduction It is extremely important to have a well-designed compensation system.. Gross earnings equal the rate per item multiplied by the number of items produced during the payroll period Combination Plan Many businesses pay sales people both a salary and a commission. or monthly basis. and health insurance. Such a combination plan provides some regular income and offers an incentive for superior sales. or set up a deferred compensation fund for retirement. give them stock in the business. reimbursed expenses. semi-monthly. Another type of bonus plan.LESSON 5: INTRODUCTION TO COMPENSATION. for the service of labour in production.

commissions..000. Under a non-accountable plan. these payments are subject to federal taxes. Consult your trade association and accountant to learn the most current practices.4 million owners in this group pay more than 30 percent of their limited incomes for housing and/or live in structurally inadequate or overcrowded homes. Furthermore. and tips. the current high home prices. 11. employees receive compensation in the form of gratuities or tips. and are referenced as third party payments. A growth in the overall percentage of homeownership somewhat offsets the negative figures. some 8. Incomes at the $50.” issued by the Joint Center for Housing Studies at Harvard University. Travel and entertainment reimbursements. paid to an employee under a non-accountable plan are also included as wages. This is one of the findings of “The State of the Nation’s Housing 2002. The amounts are disbursed by the insurance company or the employee’s trust. certain payments are. and other payments that are likely to be tax deductible such as qualified moving expense reimbursements. a calculation or statement of money earned for a period of time from one hour (hourly wage) up to one year (annual wages). the vast majority of lowest income owners also face severe housing affordability problems. awards and vacation pay on termination. and are either employed or retired. What is a Wage Level? The ‘wage levels’ represent the money an average worker makes in a geographic area or in his organization. especially among minority groups. Tips In certain businesses. The continuing stagnation of the income levels for the most disadvantaged households is causing serious housing challenges for people in the lowest 20 percent of the income scale. the employee is given a certain amount of money toward expenses. The top category has shot up from slightly below $100. the actual wage paid is entirely between you and your prospective employee. It is only an average. by their nature or timing. while good for sellers.1 © Copy Right: Rai University . money received or paid usually for work by the hour. What is “Stagnated” Wage Levels? An add to Housing Woes of Poor.6 million renters and 6. The distinction between regular and supplemental wages is important because special rules apply to withholding on supplemental wages. indicates a large disparity between even middle-income and high-income households. taxable fringe benefits. or month. Supplemental Wages Supplemental wages differ from regular wages only in that they may be based on a different payroll period.” The 2002 report. As with any form of compensation. based on 2000 census data. but does not have to substantiate them or return any excess cash. computed on a different compensation plan or rate. while the lowest income has stayed constant at below $20. work against the lowest income households. travel advances paid to the employee prior to travel in excess of substantiated expenses must be repaid to the employer within a reasonable and specified period of time. Home ownership continues to increase. supplemental wages. or other expense allowances.622. cost ratios and profit margins in your business field. “Overall. severance pay. or week. Sick Pay In general. specific markets or firms and individual wages can vary widely from the average. Fringe benefits include the following: • • • • • • Exempt Payments Compensation not considered wages includes sickness and injury payments under a workers’ compensation law. A tip is an additional amount from a customer for services rendered. How are Wage Levels are Set? Wage levels are calculated using position importance and skill required as criteria.benefits. driving up both purchase prices and rents for twenty million families. Such payments include retroactive pay increases. Now let us discuss about wage level. The employer advances an amount to the employee for business expenses and the employee does not return any unused amount. own their own homes. Minorities accounted for 40 percent of the net new owners during the last 31 Personal use of company cars Free or discounted airline flights Vacations Discounts on property or services Memberships in country clubs or other social clubs Tickets to entertainment or sporting events Reimbursed Expenses Payments made to employees for travel and other necessary business expenses are taxable only if: The employee does not have to substantiate those expenses with receipts or other documentation.” said the report.000 level in 1975 have increased but lag far behind the actual dollar and percentage increases of the highest level.000 in 1975 to just under $150. Non-Cash Fringe Benefits Non-cash fringe benefits must be included in an employee’s gross earnings.. bonuses. day. sick pay is any amount paid to an employee because of illness or injury under a plan providing for such benefits. or paid at a different time than regular wages. The continuing stagnation of the income levels for the most disadvantaged . In addition.000 in 2001. COMPENSATITION MANAGEMENT Wage Level We have already discussed before that wages are something received by a worker or paid by an employer for time on the job. “Although the plight of renters receives much attention. While there is a minimum wage set by federal law for most jobs. Hair stylists and taxi drivers also depend on tips as a major source of income. Bartenders and restaurant servers usually receive tips in addition to wages. The report shows that the lowest income households are white. Under an accountable plan.

4. Adam Smith explains occupational wage differentials in terms of : 1. An expanding market for low-income borrowers has resulted in a “dual” mortgage market. as for a service or loss. employers. Responsibility of the job. the grade consists of a range of evaluated wage rates (or points. Training requirements of jobs in terms of length. it is typically called the wage rate. They also make much use of wage and salary surveys in wage structure decisions. The grouping can be according to occupation.) Whether you’re offering a straight basic salary structure or an incentivebased pay structure may make or break you in the eyes of top job candidates. Organizations with relatively open internal labor markets (organizations in which most jobs are filled from outside) make much use of market value. Difficulty of learning the job. The reason for it’s existence is that in different occupations require different qualifications. according to the Harvard report. the ‘pay-grade’ consists . If the ‘ranking’ plan is used.five years. This is a theory of wage structure.) The wage structure or ‘grade’ is comprised of jobs of approximately equal difficulty or importance as determined by’ job evaluation. or individuals constitute a primary factor in human-capital analysis and thus job worth. wages are usually fixed on the basis of the differences in occupations and various degrees of skills. such as money. Conversely. Although money isn’t everything. Chance for success or failure in the work. Hardship. the jobs are already categorized into ‘class’ or ‘grades. Their analysis of job worth relies more heavily on perceptions of organization members of the relative value of jobs. (Yes. the grade consists of a specific number of ranks. it is not only the mathematics but other subjects such as biology and psychology play a major role in compensation determination. if the wage rates are converted to points). different wages of skill and carry different degrees of responsibility. given or received as payment or reparation. the report states. Sub prime rates can be higher than conventional mortgages and often expose borrowers to greater risks. bricklayers. they are interviewing YOU. 32 © Copy Right: Rai University 11. the increase in size or activity of one part of an organism or organ that makes up for the loss or dysfunction of another. A large part of this may be accounted for by the increase of homeowners among immigrant populations.of jobs falling within a range of points. What is a Wage Rate? A wage is an amount of money paid to a worker for some specified quantity of labor. and 5. organizations with relatively closed internal labor markets (most jobs are filled from inside) emphasize use value. difficulty. Stability of employment. such as wage structure of craftsman (carpenters. known as Occupational Wage Differentials. If the ‘factor comparison’ plan is used. If ‘classification’ system is used. The term wage structure’ is used to describe wage/salary relationships’ within a particular grouping. Low-income borrowers turn more toward government-backed and subprime mortgages and to manufactured homes. etc. 3. Training Some other wage structure determinants derived from economic analysis may be noted. behavior that develops either consciously or unconsciously to offset a real or imagined deficiency. Hence we can realize that compensation management is an integral part of the labor market characteristics in order to attract capable employees by respective organizations. it certainly is one of the top issues potential employees look at when interviewing new companies. Definition and Concept of Compensation Structure Biology. The interaction of ability requirements with training requirements can yield different job values depending on the scarcity of As it has been discussed in the earlier chapters that compensation is the act of compensating or the state of being compensated or something. 2. So the term Compensation structure means the pattern or the break up of the salary paid to the employees in their respective organization. Please remember that while determining the compensation structure of employees. mechanics. Psychology. paid per unit of labor. or organization. COMPENSATITION MANAGEMENT Determinants of the Wage Structure Before discussing the wage determination process in detail let us first discuss the determinants of wage structure. Job Worth These two concepts of worth and the concept of internal labor markets combine to explain important differences among employers in wage structure decisions. But his standards of worth are equally useful in explaining the complexity of wage structure decisions. When expressed with respect to time. Higher income borrowers continue to use conventional mortgages keyed to the prime interest rate. face it. It is the main monetary item that the worker and the employer focus on.1 . If the ‘point’ method of job evaluation is used. Economic Determinants In the labor market there commonly exists. What is Compensation Structure? A Histogram of what people earn. usually monetary. Use value is the value an individual buyer or seller anticipates through use of the item. and whether the training is provided by society. Compensation structure consists of the various salary grades and their different levels of single jobs or groups of jobs. The market value of an item is the price it brings in a market where demand and supply are equal.622. as in personality or physical ability. The wage rate is the pre-tax amount of payment. Use value obviously varies among individuals and over time.

In like manner. People differ in the occupations they like and dislike.622. occupations have non-monetary advantages and disadvantages of many kinds.the ability required and the number of people who try to make it in the occupation and fail. Employee Tastes Employee tastes and preferences are another economic factor.1 © Copy Right: Rai University 33 . COMPENSATITION MANAGEMENT 11.

Pay system decisions can be regarded as focusing on individual equity. compensation inputs can be classified into three general areas: • • • Introduction to Factors Affecting Wage Determination Process Individual Wage Determination From the viewpoint of the employee. Thus management seeks to reward performance through meritbased and incentive pay systems. G. and Personal. not one that is determined once and for all. is an external organizational decision that determines the organization’s competitive posture toward its human resources. Not all individuals within an organization are likely to perceive their pay situation the same. on what basis and how? These are not trivial questions. First. The first compensation decision. it may make quitting an unattractive way to solve feelings of inequity. Such systems reflect the realization by management and employees that it is important to reward more than just minimal performance on the job. The second major compensation decision is an internal organizational decision involving the structuring of the jobs within the organization. neither organizations nor individuals would be satisfied by making the employment exchange solely on this basis. Second. The great majority of workers are paid through systems that provide for variable payment for the jobs. So the next decision to be made is whether all people on a particular job are to receive the same pay or different pay. Simon have been translated into equity theory. Equity theory states that a person compares his or her “inputs” or contributions with the “outcomes” from participation (I/O ratio). Anything the person perceives as relevant goes into these input and output considerations.COMPENSATITION MANAGEMENT LESSON 6: INTRODUCTION TO WAGE DETERMINATION PROCESS AND WAGE ADMINISTRATION RULES Learning Objective • • • • To know the Factors Affecting wage determination process To understand the Wage Determination Process To know the Concept of Wage Surveys To understand the Preparation of a Wage Structure When this is hard to do directly. To explain. This allows the person to accept or decline the exchange in the way that a student stays or leaves a course after the professor hands out a syllabus. by themselves. Membership. 34 Job. a balance in the person’s favor. nor is the organization (through its management) likely to see the situation the same as the employees. If an organization wishes to retain people.622. organizations can affect (through communication and influence) the inputs and outcomes the person focuses on. they can make certain responses to inequity more likely to occur than others. Putting these two decisions together in a wage structure provides the wage or range of wages that the organization perceives as equitable for each of its jobs. the end product of any compensation program is a paycheck. while employees and their unions seek to have learning. The organization must maintain. The wage determination must be personalized by making a further set of decisions. as a minimum. March and H. and. Although pay rates are determined for jobs. The Decision to Participate The decision to participate assumes maintenance of an equilibrium between the inducements the organization offers and the contributions the person is asked to make. People’s perceptions determine whether their pay situation is equitable. the person compares his or her I/O ratio with some other I/O ratio. The Decision to Produce D. in order to provide a regular paycheck perceived as equitable to the employee. the wage level. they can define clearly the inputs required of the person. Although these are critical input factors. proficiency and seniority rewarded. Pay system decisions must incorporate the performance and personal factors into compensation. Influence Organizations are not powerless in this cognitive process. a balance of these two in the mind of the person. both in the marketplace and within the organization.1 . They can influence the perceptions of the person in a number of ways. A. Performance. The ideas of J. Katz claims that organizations seek three things from employees: 1. deliver a paycheck to the employee. Inputs and Outputs Compensation decisions often focus upon the value of the job. more realistically. This makes the creation of equity in the organization a difficult and recurring problem. Role behavior and © Copy Right: Rai University 11. and if different. The decision regarding the type of salary administration and/or structure system to be used do not. 2. it is people who receive paychecks. Third. Equity as a Cognitive Process Experiencing equity is a cognitive process.

2. The decision to produce. The individual must understand what is requested and see its connection with the reward.1 Steps Involved in Determination of Wage Rate The Process of Job Analysis Results in job descriptions which lead to job specifications. and how it is being done. is that it is seen as a path to many different types of need satisfaction. we can be confident that the answer is yes – but not the same size yes for all people. To the extent that role behavior is explicitly spelled out and is seen as the basis for the person’s input to the organization. This is also needed for consistency and coordination of activities within the organization. This theory has three basic parts: 1. This connection may seem obvious but it is not. The performance-effort connection. COMPENSATITION MANAGEMENT The Wage Determination Process Usually. Fig.622. It provides consistency to the organization’s labor force and reduces staffing and training costs. Also. Clearly this requirement is not covered in the decision to participate. Content theories help us understand how people’s need for money may be very different. All of these subjects should be taken into account in designing a pay system (and will be taken into account in some manner. In some cases this perception is valid in that the organization says it uses merit but does not. In short. but most employees do not perceive that merit is the primary basis on which pay adjustments are made. To try to connect performance to reward in such jobs frustrates the incumbent. Does the person want the reward the organization is offering? Since our subject is pay. Managers find it difficult to always define the results and behaviors they desire. in other cases the organization is rewarding merit but is not accurately communicating this fact to the employees. framing rules of wage administration. A useful framework for this decision is provided by expectancy theory. the definition of performance is difficult in and of itself. like all understanding based on communication. responsibilities. assigning grades and price to each job and paying the guaranteed wage. However. explaining these to employees. even if by the default copying of some other organization’s design and definitions). Innovative and spontaneous behavior addresses the organization’s need for the person to adapt what he or she is doing. Most organizations claim they have a merit system of pay. Role behavior consists of doing the job as it is described and/ or assigned. this requirement is also covered under the decision to participate. How much increase or difference in pay does it take to make the person respond? This is the difficult question of the proper size of a meaningful pay increase. then. analysis of relevant organizational problems forming wage structure. moves the person beyond the minimum required just to maintain membership. though. There are many jobs in which variations in performance are impossible or inconsequential. This. individual effort is not a useful gauge in the many jobs whose tasks take two or more people to accomplish.1 © Copy Right: Rai University 35 . is hard to realize perfectly. People differ in how valuable money is to them compared with other things on and off the job. The organization must worry not only about whether pay is a motivator but also about whether it is offering enough to make it worthwhile for the person to produce beyond the minimum. It is what most managers call motivating their employees. Valence In expectancy theory valence means the strength of a reward. then the organization is not likely to obtain those outcomes. Also. A job analysis describes the duties. Membership includes remaining with the organization and being present for work regularly. since if the individual does not see the rewards he or she wants as being contingent on the behaviors or outcomes the organization wants. This connection would seem to be obvious. and all jobs have areas of discretion that allow the person freedom in accomplishing tasks. the effort-performance connection highlights the fact that the person must perceive that he or she can adequately perform the task. it is difficult to measure and/or appraise whether these outcomes have occurred.3. wage surveys. Valence. Innovative and spontaneous behavior. 11. to the constantly changing circumstances within the organization. The advantage of pay as reward. but in fact it is not. not all required role behavior is easily spelled out in jobs. Finally. the steps involved in determining wage rates are: performing job analysis. The Performance-Reward Connection This may be the most important part of the decision to produce. The performance-reward connection and 3. working conditions and inter-relationships between the job as it is and the other jobs with which it is associated. The Performance-Effort Connection People must feel that their efforts will affect their performance.

There are though no hard and fast rules for making such decisions. WAGE LINE Plotting jobs on a curve (Some points fall well off wage line) f. wage rates are shown on the vertical axis while pay grades (in points) along the horizontal axis. and ii.It attempts to. or is able. or they participate in wage surveys and receive copies of results. which jobs are to be placed in each of the pay grades. and what should be the relationship between the wage structure and the fringe benefit structure? Belcher has listed 108 variables which can affect levels of compensation and the wage structure These surveys may be carried out by Mailed questionnaire. The ‘wage curve’ shows the relationship between: i. For example. or equal to the average in the community or industry. record and analyze details concerning the training. Finding out the average pay rate for each pay grade. the actual amounts to be paid must be determined. Wage Surveys Once the relative worth of jobs has been determined by job evaluation. rating or evaluating the job occurs. and willingness of organizations to share information. Government Labour Bureaus. what to do with salaries that are out of line once these decisions have been made. The greater the accuracy and detail needed. the actual process of grading. experience. b. the actual process of grading. which are usually known as good indicators. qualifications. the “value” of the job. Such wage surveys provide many kinds of useful information about differences in wage levels for particular kinds of occupations. Once per year is common. whether the organization would recruit new employees after revised wage structure. the greater the requirements for careful description and specification and surveyor’s reliance on person-to-person ‘interviewing rather than mailed questionnaires. whether there exists well-established and wellaccepted relationships among certain jobs which can upset job 36 © Copy Right: Rai University 11.622. below. The next step is that of providing the job with a price. In the above figure. Relevant Organizational Problems In addition to the results of job analysis and wage surveys. d. skills. This can have a great influence on an organization’s compensation policy. A wage survey to be useful. The following steps are involved in drawing a wage curve: 1. Such surveys seek to answer questions like what are other firms paying? What are they doing by way of social insurance? What is the level of pay offered by other firms for similar occupations? etc. There are various ways to make such a survey. e. For this. by gathering information about ‘benchmark jobs’. required efforts. After determining the job specifications. and g. are the prevailing rates in industry or community inconsistent with the results of job evaluation? What will be the result of paying lower or higher compensation. whether the organization wishes. differentials between pay plans. such as: a.1 . c. or personal interviews with other managers and personnel Agencies. This involves converting the relative job values into specific monetary values or translating the job classes into rate ranges. (c) Accuracy The diversity in job titles and specific job duties is staggering. current and contemplated. several other variables have to be given due consideration in establishing wage structure. rating or evaluating the job specifications. (b) Scope (number of firms) Influenced by the geographic area from which people are drawn. and procedure commonly used is the two-dimensional graph on which job evaluation points for key jobs are plotted against actual amounts paid or against desired levels. the number of units competing for this labor. for each pay grade may have several jobs and chances are that each of these jobs is currently being paid a different rate. several decisions need be taken. etc. whether wage ranges should provide for merit increases or whether there should be single rates. Plotting the remaining jobs then reveals which jobs seem to be improperly paid with respect to the key jobs and to each other. the actual money value to be as signed to various pay grades. abilities. WAGE RATES COMPENSATITION MANAGEMENT Preparation of Wage Structure The next step is to determine the wage structure. evaluation. and responsibilities expected of an employee. accuracy requirements. A job is rated in order to determine its value relative to all the other jobs in the organization which are subject to evaluation. the “average wage rates” of these grades (or jobs). must satisfy these points: (a) Frequency Affected by rapidity of changes. Most firms either use the results of “packaged surveys” available from the research bodies. the number and width of the ‘pay grades’ and the extent of overlap. telephone. employer’s associations. to pay amounts above. This is done by making wage or salary surveys in the area concerned.. or else they conduct their own.

and so forth.’ i. clerical rates as a whole may be closely related to other clerical rates than to managerial or factory rates. or or the sales girls in a department store or the stenographers in. Factory. 4. 2. structures are developed . ‘It makes it easier to attract experienced employees from other organis9. if there are 1.. It also allows the management to provide for performance differences between employees. Technology. This will mean that average for that grade is too high (or too low). say 100..” Livernash described that: Broad groups may be illustrated within manufacturing as: 1. 3. It is important to keep in mind that there is an adequate differential. 2. This will make job evaluation programme more acceptable to employees.. an office (Social custom). Some authorities feel that there should be only one comprehensive ‘pay grade’ for each organization. However. 3. raises for jobs in this pay grade may be required. a straight line is usually employed. narrower groups are obvious. the employees on a furnace or a mill and the crew of a train or a plane can constitute a job cluster (technology). iii. added sources of income or characteristics (rural versus urban or industrial). overlap between the pay rates and those prevailing in the labour market. They are mentioned below: First. Drawing “Wage Lines” through the points plotted. major cost of living differences between areas.. between superiors and subordinates ...1 © Copy Right: Rai University .. Within production are certain smaller groups. and supervisory. Because of the continuous rise in wage and salary levels. in the case of hourly jobs. Social custom that they have common wage-making characteristics. It helps to ensure that there is an. In an industry. i. or iii. and 3. the maximum of individual pay grades may vary from 10 to 20% above the minimums. each grade might include all those jobs falling between 50 to 100 points. To freeze the rate paid until general salary increases bring the other jobs into line with it. The management can take a more flexible stance with respect to the labour market. Managerial. which are linked together by: 1. while in case of salaried employees the maximum of pay grades may vary from 15 to 75% above the minimum. The sound thing is to make general adjustments in wage structure according to the price index number. Such a raise may be given either immediately or in one or two steps. This indicates the need for having several pay ranges for each organization. and promotion. Pricing jobs: Wages along the “wage line” are target wages or salary rates for the jobs in each pay grade. When the pay-range of one group is changed. 150 to 200 points. The forces that favour uniformity in wages are: High mobility 37 COMPENSATITION MANAGEMENT ii. that indicates rates are high and the over paid employees are often called “red circle. 2. Regional differences in wages should invariably be maintained.. 5. In this sense. the number varies from as few as five to as high as thirty.” or “overrates. These lines may be straight or curved. ii. considerable attention must be given to handling upward changes in wage-structure. For instance.e.2. grades/ranges Several wage. Certain job clusters may be more closely related to some rather than to other clusters. so also may employees in a department (administrative organization). 4. While determining pay ranges the following consideration should be attended to: 1. given the pay rates for other grade. than where the jobs are few. lay-off.tions. It is a standard practice to establish ‘pay grades’ or equal width or ‘point spread. Second.” “flagged. But it is probably more realistic to have several pay.622.7 If the plot falls above the wage line. If the plot falls below the line. inspection. Such a range usually has several advantages: i. including policies of transfer. Since each grade is of the same width. Clerical. more ‘pay grades’ will be needed. Within the factory group are maintenance. To cut to the maximum in the pay grade. The administrative organization of the production process. it is necessary to determine how many grades there should be. It is possible that some of the plotted points may fall off the wage line. if the pay grade comprise a single job cluster.. or 3. the size of the organization.executive. varying with the nature of the industry. “Thus. Others give increases based on merit or length of service. equal attention must be given to the pay-level of the other. Plotting the wage rate for each pay grade. 100 to 150 points. several forces work to level these differences. 11.” This will necessitate either: i. a rise resulting from a variety of environmental pressures. iv.000 jobs to be graded.one for each type of job or “job cluster Dunlop describes the cluster concept as follows: “A job cluster is defined as a stable group of job classifications or work assignments within a firm.whether they are paid under the same pay plan or under different ones. To transfer or promote the employee to a job where -he can legitimately be paid his current rate. the broadness of the grades.e. Some firms give general percentage or “across the board” pay increases shortly after wage increases are negotiated. transportation and production. within each broad group. Two points need consideration when deciding the number of grades. professional. lower skill jobs. administrative. Forces that favour regional differences are: low mobility. The existing pay structure should be regularly reviewed and revised. seasonal occupations as in agriculture versus stable occupations.

This type of system is useful where performance variation and/ or other personal characteristics are nonexistent or unimportant. Unions often like single rates because they eliminate judgment-based differences in pay. There a single rate is paid for the job and the individual receives just that rate. access to timely. One study reported that the rationale for rate ranges in most large organizations was the need for performance differences. the wage line provides the job rate. wide spread unionization efforts. This reflect the greater demands (and performance variability) inherent in jobs in these grades. Some assembly-line positions and lower-level service positions have very little discretion. a person who has been on the job larger and is more experienced may earn more than a fresh employee in the next higher pay grade. Rate ranges can serve other purposes for organizations. The individual in this type of system is paid for his or her time on the job and for completion of the job as directed. or by the competitive value provided by a research analysis product. The major way in which organizations allow for factors other than the job to enter into the determination of an individual’s pay is to develop a range of pay for each job or grade of jobs. The maximum and minimum Figure 16-1. Experienced personnel can be made difficult to hire away by paying them above the market rate for the job. may be arbitrarily decided. a midpoint (the market or job rate). Where the grade rate prevails. Not all jobs allow for a significant difference in performance. Thus labor-market demands may also be a significant factor. reliable information. Retention is one of the most important of these.” A maximum and minimum rate for each grade. Other circumstances that lead to use of single-rate systems are: 1. and the dimensions of range rates. such as 15% above and below the wage line.between regions and/or employees. Now let us study further single-rate wage systems. Single-rate systems are simple to administer: once the pay rate of a person’s job is identified. it is acceptable to the parties involved. This is seen by the person as a significant reward for membership. and a maximum (the highest rate the organization is willing to pay for the job). so concern with differences in output or behavior are minimal.1 . 38 © Copy Right: Rai University 11. option a. This pay rate is the market rate and may be paid to either a job or a pay grade. Thus. the individual is paid in accordance with the grade level assigned to the job. The one usually adopted approach is to use the “Wage Curve. two types of rate ranges. Setting of Rate Ranges lines may then be drawn on the curve. by the competitive value discovered in a review. a salary survey. The individual is paid in accordance with the number of points assigned the job by the job evaluation system. (often along industry/ occupational lines). Single-Rate Wage Systems Before discussing various aspects of rate ranges we should first consider situation in which there is no range. This is illustrated in figure 16-1. Rationales for Rate Ranges Any time individuals on the same job differ significantly in performance or personal characteristics that are perceived as relevant to either the organization or the person. A rate range consists of a minimum pay rate (the beginning hire rate). Most organizations structure their rate range to overlap a bit. a strict technology that controls the output and 2. there is little variation in output and 2. the ‘range’ may be allowed to become wider for the higher pay grades. but in some cases industry practice was a major reason. no further decisions need be made as to how much he or she is to be paid. A rate range is a range of pay determined by the organization to be appropriate for anyone who occupies a particular job.622. jobs for which the training time is short a couple of hours or so hereby making a learning curve inoperative. the rationale for rate ranges. COMPENSATITION MANAGEMENT Rate Ranges ‘Rate ranges’ can be developed in various ways. the manner in which a pay rate is set for individuals within a range. Alternative types of rate ranges If a job rate is used. differentiation by means of rate ranges may be in order. The system can operate successfully if: 1.

The union is likely to bargain for ranges in terms of movement within the range by seniority. option b. and the determination of any two will decide the third. This type of step system is most common in semiskilled blue-collar jobs. COMPENSATITION MANAGEMENT Types of Ranges Having made the argument that rate ranges are useful and expected. they may see that length of time on the job is an important input and expect a reward for it. or other characteristics beyond the normal or average. A further rationale for rate ranges is employee expectations. But they may also see a number of factors other than performance as relevant to movement within the range.1 © Copy Right: Rai University . but the middle is the most common. In particular. Is movement in the range in fact related to performance? One major study challenged this assumption and found that performance was a very poor predictor of pay rate. The connection of performance and reward is not well served in this case. usually a specified distance apart. as in the single-rate system. Other places. If there were ever a reason for organizations to have a formalized method of administering salaries. In this situation there would be a number of steps. This type of system is illustrated in figure 16-1.Where there is a significant quality variation among people on the job. a rate range may represent an attempt by the organization to retain the best employees by paying them on the basis of quality. Two basic types of step ranges are common: The first consists of a starting rate and a job rate (assumed to be the market rate). but one point should be made here. Thus. and progress to the midpoint over time is on the basis of learning job proficiency. as in the other step system. Step ranges may vary considerably in number of steps and the total range the steps cover. a person at the midpoint of the range is assumed to be a satisfactory performer. For instance. most commonly three. A person who is moved from one step to the next usually retains the new step even when the overall wage structure is changed. It is used in a wide variety of office nonexempt jobs and lower-level exempt jobs where performance is important but not critical. may be illegal to use as a differentiator of pay. Although performance is the reason most often given for rate ranges. Even if movement is by performance. Others. These two types of rate ranges are not mutually exclusive in an organization. More importantly. The rationale for such a system is that the discretion in higher-level jobs in the organization allows for performance differences not permitted in lower-level jobs. such as the person’s sex. option c. Another rationale for rate ranges may be collective bargaining. The future challenge of compensation managers is clear for the next ten years – employees walking into their offices with salary increase requests based upon free data from the Internet. Movement above the midpoint is assumed to be for performance. this movement corresponds with the learning curve of the job. The market rate is the maximum. This kind of system is illustrated in figure 16-1. Finally. since it is assumed that once the person has learned the job. such as the one-third point or the two-thirds point. It should also be noted that although some employees perceive the need for a rate range. the Internet has produced a wide array of sources by which employees can gain access to information regarding the competitive pay for their positions. Employees may also perceive that they should receive more pay for a variety of non-work-related factors. are also possible. Personal factors having to do with the job are a good example. In contract negotiation the organization may agree to rate ranges or to an expansion of rate ranges as an alternative to a general increase. adjusting the wage structure to meet labor-market changes automatically becomes a general increase for employees in a step system. Employees are hired at the starting rate. Some of these factors. New employees are brought in at the starting rate and then moved up to the job rate in a series of steps. we turn to how to develop rate ranges. they do not feel that performance should be the basis for this range. performance differentials are minimal. The need for this perception makes communication very important in pay systems. such as the birth of a new baby may be very important to the person but seen as irrelevant by the organization. Few people are content to make the same wage and be dependent on changes in the total wage structure for raises. The point is that there are three variables present. Step Ranges A common form of pay range consists of a series of steps. Movement within grades will be discussed later. management must protect the organization’s bottom line by guarding against overpaying employees based upon the high rates reported by Internet sites focused on increasing their visitor hits to enhance their IPO values.622. In this way. Lower-level pay grades may have the type of range that ends at the midpoint. a person can eventually reach the 39 11. The second type of step system places the market rate not at the top of the range but in the center of it. it would be to forestall the number of hours wasted by management trying to disprove inflated salary averages reported on free Internet sites. Clearly these two in combination will determine the size of each step. the plethora of job/career information freely available on the Internet has changed this. this rationale should be scrutinized. While in the 1990’s employees knew little about the competitive value of their jobs. If done properly. either in percentages or flat amounts. There is a further consequence of this type of system: all people tend to move to the top of the grade over time. while higher grades have ranges extending beyond. between the starting rate and the job rate. There must be more than just an actual connection between pay rate and performance: there must also be a perception by the individual that this connection exists. many employees who are going to school part time perceive that they should receive something for this.

The function of the midpoint. In this system the organization defines the midpoint. Organizations that promote intentionally fast encourage narrow ranges. Establishing range maximums is particularly difficult. illustrate two types of open pay ranges. This phenomenon in turn has a dramatic effect on the total wage bill.2 Parts of a wage structure Factors other than potential performance differences may also affect range breadth. options d and e. The latter is more common and will be used here. as well as variable starting rates among jobs. as in the second type of step system. These usually take place after five or ten years at the top of the grade. hourly jobs have ranges of 10 to 20 percent. Higher grade levels tend to have broader ranges for this reason. a great deal of movement within pay grades. It is the vertical dimension of the range. office jobs 15 to 35 percent. Any one employee may be paid anywhere within this defined range. no-growth situation the organization may soon be paying above market rate even if it sets the midpoint of the range at the market.top and stay there regardless of future performance.622. the assumption is that performance differences are narrow and vice versa. These broad ranges indicate that the process of determining the market rate is not a precise one. Realistically the person should be told that this is as high as he or she can go in the rate range and that any further salary adjustments will come from general increases. There is some logical maximum value for any job. If one knows the bottom and top of the wage structure. Option d has a series of steps up to the midpoint and an open range above the midpoint. Assuming that performance is the criterion. this may not be possible at the appropriate time. Long-term employees who will never be promoted and whose performance remains good are sometimes granted longevity increases beyond the maximum of the range. Trouble in recruiting and retaining professional and 40 © Copy Right: Rai University 11. With the increased emphasis on performance in organizations. In a period of normal growth and turnover the average wage for the job classification will probably match the market rate as people start to climb the ladder while others leave. Some organizations have many grades. since people do not stay within one grade very long. which tends to create an opposite set of characteristics. the person’s wage is not automatically adjusted when the wage structure is adjusted. When examining pay ranges we can determine the total wage structure with the help of three characteristics: the breadth of the rate range. Where ranges are narrow. the person’s performance is reviewed and adjustment is made in relation to that performance. either to a new job or by upgrading the tasks of the present job. Figure 16-1. This number can be a matter of the policy of the organization. the breadth would represent the opportunity for performance differences in the job. new employees would start at the bottom and move to the midpoint as they learned the job and became average performers. In practice. the slope of the pay line. Payment above the midpoint can be reserved for above-average performance. But in a lowturnover. Ideally when this point is reached the person is promoted. They provide more flexibility than a step system in granting pay increases and are more resistant to automatic increases. 16. and any two of the three characteristics just cited. Open Ranges In order to focus more clearly on performance and to avoid the problems of step ranges. is that the average performer would be paid at this rate. more and more organizations are using an open-pay range. open ranges not only may make it easier to reward performance but are also useful when criteria other than performance are to be used. Unfortunately. little overlap between grades and limited promotion to higher grades. open-range systems are becoming more popular. Also as in the second step system. Finally. At this point. regardless of how well it is performed. the third will be determined. Broad ranges can accommodate a wide variety of jobs. Dimensions of Ranges Any wage structure has a number of rate ranges and pay grades. the number of pay grades and the overlap (see figure 16-2). The breadth of the range should vary with the criteria for movement within the range. broad definition of job titles. Unlike the second step system. The breadth may be stated in dollar amounts or in percentages. Some organizations provide steps beyond the maximum of the range.1 . because all the employees in the job are in the top steps. Range Breadth The breadth of the rate range is the distance from the top to the bottom of the range a to b in figure 16-2. There are usually two rationales for this – seniority and recruiting. Small organizations tend to have a small number of pay grades accompanied by wide pay ranges. and managerial jobs 25 to 100 percent. the maximum and the minimum of the range. COMPENSATITION MANAGEMENT Fig. A wide range is encouraged if adjustments need to be large to be noticed by employees. option e has an open range from minimum to maximum.

the more pay grades. figure 16-2). COMPENSATITION MANAGEMENT Number of Grades The total number of pay grades in the wage structure can be a result of other calculations (mainly range breadth and overlap) or a conscious decision that forces the other two variables to adapt. A conscious decision to keep overlap to some maximum (such as 50 percent) will reduce one of the other two variables. It should be noted. For example. A structure that covers the whole organization will tend to have more pay grades than one that deals only with one job cluster. accompanied by wide ranges was traditionally thought of as unreasonable in that cost control of salary administration would be lost. A small number of pay grades allows for flexibility. A second is the comprehensiveness of the job structure. This reasoning seems to work: seldom are there complaints about overlap. Production jobs whose pay policy line is relatively flat will tend to have fewer pay grades than a managerial structure that has a steep slope. A person high up in a rate range who is promoted may start in the new rate range higher than the job rate of the new grade. Some overlap is desirable. with half the paychecks in Canada being written by governmental agencies. in order to retain them the organization must go beyond the maximum to provide any significant movement in grade. Overlap will work well where there are many wide pay grades. Operating such ranges calls for some method that differentiates between employees. number of pay grades is associated with size and number of levels in the organization. Of course. but this is always done in predetermined amounts. organic structure would have a minimum of pay grades whereas more structured and bureaucratic ones would have more. A general step system is illustrated in option c in Figure 16-1. and a determination of the size of a meaningful pay increase. the number of pay grades varies from as few as 4 to as many as 60. The last determinant is the pay-increase and promotion policy of the organization.1 © Copy Right: Rai University 41 . Overlap allows people in a lower pay grade to be paid the same as or more than those at a higher grade. In practice. a structure with a single pay grade would have a minimum and maximum embracing the total wage structure and would include all jobs.622. the type of jobs in a structure makes a difference. At one extreme. each job evaluation point on the horizontal axis would constitute a separate pay grade. A small number of pay grades. In the late 1980’s. A number of considerations help to determine the appropriate number of grades. The presence of many grades has the opposite characteristics. whether there are to be steps beyond the market rate. At least three steps are almost always used. Clearly there is no optimum number of pay grades for a particular job structure. it may be possible to move a person two steps. As with the number of grades. The designers of career paths in some organizations reduce this problem by placing the next job in the sequence more than one pay grade above the present one. Such a method must provide a decision framework for positioning each person within the range. But 10 to 16 seems to be most common. though. the time required to achieve proficiency in the job. The rationale for such a phenomenon is that a person at a lower pay grade whose performance is very good is worth more to the organization than a new person at the higher pay grade who is not yet performing effectively. At the other extreme. It also seems reasonable that organizations with a fluid. In the latter circumstance two jobs would occupy the same pay grade only if they had identical job evaluation points a situation that would assume a very accurate job evaluation plan. The main one comes about in promotions. (One should always be aware of the influence of government systems in compensation. The number of pay grades is reflected in the horizontal dimension of figure (a to c). But not to give the promoted person a pay raise is hardly to have promoted him or her. A large number of pay grades allows for many promotions but entails narrow ranges and a narrow classification of jobs. A large number of pay grades often coincides with a narrow range. Organizations generally set some policy that any promotion be accompanied by some specified minimum increase.managerial employees can be ameliorated by starting these people quite a ways up in the rate range. overlap can be either a determining variable or the determined variable. one cannot overlook these step approaches). The present section will focus on movement within grades in a step system. Moving Employees Through Rate Ranges Rate ranges make possible different pay rates for individuals in the same job and/or grade level. Not surprisingly. Third. One is organization size: the larger the organization. in that it assigns people to a wide range of jobs without changing their pay grade. such as one step in the new rate range or a specified percentage. Step rates facilitate the granting of pay increases by determining the amount that any increase will take. but there are problems. Open rate ranges facilitate a pay-for-performance approach to individual pay determination. This number is a function of the breadth of the rate range. this reasoning was badly shaken. that an open range system can also accommodate the methods of progression discussed. With few grades there are many jobs in each grade and the increments from one grade to another are quite large. Many organizations prefer to be able to grant a wide variety of increases to better relate pay to their pay-increase policy Overlap The final pay range determinant is the degree of overlap between any one pay grade and the adjacent grade (c to d in 11. Such increases can be considered a disadvantage as well as an advantage. Step Rates Most government and some private organizations divide their entire rate range into a number of steps. permitting a large number of promotions and multiple classifications in job families in the organization.

The major difference among them is the criteria for movement. not all employees exceed average performance on the job. In the second form there is a series of steps up to the midpoint but an open range from that point on with movement of any degree possible and decided by merit. A fully automatic progression plan is actually a variation of the single-rate or flat-rate system. then labor costs are equalized. raises concerns about the equity COMPENSATITION MANAGEMENT © Copy Right: Rai University 11. Studies indicate that in most areas of the country and in most industries. The system is designed to be automatic. Probably the usual combination is automatic progression to the midpoint – the market rate – and progression beyond the midpoint on the basis of merit. Another method is to combine longevity and merit at all points in the range. The distinguishing feature of this form is how movement is determined after the midpoint has been reached. or shortening the time period between step increases. On the other hand. A major source of variation in automatic plans is the nature of the maximum rate – whether it is the market rate or an abovemarket rate. It appears that automatic methods are most typical of factory jobs and combination methods most typical in office situations. The emphasis on productivity in the United States is translating itself into a search for ways to make employees more productive. Then a way must be developed to incorporate this judgment into a wage increase. It is also possible to hold back those who are not performing well. Focusing on performance instead of longevity is part of this trend. Variation can be introduced in two ways: First.1 . The first looks like option c in figure 16-1. there are a small number of increases often in rapid succession (every three months) to the maximum rate for the job. This makes administration more complex and. An organization does not have to restrict itself to only one method. It is possible also to design progressions that try to balance merit and longevity. Merit considerations in automatic plans should not be overemphasized. The rationale for this method of progression is that all employees can be expected to reach average proficiency within a certain time on the job. some governmental organizations may have many steps (five or more) and grant increases once a year. and the organization wishes to reward continuity of employment. but those with above-average performance receive more. Automatic-progression methods are simple to administer since they are purely mechanical adjustments made by time in grade. The areas of prevalence of these different methods are hard to determine. the time period may vary from step to step. such as basic industries. In these situations longevity on the job leads to higher proficiency. The major methods are automatic progression. some systems move people rapidly to the midpoint and then much more slowly. Introducing merit complicates the pay decision by adding a judgment about how well the person is doing the job. Automatic Progression This type of progression (sometimes referred to as scheduled increases) consists of wage increases based automatically on length of service. it may use different methods for different jobs or even different methods for a single job at different parts of the rate range. These progressions usually let employees focus on different criteria at different places in the pay range. this period matches the automatic movement to the midpoint. they tend to spread out the progression to the top of the grade over a long period. The second variation introduces a little merit into the system by either denying movement to the next step for poor performance. If all employees can expect to reach the maximum of the rate range after a given period on the job. not the rule. Organizations that move only to the market rate tend to have rate ranges with a small number of steps and a short time frame for progression. They are interested not so much in rewarding longevity as in encouraging learning the job. The rate range can take one of two forms in this case. But this may be changing. giving good performers a double-step jump. if the judgments are perceived as arbitrary. the assumption is that the maximum is the real rate for the job. a combination of merit and automatic progression and merit progression. However. Combinations of Automatic and Merit Progression We have just seen that some introduction of merit is possible even in automatic progressions that focus on longevity. Under this arrangement all employees receive an automatic adjustment. The latter action is rare but can be effective in probationary situations. Automatic progression does not have to be totally automatic. if these are out of balance. Unions commonly accept rate ranges but insist on automatic progression and encourage maximum rates that are above the 42 market rate. option d. these alternatives are rarely used: the problems they pose for administration of the workplace are not perceived by supervisors to be worth the advantages they offer.622. and variations are seen as exceptions. Organizations that move beyond the market rate are specifically rewarding longevity on the job. then labor costs are higher or lower than is optimum. Organizations make much more use of automatic progression than might be assumed. In most systems that allow either movement ahead or denial of increases. In some situations. the extended steps beyond the midpoint are clearly tied to longevity. This form is illustrated in figure 16-1. and movement from the midpoint on should be based on performance that is above average. automatic progression is the norm and not the exception. If the organization does a good job of matching time taken to reach the midpoint with time taken to reach proficiency in the job. For instance. These are jobs in which proficiency can be gained in a short time. such as a two-step jump. with a series of steps from bottom to top and the market rate as the middle step.Methods of Progression All methods of progression specify how a person moves from the bottom of the range to the top of the range.

It refers to the case in which a person is paid less than the minimum of a grade. Lower-level supervisors. either the system tends to be seen as arbitrary or supervisors tend to grant the same increase to all employees and thus destroy the performance-reward connection. But what if it hires a person who can do the job from the beginning? Clearly this person should be hired at the market rate (the midpoint). for example. This phenomenon of getting to the top of the range tends to be hidden when the organization is growing and times are good. unless the performance-appraisal system is tied consistently to the merit pay adjustments. Terms of the trade Many a new compensation analyst has been tested by management with the question.622. based upon their qualifications. In actuality. Correcting Out-of-Line Rates The rate range defines the minimum and maximum that a person may be paid for a given job. The labor market may complicate the rate range when there is a shortage of applicants. and this may be worth the trouble. people are likely to be brought into the organization anywhere up to the midpoint of the range. Movement within the range is based strictly on performance. Thus a system that ends at the market rate has a flat rate for hiring fully qualified employees. The advantage is that a connection is made between performance and reward. A person who is then expected to stay in the grade for three or more years before promotion can only look forward to general increases. and midpoint defined. For these supervisors it is often cooperation and not competition that is important. a merit progression is usually a combination of merit and longevity. annual pay increases are almost institutionalized in organizations today. in particular. Because of the inflation of the late 1970s. What we cover here is movement between steps of a pay grade. and the organization finds that all employees are at the top of the range. a person paid below the minimum of the rate range for his or her job is said to carry a green-circle rate.of the system. But when growth stops. For a number of reasons an individual’s pay may be more or less than the prescribed range. people differ in their rate of improvement to proficiency. COMPENSATITION MANAGEMENT Rate Ranges and Recruitment To this point we have assumed that the organization has been hiring people who are just qualified and moving them up in the range as they learn the job. Further. but not given a pay increase (because all increases may have been frozen by top corporate management). Labor costs thus become very high at exactly the time the organization can least afford them. employees stay on their current job. If step 4 is one step above the midpoint. “Do You Know What a Green Circle Is?” This question separates the college student from the practitioner. and this should be taken into account. This lack of wage increases makes the potential for feelings of inequity increase considerably. it is performance that the organization wants and should pay for. The organization needs policies for dealing with these out-ofline rates. The rationale for merit progressions is that the movement to proficiency is actually an improvement in performance and should be treated as such. but actually the person needs only to maintain a level of performance that will not result in termination. This extreme situation makes any upward movement within the grade difficult or impossible for the person. The 11. and there are no adjustments for general increases. This may result in hiring rates at the top of the rate range or above. In practice. as in figure 161. maximum. which requires him or her to make competitive distinctions between employees.1 © Copy Right: Rai University 43 . then promotions slow up. then. the only pay increases received are those that occur through wage structure adjustments. Merit Progression A pure merit progression employs an open rate range with only the minimum. But studies show that up to 80 percent of employees are at the top of their rate range. In a Bad Economy In all step systems most employees eventually get to the top of the pay range. From the employee’s perspective. This pay-for-performance system requires an integration of performance appraisal with pay determination. one way organizations adjust is to raise the starting pay to wherever in the range it must go in order to obtain people. as in option e in figure 16-1. In a merit progression method the good performer should get there faster than the average or poor performer. The initial decision to move a person from say. This situation Actual Practice Most organizations and their management claim that they use a merit progression system. This occurs. especially where organizations simply call all pay adjustments merit increases. movement to the top of the range is accelerated. on the basis of merit. and these are likely to decrease in these circumstances. when a person is promoted into a position in a higher pay grade. option c. but from that time on the person retains step 4 when adjustments to the wage structure are made. step 3 to step 4 is based on performance. When it is hard to recruit. Granting all employees the same pay increase and announcing it as a merit increase destroys the concept of merit. Underpaid Employees As stated. This makes merit progression something of a misnomer. thereby remaining at the same relative position in the range. the assumption is that this person is always above average in performance. find it uncomfortable to deal with merit pay. problem is compounded when management mixes up general pay increases with merit pay.

both in others and in the person affected. One. Overpaid Employees A person paid above the maximum of the range for his or her job is said to receive a red-circle rate. The advantage of the adder is that the top rate for the job is made clear and both the person and the organization are aware of the exceptional and temporary character of the differential. Of course it is possible.1 .usually occurs when the wage structure is changed upward and the individual was at the bottom of the rate range. COMPENSATITION MANAGEMENT Tutorial Activity 1. Other names for this situation are ringed. overrates. Transfer or promote the person to a job in an appropriate pay grade. Failure to correct red-circle rates means that range maximums are meaningless. there are usually adjustments that can be made. Discuss the importance of wage administration rules in organizations. Freeze the pay until general increases catch up with the current pay. so some action is always called for. and personal out-of-line differentials. This same reasoning could apply to older and handicapped employees who cannot fully carry out their jobs. 3. such as six months. a lower classification involving job redesign to accommodate the person’s skills would be in order. Solutions to overpay vary from doing nothing to reducing the pay to the top of the range. 44 © Copy Right: Rai University 11. Eliminate the differential after a period such as a year or gradually over time. the adder.1 Questions 1. reduce the pay at the end of the period.622. For instance. The employee is given 100 percent of the differential the first year. people may be paid more than their job and performance are worth to the organization. Even so. and any reduction in pay will be seen as unfair by them. If the person is performing adequately. if the labor market is very tight and marginal workers must be hired and retained. A number of less common arrangements also exist. What do you understand by rate range? Discuss the types of rate ranges. Discuss the factors affecting wage determination. 2. All the actions just described try to balance these two perceptions in arriving at an equitable solution. Also. Freeze the pay for a limited period. a careful review is required not only may the costs of adjustments be high but also equity between the newly raised employees and other employees on the job may require a phasing in of increases. But if many employees are underpaid. is a payment to the employee in quarterly installments of the difference between his or her rate and the maximum of the range. If this is unsuccessful. Usually there will be a few underpaid employees. and a policy of bringing their rates into line immediately protects the integrity of the pay system. 2. that the employee is not worth the minimum of the range. Little question exists regarding the appropriate response: the underpaid employee should have his or her pay raised to the minimum of the range. For example. the employee may be paid the difference times 2080 hours and have his or her pay rate brought immediately into line. Overpayment is usually not the fault of employees. Another possible solution is a lump sum payment. and that it is more difficult to deal with than the problem of underpaid employees. Or a trainee rate may be appropriate if the employee is still learning the job. there is also the perception of equity by other employees. On the other hand. 4. Then attempt either of the previous strategies. 75 percent the next year. all underpay situations should be examined for racial or gender discrimination. that it stems from a number of sources. redesign may be unnecessary where there is already a lower-level job to which the person can be assigned. Both approaches can cause equity problems. The most common solutions are the following: 1. for a number of reasons. red allowances. and so on until there is no differential. On the other hand. immediately if possible or in a couple of steps. flagged. Any solution to overpay involves questions of equity. Redcircle the job and not the person. 3. or personal rates. the difference between his or her rate and the minimum of the range should be made up by the employer. and organizational resources are being diverted into paying these rates rather than rewarding others’ good performance. The variety of terminology suggests that this is a common problem in organizations. Explain wage determination process in detail.

various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition. 3. trade unions encourage this practice so that their members can have equal pay. Productivity. but if the demand for manpower skill is minimal. Living wage. all of these remuneration standards are determined by immediate market forces and factors. such as changes in the cost of living. wages are cut because funds are not available. The cost of living. equal work and geographical differences may be eliminated. 7. functionally related firms in the same industry require essentially the same quality of employees.. it will not be able to attract and maintain a sufficient quantity and quality of manpower. During the time of prosperity. or because by lowering hiring requirements they can keep jobs adequately manned. irrespective of their profits or losses. Mescon says: “The supply and demand compensation criterion is very closely related to the prevailing pay. and recruit marginal labour. the result is a rise in the price to be paid for these skills. Besides the basic factors provided by a job description and job evaluation. viz. The prevailing market rate. some units pay well above the going rates in the labour market. employers pay high wages to carry on profitable operations and because of their increased ability to pay. 4. Second. They do so to attract and retain the highest calibre of the labour market. In the long run. 2. and the ability to pay are accorded a secondary importance. the wages will be relatively low. At the other extreme. those that are usually taken into consideration for wage and salary administration are: 1. 11. But a large number of them seek to be competitive in their wage programme. Marginal firms and non-profit organisations (like hospitals and educational institutions) pay relatively low wages because of low or no profit. If the demand for certain skills is high and the supply is low. job requirements and the prevailing rates of wages in the labour market. Supply and demand of labour. the economic influence on the ability to pay is practically nil. Fourth. the supply and demand of labour. higher ability to pay and the bargaining power of a trade union.e. The organization’s ability to pay. while other organisations pay lower wages because economically they have to. They feel that.622. Marginal units pay the minimum necessary to attract the required number and kind of labour. i. They do so to attract and retain the highest caliber of the labour force. Belcher and Atchison observe: “Some companies pay on the high side of the market in order to obtain goodwill or to insure an adequate supply of labour. and lower wages when it is excessive. comparable wage and on-going wage concepts since. by paying high wages. This results in a considerable uniformity in wage and salary rates. Trade union’s Bargaining power. © Copy Right: Rai University 45 . labour costs may turn out to be lower than those existing in firms using marginal labour. This greater production per employee means greater output per man hour. Hence. Other factors.1 The other alternative is to pay higher wages if the labour supply is scarce. A sound wage policy is to adopt a job evaluation programme in order to establish fair differentials in wages based upon differences in job contents. In the short run. with the same skills and experience. All employers. if there is great demand for labour expertise. Most units give greater weight to two wage criteria. Similarly. must pay no less than their competitors and need pay no more if they wish to attract and keep workers. they would attract better workers who will prod use more than the average worker in the industry. competition demands that competitors adhere to the same relative wage level. Some managers believe in the economy of higher wages. these labour-market pressures probably force most organisations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job evaluation. Some units pay high wages because of a combination of favourable product market demand. But during a period of depression. the ability to pay is very important. Often. 6. wages rise. 5.COMPENSATITION MANAGEMENT LESSON 7: INTRODUCTION TO FACTORS INFLUENCING WAGE AND SALARY STRUCTURE AND PRINCIPLES OF WAGE AND SALARIES ADMINISTRATION Learning Objective • • To know the Factors Influencing Wage and Salary Structure To understand the Principles of Salary Administration Factors Influencing Wage and Salary Structure The wage policies of different organizations vary somewhat. they aim at paying somewhere near the going rate in the labour market for the vari0us classes of labour they employ. When prolonged and acute. if the same or about the same general rates of wages are not paid to the employees as are paid by the organisation’s competitors. these units pay only the minimum wage rates required by labour legislation. in essence. Third. Finally. This is done for several reasons: First..

But the strength of these forces varies by organization type and within organizations by job clusters. establish some key jobs and job clusters and provide an upward thrust to the entire structure. and government employment.Such wage structures may be influenced by product markets. unions. and wage contours. without regard to organization type. isolated locations. wage structures represent management decisions shaped and restrained by technology. Banks. Organizations made up largely of members of craft unions have wage structures almost completely determined by the union. Managerial salary structures are primarily internally determined except in very tight labor markets. But although organizations can be classified as having wage structures that are oriented primarily in one of the four ways just outlined. Organizations with internally determined or union-andproduct-market-determined wage structures leave large portions of wage structure decisions to management. job clusters. in mining. 16.4 : Criteria for wage Fixation 8. Organizations in many branches of manufacturing. long shoring and maritime work. because jobs are easily identified and are quite uniform throughout the market. Internally determined wage structures result from management decisions and may range from highly rational structures flowing from job evaluation to a system of personal rates. Key jobs acquire their status from labor markets. Unions.622. printing and publishing. Cost-price relationships and the product market compel the organization to resist this upward push and to make changes in jobs and job relationships in line with such resistance. Organizations with this kind of wage structure can eventually get into a competitive bind. Description in Detail The Organization’s Ability to Pay Organization decisions on job and wage structures represent a balancing of the aforementioned forces. department stores. Levels of skills available in the market. and restaurants are organizations with primarily market-oriented wage structures. Professionals are groups of employees whose jobs have been designed largely by the educational process they have been through. Job requirements. regardless of the major activity of the organization. product markets. again often fostered by unions. through their insistence on traditional relationships. however. and entertainment offer examples of union-oriented wage structures. and comparisons with other organizations. and in some service industries are examples of organizations with union-and-product-oriented wage structures. Organizations having many specialized jobs. Organizations employing artisans. Low ratios of labor cost to total cost and inelastic product demand. Job clusters come from technologies and employee skill groupings. Custom strongly influences all three. and the wage structure of the clerical job cluster is largely market-oriented. COMPENSATITION MANAGEMENT Fig. are usually forced to develop a unionoriented wage structure for this job cluster.1 . Organizations of this type have only limited choices. but only if labor cost is high relative to total cost. unless they are members of an industrial union. 9. Organizations whose members come largely from a wellorganized and competitive labor market but are not unionized have what might be called market-oriented wage structures. dealing in labor markets too disorganized to provide adequate grading and pricing. Wage structure determination in these organizations follows closely Dunlop’s theory of key jobs. Most large. Managerial attitudes. as do unique organizations in larger communities. Professional employees (such as engineers and scientists) have salary structures that combine market orientation and internal determination. reduce competitive pressures on organizations. 11. organizations of any considerable size have job clusters that fall more comfortably into one or more of the other categories. and cost-price relationships. In these organizations. and lacking unionization have primarily internally determined wage structures. Technology provides some uniformity in job structures in organizations engaged in common lines of production. unionized organizations have what might be called union-and-product-oriented wage structures. Organizations in small towns. and the product market. often fostered by unions. 46 © Copy Right: Rai University 11. Organizations in construction. the railroads. or nonunion communities provide examples. and 10. Wage contours originate in customary comparisons with other organizations. This makes for a commonality between organizations in the design of professional jobs. Psychological and sociological factors. insurance companies. All organizations employ clerical workers.

1 First. if there is great demand for labour expertise. The other alternative is to pay higher wages if the labour supply is scarce. employees in these areas often recognize the advantageous position they are in and seek maximum advantage. A part of this negotiation is for a relative increase in pay greater than other groups are obtaining. most organizations replace the external labor market with an internal labor market that makes decisions by administrative means rather than according to supply and demand. wages are cut because funds are not available. in essence. But given relatively adequate labor supplies. If the ratio of unit labor cost to price is critical. © Copy Right: Rai University 47 . the strength of these relationships varies by organization and over time. Wage increases should be given by those organizations which can afford them. of course. An organization’s compensation policies generally tend to conform to the wagerates payable by the industry and the community. clerical. But organizations differ greatly on how many of their jobs are highly market-oriented. Marginal firms and non-profit organisations (like hospitals and educational institutions) pay relatively low wages because of low or no profits. especially changes not made by other organizations. therefore. wages rise. But another part of the negotiations is for a “better job.5 : Factors Affecting Compensation Plans 11. competition demands that competitors adhere to the same relative wage level. Computer programmers are an example of a group of workers with a skill in short supply in a new and expanding industry. As discussed earlier. Shortages in the labor market provide those who are qualified to fill the jobs an opportunity to negotiate better terms of employment. Although. 16. or is designed to fill openings from outside the organization. particularly in those organizations in which the labor supply is mostly provided from within the organization. all of these remuneration standards are determined by immediate market forces and factors. In the short run. and organizations will strongly resist changes in their wage rates. those whose prices are interrelated.Thus the typical organization develops and administers at least four or five of the following separate wage structures: shop. there will be relationships among these separate wage structures. Similarly. supervision. During the time of-prosperity. The product market also affects wage structures through costoriented jobs. the jobs involved become cost-oriented jobs. On the other hand. and lower wages when it is excessive. But during a period of depression. Organizations that compete in the same product market. the result is a rise in the price to be paid for these skills. engineers and scientists. irrespective of their profits. which are highly sensitive to the labor market but rely on the organization’s internal labor supply to fill most job openings. These organizations have restricted ports of entry. and executives.” Workers in jobs where there is a shortage of qualified workers will demand changes in job content that will increase the job’s value to the organization and in the eyes of other workers. the ability to pay is very important. these labour-market pressures probably force most organisations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job evaluation. craftsmen and technicians. All employers. The independence of action and discretion allowed this group of employees is based. is otherwise well organized. In the long run. If the demand for certain skills is high and the supply is low. runs into the problem of customary relationships already discussed. the labor market determines wages only if the labor market: is structured by unions. Prevailing Market Rate This is also known as the ‘comparable wage’ or ‘gain wage rate’. and determine organizational wage structure and level. The exception occurs when there is an internal and external shortage of people to fill vacancies for specific skills. any job for which qualified people are in short supply becomes a market-sensitive job. or those experiencing or anticipating increased competition or decreased demand may regard any increase in unit labor costs as a threat. on the continuing shortage of this skill. Companies that have good sales and. at least partially. This is done for several reasons: • COMPENSATITION MANAGEMENT Fig. employers pay high wages to carry on profit9ble operations and because of their increased ability to pay. but if the demand for manpower skill is minimal. Supply and Demand of Labour The labour market conditions or supply and demand forces operate at the national. the wages will be relatively low. When prolonged and acute. the economic influence on the ability to pay is practically nil. In fact. sales. especially when labor cost is a significant proportion of total costs. must pay no less than their competitors and need pay no more if they wish to attract and keep workers. Such jobs exist where profit margins are sensitive to changes in unit labor cost. Mescon says: “The supply and demand compensation criterion is very closely related to the prevailing pay.622. regional and local levels. and is the most widely used criterion. This. comparable wage and on-going wage concepts since. administrators. high profits tend to pay higher wages then those which running at a loss or earning low profits because of the high cot of production or low sales. obviously. or losses.” Please note that the labor market influences the wage and salary structure through the supply of labor.

methods. The limit of craft rates is the cost-price resistance of employers. but compress the structure in relative terms.1 . whereas flat percentage increases maintain relative differentials and increase absolute differentials. the influence of industrial unions on wage structure is light compared with that of craft unions. various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition. they feel that the level of -living prescribed in a worker’s budget is open to argument since it is based on subjective opinion. This criterion calls for pay adjustments based on increases or decreases in an acceptable cost of living index. A strike or a threat of a strike is the most powerful weapon used by it. industrial unions are concerned with equalities and differentials among particular groups of jobs. functionally related firms in the same industry require essentially the same quality of employees. with respect to general increases. materials and management. Craft unions tend to determine craft rates as well as the design of craft jobs for all organizations employing members of the craft. Sometimes trade unions force wages up faster than increases in productivity would allow and become responsible for unemployment or higher prices and inflation.hour. Also. can also affect wage structures. If the industrial union deals with organizations in a common product market. Actually. However.men. but the differential effects of craft and industrial unionism and the type of bargaining relationship are considerable. with the same skills and experience. while they resist changes that might decrease employee security. although theoretically it is a sound compensation criterion. operationally many problems and complications arise because of definitional measurement and conceptual issues. on the other hand. Finally. workers and trade unions demand adjusted wages to offset the erosion of real wages. for those remaining on the pay roll. industrial unions may attempt to impose a common wage structure on organizations. greater ingenuity and skill by labour are all responsible for the increase in productivity. Another problem is that productivity can be measured at several levels . trade unions encourage this practice so that their members can have equal pay. a real gain is often achieved as a consequence of a trade union’s stronger bargaining power. Thus. rational wage structure. Trade Union’s Bargaining Power Trade unions do affect rate of wages. the higher the wages. They often serve to reinforce custom and tradition in jobs and wage structures. better organization and management. Flat cents-per-hour or dollars-per-month increases maintain absolute differentials. productivity measures the contribution. Industrial unions especially may follow a policy of cents-perhour increases because most of their members are in lower-paid COMPENSATITION MANAGEMENT • • • Belcher and Atchison observe: “Some’ companies pay on the high side of the market in order to obtain goodwill or to insure an adequate supply of labour. Fourth. But even in such cases. economic level. Generally. It is not due to labour efforts alone. When the cost of living increases. Technological improvements. However. Third. No productivity index can be devised which will measure only the productivity of a specific factor of production.• Second. are more concerned than craft unions with employing organizations. equal work and geographical differences may be eliminated. but less concerned with product markets because they often bargain with organizations in many product markets. Such job rates distort rational job and wage structures. plant. and a series of them can so impair an organization’s cost-profit position that management is forced to fight for a revised. machines. and is measured in terms of output per man. it will not be able to attract and maintain a sufficient quantity and quality of manpower. Unions affect wage structure. Typically this means that wages of changed jobs are not cut but often increased when the changes result in increased productivity. In recognition of the influence of the cost of living. “escalator clauses” are written into labour contracts. industry or national.622. Industrial unions. the development of better methods of production by labour and management. or because by lowering hiring requirements they can keep jobs adequately manned. when living costs are stable or decline the management does not resort to this argument as a reason for wage reductions. The Living Wage This criterion states that wages paid should be adequate to enable-an employee to maintain himself and his family at a reasonable level of existence However. even if the wage structure clashes with product-market realities. it may attempt to impose a common job design and wage structure by comparing rates of a number of reasonably comparable jobs. of all the resource factors .” The Cost of Living The cost-of living pay criterion is usually regarded as an auto minimum equity pay criterion. Within organizations.job. employers do not generally favour using the concept of a living wage as a guide to wage determination because they prefer to base the wages of an employee on his contribution rather than on his need. while other organisations pay lower wages because economically they have to. the stronger and more powerful the trade union. 48 © Copy Right: Rai University 11. A trade union’s bargaining power is often measured in terms of its membership. Thus. if the same or about the same general rates of wages are not paid to the employees as are paid by the organisation’s competitors. Productivity It is an another criterion. This results in a considerable uniformity in wage and salary rates. its financial strength and the nature of its leadership. Union strategy. Please note that the unions also affect wage structures by resisting lower wage rates for jobs downgraded by technological change and by demanding that increased productivity arising from any source results in wage increases.

most of them craft unions. and correcting the irrationalities may require long and bitter strikes. and so forth. or in the wages get. the weight to be given for performance or length of service. But technology seldom provides rigid boundaries. Demand wage increases for all increases in job productivity. sex or religion. on participating in the latter decisions. and competitive pressures can operate in designing jobs and job relationships. Craft unions. seek to preserve customary relationships and job security. unions. Jobs for clerical workers are structured by the institutions that train them. Lester observes. it is clear that organizations determine the pay for jobs by taking a number of considerations into account. In fact.of wages are bound to bound to be affected accordingly. This participation is guided by customary relationships among and within employee groups. Sociologically and ethically. persons perceive the level of wages as a measure of success in life. what job factors should be’ used to reflect job worth. to reduce turnover. and job conditions required. color. Furthermore. there is shortage of skilled resources. worker preferences and resulting labor-supply shortages force restoration of relative differentials in both union and nonunion situations. Custom also operates in nonunion situations. Managerial Attitudes These have a decisive influence on the wage structure and wage level since judgment is exercised in many areas of wage and salary administration — including whether the firm should pay below average.622. At the other extreme are semiskilled factory employees. some unions take an active part in job evaluation. Unions of semiskilled factory workers typically insist. “Top management’s desire to maintain or enhance the company’s prestige has been a major factor in the wage policy of a number of firms. These influences are often indirect in that they influence the design of jobs and therefore the way the organization is likely to evaluate it in relation to other organization jobs. Still other unions seem totally uninterested in job designs and the wage structure of the organization and they 1. Besides the determinants so far considered. for example. Desires to improve or maintain morale. Job Requirements Generally. But unions cannot maintain this strategy in the face of opposition from higher-paid groups. A further societal influence on jobs and wage structures is the technology used by the organization and changes in that technology. The technological development.” that “ they are not exploited. 2. Please note that people and institutions both have a hand in designing jobs and wage structures.” To satisfy the conditions of equity. These choices lead in turn to variations in the wage structures that organizations create. to attract high-caliber employees. with the result that clerical jobs are often quite similar in different organizations. and that no distinction is made on the basis of caste.groups. seem inadequate or feel the reverse of all these. As mentioned. and the result is influenced in part by the institutions that train them. and Encourage wage-inequity grievances. however. But organizations do not have total freedom in the design of wage structures. It typically provides choices within which management. Skill Levels Available in the Market With the rapid growth of industries. or above average rates.” that “ wages should be commensurate with their efforts. effort. both the structure and level. business trade. these things should not be overlooked by the management in establishing wage rates. Jobs are graded according to the relative skill. Thus the wage levels of skilled employees are constantly changing and an organization has to keep its level upto suit the market needs. Insist on no wage cuts when job content changes. people feel that “ equal work should carry equal wages. Therefore. the higher are the wages Measures of job difficulty are frequently used when the relative value of one job to another in an organization is to be ascertained. Other unions. automation have been affecting the skill levels at a faster rates. the more difficult a job.1 © Copy Right: Rai University 49 . causing resistance to change in job design. which are often prolonged by political struggles within the union resulting from the wage inequities. COMPENSATITION MANAGEMENT 11. Psychological and Social Factors These determine in a significant measure how hard a person will work for the compensation received or what pressures he will exert to get his compensation increased. they have considerable choice as to how much emphasis to place on various determinants. resist changes in job content and structure. Organizations employing these workers are subject to little influence on job design by either employees or unions. But probably the strongest influence of unions on wage structures is the quality of the union-management relationship. Professional employees and managers insist on having a say in the design of their jobs. They may not take pride in their work. except in job-redesign decisions. Psychologically. These matters require the approval of the top executives. famines and justice. there are a number of other influences on the design of wage structures that will be considered in this section. responsibility. and their interest in a rational wage structure results in reduced grievances over wage inequities. 3. determine the kinds of work their members do and expect employing organizations to adjust to these decisions. From the last lessons. and are uninterested in the employer’s problems of maintaining economic efficiency. and to provide a high living standard for employees as possible also appear to be factors in management’s wage-policy decisions. a management should take these factors into consideration. people may feel care have an inferiority complex. In such cases job. Strongly resist job-content and other changes calculated to increase productivity. and wage structures become chaotic.

comparable wage and on-going wage concepts since. Control or Administration of Wages and Salaries Wage and salary administration should be controlled by some proper agency. job description.Introduction to Salary Administration It comprehends systems and procedures designed for purposes of efficiently managing the compensation of organisational members. employers pay high wages to carry on profitable operations and because of their increased ability to pay. They feel that. or because by lowering hiring requirements they can keep jobs adequately manned. some units pay well above the going rates in the labour market.. Marginal firms and non-profit organisations (like hospitals and educational institutions) pay relatively low wages because of low or no profit. This greater production per employee means greater output per man hour. The wage policies of different organizations vary somewhat. They do so to attract and retain the highest calibre of the labour force. functionally related firms in the same industry require essentially the same quality of employees. Marginal units pay the minimum necessary to attract the required number and kind of labour. various government laws and judicial decisions make the adoption of uniform wage rates an attractive proposition. the supply and demand of labour. But during a period of depression. Some units pay high wages because of a combination of favourable product market demand. iii. Finally. In the long run. Mescon says: “The supply and demand compensation criterion is very closely related to the prevailing pay. Some managers believe in the economy of higher wages. while other organisations pay lower wages because economically they have to. Such staff committees may be for job evaluation. and for a review of present wage rates. the ability to pay is very important. This responsibility may be entrusted to the personnel department or to some job executive. it will not be able to attract and maintain a sufficient quantity and quality of manpower.e. it is usual entrusted to a Committee composed of high-ranking executives representing major line organizations. competition demands that competitors adhere to the same relative wage level. if there is great demand for labour expertise. labour costs may turn out to be lower than those existing in firms using marginal labour. i. During the time of prosperity. Most units give greater weight to two wage criteria. and v. ii. wages are cut because funds are not available. Alternatively. If the demand for certain skills is high and the supply is low. The major functions of such Committee are: i. job requirements and the prevailing rates of wages in the labour market. such as changes in the cost of living. must pay no less than their competitors and need pay no more if they wish to attract and keep workers.622. procedure and policies. the result is a rise in the price to be paid for these skills. Approval and /or recommendation to management on job evaluation methods and findings. Other factors. all of these remuneration standards are determined by immediate market forces and factors. Since the problem of wages and salary is very delicate and complicated. This Committee should be supported by the advice of the technical staff. viz. At the other extreme. Often. Third.1 . Fourth. All employers. When prolonged and acute. trade unions encourage this practice so that their members can have equal pay. They do so to attract and retain the highest calibre of the labour market. the economic influence on the ability to pay is practically nil. these units pay only the minimum wage rates required by labour legislation. Second. wage and salary survey an industry. in essence. irrespective of their profits or losses. the over-all plan is first prepared by the Personnel Manager in consensus and discussions with senior members of other departments.. and lower wages when it is excessive. equal work and geographical differences may be eliminated. merit rating. • • • Belcher and Atchison observe: “Some companies pay on the high side of the market in order to obtain goodwill or to insure an adequate supply of labour. Similarly. with the same skills and experience. if the same or about the same general rates of wages are not paid to the employees as are paid by the organisation’s competitors. Review and recommendation of basic wage and salary structure. by paying high wages. but if the demand for manpower skill is minimal. In the short run. the wages will be relatively low. they aim at paying somewhere near the going rate in the labour market for the vari0us classes of labour they employ. But a large number of them seek to be competitive in their wage programme. Help in the formulation of wage policies from time to time. The other alternative is to pay higher wages if the labour supply is scarce. This is done for several reasons: • • COMPENSATITION MANAGEMENT First. This results in a considerable uniformity in wage and salary rates. It is then submitted for final approval of the top executive. and recruit marginal labour. these labour-market pressures probably force most organisations to “reclassify hard-to-fill jobs at a higher level” than that suggested by the job evaluation. Co-ordination and review of relative departmental rates to ensure conformity. and the ability to pay are accorded a secondary importance. they would attract better workers who will prod use more than the average worker in the industry. Review of budget estimates for wage and salary adjustments and increases. 50 © Copy Right: Rai University 11. Hence. iv. wages rise. higher ability to pay and the bargaining power of a trade Union.

Although internal salary structure is not directly and instantaneously responsive to market forces at all points. the value of a job is comparative. The actual appraisal of the performance of subordinates is carried out by the various managers. for the wage and salary structure and the rules for administration. Internal Relativities The value of a job within an organisation is relative. Within your own organisation. External equity is a fundamental aim of any salary system. However. Besides this. If insufficient attention is given to market rates your organisation may not be able to attract and retain good quality personnel. the government has had often to appoint wage boards to determine the wages in particular industries: You are also perhaps aware of the labour courts and industrial tribunals set up by the government to settle wage disputes by adjudication. which may form the basis for wage fixation. the value of the service to the buyer and seller. his salary should be influenced by his performance. Individual Worth Although the value of a job is relative to other jobs inside and outside the organisation. COMPENSATITION MANAGEMENT Description External Relativities A salary is a price indicating. However I when you design such an ideal structure you must also take account of external as well as internal pressures. Depicting the interplay of external and internal influence. Internal relativities: salary relativities between jobs within the organisation depending on the values attached to different jobs. In unionized industries/organisations wages/salaries can be determined through the bilateral process of collective bargaining. Principles of Salary Formulation The main factors affecting salary levels within an organisation are: External relativities: market rates as affected by supply and demand and general movements in pay levels. Individual worth: the value of the individual’s performance to the organisation. who in turn submit their recommendations to higher authority and the latter. its implementation becomes a joint effort of all heads of the departments.Once he has given his approval. The ideal salary structure should establish and maintain appropriate differentials based on an objective system of measuring relative internal values. his capacity to pay. The wages that an employer is willing to pay depends on his philosophy. Hence. to the personnel department. The government has always played a significant role in the determination of wages in the organised sector. This is determined by the scientific job evaluation method and/or by the going rate in the area. and many will claim that a job is worth what the market says it is worth. the president makes the final decision. there are many region-cum-industry settlements like the agreement between the management and the union of an industry in a particular geographic region.622. the value of a person in the job is something very specific to that individual. the employer and the employed. the general structure must reflect the changing pressures of the market. The salary structure of an enterprise is built on the premise that each job has its own price. The salary system should. we must take recourse to job evaluation to arrive at this internal relative values of jobs. In unusual cases of serious disagreement. given the imbalanced positions of the employer and the employee. The personnel department ordinarily reviews recommendations to ensure compliance with established rules of administration. The going rate ‘for a job is its market rate. Self contained model where external influence is marginal Stage2. his competitive position and his ability to attract and retain a workforce by factors other than wages. Stage 1. pay levels will be affected by real or perceived differences between the value of jobs. enable the individuals to be rewarded according to the contribution and not restricted by the artificial barriers contained in a rigid salary structure. in turn. In this sense. as far as possible. You are probably aware that there are a number of laws to ensure payment of a minimum wage and payment on time. like any other price. when such processes break down or reach a 11. As we have seen in an earlier unit.1 © Copy Right: Rai University 51 . Moreover.

with in – grade increases. For revision of wages. the number of pay grades. The design of rate ranges may vary from a structured set of steps a given percentage apart to an open range in which only the minimum. Last. as current employees are paid less than new employees. and the amount of overlap between grades. retain and motivate people of the required caliber and qualifications. Keeping employees within the rate range is a constant problem. A job carries a certain wage rate. One of the most pervasive problems is keeping the focus of increases on performance. if there is one. These types of plans can provide the organization with a welltrained work force. The general level of wages and salaries should be reasonably in line with that prevailing in the labour market. Wage structures deal with rewarding these sets of contributions by establishing rate ranges for jobs. a wage committee should always be preferred to the individual judgment. it may be a wage incentive plan. and a person is assigned to fill it at that rate. This allows for variable pay rates for employees on the same job and/or in the same pay grade. so the choice is one of emphasis and not of kind. or a manager. while other aspects of compensation administration are often centralized in the hands of compensation staff. This in turn can lead to compression. In still others. The labour market criterion is most commonly used. such as skill effort. We have also examined a radically different type of pay system. An equitable practice should be adopted for the reorganization of individual differences in ability and contribution. In this system employees are paid for the range of skills that they bring to the job that are useful in performing the job. namely the distance from top to bottom of the entire wage structure. Recruitment in the labor market may require the organization to hire new employees at advanced positions on the range. midpoint and maximum are defined. Open ranges allow the organization to more clearly recognize variable performance. including the need for self-actualization. It has been recognized that “ money is the only form of incentive which is wholly negotiable. Equal pay for equal work i. supervisors and employees alike are more comfortable with seniority increases. The breadth of the rate range (distance from top to bottom) is a matter of judgment for the designer of the wage structure. recourse is taken to government machineries oflabour tribunals arid law courts. ii. The wage should be sufficient to ensure for the worker and his family reasonable standard of living. Principles of Wages and Salary Administration The generally accepted principles governing the fixation of wages and salary are: i.deadlock. and mental and physical requirements. There is an aspect of rewarding both in either case. should be informed of his own position.. There should be definite plan to ensure that differences in pay for jobs are based upon variations in job requirements. In administering the movement of employees within rate ranges.1 COMPENSATITION MANAGEMENT 52 © Copy Right: Rai University . Summary of Wage Determination Process and Administration Rules Organizations wish to pay for more than just the job that the employee does. The wage and salary structure should be flexible so that changing conditions can be easily met. in others. responsibility or job or working conditions. depending upon his ability and contributions. flexible as to work assignments and interested in the work. however unbiased. the decision is interrelated with other factors in the wage structure. As employees learn more skills they are paid more. The plan should carefully distinguish between jobs and employees. Step systems do a good job of rewarding membership and seniority. that of skill-based pay. this may take the form of rate ranges. Aims of Salary Administration The aim of salary administration is to develop and maintain a salary system of policies and procedures. the pay should be the same. Employees contribute both in terms of membership (staying on the job) and being productive while on the job. regardless of who fills them. Further. 11. Both of these sets of contributions need to be rewarded by the organization. This may be integrated with the regular grievance procedure. require too many people in training. The employees and the trade union. it may take the form of closely integrated sequences of job promotion. The wage and salary payments must fulfill a wide variety of human needs. and of the wage and salary structure. if it exists.e. Workers should receive a guaranteed minimum wage to protect them against conditions beyond their control.622. Prompt and correct payments of the dues of the employees must be ensured and arrears of payment should not accumulate. appealing to the widest possible range of seekers…. A well-developed salary system will enable your organisation to attract. Picking the type of range depends largely on the factors that the organization wishes to reward. compensation specialists face a number of problems. and be difficult to integrate with the traditional wage structure of the organization. Exceptions sometimes occur in very high-level jobs in which the job holder may make the job large or small. It can also be more costly. Monetary payments often act as motivators and satisfiers interdependently of other job factors. There should be a clearly established procedure for hearing and adjusting wage complaints. Secrecy in wage matters should not be used as a coverup for haphazard and unreasonable wage programme. the determination of pay increases within grade must involve all supervisors in the organization. For some units. if two jobs have equal difficulty requirements.

understand. its individual staff. Organisational Aims The salary system should be tailored to meet the organisation’s special needs and should be easily capable of modification in response to change. Discuss the factors influencing wage and salary structure? 2. collectively. 6. Provide rewards for good performance and incentives for further improvements in performance. Collective Aims The objective of trade unions and staff associations must be to obtain the maximum benefits for their members. They will want their members’ pay to keep ahead of inflation. Create appropriate differentials between different levels of jobs in accordance with their relative value. His assessment will be based on comparisons with market rates for similar jobs elsewhere and with the pay received b other staff in the organisation. Be simple to explain. These aims and objectives have to be seen in greater depth from the point of view of the organisation. 3. and he expects to be paid according to his own evolution of his worth.1 Questions 1. Be cost-effective in the sense that the benefits of the system are obtained without undue expense Individual Aims The individual wants to feel that he is being treated fairly. to match or exceed market rates and to reflect any increase in the prosperity of the company. Ensure that the organisation can recruit the quantity and quality of staff it requires. Explain the importance of maintenance of a smooth wage and salary administration in organizations. In particular the aim of the system should be: 1. COMPENSATITION MANAGEMENT Tutorial Activity 1. 5. Encourage suitable staff to remain with the organisation.622. Moreover. 3.1 © Copy Right: Rai University 53 . because they are thought to be arbitrary and unfair. and. Achieve equity in pay for similar jobs. they will also want an equitable system and may object to merit review schemes based on management discretion. operate and control 8. 11. Operate flexibly enough to accommodate organisational changes and relations in the relative market rates for different skills 7. Throw light on the principles of wage and salaries administration.Such a system should also be able to control your payroll costs. 4. 2.

The se labor grades are described below: Skilled Labor These are workers who have received specialized training to do their jobs. v. • • • • • • To further understand the concept of wages To understand different Theory of wages The Employee’s Acceptance of a Wage Level The Internal Wage Structure Wage and Salaries and Motivators To know the relation between Labour and Wages Wages Wages in the widest sense mean any economic compensation paid by the employer under some contrast to his workers for the services rendered by them. by way of basic salary and allowances. etc.Officer workers Pink Collar . Wages. 1936 section 2 (VI) “any award of settlement and production bonus. The three primary groups of professional are doctors.Manual laborers White Collar . “wages for leave period. a labour market. mechanics. These are white collar workers. police. is no longer used. traveling allowance. Today that is no longer the case. for example. Any contribution to pension. Mechanics require a great deal of skill and training to work with today’s modern engines.COMPENSATITION MANAGEMENT LESSON 8: INTRODUCTION TO THE THEORY OF WAGES Learning Objective iv. factory assembly line workers. on the other hand. relief pay. or a scheme of social security and social insurance benefits. 1923.” But under the Payment of Wages Act. overtime pay. used to be considered unskilled labor.Jobs associated with women like nursing. are paid in addition to the basic wage to maintain the value of basic wages over a period of time. Value of any house accommodation. For example. payment in lieu of notice and gratuity payable on discharge constitute wages. sanitation and custodial workers. Job type is linked to status as is wealth. The basic wage is the remuneration. These are blue collar workers.” The following type of remuneration. Section 2 (m). “retrenchment compensation. therefore. though all the Acts include basic wage and dearness allow come under the term wages. A mechanic. engineers. iii. holiday pay. these are those workers who need an advanced degree to do their jobs. A wage structure is a hierarchy of jobs to which wage rates have been attached. the members of this group have developed more and more skills. etc. which is paid or payable to an employee in terms of his contract of employment for the work done by him. plumbers. Under the payment of wages act. if paid. 54 © Copy Right: Rai University . bonus. Any sum paid to defray special expenses entailed by the nature of the employment of a workman. bonus and social security benefits. if paid. provident fund. water. a region or a nation. an establishment. in India. 11. Unskilled Labor These are workers who have received no special training and have few specific skills.1 ii. They are composed of two parts . Bonus or other payments under a profit-sharing scheme which do not form a part of the contract of employment. The terms blue collar or white collar employees were used to describe the type of vocation. both are important to Americans. Examples of unskilled laborers are construction workers.622. and good conduct bonus” form part of wages. But. Some examples of skilled labor are: carpenters. A wage level is an average of the rates paid for the jobs of an organization. under the Workmen’s Compensation Act. This being a rather sexist term. electricians. constitutes wages. Labor and Wages The type of job one does and the financial compensation he or she receives are very important in our society. secretarial. different Acts include different items under wages. overtime pay. 1948. etc. Allowances. artisans.the basic wage and other allowances. Such allowances include holiday pay. As our society has grown into an increasingly technological one. lawyers and teachers. an industry. These are usually not included in the definition of wages. or -payment in lieu thereof or any other concession. business executives and managers. Any other amenity or service excluded from the computation of wages by a general or special order of an appropriate governmental authority. Blue Collar . While the type of job one performs is arguably more important status wise then wealth. Professionals Arguably the elite of the labor grades. In the past we used to use other descriptions to classify workers. These may be blue or white collar workers. attendance bonus. do not amount to wages under any of the Acts: i. Today we classify our work roles into three categories called labor grades. in the narrower Sense wages are the price paid for the services of labor in the process of production and include only the performance wages or wages proper. include family allowance. medical attendance. financial support and other benefits. However. accountants. They have developed and honed a special skill and may or may not need to be licensed of certified by the state. painters. supply of light.

It is through this theory that the wide scope of his sociological and historical thought enables him simultaneously to place the capitalist mode of production in his historical context. Subsistence theory 2. The labourer was not paid in proportion to the time spent on work. there were four factors of production/ business activity. but much less. price. I may be the best teacher in the world sought after by many students and parents but it wouldn’t matter. if it was small. letter to Engels of 24 August 1867). labour is the residual claimant. their numbers would increase as they would procreate more.” The theory was based on the assumption that if the workers were paid more than subsistence wage. and this would bring down the rate of wages. malnutrition.’ The price of any product was determined by the labour time needed for producing it. Wages Fund Theory This theory was developed by Adam Smith (1723-1790). different methods of wage payment are prevalent in different industries and in various countries. COMPENSATITION MANAGEMENT Theory of Wages There are two key theories that explain why salaries are the way they are in a particular field. The subsistence theory of wages is generally attributed to David Ricardo. the number of workers would decrease . to be utilized for paying other expenses. more workers will be produced. which could be purchased on payment of ‘subsistence. Marx himself considered his theory of surplus-value his most important contribution to the progress of economic analysis (Marx. in each case bringing supply back to a subistence-level equilibrium. His basic assumption was that wages are paid out of a predetermined fund of wealth which lay surplus with wealthy persons . According to him. The main elements in these theories may be summed up as follows: Below is mentioned the theory of Wages: 1. wages would be high. etc.1 © Copy Right: Rai University 55 .622. Residual claimant theory 5. According to this theory. The demand for labour and the wages that could be paid them were determined by the size of the fund. including payment at piece rates. and plays a large role in Marxist economics. This fund could be utilized for employing laborers for work. which remains after payment has been made for all these factors of production. capital and entrepreneurship. disease.These labor grades are often said to be non competing labor grades because workers rarely move from one grade to another and do not compete salary wise with each other.as many would die of hunger.” was propounded by David Ricardo (1772-1823). Wages are fixed mainly as a result of individual bargaining. Since I am a teacher my salary is set by collective bargaining with my union. it assumes that wages depend upon the demand for. the labour was an article of commerce. These two theories are: Traditional Theory of Wage Determination In this theory the law of supply and demand dictates salary.as a result of savings. 3. 4. 5. viz. wages are based upon an entrepreneur’s estimate of the value that will probably be produced by the last or marginal worker. If the fund was large. when that happened the wage rates would go up. and to find the root of its inner economic contradictions and its laws of motion in the specific relations of production on which it is based. wages would be reduced to the subsistence level. Wages fund theory 3. the subsistence theory of wages states that wages in the long run will tend to the minimum value needed to keep workers alive. some workers will die. Subsistence Theory This theory. also known as ‘Iron Law of Wages. and many would not marry. However. The bargaining theory of wages 7. Likewise doctors and lawyers whose specialized skills people need command a high wage. This theory (1817) states that: “The laborers are paid to enable them to subsist and perpetuate the race without increase or diminution. Wages represent the amount of value created in the production. and when wages are lower. How wages are determined has been the subject of several theories of wages. arguing instead that wages in a market economy are determined by marginal productivity 2. The cost of education and training may be a significant obstacle. land. collective bargaining or by public or State regulation. These days programmers are in short supply and are in great demand thus they will command a higher salary. Marginal Productivity Theory This theory was developed by Phillips Henry Wicksteed (England) and John Bates Clark (USA). If the wages fall below the subsistence level. According to this theory. There are reasons why they do not compete with each other. and the surplus went over. In economics.. Most modern economists dismiss the theory. The surplus value theory of wages 4. Behavioural theories Now let us discuss the theory of Wages in detail: 1. There may be payment by time or payment by results. cold. labour. Marginal productivity theory 6. and supply of. In other words. The justification for the theory is that when wages are higher. Walker (1840-1897) propounded this theory. labour. Residual Claimant Theory Francis A. If you looked at the bill my electrician gave me you would know he is in demand! Theory of Negotiated Wages Those employees who work in unions where the union negotiates salary on behalf of all workers fit into this theory. 11. In other words. They might lack the opportunity to make such a move and they might also have a lack of initiative. The Surplus Value Theory of Wages This theory owes its development to Karl Marx (1818-1883).

cost of living increases. Explain the importance of the theory of wages.1 Questions 1. Robert Dubin. Food. job differentials and individual differences tend to be determined by the relative strength of the organization and the trade union. the ratio of the maximum and minimum wage differentials. and other wage increases unrelated to an individual’s own productivity typically may fall into maintenance category. it pays the employer to continue hiring. State the difference between blue collar. transportation. insurance. 3.622. The size and prestige of the company. the wages and benefits that the employee receives in proportion to the contribution made by him . Tutorial Activity 1. Behavioural Theories Many behavioral scientists . Wage and Salaries and Motivators Money often is looked upon as means of fulfilling the most basic needs of man. As long as each additional worker contributes more to the total value than the cost in wages. Explain in detail. basic pay. Merit increases. pension plans. the prestige attached to certain jobs in terms of social status. workers are paid what they are economically worth. wages are determined by the relative bargaining power of workers or trade unions and of employers. on the basis of research studies and action programmes conducted by them. Briefly such theories are: The Employee’s Acceptance of a Wage Level COMPENSATITION MANAGEMENT This type of thinking takes into consideration the factors. shelter. The result is that the employer has a larger share in profit as has not to pay to the non-marginal workers. Eliot Jacques have presented their views or wages and salaries. the employer may resort to superior technology.1 . where this becomes uneconomic. basic wages. 6. When a trade union is involved. the need to maintain internal consistency in wages at the higher levels. customs prevalent in the organization and psychological pressures on the management. and demand for specialized labour all affect the internal wage structure of an organization. Under this theory. which may induce an employee to stay on with a company. white collar and pink collar employees. the power of the union. 2. bonuses based on performance.notably industrial psychologists and sociologists like Marsh and Simon. 56 © Copy Right: Rai University 11. 7. traditions.wages and salaries. However. The Internal Wage Structure Social norms. What are the different types of theory of wages. clothing. education and other physical maintenance and security factors are made available through the purchasing power provided by monetary income . The Bargaining Theory of Wages John Davidson propounded this theory. and the norms of span of control. fringe benefits.Consequently.all have their impact. and other forms of monetary recognition for achievement are genuine motivators.

the productivity of labour. which is to be fixed in accordance with the awards and judicial pronouncements of Industrial Tribunals. the present level of national income did not permit of the payment of a living wage on the basis of the standards prevalent in more advanced countries. In the second stage. A Minimum Wage It has been defined by the Committee as “the wage. the principles for determining minimum wages were evolved by the Government and have been incorporated in the Minimum Wages Act. and protection against misfortunes.1 © Copy Right: Rai University . 1948. and fair wage and living wage are the terms used by The Report of the Committee on Fair Wages. set up by the Government in 1948 to determine the principles on which fair wages should be based and to suggest how these principles should be applied. According to this Committee. and his family as well as a measure of decency. medical care and other amenities. • To know the concept of Statutory. The standard of living cannot be determined accurately. The Committee was of the opinion that although the provision of a living wage should be the ultimate goal. This obviously implied a high level of living. including old age. it follows that this index should be periodically reviewed and modified. FAIR AND LIVING WAGE Learning Objective These issues are very difficult to decide. The goal of a living wage was to be achieved in three stages.COMPENSATITION MANAGEMENT LESSON 9: INTRODUCTION TO MINIMUM. medical requirements and amenities. The question of determining the minimum wage is a very difficult one for more than one reason. depending upon the bargaining power of labour. The living wage may be somewhere between the lowest level of the minimum wage and the highest limit of the living wage. or where there is a great chance of exploitation of labour.622. the upper limit is set by the “capacity of the industry to pay. industry to industry and from worker to worker. which must provide not only for the bare sustenance of life. They are obligatory on the employers. In the first stage.” In other words. the wage to be paid to the entire working class was to be established and stabilized. Moreover. for his efficiency. the minimum wage should represent the lower limit of a fair wage. the important principle being that minimum wages should provide not only for the bare sustenance of life but also for the preservation of the efficiency of the workers by way of education. Minimum wage. the general effect of the wage rise on neighboring industries. but for the preservation of the efficiency of the worker. including education for his children. “it is the wage which is above the minimum wage but below the living wage. the place of industry in the economy of the country. Conditions vary from place to place. It defined a Living Wage as “one which should enable the earner to provide for himself and his family not only the bare essentials of food. Bare or Basic Minimum Wage It is the wage. and the capacity to pay of an industry. Fair Wage According to the Committee on Fair Wages. What then should be the quantum of the minimum wage? What is the size of the family it should support? Who should decide these questions? Living Wage This wage was recommended by the Committee as a fair wage and as ultimate goal in a wage policy. clothing and shelter but a measure of frugal comfort. fair wages were to be established in the community-cum-industry. Such wages are required to be fixed in certain employments where “sweated” labour is prevalent. the minimum wage must provide for some measure of education. and the highest level of the fair wage is the living wage. a living wage was to provide for a standard of living that would ensure good health for the worker. Such a wage was so determined by keeping in view the national income. it is the obligation of the employer to pay them. comfort~ education for his children.” In other words. In the third stage. Once the rates of such wages are fixed. However. for their medical care and for some amenities. 1948.” 57 11.” The lower limit of the fair wage is obviously the minimum wage. There are: Statutory Minimum Wage It is the wage determined according to the procedure prescribed by the relevant provisions of the Minimum Wages Act. The next higher level is the fair wage. regardless of his ability to pay. and the prevailing rates of wages in the same or similar occupations in neighboring localities. Bare or Basic Minimum Wage • To understand Fair Wage • To understand Living Wage • The Need-Based Minimum Wage Some new terms have gained currency in India after independence. protection against ill-health. the level of the national income. the working class was to be paid the living wage. since the cost of living varies with the price level. requirements of essential social needs and a measure of insurance against the more important misfortunes. the capacity of the industry to pay. National Tribunals and Labour Courts. for the education of his family. a minimum wage should provide for the sustenance of the worker’s family. For this purpose.

1948 rests with the State Governments. Therefore. the norms should be the minimum rent charged by the Government in any area for houses provided under the Subsidized Housing Scheme followincome groups. the rates of minimum wages for Bidi Rollers are fixed on a piece rate basis (number of bidis rolled). The clothing requirements should be estimated at a per capita consumption of 18 yards per annum.2 Now let us study from the notification below “The minimum wages notified by the Government of Madhya Pradesh” and the employees covered under it. the actual wages should depend on considerations of such factors as: a. etc. The problems of the bidi workers continue to be a cause of concern for the labour administrators and enforcement authorities as the workers often complain of the unfair treatment at the hands of manufacturers. The level of the national income and its distribution. attempts were made by several government and private agencies and trade union organizations to work out is monetory equivalent. What is the difference between minimum wage.1. wage fixation should be needbased.Between these two limits. due to ignorance.1 Introduction 5. lighting and other miscellaneous items of expenditure should constitute 20 per cent of the total minimum wage.1 Questions 1. 58 © Copy Right: Rai University 11. Tutorial Activity 1. The workers in bidi industry are scattered over large areas and do not have collective bargaining power. study it’s compensation package and find out the kind of wage level offered by it to it’s employees.2 In Madhya Pradesh. 1976. a total of 72 yards. poverty. iii.1 . Ever since the I. Wages. b. The Regional Labour Ministers Conference held during 1994-95 had endorsed the recommendations of the Ministry of Labour for the Constitution of a Tripartite Standardisation and District Level Vigilance Committee and had made the following recommendations in respect of bidi workers:- ii. c. tobacco. illiteracy and lack of bargaining power. The Act empowers both the Central and the State Governments to fix and revise the minimum rates of wages in the Scheduled Employments falling under their respective jurisdictions. thread. What do you understand by the term need-based minimum wage and explain the importance of it in compensation management? 4.700 calories. For the calculation of the minimum wage. living wage and fair wage? 3. COMPENSATITION MANAGEMENT Labour Bureau Government of India Report Onevaluation studies on implementation of The minimum wages act. Although the Act does not provide for registration of establishments.C. at its 15th session held in July 1957. They notify the minimum wages for bidi workers within their jurisdiction. and adjudicators: i. the Minimum Wages Act. fixation and revision of minimum wages is of no consequence unless these are actually paid to them. In respect of housing. yet it is applicable to employments where the workers are particularly vulnerable to exploitation. they are in need of protection. What are the different types of wages? 2.1 The Minimum Wages Act. 5. and v. The prevailing rates of wages in the same or neighbouring localities. Therefore.1.622. The productivity of labour. Akroyd. the earnings of women. 1948 and the Equal Remuneration Act. and d. The place of industry in the economy of the country. for an average worker’s family of four. The bidi making establishments fall under the Scheduled Employment “Tobacco” (including Bidi Making) Manufactories’ in the State Sphere. 1966. The minimum food requirements should be calculated on the basis of the net intake of 2. children and adolescents should be disregarded. including the Minimum Wage Committee.) as well as the violation of the provisions of the Bidi and Cigar Workers (Conditions of Employment) Act. Fuel. However. which would mean. 1948 is both a protective and beneficial legislation guaranteeing the payment of minimum rates of wages to the workers in the various Scheduled Employments scattered over different parts of the country. the Conference accepted the following norms and recommended that they should guide all wage-fixing authorities. issue of inadequate quantity and poor quality of raw material (tendu leaves. the traditional measure being per thousand bidis. the responsibility for implementation of the provisions of the Minimum Wages Act. made its recommendations on the needbased minimum wage. suggested that minimum. for an average Indian adult of moderate activity. as recommended by Dr. and should meet the minimum needs of an industrial worker. Earnings and Hours of Work 5. Wage-Boards. 1948 In bidi making establishments in Madhya pradesh The Need-Based Minimum Wage The Indian Labour Conference. Contractors and agents in matters of rejection of finished products. The standard working class family should be taken to consist of 3 consumption units for the earner.L. iv. These estimates have varied considerably. Tutorial Activity 1. Identify an organization.

0. Monthly Wages (Rs. 1966.2 The revised rates of minimum wages are subject to the following conditions:The variable dearness allowances shall be calculated on 1st October of every year on the basis of the average indices for twelve months i. The latest wage revision.75 70. Godown keeper Sorter/Checker.80 Daily Wages (Rs.The wages include the variable dearness allowance. Clerk Loader. which are not under his control. had become effective from 1st October. Semiskilled and Unskilled workers. Rs. 1/9/A/5/97/32759-33288 dated 12-10-2000. Typist. Skilled : 2.17(per thousand bidis) 2. Alternatively. The State Governments as well as Welfare Commissioners have been requested to give wide publicity to the statutory provisions of the Bidi and Cigar Workers (Conditions of Employment) Act. Un-loader.622. 5. pertaining to rejection of not more than 2.5 percent bidis of sub-standard quality and ensure that employer/ Contractor supplies tendu leaf of the optimum quality to the workers. Skill Category Skilled Semi-Skilled Unskilled. Store Keeper. 15..The revised rates of minimum wages applicable during the period of study are given below:Prescribed Minimum rates ofWages for piece rated employees Class of Employees Minimum Wages ( in Rs. which was in force at the time of the study.Unskilled: Driver (Heavy Vehicle). epidemic etc. Accountant.95 N.2 Prescribed Rates of Minimum Wages ‘Tobacco (including bidi making) Manufactories’ is a Scheduled Employment originally included in Part-I of the Schedule appended to the Act. 1. the rejected bidis should be returned to workers after deducting proportionate cost of tendu leaf and tobacco issued to them at the rates to be fixed by the State Governments from time to time alongwith wages.25 for the first time in 1966. 19. The wage loss due to rejection should not be more than 2. July to June of the preceding year.09.2. Munim.05 per lakh bidis ( c) Wrapping on 1000 bundle (each bundle of 25 bidis) (i) Wrapping of Horizontal & Vertical Strips (ii)Wrapping/Pasting of paper (iii)Wrapping and Pasting of Trade Mark In bidi making industry all the time-rated (monthly/daily paid) workers other than the above mentioned piece rated categories have been classified into three broad categories as Skilled.2001. Bidi Rolling 36.30 1662.1 © Copy Right: Rai University 59 . 1948.5. An employee shall be entitled to a guaranteed minimum wage of Rs. Chowkidar.. 11.85 per thousand bundles (ii) Labelling on both sides of bundles Rs.05 perlakh bidis (iv)Puda Making Rs. the revised wages will not have adverse effect on any employee in any case and the higher rates shall continue to be paid.1 These wages have been linked to 1206 points of the Labour Bureau Series of All-India Consumer Price Index Numbers for Industrial Workers (Base 1960=100).5 percent instead of 5 percent. Puda Making etc. Head Clerk. Billman. In case an employer fails to supply raw material due to certain conditions like fire. 2. 81..The minimum quantity of raw material to be issued should be 800 grams of tendu leaf of standard average quality and 300 grams of tobacco for 1000 bidis of standard size.The Variable Dearness Allowance (VDA) is payable at the rate of 1 paisa per point for an increase of 930 points over 1206 points upto 30.) 76.B.76 per thousand bundles (i) Thin paper labelling Rs. Puda Maker and COMPENSATITION MANAGEMENT Prescribed rates of Minimum Wages (including V.D. The guaranteed wage will include the actual number of bidis made by an employee during a week from the raw material supplied to him.Semi-Skilled : 3. Ministry of Labour. an employee shall not be entitled to the guaranteed wages.32 63. Driver (Light Vehicle).178. Bhattiwala. 11.) 1995.65 per thousand bundles (a) Pasting of Slips on bidi bundles Rs.26 per thousand bundles (b) Wrapping and Labelling Rs. The minimum wages applicable to the bidi workers at the time of the Study were notified by the State Government of Madhya Pradesh as provided under Section 3(1)(b) and Section 5 of the Minimum Wages Act. Wherever the prevailing wages are higher. Cashier. 68. 2.2.Since then they have been revised several times. No.) for time rated employees were as below: Sl. 3.Prior to 1953. 5.) 1. 1. The minimum rates of wages for various categories of employees in Tobacco (including Bidi Making) Manufactories appearing in Part I of the Schedule were linked to the Consumer Price Index Numbers (Industrial Workers). distress. An employee shall not be entitled to the guaranteed wages if he fails to make full use of the raw material supplied to him while the raw material so supplied is sufficient for rolling 5600 bidis per week.37 per thousand bidis.62 to Rs. The revised rates of daily wages are to be worked out by dividing the monthly rates by 26 days.44 1828. Government of India. The occupations’ which comprise these three skill categories are as under: 1. Minimum Wages were fixed at Re. 81.00-2.01 perthousand bundles (ii)Thin paper sticking Rs. These wages were revised to Rs.A. 5.00 perthousand bundles (i) Labelling. 2000 vide notification No.00 in case the employer fails to supply sufficient quantity of raw material for rolling 5600 bidis per week. 22. Wrapping/Packing/Labelling Rs.4.e. * * Annual Report 1999-2000.35 perlakh bidis (iii)Labelling Rs.

Table 5. 1 2 3 4 5. packing and labelling operations are paid on ‘piece rate basis’ while those in all other operations on ‘time rate basis’. No.0 26.0 percent and 75.0 COMPENSATITION MANAGEMENT 6 Bidi Roller All Categories 5. Devas.4 Wage Period 5. The proportion of employees paid on piece rate basis in different Strata oscillated between 84.e.On the other hand all the Bidi Rollers were paid on weekly basis.0 100. Taraiwala (Sorter)/Checker 3.2 81. like. wages were calculated on the basis of daily production and payments were made on weekly basis or adjusted on a monthly basis.3 The category-wise system of payment of wages is given in Table 5. Wrappers.5 percent were paid on time rate basis. 1948 provides for different wage periods ranging from hour to month.9 79.5 82.Sorters.3. all these and similar provisions of the Act are of little consequence to a major proportion of the employees in this industry comprised of a sizeable number of Bidi Rollers who roll bidis within the four walls of their houses. In bidi making establishments employers have adopted both the systems of payment of wages i. The minimum wages notified by the Government of Madhya Pradesh for different types of operations were either time rated or piece rated.6 80. Labellers and Wrappers were paid on piece rate basis. Indore.2 Percentage Distribution of Bidi Employees by their Categories and by the System of Payments: Sl. ‘time rate’ and ‘piece rate’.3 Mode of Payment 5.0 100.0 100.0 100.5 100.9 percent the former being in Stratum I and the later in Stratum IV.4.0 17.1 Section 3(2) of the Minimum Wages Act.8 75. Raw Material Distributors.4 19.It will be seen from the Table that all the Bidi Rollers.0 100.0 100.5 Hours of Work The working hours in the Scheduled Employment ‘Tobacco (including Bidi Making) Manufactories’ are governed by the Bidi and Cigar Workers (Conditions of Employment) Act.1 Section 3 (3b) of the Minimum Wages Act. 1948 empowers the Appropriate Governments to fix the minimum rates of wages either for time rated work or for piece-rated work.0 100.5 percent of other workers who were receiving wages on monthly basis.5 100.0 84. Bidi Roller All Categories 60 © Copy Right: Rai University 11.0 100.3. the period of work should not exceed 10 hours in a day and 54 hours in a week.1 Percentage Distribution of Employees by Stratum and System of Payments Sl. Furnace Men. Clerks. Furnaceman (Bhattiwala) 4. Datiya and Vidisha Stratum IV Balaghat Stratum V Bhopal. Categories of Employees Wrapper/Labeller/Packer Taraiwala (Sorter)/ Checker Furnaceman (Bhattiwala) Clerk Raw Material Distributor Percentage of Employees paid Monthly Weekly Total 100.The stratum-wise system of payments is shown in Table 5. Packers. Under the Act no employee can be made to work beyond five hours without a rest interval of at least half an hour. 1948 on the other hand only provides for fixation of normal hours of work.3.5 percent) of employees were paid on piece rate basis and only 18.0 100.2 24.3.. Raw Material Distributor 6. packing and marketing.5 1. However.0 100.2 It is evident from the Table that major proportion (81.0 100. 5.8 18. Clerk 5. No.0 18. wrapping.5. Labellers...1 .5 percent. as against 26. Satna Stratum III Gwalior.4. 1 2 3 4 5 All Strata Stratum/ District Stratum I Sagar Stratum II Jabalpur. Wrapper/Labeller/Packer 2. The payment for overtime work has to be made at twice the ordinary rate of the wages or the average daily full time earnings in case of piece rate workers. etc. were paid on monthly basis. Wages for bidi rolling. Ujjain& Hoshangabad Percentage of employees paid on the basis of Time-rate Piece-rate 16. 5. inclusive of overtime work.All other workers.. Table 5.3 Percentage Distribution of Bidi Employees According to Wage-periods Sl.The Act restricts the hours of work to nine per day and forty eight per week with a maximum spread over of 10. Categories of Employees Percentage of Employees paid on the basis of Time-rate Piece-rate 100. etc.5 5. and Clerical Staff. No. the Bidi Rollers did not have a clear idea about their actual earnings.5 81. However. The wage periods adopted by the bidi manufacturers for different categories of employees covered by the study are presented in Table 5. The Minimum Wages Act. Table 5. Raw Material Distributors.1 20.It was observed that in operations like bidi rolling. It was also observed that because of these adjustments after a week or a month. were paid on time rate basis.0 73. An adult employee can work in excess of the prescribed hours of work subject to the payment of over time wage rate.0 100.0 100.30 hours per day.2 It will be seen from the Table that all the factory workers and office staff viz.1. As such the overall proportion of bidi employees paid on weekly basis worked out to 73.0 100.2. 1966. Inter-stratum variation was attributed to the fact that Stratum-I was the largest bidi producing area dominated by the smaller establishments of agents and middlemen engaged in getting the bidis rolled for passing on to bigger or Trade Mark Establishments for wrapping. 5.622. a weekly day of rest and payment of overtime wages in the Scheduled Employments by appropriate Government.

The dependants of the home workers rendering effective assistance in rolling bidis constitute a large segment of Bidi Rollers who could not be treated as employees for want of an established employer-employee relationship.62 89.1 The bidi workers constituted 26. The time rated employees were usually working as Clerks.1 During the course of Study.60) in Stratum III and the lowest (Rs.89 61. The average daily earnings of the Bidi Rollers and their helping dependants are given in Table 5.83 66.122. weekly holidays.98 68.69 66.36 Stratum-III 62.54 65. a system of obtaining commission from the Bidi Rollers by the Sattedars to compensate the low wages paid to them by the Trade Mark Establishments and Contractors was in vogue. 5.62.2 The employees in bidi making industry constitute a heterogeneous lot with various categories of bidi workers on the one extreme and the Bidi Rollers (home workers) engaged either directly or through the Contractors on the other. were being implemented. however.32 69.67 51. are the real beneficiaries of these provisions. Packers. 1 2 3 4.89 68.2.For piece rated workers viz.08 Stratum-IV 65. They collected the raw material from the Employers or Contractors and rolled the bidis in their dwellings.96 respectively.4.96 61. etc. 5 Categories Wrapper.23 76.6. Raw Material Distributors.6. far above the prescribed wages in the Trade Mark Establishments. 5. 1. 61.29 67.During the study.53 69. in keeping with the requirements of management and responsibilities assigned to them.29 65. yet the records for Bidi Rollers engaged by the Contractors were not maintained correctly as they showed only production.6 Wages and Earnings 1.32 per day.The average earnings of Raw Material Distributors were the lowest (Rs.22 85. Table 5. rest interval.76.2. 5. 67. did not have registration in any bidi factory as the manufactures avoided registration of a large number of Bidi Rollers to evade the fringe benefits due to them .40 75.11 86. 89.5. They were not only distributing raw materials but also were actively involved in collecting the bidis. who were skilled rollers. therefore.3 Bidi Rollers and Helpers COMPENSATITION MANAGEMENT 5.2 The above table reveals that the average daily earnings of Clerks were Rs.6.36 11. The premises/factory workers.62 57. chances of exploitation of the Bidi Rollers at the behest of the former.31 72. Sattedars and Sub-Contractors. there were. relating to hours of work.69 122.6. Labeller.Overall average daily earnings of Raw Material Distributors and Furnacemen worked out to Rs.82 71.23 All Strata 62. 5.For the purpose of the study. the provisions of the Act. it was observed that although the big manufacturers were keeping records of the wages paid to premises workers and the Bidi Rollers who were directly employed by them.62 and Rs.60 69.13 80. Taraiwalas. Average daily earnings of different categories of bidi workers are given in Table 5..2 Bidi Workers 5.93 63.6.96 89. etc.622.Surprisingly. Taraiwala/Sorter/ Checker Furnaceman (Bhattiwala) Raw Material Distributor Clerk All Categories Average daily earnings in Stratum-I Stratum-II 63. As far as the Trade Mark Establishments and the medium sized establishments are concerned.6. Managers have been clubbed with the clerks because wages had not been notified for the managerial staff.14 Stratum V 50.As the payments were made through Contractors.64 69.6.71 69. It is a fact that most of these helping dependants.3. No.57.4 Average Daily Earnings of Bidi Workers (in Rupees) Sl.These home workers do not have any prescribed hours of work as they roll bidis as and when they are free from their domestic chores. Wrappers/Labellers/Packers the average daily earnings worked out to Rs.The employers met their requirements of daily production by giving huge amounts of raw material to the registered Bidi Rollers for rolling bidis with the help of their dependants. The average daily earnings of Clerks worked out to be the highest (Rs.5 per cent of the employees covered by the Study.98 67. Hence for properly analysing the earnings of the Bidi Rollers (home workers).1 © Copy Right: Rai University 61 .33.1 In Madhya Pradesh Bidi Rollers constituted the largest segment among the bidi employees.17 67. an effort was made to separate the estimated earnings of these workers from those of the registered or the identified Bidi Rollers. it is necessary to identify and isolate the contribution of this hidden segment of Bidi Rollers.33 68.71 per day) in Stratum II. They get a lot of assistance from their family members in rolling bidis.69 per day) in Stratum III which were attributed to low wage paid areas of Datiya and Vidisha dominated by Contractors.

The average daily earnings were highest in Stratum III (Rs.66 16. It shows that these helping dependants of Bidi Rollers made a significant contribution towards the production of the bidi industry.17 14.62 Overall 17.3 The above table also reveals that the average daily earnings of the registered Bidi Rollers were substantially higher than their helping dependants in all the Strata except Stratum IV where it was marginally higher. 20. 62 © Copy Right: Rai University 11.5 Average Daily Earnings of Bidi Rollers and their Helping Dependants(in Rupees) Sl.16 18. There is.99 17.The employment opportunities in agriculture had also not been encouraging enough for the Bidi Rollers to lean on. No.16 per day) followed by Stratum II (Rs. Devas.00 17.5) 5. Datiya and Vidisha Stratum IV Balaghat Stratum V Bhopal.1 ..76 18. therefore. 5. 20.36 24. Stratum I (Rs. In Stratum III the highest average daily earnings of Bidi Rollers were attributed to the non-availability of Bidi Rollers ( whose average daily earnings were lower than those of Bidi Workers) in the districts of Gwalior.6.76 per day). Moreover.18.3.88 20.3.21 19.36 per day) and the lowest in Stratum IV (Rs.04 Helping Dependants 14. Stratum V (Rs. Datiya and Vidisha where the average daily employment in the establishments was the lowest.01 18. The average daily earnings of the Bidi Rollers worked out to Rs. an urgent need for bringing this hidden work force under the labour laws with a well defined employer-employee relationship for effective enforcement of the minimum wage legislation.04 per day. Indore.The workers in these areas accepted whatever wages the employers gave. yet they constituted a neglected lot.2 It emerges from the Table that in all the five Strata the wages paid were below the prescribed wage levels.88 The Bidi Rollers did not get regular employment in bidi making establishments also. The other important reasons for low earnings were malpractices in matters of rejection of finished bidis on the ground of not conforming to quality standards. in the absence of any trade unions the Bidi Rollers were not strong enough to bargain for the prescribed wages.52 20. deprived of the benefits of various labour laws.622. issue of inadequate quantity and poor quality of tendu leaf and tobacco by the employers or their Contractors or agents. With the modern salesmanship entering the bidi industry the margin of profit in the bidi industry is quite lucrative for the brands established in the market. 22.6.88 per day). Stratum/ District 1 2 3 4 5 Stratum I Sagar Stratum II Jabalpur.31 23. 24. Ujjain&Hoshangabad All Strata Average daily earnings of Bidi Rollers 20. 26. Satna Stratum III Gwalior.46 per day).They had always remained an exploited lot in the hands of petty Contractors who did not even keep the records and registers of the Bidi Rollers.Table 5.77 22.46 22. COMPENSATITION MANAGEMENT EXHIBIT – 8 Average Daily Earnings of Bidi Rollers and their Helping Dependants (Table 5.76 26.

it should be noted that as with industrial relations. enable them to enjoy the benefits of economic growth.to motivate workers. Indonesia. Its purpose is to protect vulnerable low wage workers from exploitation. Particularly. that is the payment of exceptionally low wages. Before looking at the current debate on minimum wage policy.COMPENSATITION MANAGEMENT LESSON 10: INTRODUCTION TO THE MINIMUM WAGE Tutorial Activity Asian Labor Update home-workers. It is generally considered that minimum wage regulation was first developed in New Zealand (1896) followed by Australia (1899). For instance. for example Thailand. As a minimum wage is established by a law. minimum wage regulation had been adopted by more and more industrialised and developing countries as a major social policy tool to protect low-skilled workers by establishing a minimum wage floor under which no payment should be made. the Minimum Wage Fixing Machinery (Agriculture) Convention (No. The standard argument against the minimum wage system was based on the assumption that a minimum wage above a certain level will cause unemployment and therefore inadvertently work against poverty reduction.e. it would have a negative impact on employment and therefore make its overall effect on income distribution at best ambiguous. those in the informal sector. both the exact nature and the scope of minimum wage protection reflect the particular historical and institutional development of the country concerned. 99) 1951. there is on-going debate on the usefulness of minimum wage regulation. Cambodia has minimum wage fixing machinery only for the country’s garment and textile sector. It is a time-based wage that usually applies to unskilled adults entering work for the first time. i. and contribute to the economy. As the main objective of minimum wage regulation was the elimination of ‘sweating’. minimum wage regulation has been under attack on several grounds: proponents of the structural adjustment programme argued that minimum wage regulation did not help the poorest of poor workers. aim. A minimum wage is a minimum level of payment established by law for work performed. 131) 1970. as the accelerating process of globalisation forces nation states to compete against each other to attract more foreign investment. This means the minimum wage should provide sufficient purchasing power to enable a worker to have a basic standard of living. it is legally enforceable. and Japan. However. have decentralised minimum wage systems. the number of countries adopting minimum wage regulation grew rapidly. In spite of impressive development of the minimum wage system in many countries. however. furthermore. In the specific context of Learning Objective • To study about minimum wage policy • Does a minimum wage policy protect workers who are under pressure in the ‘race to the bottom’ of labor standards in a globalising world economy? • The role of Trade Union Virtually everywhere in the world. as the regulation covered only formal sector workers. and the Minimum Wage Fixing Convention (No. if a minimum wage is set at an unreasonably high level. As seen above. women. China. and later Britain (1909). as both developing and developed countries have faced a serious under-employment and unemployment crisis since the 1980s. A number of developing countries also carried out experiments with minimum wage regulation to protect categories of workers judged to be particularly vulnerable. its application was usually restricted to a limited number of particularly lowpaying sectors or to selected categories of workers. with the exception of a few countries. minimum wage regulation is seen as a possible barrier to more investment. Towards the end of the economic depression of the 1930s and after the Second World War. while Argentina introduced the Home Work Act in 1918 with a view to protecting low paid home-workers. But the usefulness of a minimum wage is now under question by policy-makers and economists. children and indigenous workers judged to be particularly vulnerable. and history of minimum wage regulation. There was also a trend towards extending wage protection to more and more groups of workers and in many cases was more universal. The key purpose of a minimum wage system is social to prevent labor exploitation and poverty. 26) 1928. The minimum wage may also have an economic objective . Sri Lanka’s Minimum Wage Ordinance was promulgated in 1927. The early development of minimum wage regulation and subsequent expansion since the 1920s are well reflected in a series of International Labour Conventions on minimum wage regulation by the International Labour organisation (ILO): Minimum Wage Fixing Machinery Convention (No.1 © Copy Right: Rai University 63 . it is useful to have a brief look at the definition. minimum wage fixing remained a rarely used and limited instrument of government policy in both industrialised and developing countries before the Second World War. while others like South Korea and Vietnam have a single minimum wage for the entire country. Some countries in Asia. Since structural adjustment programmes were introduced in the 1980s to many developing countries.622. such as 11.

which encourages a cycle of skill development and productivity enhancement. there could be a minimum wage ‘trap’ for both employers and workers. Available evidence confirmed this to be the case. Regarding the effect of minimum wage on poverty. as opposed to theoretical] research undertaken recently did not show a negative effect on employment by moderate increases in the minimum wage. For such workers. the minimum wage had thus drifted from its usual intent . new entrants to the labour market. skill development. ILO analysis found that for a constant level of GDP per capita and average wage in manufacturing. is not the major factor behind the informalisation of Latin American economies. often with several years experience and skills. Thai employers. that changes in the ratio between the minimum wage and the average wage exert no significant impact on the share of the informal economy in South and Central America. and informalisation in developing countries. It may be an inevitable. a minimum wage system in the formal sector was blamed for crowding out formal sector jobs into the informal sector. there was a heated debate on the role of the minimum wage in Thailand.to provide a wage floor for unskilled. This situation may suggest that the most appropriate role for a minimum wage is to provide a defined floor to the wage structure to provide a ‘safety net’ protection for the lowest income groups. But empirical [= practical. Let us examine another important argument against minimum wage regulation which is often put forward in the context of globalisation and competitive edge. employment. logical choice for an emerging trade union movement which has very weak roots in the work place. There is some evidence to support this view. But is it really true? Take the case of Thailand. after analysing economic data in Latin American countries. In sum.1 . This result supports the view that labour market rigidity. however. But there are other possible consequences. more motivation. On the contrary. and more specifically low wage rigidity. Also. no evidence indicated that the level of the minimum wage relative to the average wage affected the size of the informal economy in Latin America. During the pre-crisis period in Thailand. If either is true. However. the fragmented trade union movement tends to concentrate efforts on increasing minimum wages through tripartite negotiation with the National Labour Council.that generous increases in the minimum wage had deprived them of the ability to control their own wage structures and to devise wage policies suited to the enterprise. in one locality. COMPENSATITION MANAGEMENT 64 © Copy Right: Rai University 11. it remains possible that the motivation of the wage is disturbed when there is no obvious link between pay and performance after years on a job. One view argued that the minimum wage was one factor responsible for falling competitiveness of Thai industries which triggered the crisis. The example of Thailand illustrates the importance of developing a sound enterprise wage structure through enterprise pay negotiations and a good human resource management policy. the research findings strongly support the idea that the minimum wage may bring positive results in poverty alleviation by improving the living conditions of workers and their families while having no negative results in terms of employment. The study found that if other things were equal. were ‘stuck’ on the minimum wage. Actually. The ILO conducted research to investigate relations between wages and other economic variables. While minimum wage increases might be seen as ‘rewarding’ workers with seniority. For one.1998. The ILO’s research revealed that it was not primarily the level of the minimum wage but other macroeconomic factors such as a fixed exchange rate and falling productivity of Thai industries which caused falling competitiveness. Also. the function of the wage to motivate is disrupted when the link between pay and performance is weakened. it should be emphasised that without developing a sound enterprise wage structure. it is very clear that unions should make great efforts to improve pay bargaining capacity at the enterprise level to achieve settlements above the level of minimum wages. The above studies suggest that the argument against a minimum wage system in developing countries on the grounds of employment and poverty is not convincing. Because of this Thai trade union officials complained that workers. At the peak of the Asian financial crisis in 1997 . which should activate a cycle of pay increases. Otherwise there is a real danger that minimum wage effectively becomes maximum wage and union organisations in the workplace will find it difficult to recruit rank-and-file workers and convince them of the value of union membership. there is a real danger that a legal minimum wage turns into an effective maximum wage. and higher productivity. Also. when workers have no bargaining power at enterprise level. Efforts to link wages more closely to enterprise performance were frustrated. At the same time. argued the complete opposite . recently the ILO undertook a multi-country statistical analysis of the effect of minimum wages on poverty. the ratio of minimum wage to average wage in non-metropolitan regions was extremely high (around 70 percent).622. it is possible that higher increases in the minimum wage than in average wages could reduce the incentive to improve skills. employers often abandon their own wage decisions to the government’s annual announcement of the minimum wage adjustment. on the other hand. labour productivity could suffer.informalisation in developing economies. As trade unions are very weak at the enterprise level. a higher minimum wage is associated with a lower national level of poverty. the study concluded. the level of the minimum wage has an insignificant effect on the level of employment. eventually leading to the economic crisis. In Cambodia for example. the majority of workers in garments and textiles receive just a minimum wage. which is currently US$45 per month. Often it is alleged that a high minimum wage is responsible for weakening competitiveness of industries.

622. several studies in the 1990s showed that the minimum wage had little. However. with little effect on average wages and inflation. Several factors are responsible for the renewed interest in the minimum wage as a tool of market policy. At this low level of minimum wage relative to average wage. too. In developing countries.either negotiation or consultation .is common in many countries is important. which will continue.1 © Copy Right: Rai University 65 . Of course there is the opposite case. Second. for example. workers. national trade union centres tend to concentrate excessive effort on the minimum wage fixing process. in a number of countries where trade unions at the workplace have very weak bargaining power. As illustrated above. Industrial Relations Specialist. the fact that minimum wage fixing through tripartite discussion . we could say that the minimum wage system has failed to meet its original goal of protecting low-wage unskilled workers. Where there is good quality information and the parties genuinely desire a commoninterest outcome. If minimum wages are too low the objective of poverty reduction will not be achieved. there is a new human rights approach that focuses on the right to have decent employment. minimum wage determination is a delicate issue. the minimum wage accounts for only around 30 percent of average wage and therefore covers less than two percent of the total workforce. which should be seen in a broader context of interplay between market forces and collective bargaining power at various levels of economies.For this reason. the minimum wage regulation seems to be back in favour as a means of providing unskilled workers with decent living conditions. trade unions in many Asian countries face an uphill battle to win a minimum wage system. if any. an ILO publication suggests that the economic impact of minimum wages should ideally be only a slight upward pressure at the bottom end of the wage structure. tripartite deliberation could offer a mutually beneficial compromise. ILO. After years under attack for alleged negative effect on low-paid employment. policy makers are not only concerned with the impact of the minimum wage on employment. trade unions often lack the capacity to analyse them and engage in meaningful joint discussions. By Chang-Hee Lee. Another typical problem in least developed countries is that there is often no reliable data on economic variables to be taken into account for minimum wage fixing and adjustment. This is a battle for decent work for all working men and women. East Asia Multidisciplinary Advisory Team. Therefore. But trade unions and other parties to consultations in many developing countries face a number of problems. In this regard. Even if there are economic data for it. not in isolation from other forces at work. This introduces an element of negotiation between government. First. In Korea. as the globalisation process and mobility of capital put great downward pressures on working conditions and in particular on minimum wage systems. unintentionally resulting in further weakening trade union organisations and collective bargaining in the workplace. People will continue to work because they have no alternative but the result is a society of ‘working poor’. effect on creating unemployment. Bangkok COMPENSATITION MANAGEMENT 11. and employers in the wage setting process. Developing power and abilities of trade unions at both workplace and national levels is an urgent task in many countries. but also with its impact on the level of poverty.

better workmen will have no incentive to work harder and better. he is paid at the settled rate as soon as the time contracted for is spent.” • To know concept of Wage Plans • To understand the different Types of Wage Plans Interaction There are two major kinds of wage and salary payment plans: those under which remuneration does not vary with output or the quality of output. week.” Taylor says: “The men are paid according to the position which they fill and not according to their character. This Kind is known as the piece or output wage plan. skill and reliability. This puts the authorities in a difficult position in the matter of quoting rates for a particular piece of work. They will therefore be drawn down to the level of the least efficient workman. fortnight or month. the rate of each unit being settled in advance. 66 © Copy Right: Rai University 11. which his employer expects he would take. therefore. per week. Demerits The main drawbacks of this system are: i. 4.622. iii. As the employer does not know the amount of work that will be put in by each worker. v. The time unit may be the day. As there is not specific demand on the worker that a piece of work needs to be completed in a given period of time. It is simple. it becomes difficult for the employer to determine his relative efficiency for purposes of promotion. an employee is required to put in more labour and produce more. 3. 5. This does not mean that a worker can take any time to complete a job because if his performance far exceeds the time. the total expenditure on wages for turning out a certain piece of work cannot be adequately assessed. To earn more. All the other plans are simply variations of these two. This system permits many a man to work at a task for which he has neither taste nor ability. The essential point is that the production of a worker is not taken into consideration in fixing the wages.1 . which is a distinct advantage for the employer. Due to the slow and steady pace of the worker. These are known as time wage plans.COMPENSATITION MANAGEMENT LESSON 11: INTRODUCTION TO BASIC KINDS OF WAGE PLANS Learning Objective a regular and stable income to the worker and he can. but depends on the time unit consumed in performing work. irrespective of the time taken to do the task. the overhead charge for each unit of article will increase. ‘ If he consistently takes more time than the average time. there is no rough handling of machinery. at the rate of so much per hour. 2. when he might make his mark in some other job. energy. adjust his budget accordingly. Time plans are non-incentive in the sense that earnings during a given time period do not vary with the productivity of an employee during that period. As all the workmen employed for doing a particular kind of work receive the same wages. per day. iv. for the amount earned by a worker can be easily calculated. It is the only system that can be used profitably where the output of an individual workman or groups of employees cannot be readily measured. It is a direct financial incentive plan. The second kind is concerned with the output or some other measure of productivity during a given period of time. he does it at the risk of losing his job. workmen are not in a hurry to finish it and this may mean that they will pay attention to the quality of their work. As no record of an individual worker’s output is maintained. There is indirect implication that a worker should not take more than the average time. This system is favored by organized labour. there is always the possibility of a systematic evasion of work by workmen. Halsey observes: “Matters naturally settle down to an easygoing pace in which the workmen have little interest in their work and the employer pays extravagantly for his product. workers are paid according to the work done during a certain period of time. It does not take into account the fact that men are of different abilities and that if all the persons are paid equally. Types of Wage Plans After understanding above the concept of wage plans no let us understand in details below the different types of wage plans: Time Rate This is the oldest and the most common method of fixing wages. It requires less administrative attention than others because the very basis of the time wage contract is good faith and mutual confidence between the parties. Under this system. The labour charges for a particular job do not remain constant. As there is no time limit for the execution of a job. Merits The merits of the system are: 1. per fortnight or per month or any other fixed period of time. The day or time wage provides ii. for it makes for solidarity among the workers of a particular class. the “time” and the “output” wage plan are the two basic systems. ill will and jealousy among them are avoided. Piece Rate Under this system. Thus. workers are paid according to the amount of work done or the number of units completed.

It will be seen that the debit during the second week completely eliminated the edit of Re. Excessive speeding of work may result in frequent wear and tear of plant and machinery and frequent replacement. The total unit cost of production comes down with a larger output because the fixed overhead burden can be distributed over a greater number of units. I In weaving and spinning in the textile industry.37V2 an hour. If his piece rate earnings are equal to his time rate earnings. he gets credit for the balance. There is a greater chance of deterioration in the quality of work owing to over zealousness on -the part of workers to increase production. he determines the rate by the rule-of-thumb method. vi. 11. the raising of local in the mines. N stands for the number of pieces produced and R for the rate per piece. Where piece rate earnings if less than time rate earnings. This over-zealousness may tell upon their health. 1. This is a point of considerable gain to the management. the actual amount of pay per unit of service being approximately equal to the marginal value of his service in assisting to produce that output. In spite of the advantages accruing to the management as well as to the workmen. Demerits The demerits of the system are: i. is paid exactly in proportion to his physical output.. although his earnings during the first week are Rs. and when he finds that the workers. a worker. but the methods of production too are improved. This system is adopted generally in jobs of a repetitive nature. he is paid on the basis of the time rate. This gives him a direct stimulus to increase his production. pressure is brought to bear upon the workers for a cut in the piece rate.e.” ii. Without it.16. iv. Balance or Debt Method This method is a combination of time and piece rates. where WE is the worker’s earning. This system presupposes the fixation of time and piece rates on a scientific basis. An adjustment will be made periodically to find out the balance be paid to him. It pays the workman according to his efficiency as reflected in the amount of work turned out by him. because to escape further cuts they begin to produce less and also regard their employers and their enemies. iii.00 and during the second eek they are Rs. they generally consume more power. to be opposed in everything they want. the weekly work hours are 40 and the number of units to be completed during these 40 hours is 16. the plucking of leaves in plantations. He is paid in direct promotion to his output. and there “arises a system of hypocrisy and deceit. Let us suppose that the piece rate for a unit of work is Re. with it he will stifle the rising ambition of his men. The worker will be paid his guaranteed time rate. As the workers wish to perform their work at breakneck speed. for workers are not likely to while away their time since they know that their wages are dependent upon the amount of work turned out by them. the employer will continue to pay extravagantly for his work. for it encourages rivalry among workers and endangers their solidarity in labour disputes. on an average. working in given conditions and with given machinery.00. as in the gas and electricity industries. the goose must be killed. It satisfies an industrious and efficient worker. in this case Rs. and it appeals to skilled and efficient workers who can increase their earnings by working to their full capacity. get higher wages compared to the wages of workers doing the same task on a day-rate basis. overwork the machines.14. The worker is guaranteed an hourly or a day-rate with an alternative piece rate. It encourages soldiering. A worker’s earnings can be calculated on the basis of the following formula: WE=NR.1 In most cases. but the excess which he is paid is carried forward as a debt against him to be recovered from any future balance of piece work earnings over time work earnings. the system is not particularly favoured by workers. inspected and counted. the excess piece rate earnings over the time rate earnings. Trade unions are often opposed to this system. in the first week and the same amount in the second eek. If the earnings of a worker calculated at the piece rate exceed the amount which he would have earned if paid on time basis. calculation of costs while filling tenders and estimates becomes easier. for the worker demands materials free from defects and machinery in perfect running conditions. the question of excess payment does not arise. 0. and in the shoe industry. for he finds that his efficiency is adequately rewarded.00. Nevertheless.00 obtained during the first week. Halsey observes: “cutting the piece price is simply killing the goose that lays the golden eggs.622. i. As the direct labour cost per unit of production remains fixed and constant. for it reduces plant maintenance charges: iv. It is particularly suitable for standardized processes. COMPENSATITION MANAGEMENT © Copy Right: Rai University 67 .15. 1. This results in a high cost of production and lower profits. and do not try to avoid wastage of materials. The main reason for this is that the fixation piece rate by the employer is not done on a scientific basis. v. ii.00 and the time rate Rs. resulting in a loss of efficiency. this system can be very useful. iii. But its application is difficult where different shifts are employed on the same work or where a great variety of different grades of workers are employed on different and immeasurable services. where tasks can be readily measured. v.Under this plan. a workman is likely to take greater care to prevent a breakdown in the machine or in the workshop. Being interested in the continuity of his work. Supervision charges are not so heavy. Not only are output and wages increased. Merits This system has many advantages: i.

employers continue to seek new kinds of retirement income plans.The obvious merit of this system is that an efficient worker has an opportunity to increase his wages. more mobile workers. Such plans grow throughout an employee’s career and allow employees to see that growth through an account balance. but the employer contributes to the plan as a whole (covering all workers in the plan) to ensure that sufficient funds will be available to pay all benefits. The contribution is often stated as a percentage of the employee’s salary. like cash balance plans.Rest.7 years. Table 16 : Balance Method of Wage Payment Total Total Earnings Units of Earnings Under Completed Under Piece Rate Rate 16 Rest. Consider some of the needs of today’s employers. The different career plans of the younger generations have led many employers to conclude that their retirement plans were not beneficial to these younger. 1/ • The ability to provide predictable retirement benefits • The ability to accommodate early retirement • The ability to provide portable benefits upon employment termination or retirement • The ability to provide benefits that keep up with inflation 14 Rest. even though they are defined benefit plans. 15/. even though the excess paid to them is later deducted from their future credit balance. One new approach is the pension equity plan. all funds go into an individual account designated for the employee. which is a defined benefit plan that builds cash value throughout a person’s working life. What are the basic kinds of wage plans? 3. Such plans. let employees know the lump-sum value of their pension while they are still working.1 . hybrid forms of pension plans— including pension equity plans and cash balance plans—have been developed. Nil Nil Rest. Traditional defined benefit pension plans have been described as “golden handcuffs. pension equity plans. 1/- Nil Rest. are given a sufficient incentive to attain the same standard. The account in a hybrid plan is theoretical and is not actually funded by employer contributions. This was not conducive to attracting potentially valuable employees that could help increase efficiency. The Federal government guarantees benefit payments. employers have attempted to deal with these changing needs by seeking alternative approaches to providing retirement income. Unlike a defined benefit plan. which mobile employees can access when they leave their employer. the risk of investment loss in a defined contribution plan is borne by the employee. workers of ordinary ability. The employer’s contribution in a given year may be more or less than what is credited to an individual employee’s account. they combine the features of both defined benefit and defined contribution plans.6 years. from employers and employees. which often base benefits on earnings in a worker’s last years with the company. may provide lower benefits for those employees who work in multiple jobs throughout their lifetimes. by getting the guaranteed time wage. A defined benefit plan typically includes a formula for computing benefits at retirement. In contrast. 16/- while expressing benefits in terms of a current lump sum.622. of Tutorial Activity 1. What proper administration of wage plans is required in compensation management? To meet these needs. The key difference between defined contribution plans and hybrid plans is that defined contribution plans establish an actual account for each participant while hybrid plans use a theoretical account that does not actually accrue funds. including investment earnings. A defined contribution account accumulates the actual funds contributed by the employee and employer. and the account changes with investment earnings and losses. but guarantee final benefits like a defined benefit plan.” providing generous (“golden”) retirement income to workers who remain with the same employer (the “handcuffs”) throughout their work life. In January 2002. What do you understand by the term wage plan? 2. new. 1/ Questions 1. pension equity plans offer the guaranteed benefits of a defined benefit plan 68 © Copy Right: Rai University 11. Hybrid plans generally specify contributions to an account (or balance) like a defined contribution plan. 14/Rest.3 which have received considerable attention in recent years. COMPENSATITION MANAGEMENT • The ability to recruit new employees that are well into their careers Credit Debit Balance Name of Worker Sohan first week) Sohan Second week) Rest. Among the first pension equity plans was the plan designed for RJR Nabisco and introduced in 1993. within limits. At the same time. Such plans are referred to as “hybrids” because. a defined contribution plan specifies contributions. Benefits are often based on salary and length of service. today’s employers may face different issues than were faced in the past. Hybrid plans began to emerge in the late 1980s with the introduction of cash balance plans. BLS data indicate that.) When designing retirement benefits.Rest. is paid to the employee at retirement.1 These data suggest workers may be accumulating retirement benefits from several jobs.1 Let Us Understand What is a Pension Equity Plan? To meet the needs of workers who hold a number of jobs throughout their lives. those aged 45 to 54 had worked for their current employer an average of 7. 15/. The fund balance. employees had worked for their current employer for an average of 3. employers are required by law to place sufficient funds in the plan to pay for future benefits. (See the appendix for a comparison of cash balance plans and pension equity plans. Much like cash balance pension plans. The employee receives credits each year and the account balance grows. or ranges of contributions.

0 6. While hybrid plans are designed to allow workers to know the value of their retirement benefits at any time. defined benefit plans with a value of $5.differs considerably because of differences in their ages and lengths of service. For example. but the amount of their actual lump-sum benefit and consequently their annuity value . without the consent of the covered employee. COMPENSATITION MANAGEMENT Plan Design A pension equity plan is a defined benefit plan that provides an annuity or lump-sum benefit at the termination of a participant’s employment. Table 1. a plan that accrued 3 percent of earnings per year for those aged 31 to 40 might increase that accrual to 5 percent per year for those earnings that exceed the wage base. such value is determined by the present value of future benefits. When an employee leaves the employer. Pension equity plans define benefits in terms of a current lump-sum value.000 or less can. Employers may use alternative approaches to determining credits under a pension equity plan.7 the company with the same final average earnings (as defined by the plan). for example. The plan determines the total benefits by providing a “schedule of percents” that are accumulated throughout the work life of the employee. Annual credits can be based on age. pay the employee a lump sum and not offer an annuity option. such as a lump sum. either at retirement or at any time once vested. while those with more than 20 years of service might receive an additional 3 percent per year. In a hybrid plan. an employer can provide a standard age-based accrual and add to that a smaller accrual based on service.0 5. other hybrid plans have grown rapidly. In 2000. Defined benefit pension plans are also allowed to “integrate” benefits with Social Security. Table 2 shows an example of this flexibility. reflecting both long service and nearness to retirement age. The employee with 30 years of service who retires at age 65 has the greatest accumulation. Because the benefit credits accumulate more quickly for older workers.000 must be offered the option of an annuity. In practice. service. In this example. in fact. and they can provide different accruals for those earning more than the Social Security taxable wage base. this annuity requirement is typically only applicable to workers who are nearing retirement age. For example. The total percent (shown as a credit in some plans) is multiplied by the employee’s final average earnings.5 Distributions While pension equity plans identify their benefits in terms of a lump sum (a percent multiplied by final earnings). While the incidence of pension equity plans remains very low. about 1 percent of full-time workers in larger private companies with a defined benefit pension plan were in a pension equity plan. which are accumulated throughout the employee’s career with the employer.1 © Copy Right: Rai University 69 . Only if both the employee and spouse waive the right to a joint-and-survivor annuity can the benefit be paid out in another way. Appendix: The following tabulation shows an example of how a pension equity plan might accumulate percents of earnings strictly on the basis of age: Age Percent of earnings accumulated 29 and younger 30 to 35 36 to 40 41 to 45 46 to 50 51 to 55 56 to 60 61 and older 2. who has 15 years of service at age 65. such a provision takes into account the employer funding of Social Security benefits up to an annual threshold (the Social Security taxable wage base). For example.5 13. Each employee leaves 11. By law. as a defined benefit plan they must make benefits available in the form of an annuity.5 3. Pension equity plans can vary their accrual rate based on both age and service. Employees with 10 to 20 years of service might receive an additional service accrual of 2 percent per year.0 4. 1 in 4 full-time private industry workers with a defined benefit pension plan was in a cash balance plan. Workers whose account value is greater than $5. A pension equity plan might vary its accruals for those earning less than or more than the wage base.the 22 percent of full-time private industry workers with a defined benefit pension plan in 2000. the accumulated percentage is applied to final earnings (defined by the plan) to determine a lump-sum benefit. Illustrates how three different workers would accumulate benefits under a pension equity plan. Final average earnings generally are defined as an annual average of the highest earnings over a specific number of years—for example the average of the highest 3 years of earnings. and to have easy access to the lump-sum value of those benefits should they leave their employer. In a traditional defined benefit plan. perhaps suggesting that more pension equity plans will be seen in the future. or a combination of both. In 1997. 3 percent participated in pension equity plans.622.5 10. an employer with multiple lines of business can adjust the percents to accommodate many different types of workers.5 8. the standard form of benefit for a married employee must be a joint-and-survivor annuity. the value is the actual account balance. up from 1 percent in 1988 and 6 percent in 1997. the plan includes three different schedules of percents for three different occupational groups within the same company. receipt of retirement benefits prior to Employees receive a percent of earnings credits for each year of service. employee 1 with 15 years of service at age 40 has a smaller lump-sum benefit than does employee 3.

By contrast. Because benefit accruals typically rise with age. Another perceived advantage is that there is no reduction in benefits due to early retirement. as defined by the plan. as determined by the benefit formula. BLS will continue to monitor and report on the incidence of pension equity plans. To avoid such taxes. or earnings Percent of earnings. a major difference is the earnings used to determine the benefit. This feature provides built-in inflation protection. service. the employee terminating employment and moving on to another job can roll over the lump-sum benefit into an Individual Retirement Account (IRA) or a retirement plan sponsored by a future employer. or earnings Dollar amount (benefit formula times earnings) placed in hypothetical account each year.) No such adjustment occurs in a pension equity plan. Bernard Green He is a graduate student in economics at Florida State University. 70 © Copy Right: Rai University 11. from traditional defined benefit to defined contribution to hybrid plans. Regardless of whether an employee has just a few years of service required for vesting or has worked under the plan an entire career. Bureau of Labor Statistics.622. During 2001 and 2002. but has fulfilled the vesting requirements.1 . but the final benefit is not determined until employee leaves the plan Cash Balance Plan Percent of earnings. In contrast. BLS has tracked the change in retirement plans over time. may vary by age.retirement age can have adverse tax consequences. Such distributions are considered taxable income in the year they are received. he worked as an intern in the Division of Compensation Data Analysis and Planning. interest on account balance also credited each year Percent applied to each year’s earnings How benefits are accumulated Definition of earnings Total accumulated benefit applied to final earnings. This means that if a worker terminates his or her employment before normal retirement age. it is in fact merely an adjustment based on life expectancy. While this early retirement “reduction” is considered a penalty by some. benefits are based on earnings at the end of the employee’s career. but can be converted to an annuity By L. based on that year’s earnings. While pension equity plans and cash balance plans share methods of accumulating value. Through its annual benefits survey. final earnings typically those in last 3-5 years before retirement Employees can multiply their accumulated percent of earnings times their final earnings as defined by the plan to determine their current benefit Specified as a lump sum. however. Employees receiving benefits before that age typically receive lower benefits to account for receiving benefits over a longer expected lifetime. depending upon the employee’s age. service. (Some employers subsidize that adjustment by making the reduction less than a true actuarial reduction. the pension equity plan formula already has adjustment for age built into the accrual formula. the credits are applied to final earnings. Feature Benefit formula Pension Equity Plan Percent of earnings. are accumulated each year. Cash balance plans specify a credit each year. a traditional defined benefit pension plan specifies periodic pension distributions as the amount available at normal retirement age. The distribution may also be subject to a 10-percent Federal tax penalty for early receipt of retirement benefits. in a pension equity plan. may vary by age. the benefit will reflect the length of time worked. but can be converted to an annuity How to determine value of benefits for current employees Distribution Account balance is the current benefit Specified as a lump sum. Comparison of features of Pension Equity Plans and Cash Balance Plans COMPENSATITION MANAGEMENT Pension Equity Plan Advantages The ability of employees to know the current value of their plans at any time is one of the advantages of pension equity plans.

Inter-firm differentials. © Copy Right: Rai University 71 • • • • • • To learn the meaning and definition of wage differential To understand the concept of wage differential To know the types of wage differential To understand the reasons for wage differential To know the need of a good wage plan To understand the essentials of a good wage plan Wage Differentials Definition The word differential means relating to. or making use of a specific difference or distinction.622. ii. different wages of skill and carry different degrees of responsibility. which would exist even if employment markets were perfect and social prejudices were absent. b. The basis functions of such differentials are: a. Regional wage differentials may be conceived in two senses. ii. supervision and other non-labor factors. In other words. power and availability of transport facilities . are paid different wages. but living in different geographical areas. Inter-area or regional differentials. Occupational differentials or differentials based on skill. Occupational Differentials These indicate that since different occupations require different qualifications. are responsible for such anomalies. wages are usually fixed on the basis of the differences in occupations and various degrees of skills. obstacles to geographical. and geographical or inter-area wage differentials. status or ethnic origin belong to this category. or those involving “a great chance of unemployment. occupational or inter-firm mobility of workers. Wage differentials has been classified into three categories: First The differentials that can be attributed to imperfections in the employment markets. inter-industry.these also account for considerable disparities in inter-firm wage rates.” b.COMPENSATITION MANAGEMENT LESSON 12: INTRODUCTION TO WAGE DIFFERENTIALS & ELEMENTS OF A GOOD WAGE PLAN Learning Objective Description of each wage differential in detail: i. Differences in technological advance. Difference in the quality of labour employed by different firms. c. inter-firm. they are merely a part of inter-industry differentials in a particular region. Lack of coordination among adjudication authorities. Occupational wage differentials generally follow the changes in the relative supplies of labour to various occupations. Wage differential is an element of location selection that is a wage scale reflecting the average schedule of workers’ pay in an area that takes into account the performance of related tasks or services. 11. and general skill differentials. iii. wage differentials may be: i. for they considerably help in bringing about an adequate supply of labour with skills corresponding to the requirements of product plans. age. Third Occupational wage differentials. financial capacity. such as the limited knowledge of workers in regard to alternative job opportunities available elsewhere. skill differentials play an important role in manpower and employment programmes. Wage differentials by sex. In countries adopting a course of planned economic development. One therefore comes across the terms as occupational wage differentials. Differences in the efficiency of equipment. Wages differ in different employments or occupations.1 . or time lags in the adjustment of resource distribution and changes in the scope and structure of economic activities. managerial efficiency. iv. and v. or showing a difference. In the first sense. non-manual and manual (white and blue-collar). Inter-industry differentials. too. Inter-occupational differentials may comprise skilled. To induce workers to undertake “more demanding. and 0 between persons in the same employment or grade. unskilled and manual wage differentials. Differentials based on sex. Inter-firm Differentials Inter-firm differentials reflect the relative wage levels of workers in different plants in the same area and occupation. relative advantages and disadvantages of supply of raw materials. The main causes of inter firm wage differentials are: a. inter-firm. Examples of such wage differentials are inter-industry. age and size of the firm. Inter-area or Regional Differentials Such differentials arise when workers in the same industry and the same occupational group. industries and localities.” “more agreeable or dangerous” jobs. and c. interarea or geo graphical differentials and personal differentials. To perform a social function by way of determining the social status of workers. To provide an incentive to young person to incur the costs of training and education and encourage workers to develop skills in anticipation of higher earnings in future. or wide uncertainty of earnings. Second The wage differentials which originate in social values and prejudices and which are deeper and more persistent than economic factors. iii. Imperfections in the labour market.

1 . first let us discuss why a good wage plan is required? Ans. ii. It should have a discussion on the standard setting agenda in a two tier and a double discussion procedure. Daily or weekly payment of wages would be preferable to induce employees to work.. Dr. Lack of organization among women employees. In both cases. regional differentials are also used to encourage planned mobility of labour. It should be easily understandable. The worsening employment situation all over the world demands urgent attention and a plan of action to find solution. Turning to unemployment and under employment. if employed. they may represent real geographical differentials. Labour Tribunals. Referring to social protection. equality and respect and these should be integrated in the employment and wage policies of the Governments. The Labour Minister pointed out that every worker as human being deserves to be treated with dignity. v. In the second sense. It should be relatively stable rather than frequently varying so that employees are assured of a stable amount of money.e. So below is mentioned the following features of a good wage plan: i. He said many of the ILO conventions have been adopted ignoring realities of the situation obtaining in the developing countries and this two tier discussions will help remove the regional imbalances. iv. Other factors influencing inter-industry differentials are the extent of unionization. Mathematical tables may be supplied. while those paying less. Inter-industry Differentials These differentials arise when workers in the same occupation and the same area but in different industries are paid different wages. Dr. freely chosen and productive in terms of the Copenhagen Declaration. all the employees should easily understand what they are to get for their work. equality of life and unavoidable corollary of the income generation. he averred. resulting in the payment of different rates for the same type of work. 72 © Copy Right: Rai University 11. their lower subsistence and their weak constitution are other reasons which bring them lower wages than their male counterparts receive. Jatiya Labour Minister Addresses ILC Session In Geneva India has urged the International Labour Organisation (ILO) to explore new methods of standards setting concerning labour welfare laws. Any measures for employment should also be full. labour-capital ratio. the ability to pay. it should provide an incentive for work. i. isolation. sub-standard housing. as also by Industrial Courts.L. Dr.. This will give more opportunities to reflect the regional positions and better understanding and appreciation at the international level. less mobility among them. today.e. Jatiya called for analysing and addressing effectively the present employment scenario so as to achieve socio-economic progress. v. are paid less than men workers. Elements or Ingredients of a Good Wage Plan Before going ahead with the plans and elements of a good wage plan. the general average of wages would be expected to vary. iv. Also it helps in tackling retention management and employee motivation problems to a great extent. disparities in the cost of living and the availability of manpower. and for this reason alone.O. Such differentials are the result of living and working conditions. 100). Among them are. bonded. A good wage plan is a more or less a mandatory requirement by the oprating firms in order to attract the most creamy work force.The industry mix varies from one area to another. They should be instructed in how the wage plan works. it should be sufficiently simple to permit quick calculation. the Minimum Wages Committee and the Fair Wage Committee.. It should provide for remuneration to employees as soon as possible after the effort has been made. be quickly made. regional differentials affect the supply of manpower for various plants in different regions. It should be capable of effectively motivating the employees. and the stage of development of an industry. iii. be reference to which calculations can. i. livelihood. He stressed that employment generation must be kept on the top of the agenda of the ILO for the next decade. women workers. on the other. “Equal pay for equal work” has been recommended by the I. COMPENSATITION MANAGEMENT Latest Updates In Labor Welfare Laws India Calls For New Standards In Labour Welfare Laws Employment Generation Be Given Continued Priority In Ilo’s Agenda Says Dr. have been industries with a large proportion of unskilled and semi-skilled workers. contract. one at the regional level and the other at the International level. The industries paying higher wages have mostly been industries with a large number of skilled workers. This suggestion was made by the Indian Labour Minister. Satyanarayan Jatiya while addressing the 87th Session of the International Labour Conference in Geneva. This is necessary to create a balance between employment generation on the one hand leading to the decent income. It should be capable of easy computation. Convention (No. In some cases. a plan should be selected that will not unduly influence the worker to work too fast or to become careless of quality. But in practice this principle has not been fully implemented because in occupations which involve strenuous muscular work. such as unsatisfactory or irksome climate. Personal Wage Differentials These arise because of differences in the personal characteristics (age or sex) of workers who work in the same plant and the same occupation. migrant and casual labourers. Inter-industry differentials reflect skill differentials. Le.622. If both the quality and quantity of work are to be stressed at the same time. Jatiya stated that it assumes vital importance for those unfortunate sections of the society and the working class discriminated and economically exploitated for a long period. the structure of product markets.

he said. who have been victims of social discrimination and economic exploitation for generations. Juan Somavia. The DG has candidly noted that globalisation has brought prosperity as well as inequalities which are testing the limits of collective social responsibility. COMPENSATITION MANAGEMENT 11. employment. employment. migrant labour. The most important manifestation of the phenomenon of globalisation is widespread unemployment and under employment. If the goal of achieving social progress has to be achieved parallel to economic progress. casual labour and indentured labour. We consider it as the most important strategic objective and the progress on all other objectives is contingent upon the progress achieved in this core objective. India’s commitment. livelihood and quality of life as the logical corollary. the present employment scenario has to be analysed and addressed effectively. These are already embodied clearly and forcefully in the Constitution of India. welcome the consensus emerging in the ILO constituents for more effective and substantive relationship with the Bretton Wood institutions as they now greatly influence employment policy. contract labour. Mr. The worsening employment situation all over the world demands urgent action. Jatiya added. In other words . at the national level. President I take this opportunity to reiterate our commitment to the principles enshrined in the ILO constitution and the Philadeplphia Declaration. Juan Somavia. including legislation are taken only after taking into confidence the three social partners and after obtaining a consensus through various tripartite fore. to the ethos and culture of tripartism through social dialogue. Among them are the special victims of social exclusion such as bonded labour. Equally significant has been. The recently adopted Declaration on Fundamental Principles and Rights at work and its follow up is aimed at achieving economic progress accompanied by social justice. Logically. Director General of the ILO and said it provides the right direction and thrust for the policies and programmes of the ILO in the changing context of the social and economic environment. emerging social conditions as well as the rapid technological changes. therefore. Fundamental priciples at work place identified for promotion should be considered in the context of the broader framework for development at the national and international level. Such employment should also be full. We welcome the dominant theme of ‘Decent Work’ which is the corner stone of the strategic objective and which also has been embodied clearly and forcefully in the Constitution of India in the Directive Principles of State Policy. social security. He has. equality and respect with which every worker as a human being deserves to be treated should be integrated in the employment policy and wage policy so that there is employment generation leading to decent income. therefore. Director General of the ILO captioned “Decent Work” which provides the right direction and thrust to the policies and programmes of the ILO in the changing context of the social and economic environment globally as well as nationally. The Asian region in the recent past experienced a major financial crisis as a result of which over 20 million people lost their jobs. In India all important policy decisions on Labour. labour laws. etc. including legislation are taken only after taking into confidence. rightly identified “Creation of greater opportunities for women and men to secure decent employment and income” as one of the strategic objectives of the organisation in coming years. Their protection has been an article of faith and commitment for my national government. We are again happy to note that the DG has underlined the promotional nature of this Declaration and the importance of technical cooperation as one of the means to achieve this goal.622. Jatiya also reiterated India’s commitment to the principles in the ILO Constitution and the Philadelphia declaration. freely chosen and productive in terms of the declaration adopted at Copenhagen in which the present DG of ILO had played an important role. India also welcomes the strategic objective approach set in the report taking into account the economic. The Labour Minister Dr. Full Text Of The Speech Of Dr. Till recently the multi-lateral agencies dealing with social issues and economic issues were acting independently and were giving different policy prescription to national governments without trying to harmonise the conflicting positions. Social protection assumes importance for those unfortunate sections of the society and working class in particular. The ILO should. employment generation should be on the top of the agenda of the ILO in the coming decades. have a view on the design of the macro economic policies at the international level. Dr. therefore.Their protection has been a major commitment of the Indian Government. emerging social conditions as well as the rapid technological changes. Our submission is that the Declaration should not be used for intrusive monitoring of national economic and social policies and for developing non-tariff barriers in international trade. the social partners namely. His report has adopted a strategic objective approach taking into account the economic. In India. as also after obtaining consensus through various tripartite fora. Equally significant has been out commitment to the ethos and culture of tripartism through social dialogue. labour market relation. the dignity.1 © Copy Right: Rai University 73 . all important policy decisions on labour. the State. There was runaway inflation and a consequential fallout adversely affecting wages of the workers. He expressed India’s appreciation for the comprehensive report “Decent Work” of Dr. I would also like to take this opportunity to place on record our appreciation for the very comprehensive report of Dr. therefore. globally as well as nationally. Government Of India While Addressing The Plenary Of The International Labur Conference In Geneva On 9th June 1999 I join distinguished speakers to congratulate you on your election as the President of the 87th Session of the International Labour Conference. We. Satyanarayan Jatiya. Union Labour Minister. Employers and Employees.

His parents stay in the neighbouring village. People mostly grow jowar and pulses. We need to seriously consider the efficacy of the standard setting activity. There is lack of irrigation facility and people mostly have to depend on rainfall which is less than 600 mm per year.2 Case Study Micro-Diversification Study A Case of a Labour Contractor at Dharmaram Introduction This case focuses on the migration of labourers in search of daily wage during the dry season. He also invested some amount in digging a bore well. he started engaging labourers from his village by paying some advance wages to them. As agriculture is dependent on rainfall. The family also has one cent of residential land with a house. He got in touch with the owner of the sugar factory and got a contract of drying the sugarcane Bagas 1 which was used as fuel for the boilers for heating the sugarcane juice. This contract gave them work for additional three to four months during the lean season often from December to February. His children go to school and his wife looks after affairs of the house. The value of this property would be about Rs. It is well connected with buses to Narayankhed every hour. Prabhakar was married by this time to Saraswati. Paidipally has nearly 300 households with around 1. From these earnings. However. In this process. The main income source for the family is earnings from the labour contract. he decided to try and get similar contract elsewhere. The organisation should consider discussion on the standard setting agenda in a two-tier and double discussion procedure.1 . This advance payment to the labourers was necessary. he got his first contract from the Sri Srinivasa Sugar factory in Ramayampet for the drying of bagas. Only one crop is grown due to scarcity of water. people mostly go there for all their needs. He gradually started using his labourers in the manufacturing process of sugar in addition to bagas drying. He has been staying in this village from his childhood. What do you understand by the term wage differential and state the reasons for the existence of it? 2. this was not successful. people migrate to other places in search of wage labour. The supply of electricity is very erratic although everybody has connections. In order to increase the family’s income. The Village Context Paidipally is a small village in the Narayankhed mandal of Medak district. He often had to go out of his village in search of wage labour in the lean season.We apprehend that the proposals for voluntary code of conduct can easily be distorted and utilised for unilateral action in trade and investment.000 people. Mr Prabhakar is one such labour contractor who has a tie up with a sugar factory. Therefore. The village has more of a Kannada influence as it lies very near to the state of Karnataka. All expenditure of the house had to be met from the profits from the above contract. he provides daily wages to nearly 100 labourers during the lean season. The town of Bidar in Karnataka is only 60 Kms away from Paidipally. as they had to support their families in their absence. He is still continuing with the same contract. 74 © Copy Right: Rai University 11. one at the regional positions and laer their understanding and appreciation at the international level. In addition to earning for himself. he could buy another house. he and his father could acquire three acres of land and a residential house. It is situated five Kms away from the town of Naryankhed. We welcome the suggestion of the DG that we should explore new methods of standard setting.1 Questions 1. three sons and one daughter who are dependent on him. he came across a private sugar factory newly established near Narayankhed. Many of the Conventions have been adopted ignoring realities of the situation obtaining in the developing countries and the two-tier discussions will rectify the situation Since Narayankhed town is very near to the village. Tutorial Activity 1. The only other sugar factory existent at that time in Narayankhed was the Nizam Sugars Public Limited. The income from agriculture was meagre as small surpluses were left after own consumption. COMPENSATITION MANAGEMENT Family Details Prabhakar is now around 40 years of age. There is a hospital and both primary and high schools in Narayankhed. From the income earned from this source. His family consists of his wife. he employs about 100 workers. of whom nearly 30 are working in the processing of sugar. 45. The Tutorial Activity 1.622. He in turn got an advance from the owner of the sugar factory. The family has three acres of agricultural land the value of which would be Rs. When he got the contract. Majority of the people are small and marginal farmers who practice traditional agriculture.000. Around 18 years ago. Most of the people are engaged in agriculture. The workers are divided into various categories at the beginning and wages are paid according to the kind of work they do. Prabhakar assisted his father for four years in this business and learnt the required skills. 75. instead of assisting his father. the ILO should not become a forum for institutionalising such arrangements. What are the elements or ingredients of a good wage plan? Diversification History Prabhakar’s father used to work as a daily wage labourer. Few farmers have bore-well and are engaged in cultivation of vegetables. often uncertain. Many of the Conventions adopted over a period of time are now found unsuitable to meet the requirements of the present conditions.000. At present. Jowar and pulses are cultivated in this land during the kharif season. The soil is black cotton type.

18 to Rs. for nearly three months) as the advance given to the workers could not be taken back for lack of any work. The person at the boiler will get Rs. Out of the sale proceeds.000 per month easily as supervisor in the factory.e.wage varies from Rs.000. What kind of contractual arrangements exist in the processing sector? 3.622.1 © Copy Right: Rai University 75 . He has plans to invest in a bore well again. He would incur losses if the factory does not run for the full season completely (i. COMPENSATITION MANAGEMENT Future Plans Prabhakar is not very sure about his future plans. Higher the inflow of sugarcane in the factory. 18. He had to sell off one his house to recover this loss. it was not operating. 100. Is temporary migration a common phenomena in dryland regions? If so then when? 11. Last year. he suffered a loss of Rs 30. it ran for a month. Answer the Questions Below Based on the Case Study Above 1. greater is requirement of bagas and therefore a higher income in the season. He wants his children also to get into this business. He could have earned Rs. The factory owner had offered him a job on several occasions but he is not keen on taking it as it is against his dignity. Thus was possible because of his association for the last 18 years. he had partly repaid this loss to the sugar factory and the rest was given as credit by the factory owner. labourer using his own bullocks for drying bagas will get Rs. Often he has been supported by the factory owner in the event of any unforeseen circumstances. 100 per day. 90 whereas a person engaged in drying the bagas will get Rs. For the rest of the two months. The factory has a capacity to process 100 bags per day. 4. Prabhakar suffered a heavy loss last year due to inadequate supply of sugarcane to the factory. Due to this. He wants to continue to do this business as it is providing wages to more than 100 families. Prabhakar explained that the income from this activity is mostly dependent on the amount of sugarcane supply to the factory for crushing. What is the author trying to highlight with the help of this case? 2.

which may be based on information relating to the inputs made by jobholders as reflected by the requirement to use different levels of knowledge or skill.COMPENSATITION MANAGEMENT LESSON 13: INTRODUCTION TO INSTITUTIONAL MECHANISM FOR WAGE DETERMINATION Learning Objective • To know the Institutional Factors Influencing or determining Wage Rates tion . results but also by the size of resources controlled.622. internal differentials will be strongly influenced by differentials established in the external market from which the organization recruits and to which existing employees may be tempted to return. steps can be taken to establish internal job values by using some form of job evaluation. Responsibility involves the exercise of discretion in making decisions which commit the use of the organization’s resources. Competencies are the behavioral characteristics which demonstrably differentiate between levels of performance in a given role. and the information gained from job evaluation and market rate surveys is combined when developing the pay structure. Bearing these in mind. Or more importance may be attached to outputs. • To understand the Role of Wage Board • To learn the concept of Wages and Social Security Interaction Reward management involves the development of pay structures of varying degrees of formality which define the rates of pay for jobs. department or the organization as a whole. Internal relativities. job values will be determined by perceptions of the worth of one job compared with others. Responsibility is exercised when job holders are accountable for what they do. Rates of pay are therefore influenced not only by the scope of the job in terms of its impact on. Internal Relativities The problem with the concept of intrinsic value is that it does not take account of the other factors affecting value. The responsibilities of a job are the particular obligations that have to be assumed by any person who carries out the job. It can be argued that there is no such thing as absolute value. The intrinsic value of jobs may also be related to the input and process factors of knowledge and skills and competencies. Internal differentials reflect these perceptions.the added value they create. This chapter deals with the factors influencing job values and relativities and the basis upon which the rates of pay for individual jobs and job holders are determined. and the extent to which they receive guidance or instruction on what they should do.1 .of job holders but also by the impact they can make on the results achieved by the organization as a whole. A hierarchical structure with well-defined layers of responsibility will provide a clear indication of the pattern of differentials and produce a pay structure with fairly narrow bands. the pay relativities between jobs and the basis upon which job holders are paid. The scope or size of jobs and their rates of pay are therefore related to the accountability of job holders for achieving results. more flexible. structure will make it hard to establish a rigid rank order and differentials will be more fluid within broader pay bands and will depend more on relative levels of competence and contribution.the impact they can make on the end results of their section. Pay structures are designed by reference to judgments about job values as expressed by relativities with other jobs and external (market) rates of pay for comparable jobs. A flatter. These judgments are made against the background of the factors which influence job values. Job evaluation Performance management Legislation Wage Boards Intrinsic Value The concept of intrinsic value is based on thee apparently reasonable belief that the rate for a job should be determined by reference to the amount of responsibility involved or the degree of skill or level of competence required to perform it. External values are also established by surveying and analyzing market rates. Within an organization. The circumstances of the firm and trade union pressures. and skills refer to what job holders need to know and are able to do to meet the requirements of their jobs. The level of responsibility is related to the outputs job holders are expected to achieve and their contribu- 76 © Copy Right: Rai University 11. Inflation. The Institutional Factors Influencing or determining wage rates are: • • • • • • • • • Intrinsic value. The organization structure will clearly influence differentials and methods of payment. The value of anything is always relative to something else and is affected by external economic factors as well as internal relativities. External relativities and market practice. Perception about the intrinsic value of jobs will be influenced not only by the outputs . Knowledge. the amount of authority job holders possess. the degree of freedom they have to make decisions and to act.

S. They have had to be prepared to increase rates by less than inflation in hard times and they have reserved the right to restrict increases to individuals to below the rate of inflation if their performance does not justify the retention of their real level of earnings. They underpin pay market movements. apart from business and market rate considerations.its plans for achieving those aims will provide the basis for developing pay strategies and policies. where the level of technology is high and a large proportion of the staff are knowledge workers. the level of skills or competence they possess . 3. In effect. These rates will be determined by market relativities.the market rate . Factors influencing pay levels for individuals The pay levels of individual job holders will be influenced by three factors in addition to the rate for their job: 1. In a non-bureaucratic and flexible firm.’ The market rate concept is in any case an imprecise one..their inputs. Market rate surveys always reveal a considerable range of rates which reflect the special circumstances of the organizations. The Bureau of Labour Statistics. Relative job size is assessed in terms of inputs (knowledge and skills).A.1 © Copy Right: Rai University 77 . Individual rates and differentials have to be adjusted in the light of changing market pressures if the organization needs good quality staff. but we also know that what people cost in the job market is just what they’re worth. affect individual rates for jobs and job holders. from status to contribution. if their managements have any sense. U. Organizations have been accustomed to taking into account inflation when adjusting their pay structures although. Inflation and Market Movement Inflationary pressures clearly affect general trends in rates of pay and earnings. which are. Business Performance and/or Financial Circumstances The business or strategic aims of the organization and .External Relativities A salary or wage is a price which. This process of individual pay determination takes place within the framework of job and role analysis and. Overall levels of pay will be affected by business aims. They will press for higher rates on the grounds of the organization’s ability to pay and trends in market movement and the going rate for specific jobs. process (behavioral requirements involving the use of competences) and outputs (the level of responsibility for results and the impact the job makes on team or organizational performance). in any case. their COMPENSATITION MANAGEMENT 11. The amount of influence these factors exert will depend on the job and the internal environment of the organization.is primarily determined by the laws of supply and demand. and individual levels of performance. like any other price. is largely influenced by the interrelated processes of job evaluation and performance management for those in receipt of performance-related pay.their market stance or pay posture. And as they are doing this. they have refused to commit themselves to any semblance of index linking. this says that any employable individual has a price which is related to what other organizations are prepared to pay for his or her services. external economic and union influences. The external value of a job . It is also important to bear in mind the concept of individual market worth. As Kanter has stated: Major employing organizations are rethinking the meaning of worth itself. the ‘size’ of the job within the structure. trade unions will attempt to pressurize managements into increasing pay by at least the amount of inflation. employers are basing pay reviews on movements in market rates. The latter will determine rates of pay above the base rate either by a performance management process or a pay for-performance scheme. plans and performance. Job Evaluation Job evaluation is used to measure relativities and determine where the job should be placed in a pay structure (the rate for the job).. However. 2.622. represents the value of the service to the buyer and the seller: the employer and the employed.. The resulting business performance and/or the financial circumstances of the organization will influence the amount it can afford to pay and its pay policies on such matters as how it wants to relate pay to performance and market rates. as measured by job evaluation. however. Trade Union Pressures Depending on their bargaining power. reward policies and market rates. individual worth will be more important than position in a job hierarchy.their outputs and the overall contribution they make to organizational success. says that “job evaluation is the evaluation or rating of jobs to determine. be trends in market rates to which internal pay structures must respond if they are to remain competitive. all the market does is to allow us to assume that people occupying equal positions tend to be paid equally and as Kanter puts it: ‘The process is circular. Increasingly. we know what people are worth because that’s what they cost in the job market. These general considerations will. Organizations ignore at their peril the individual market worth of any employees they wish to retain whose talents are at a premium in the market place. they are gradually changing the basis for determining pay from position to performance. responsive to the rate of inflation. including the level of people they employ and their policies on how they want their levels of pay to relate to market rates . of course. their market worth as mentioned above. How rates of pay for individual jobs and job holders are determined. and they may attempt to restore lost differentials. their level of performance in the job . however. There will. This will be particularly important at the intake points in a structure and in respect of individuals whose market worth is high and who are therefore vulnerable to the attractions of better paid jobs elsewhere.

agricultural. On the recommendation of the Standing Labour Committee and Indian Labour Conference. To provide data on job relationships for use in internal and external selection. improve or build on employee work performance.The State shall. such as skills.Choudhary in 1920 for setting up Boards for determination of minimum wages in each industry. 4. It has been very rightly said that Performance management is an ongoing communication process that involves both the performance managers (viz. to give all workers. To provide a basis for a simpler. Performance Management Performance management assesses the individual’s performance in the job and in a performance-related pay environment. 6. To reduce pay grievances by reducing their scope and providing an agreed-upon means of resolving disputes. Political and Sr.622.1 . pay will be determined by reference to job evaluation and the quantified results achieved by job holders. and social and cultural opportunities. The evaluation may be achieved through the assignment of points or the use of some other systematic method for essential job requirements. “minimum wages” and “fair wage” besides setting out guidelines for wage fixation. more rational wage structure. social conditions and employment. 3. men and women equally shall have the right to an adequate livelihood and (b) that there is equal pay for equal work for both men and women. determines the rate of pay for that individual in the job whether he or she is positioned within a pay range or on a pay scale.. Our ability to manage performance effectively will contribute to our organization? Success and will positively affect the people who work in our organizations. direct its policy towards securing (a) that the citizen. • Developing realistic and appropriate performance standards (i. • Identifying and describing essential job functions and relating them to the mission and goals of the organisation. • The International Labour Conference adopted in 1928 • Convention No. Performance management is a strategic and integrated approach to delivering sustained success to organizations by improving the performance of the people who work in them and by developing the capabilities of teams and individual contributors.26 and Recommendation No.position in the job hierarchy. in particular. To provide incentives for employees to strive for higherlevel jobs.” Objectives of Job Evaluation For those on an incentive’ or payment by results scheme. Article 39 .”The Committee on Fair Wage” was set up in 1948 to provide guidelines for wage structures in the country. industrial or otherwise. Planning. education and development opportunities to sustain. This leads to agreements on specific standards of performance. conditions of work ensuring a decent standard of life and full enjoyment of leisure.e. and other personnel functions. a living wage.Civil Service Executives.) to assess the progress toward determined goals. The report of this Committee was a major landmark in the history of formulation of wage policy in India. Giving and receiving feedback about performance and use of information either to confirm or change current policy or programme directions to meet those goals and report on the success in meeting goals. experience and responsibility. 2.1948 Background A tripartite Committee viz.. Enactment of the Minimum Wages Act Historical Backdrop • The initiative started with the resolution placed by one Shri K. We need to manage not only our performance but also the performance of the many individuals we supervise and develop over the years. Deputy Commissioners) and the employee in COMPENSATITION MANAGEMENT The general purpose of job evaluation may include a number of more specific goals: 1.G. by suitable legislation or economic organisation or in any other way.R. Article 43 . To provide an agreed-upon means of classifying new or changed jobs. • Writing and communicating constructive performance • appraisals. personnel planning.The State shall endeavour. a Labour Investigation Committee was appointed in 1943 to investigate into the question of wages and other matters like housing. career management. work. This programme aims to equip the participants with understanding and skills so that they can motivate the employees to contribute their best to the organization The performance management process will be based on precisely the same factors used in evaluating the job as recorded in a job description or role definition derived from job or role analysis: namely skills. Legislation Minimum Wages Act. The starting point of performance management is an agreement on skill and competence requirements and on the principal accountabilities or main tasks of the job.. To provide information for wage negotiations. 5. 78 © Copy Right: Rai University 11. To provide a base for individual performance measurements. Its recommendations set out the key concepts of the ‘living wage’. competences and results. targets and work plans and personal development plans which form the criteria on which performance is reviewed and assessed. a written statement describing how well a job should be performed. As a manager one of our most important responsibilities to our organization is to manage performance well. 30 relating to wage fixing machinery in trades or parts of trades.

to evolve a mechanism to protect wages against inflation by linking it to rise in the Consumer Price Index. Enforcement Machinery The enforcement of the provisions of the Minimum Wages Act in the Central Sphere . v. Minimum food requirements of 2700 calories per average Indian adult. 1985 expressed the following views“Till such time a national wage is feasible. as the case may be. is secured through the officers of Central Industrial Relations Machinery. The Variable Dearness Allowance came into being in the year 1991. They are Committee method and Notification method. two methods have been provided for fixation/revision of minimum wages. Revision Revise the Minimum rates at an appropriate interval of not exceeding five years. should further constitute 25% of the total minimum wage. held in November. Central and State Governments are appropriate Governments to a. Local conditions and other factors influencing the wage rate. Rent corresponding to the minimum area provided for under Government’s Industrial Housing Scheme. After considering advice of the Committees/Sub-committees and all the representations received by the specified date in Notification method. medical requirement. minimum wages and paid holidays. iii. Under the Act.Vs. In so far as State Sphere is concerned. fix/revise the minimum wage in respect of the concerned scheduled employment and it shall come into force on expiry of three months from the date of its issue.622.3. Part I has non-agricultural employments whereas Part-II has employment in agriculture. The Indian Labour Conference. it would be difficult to maintain uniformity in wages. by notification in the Official Gazette. National Wage Policy Though it is desirable to have a National Wage Policy it is difficult to conceive a concept of the same. notify scheduled employment b. Committee Method Under this method. iv. cost of living and paying capacity also varies from State to State and from industry to industry. It was passed in 1946 and came into force with effect from 15.• A draft bill was considered by the Indian Labour Conference in 1945. Fuel. once on 1st April and then on 1st October.its workmen. • The 8th meeting of the Standing Labour Committee recommended in 1946 to enact a separate legislation for the unorganised sector including working hours. 11.4. ii. “Children education.48. it would be desirable to have regional minimum wages in regard to which the Central Government may lay down the guidelines. Notification Method In this method. Criteria for Notification of Scheduled Employment The appropriate Government fixes the minimum wage in respect of only those scheduled employments where the number of employees is 1000 or more. ii. Government proposals are published in the Official Gazette for information of the persons likely to be affected thereby and specify a date not less than two months from the date of the notification on which the proposals will be taken into consideration. marriage etc. Other Parameters i. the enforcement is the responsibility of the respective State Government/Union Territory.1948. The Minimum Wages should be revised at regular periodicity and should be linked with rise in the cost of living” • A Minimum Wages Bill was introduced in the Central Legislative Assembly on 11. 3 consumption units for one earner. the appropriate Government shall. committees and sub-committees are set up by the appropriate Governments to hold enquiries and make recommendations with regard to fixation and revision of minimum wages. lighting and other Miscellaneous items of expenditure to constitute 20% of the total Minimum Wages.1 © Copy Right: Rai University 79 .” This judgment was delivered by the Supreme Court of India in 1991 in the case of Reptakos Brett and Co. Clothing requirements of 72 yards per annum per family. The allowance is revised twice a year. 22 States/Union Territories have provisions for Variable Dearness Allowance. COMPENSATITION MANAGEMENT Procedure for Fixation/Revision In Section 5 of the Minimum Wages Act.46 to provide for fixation of minimum wages in certain employments. fix/revise minimum wages The Act contains list of all these employments for which minimum wages are to be fixed by the appropriate Governments. Fixation/Revision of Minimum Wages Norms The norms include those which were recommended by the Indian Labour Conference in its session held in 1957 at Nainital. i. at present. The National Wage Policy has been discussed on many occasions in different fora. minimum recreation including festivals/ceremonies and provision for old age. Methods for Fixation/Revision of Minimum Wages Fixation Section 3 empowers appropriate Government to fix the minimum rates of wages in the scheduled employments. Because fixation of wages depends on a number of criteria like local conditions. There are two parts of the Schedule. Variable Dearness Allowance (VDA) It was recommended in the Labour Ministers’ Conference held in 1988. In the State Sphere.

Accordingly, the Government issued guidelines in July, 87 for setting up of Regional Minimum Wages Advisory Committees. These Committees renamed subsequently as Regional Labour Ministers’ Conference, made a number of recommendations which include reduction in disparities in minimum wages in different states of a region, setting up of inter-state Coordination Council, consultation with neighbouring States while fixing/revising minimum wages etc. Scheduled employments for which central government has fixed minimum wages under the Minimum Wages Act,1948 Sl. Name of Employment NO. 1. Agriculture 2. Construction or maintenance of roads or building operations. 3. Stone breaking or stone crushing. 4. Maintenance of buildings. 5. Construction and Maintenance of Runways. 6. Gypsum mines. 7. Barytes mines. 8. Bauxite mines. 9. Manganese mines. 10. China Clay mines. 11. Kyanite mines. 12. Copper mines. 13. Clay mines. 14. Stone mines. 15. White Clay mines. 16. Ochre mines. 17. Fire Clay mines. 18. Steatite (Soapstone and Talc) mines. 19. Asbestos mines. 20. Chromite mines. 21. Quartzite mines. 22. Quartz mines. 23. Silica mines. 24. Magnesite mines. 25. Graphite mines. 26. Felspar mines. 27. Redoxide mines. 28. Laterite mines. 29. Dolomite mines. 30. Iron Ore mines. 31. Granite mines. 32. Wolfram mines. 33. Magnetite mines. 34. Rockphosphate mines. 35. Hematite mines. 36. Loading, unloading in Railways’ goods shed
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37. Ash Pit Cleaning in Railways. 38. Marble and Calcite mines. 39. Uranium mines. 40. Mica mines. 41. Employment in Lignite Mines. 42. Employment in Gravel Mines. 43. Employment in laying down of underground electric wires, radio, television, telephone, telegraph and overseas communication cables and similar other underground cabling work. 44. Employment in the Slate Mines. 45. Security Services

50.33 54.28 54.28 54.28 54.28 54.28 54.28

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Minimum Wages per day (in Rs.) 86.63 54.28 70.27 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 54.28 50.33

54.28 54.28

Wage Board
In the 1950s and 60s, when the organized labour sector was at a nascent stage of its development without adequate unionisation or with trade unions without adequate bargaining power, Government in appreciation of the problems which arise in the arena of wage fixation due to absence of such bargaining power, constituted various Wage Boards. The Wage Boards are tripartite in character in which representatives of workers, employers and independent members participate and finalise the recommendations. The utility and contribution of such boards in the present context are not beyond question. Except for the Wage Boards for Journalists and Non-journalist newspaper and News-agency employees, which are statutory Wage Board, all other Wage Boards are non-statutory in nature. Therefore, recommendations made by these Wage Boards are not enforceable under the Law. The importance of the non-statutory Wage Boards, has consequently declined over a period of time and no nonstatutory Wage Board has been set up after 1966, except for sugar industry, where last such Wage Board was constituted in 1985. The trade unions, having grown in strength in these industries, are themselves able to negotiate their wages with the management. This trend is likely to continue in future.

Wages and Social Security
The Government has assumed responsibility for securing a minimum wage for certain sections of workers, in industry and agriculture, who are economically weak and stand in need of protection. Towards this end the Minimum Wages Act provides for the fixation and revision of wage rates in these occupations. These measures have not proved effective in many cases. For better implementation of the law, the machinery for inspection has to be strengthened. Wage determina- tion in major industries is left to the process of collective bargaining, conciliation, arbitration and adjudication. The Second Plan recommended the setting up of Wage Boards as the most suitable method of settling wage disputes where large areas of industry are concerned. This has so far been applied to the cotton and jute textiles, cement, sugar and plantation industries; and will be extended to other indus- tries according to circumstances.

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It has been decided to appoint a Board soon for the iron and steel industry. The representatives of employers and workers have agreed that unanimous recommendations of a wage board should be implemented fully. An encouraging trend has been noticed in the coal mining industry where employers and workers have agreed to set up a bipartite committee to examine the entire question of wage revision in the industry; alternative wage-fixing machinery will be considered only if the bipartite committee fails to arrive at a settlement. Some broad principles of wage determination have been laid down in the Report of the Fair Wages Committee. On the basis of agreement between the parties, the Indian Labour Conference had indicated the content of the need-based minimum wage for guidance in the settlement of wage disputes. This has been reviewed and it has been agreed that the nutritional requirements of a working class family may be re-examined in the light of the most authoritative scientific data on the subject. Apart from the minimum wage, care should be taken in fixing fair wages for different classes of workers, that adequate incentives are provided for the acquisition and development of skills and for improvements in output and quality. There are, however, wide disparities between the wages of the working class, on the one hand, and the salaries at the higher management levels, on the other. Owing to the uncertainty attaching to it, the question of bonus has become a source of friction and dispute. It has been decided to appoint a Commission which will include representatives of both parties to study the problems connected with bonus claims and to evolve guiding principles and norms for the payment of bonus.

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Notes:

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LESSON 14: LEGALISTIC FRAMEWORK FOR WAGE DETERMINATION
Learning Objective
ii. The Minimum food requirement should be calculated on the basis of a net intake of calories, as recommended by a doctor of the committee, for an average Indian adult of moderate activity. iii. Clothing requirements should be estimated at per Capita consumption of 18 yards per annum which would, for the average workers family of four, a total of 72 yards. iv. In respect of housing, the rent corresponding to the minimum area provided for under Government Industrial Housing scheme should be taken into consideration infixing the minimum wage. v. Fuel, lighting and other’ miscellaneous’ items of expenditure should constitute 20% of the total minimum wages. Keeping in view the socio-economic aspect of the wages structure, the Supreme Court added the following additional component as ab’1lide for fixing the minimum wage in the industry:vi. Children education, medical requirement, minimum recreation including festivals, ceremonies and provision for old age, marriages, etc. should further constitute 25% of the total minimum wages. The wage which approximately answers the above six components in nothing more than a minimum wage at subsistence level. The employees are entitled to the minimum wage at all times and under all circumstances An employer who cannot pay the minimum wage has no right to engage labour and no justification to run the industry. The Concept of Minimum Wages The Act does not define minimum wages. It is only through the definition of ‘wages’ as defined in the Act that the concept of minimum wages can be deduced Wages as defined in the Act means all renuneration, capable of being expressed in terms of money which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or work done in such employment, and includes house rent allowances, but wages do not include: i. The value of a. b. any house accommodation, supply of light, water, medical attendance; or

• Minimum Wages Act, 1948 • Payment of Wages Act, 1936 • Payment of Bonus Act, 1965
Interaction
With regard to legalistic framework for wage determination in respect to Indian economy we will discuss the laws relating to Wage and Salary Administration and they are - Minimum Wages Act-1948, Payment of Wages Act 1936 and Payment of Bonus Act, 1965.

Minimum Wages Act, 1948
Object and Scope The level of wages payable to workers is determined by the forces of demand and supply. In a welfare state the protection of the interests of workers is one of the aims of any legislation which is enacted in the labour field. The Indian Labour class besides being illiterate is by and large not organized to protect its interest in a competitive market where supply of labour is always in excess of demand. Under such conditions the Indian Parliament enacted the Minimum wages Act, 1948. The Minimum wages Act was enacted to secure the welfare of the workers in a competitive market by providing for a minimum limit of wages in certain employment. This is the preamble of the Act. The Act purports to achieve the prevention of exploitation of labour and for that purpose authorizes the appropriate government to take steps to prescribe minimum rates of wages in scheduled industries. It is only with regard to certain specified industries that the payment of statutory minimum wages have been laid down. The object of the Act is to do social justice to workers employed in the scheduled employments by prescribing minimum rates of wages for them. The concept of locus standi has also been enlarged with a view to ensure the application of the law. The Act contemplates that minimum wages rates must ensure not the mere physical need of the worker which could keep him just only his subsistence and that of his family but also preserve his efficiency as a workman. It should also provide for some measure of education, medical requirements and amenities. The Directive Principle of state policy as enshrined in Articles 43 of the constitution also adheres to this principle The Tripartite committee of the Indian labour Conference held in New Delhi in 1957 declared the wage policy which was to be followed during the 2nd five year plan. The five norms of Fixations of “Minimum Wages” are:i. The standard working class family should be taken to consist of three consumption units for the one earner, the earnings of women, children and adolescents should be disregarded.

any other amenity or any service excluded by general or special order of the appropriate government; ii. any contribution paid by the employer to any pension fund or provident fund or under any scheme of social insurance; iii. any traveling allowance or the value of any traveling concession; iv. any sum paid to the persons employed to defray special expenses entailed on him by the nature of his employment;

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v. any gratuity payable on discharge. It was held in Manganese ore (India) Ltd V. Chadilalsaha, 1991 L.I. C 524 S.C when the attendance bonus is an additional payment made to the workmen as a means of procuring their regular attendance with the object of increasing production then the bonus is in the nature of extra remuneration to regular attendance which is not payable to all the workmen at the time of joining the employment but is payable to a workmen who has put in continuous service for the specified period then the attendance bonus would be held to be only an incentive and not a wage and hence it is not treated as minimum wage fixed under the Act. Broadly speaking the wages can be classified into following categories: a. The Living Wage The concept of living wage is the wage rate which prevails in most of the economically advanced countries. The living wage must provide not merely for absolute essentials such as food, shelter, clothing, frugal comfort, provision for evil days etc. as well as regard for the special skill of an artisan if he is one. b. Fair Wage It was held in Express News papers (p) LTD. Vs. Union of India 1961 I.L.L.J. 339 SC that Fair Wage is a mean between the living wage and the bare minimum wage. In All India Reserve Bank of India 1965 LL.L.J 175 SC, A fair wage is thus related to fair workload and the earning capacity It is a step 100ver than the living wage ‘W11ile the lower limit of fair wages must obviously be minimum wages, the upper limit is equal1y set by what may broadly be called the capacity of industry to pay. The factors which determine the capacity to pay will be: 1. the productivity of the labour; 2. the prevailing rates of wages in the same Or similar industries in the same or neighboring localities;. 3. the present economic position of the industry, its prospects in the near futures. The fair wages win grow with the growth and development of the national economy and the progress made by the industry must be approximate to the capacity of the industry to pay. c. Minimum Wage The minimum wage is the lowest wage in the scale below which the efficiency of a worker is likely to be impaired. The minimum wage, includes not only the bare physical necessities but also a modicum of comfort otherwise known as conventional necessities. The minimum wage must, therefore, provide not merely for the bare subsistence of life but also for the preservation of the efficiency of worker. For this purpose the minimum wage most also provide for some measure of education, medical requirements and amenities. It is in light of the above discussion there is a difference between minimum wage and fair wages. In Sangam Press. Vs. Its Workmen, the Supreme Court observed that in case of fair wage, besides the principle of industry cum region, the company’s capacity to bear the financial burden must receive due consideration. But mere hopeful observation made in the director’s annual report cannot be the basis for awarding
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increased, wages because such observations are sometimes made to inspire hope and confidence in shareholders and they cannot be a substitute for actual audited figures. The minimum wage as defined means 1. Any minimum rate of wages fixed or revised by the appropriate government in respect of scheduled employments may consist of i. A basic rate of wages and a special allowance at a rate to be adjusted at such intervals and in such manner as the appropriate government may direct to accord as nearly as possible with the variation of cost of living index number applicable to such workers; A basic rate of wages with or without the cost of living allowance, and the cash value of allowance in respect of essential commodities at concession rate where so authorized; An all inclusive rate allowing for the basic rate, the cost of living allowance and the cash value of concession, if any.

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ii.

iii.

2. The cost of living allowance and the cash value of the concession in respect of supplies of essential commodities at concessional rates shall be computed by the competent authority at such intervals and in accordance with such directions as may be specified or given by the appropriate government. The Act does not define minimum wages presumably because it would not be impossible to lay down a uniform minimum wage for all industries throughout the country on account of different and varying conditions prevailing from industry to industry and from one port of the country to another The legislature also thought it inexpedient not to apply the Act to all industry at a time.

The Payment of Wages act, 1936 (IV OF 1936)
Background Before this enactment, in the Payment of Wages Act, 1936 the employer could decide on the wages of employees according to his own whim and fancy. Employer also used to deduct sums from wages as fine. The position of employees was weak and their conditions deplorable. In this backdrop, Royal commission on Labour was appointed in 1929, which gave the Report on the basis of such report, The Payment of Wages Act, 1936 was enacted. This Act regulates the payment of wages to persons employed in any factory and in Railway administration. The State Government, after giving three months notice may extend the Act to any class of persons employed ill any Industrial establishment. The Act shall not be applicable in case if the average pay in respect of a wage period exceed Rupees one thousand six hundred a month or more. Object Act The main objects of the Act are: i. to pay the wages to the employees ii. to pay the wages at proper times as specified in the Act. iii. to prevent unauthorized deductions

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The preamble to Act clearly states the object: “Whereas it is expedient to regulate the payment of wages to certain class of employed persons. This act is a piece of legislations inclined towards social justice.

employed by him of all wages required to be paid under this Act. Fixation of Wage Periods See 4 provides that every person responsible for the payment of Wages shall fix periods in respect of which such wages shall be payable, and such period is called “wages period” No wage period shall exceed one month. Rule Making Power Under Section 26 Rule making powers are given to State Government to regulate the procedure to be followed by the authorities and Courts referred to in Sections 15 and 17. Section 26(2) the State Government may be notification in the official Gazette make rules for the purpose of carrying-into effect the provisions of this Act. Section 26(3) In particular and without prejudice to the generality of the foregoing power, rules made under SubSection (2) may a. Requires the maintenance of such records, registers returns and notices as are necessary for the enforcement of the Act, prescribe the form thereof and the particulars to be entered in such registers of records; b. Require the display in a conspicuous place on premises where employment is carried on of notices specifying rates of wages payable to persons employed on such premises; c. Provide for the regular inspection of the weights, measures and weighing machines used by employers in checking or ascertaining the wages of persons employed by them; d. Prescribe the manner of giving notice 9f the days on which wages will be paid; e. Prescribe the authority competent to approve under subsection (l) of Section 8 acts and omissions in respect of which fines may be imposed; f. Prescribe the procedure for the imposition of fines under Section 8 and for making of the deductions referred to in section 10; g. Prescribe the conditions subject to which deductions may be made under the provision to sub-section (2) of Section 9; h. Prescribe the authority competent to approve the purposes on which the proceed of fines shall be expend and; i. Prescribe the extent to which advances maybe made and the installments by which they may be recovered with reference toc1ause (b) of section 12;

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Definitions
Sec 2 of the Act dea1s with definitions Sec 2 (vi) of the Act defines wages. “Wages” means all remuneration (whether by way of salary, allowance or-otherwise) expressed in terms of money or capable of being so expressed which would if the terms of Employment express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment and also includes. a. any remuneration payment under any award or settlement between the parties or order of a court; b. any remuneration with respect to overtime work or holidays or any lease period; c. any additional remuneration payable paid as bonus under the terms of employment d. any sum which by reason by the termination of employment of the person employed is payable under any law, contract or instrument which provides for the payment of such sum but does not provide for the time within which the payment is to be made. e. any sum to which the person employed is entitled, under any scheme framed under any law for the time being in force. But it does not include 1. Any bonus which does not form part of the remuneration payable under the terms of employment or which is not payable under any award or settlement between the parties or order of court; The value of any house accommodation or of the supply of light, water, medical attendance or other amenity or of any service excluded from computation of wages by a general or special order of the State Government. Any contribution paid by the employer to any pension or provident fund and the interest which may have accrued thereon. Any traveling allowance or the value of any traveling concession. Any sum paid to the employed person to defray speci1l1 expenses entailed on him by the nature of his employment. Any gratuity payable on the termination of employment in cases other than those specified in sub clause(d)

2.

3.

4. 5.

6.

ia. Prescribe the extent to which loans may be granted and the rate of interest payable thereon with reference to section 12A; ib. Prescribe the powers of Inspection for the purpose of this Act. j. Regulate the scales of costs which may be allowed in proceedings under this Act;

See 2 (1) of the Act defines ‘employed person’ which includes the legal representative of a deceased employed person. Sec 2 (a) of the Act defines ‘employer’ which includes the legal representative of a deceased employer. Responsibility For Payment of Wages Sec 3 of the Payment of Wages Act, 1936 provides that every employer shall be responsible for the payment to persons

k. Prescribe the amount of Court fees payable in respect of any proceedings under this Act; l. Prescribe the abstracts to be contained in the notices required by section 25.

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labour should legitimately have a share in them. It is difficult to define in rigid terms the concept of bonus but it is possible to urge that once profit exceed a certain base. It is an incentive to greater effort on the part of the labour for more production. Wages must be fixed on normal conditions. Bonus as an implied term of contract between the parties. and the date to be specified under clause (3) of Section 23 of General clauses Act 1897 (10 of 1897) shall not be less than three months from the date on which the draft of the proposed rules was published. It generally represents the cash incentive given- 11. customary bonus etc. liability to pay Bonus has become a statutory obligation imposed upon the employer covered by the Act. Labour and ii. and to achieve it directs the Government to make legislations. that any such modification or annulment shall be without prejudice to the validity of anything previously done under that rule. 1976 amendment by Section 31 recognizes production bonus. as the case may be. Vs.. as soon as may be after it is made. something wholly to the good. 25-A the cancellation or variation of any such nomination. 1965. The distribution of increased profits is made by payment of Bonus than by increase in wages. iii. so however. Production Bonus. Its “Workmen” explained. Capital.1965.622. Applicability and Extent of Bonus Act Meaning: Bonus is an Extra Payment made out of Profits. and it is concealed1hat labour has a right to share in increased profits that are made in any particular period. Production Bonus The payment of production bonus depends upon Production and is in addition to wages.1 © Copy Right: Rai University 85 . lb. Prescribe the form and manner in which nominations may be made for the purpose of sub section (1) of Sec. m. the rule shall thereafter have effect only in such modified form or be of no effect.la.09. It is proper to construe the concept of bonus as sharing by the workers in the prosperity of the concern in which they are employed. Thus it ensures the peace. which was assented by the President on 25. Specify the authority with whom amounts required to be deposited under clause (b) of Sub Section (1) of Section 25A shall be deposited. namely i. The recommendations were accepted and an ordinance was issued by the Government in 1964 which was replaced by the payment of Bonus Act. each House of Parliament while it is in session on for a total period of30 days which may be comprised in one session or in two or more successive sessions and if. Textile Labour Association 1961 I LLJ 521 at 526 suggested four types of Bonus. Definition It is surprised to note that the most important term “Bonus” which is the ‘oxygen’ of the payment of Bonus Act. ‘The Bonus Commission’ explained. maintained. has not been defined in this Act or any other labour and industrial legislation. additionally on certain grounds of attendance and efficiency being. Under the Bonus Act. Sub Section (4) in making any rule under this Section the State Government may provide that a contravention of the rule shall be punishable with fine which may be extended to Rs. amicable relations between employee and employer. There are good will bonus. Scope. Sub Section 6 provides that every rule made by the Central Government under this section shall be laid. 200/ Sub Section 5 provides that all rules made under this section shall be subject to the condition of previous publication. “A boon or gift over and above what is normally due as remuneration to the receiver and which is therefore. The preamble of the Act explains the object: “An act to provide for the payment of bonus to persons employed in certain establishments on the basis of profits or on the basis of production and for matters concerned therewith” The essential factors for a successful industry are i. ii. Provide for any other matter which is to be or may be prescribed. and the prosperity of the concern. 1965. New English Dictionary defines. Profit bonus Profit Bonus Profit bonus has been given statutory recognition in the payment of Bonus Act. Object Article 43 (Directive Principles of state policy) of the constitution of India expects “living wage” for all the workers. or the making of any fresh nomination in the event of the nominee predeceasing the person making nomination and other matters connected with such nominations. before. before the expiry of the session immediately following the session or the successive sessions aforesaid. Customary bonus in connection with some festival and iv. This is subject to a statutory minimum and maximum bonus. under this the quantum of bonus depends on the extent of profit obtained in the relevant year. COMPENSATITION MANAGEMENT Kind of Bonus The Supreme Court in New Maneck Chowk Spinning and Weaving Company Vs. and the manner in which such authority shall deal with the amount deposited with it under that clause. It is universally accepted principle now that profits ate made possible by the contributions that profits are made possible by the contributions that both capital and labour make in any particular industry. The Payment of Bonus Act 1965 (ACT 21 OF 1965) Definition. Bonus Commission Government of India in 1961 setup a commission for considering all questions relating to bonus. The General Motors (India) Ltd. The term bonus is applied to a cash payment made in addition to wages. both houses agree in making any modification in the rule or both houses agree that the rule should not be made.

When the goal of living wages has been attained. wholly of partly. Where the industry does not have the capacity to pay living wage. riotous or 86 © Copy Right: Rai University 11. 21) has 40 sections and four schedules. COMPENSATITION MANAGEMENT ii. The Industrial Court went elaborately into the matter in this case and laid down certain principles and awarded to the workmen bonus equivalent in amount to 3/8th of the total basic earnings of each workman subject to certain conditions. managerial. and not a charity on the employer. Disqualification for Bonus Under Section 9 an employee is disqualified from receiving the bonus if he is dismissed from service for fraud. 12. 2. To provide for payment of minimum and maximum bonus and linking payment of bonus with the scheme of set off and set on. Recognition of the fact that the labour contributed for the profit earned by industry & so it has a right to claim a share in it.laws. Section 2 (13) provides that the employee shall be entitled to get Bonus. ii. 1965 (Act No. but still payments for Bonus are made because legally due. The responsibility is imposed upon the Employer to calculate bonus & distribute it within 8 months from the closure of accounting year. mines etc.per men sum in any industry to do any skilled. 5. 3.622. 11. It applies only to private sector. if his salary or wages does not exceed Rs. Two sections 33 and 3 7 were repealed from the Act 21 of 1975. Lord Birkenhead opines: It differs from wages. bonus must be looked upon as a temporary satisfaction. Bombay Vs. The term “Bonus” has no definition in the payment of Bonus Act. Bonus will be paid from the balance known as “Available Surplus”. 1965. if minimum of 10 persons were employed an any day of the accounting year. Rashtriya Mill Mazdbor Sangh (1950) expressed. 5. It is not an ex-gratia. but which the parties do not contemplate to continue indefinitely. supervisory. offices. bonus like profit sharing. would present more as the cash incentive to greater efficiency and production. Bonus is paid to employees in cash. The Rashtriya Mill Mazdoor Sangh Bombay 1950 (z) LLJ124 7. the employee can rise “Industrial dispute”. It is intended to bridge or narrow down the gap as may be reasonably possible between the living wage to which the labour is entitled and the actual age received. It is the right accrued to them by the Act. the punishment is imprisonment for a term which may extend to six months or with fine which may extend to Rs. An employee of an establishment to which the Act does not apply cannot claim bonus under the Act. Eligibility for Bonus Under Section 8 every employee is entitled to bonus in any accounting year if he has worked in the establishment for not less than 30 working days in that year. Two sections 31-A. dealing with bonus in all its aspects. i. He must maintain registers. but paid in addition to wages. To define the principles of payment of bonus according to the Prescribed formula iii. Salient Features of the Payment of Bonus Act. 14. Bonus is like profit sharing. 1000/or with both. This decision is known as the “Full Bench Formula”.1 . to meet the needs of labour. the Act applies to every factory and every other establishment in which ten or more persons are employed on any day during the accounting year. The payment of Bonus rules have been framed in 1945 which have only 5 rules and 4 norms. 6. technical or clerical work for hire or reward whether the terms of employment be express or implied. Social Justice: Payment of bonus is rendering social justice to the poor and hard working labor. It renders cash incentive to labour which would encourage for a better efficiency and production. Bonus will be payable only cash 7. 8. Application of the Act Under Section 1(3). The Supreme Court of India while disposing Mill Owner’s Association Vs. The Act is a comprehensives and exhaustive law. Thus the Act applies to shops. unskilled manual. If the employer refuses to pay bonus.Scheme of the Act The Act is designed i To impose statutory liability upon the employer of every establishment covered by the Act to pay bonus to employees in the establishment. 10. This Act applies to every factory and every other establishment in which twenty or more persons are employed on any day of the Accounting year. 9. The decision of the award of bonus is based on two fold objective. Capital & labour contribute to the earning of the concern so it is fair that labour should derive some benefit if there is surplus after meeting prior charges. The payment of Bonus Act. 4. a leading decision in the payment of Bonus case.2500/. administrative. 1975 1. It is not ex-gratia. The provisions of this Act apply from the accounting year commencing on any day in the year 1964. 13. 2. The Mill Owner’s Association. in that it does hot rest on contract. Principles 1. 3. 4. If the Provisions of Act 21 of 1965 are contravened. Bonus Win be payable within 8 months from the closure of Accounting year. It is regarded as Deferred Wages payable to employees. and 34-A are newly incorporated in the Act.

Minimum Bonus 8. the minimum bonus is reduced to Rs. a. it is a clear example of fraud. shall be liable far criminal proceedings far his misappropriation and may be dismissed from service disentitled far Bonus. The eligibility to bonus to employees is revised up to Rs. Section 10 has been substituted by Act 66 of 1980 with effect from 21.2500/. Important Points on Section 10 1. the employer shall in lieu or such minimum bonus.4. if he advertises against that company and induces the customers of his company to join another LMN Chit Funds Pvt. Theft. 3.33%. 4.an employee working in XYZ Chit funds pvt Ltd. misappropriation or sabotage of any property of the establishment will disqualified such employee from receiving bonus. c. Minimum Bonus and Maximum Bonus Minimum Bonus Scope: Section 10 explains about the payment of Minimum Bonus. In case of employee having not completed 15 years of age at the beginning of accounting year.Section 408 of IPC defines Misappropriation. Whether ‘or not the employer has allocable surplus in the accounting year. A .Not an Industrial Dispute Claim for Minimum bonus under Section 10 does not constitute on industrial dispute within Section 22 of the Bonus Act It is not necessary that it should be referred for adjudication to the Industrial Tribunal Labour Court is competent to entertain application under Section32 (2) of the Industrial Disputes Act and determine the amount of minimum bonus. Ltd. Where in respect of any accounting year referred to Section 10.33 of salary whichever is higher. minimum bonus shall be payable irrespective of allocable surplus.1980. 65.33% of the salary or wage earned by the employee during the accounting year or one hundred rupees. Hence dismissal on ground of disorderly behavior will not disqualify to receive bonus unless such disorderly behavior is of violent nature. he is liable far criminal proceedings. Claim of Minimum Bonus . 100 or 8.from Rs. The extent of benefit also is raised to Rs. be bound to pay to every employee in respect of that accounting year COMPENSATITION MANAGEMENT 2. Section 10: Payment of Minimum Bonus Subject to other provisions of this Act. A dismissal based on the above mentioned guilt is subject to the review of the tribunals under Section 10.every employee is entitled to get a minimum bonus which shall be 8. Fraud An employee is disqualified to receive bonus if he is dismissed from service for Commission of fraud. Provided that where such employee has not completed fifteen years of age of the beginning of the accounting year the provisions of this section shall have effect in relation to such employees as if for the words “one hundred rupee” the words “Sixty rupees” were substituted. Fraud is an act of missconduct under the Model Standing Orders.1 © Copy Right: Rai University 87 . He was convicted by the Court. every employer shall be bound to pay to every employee in respect of accounting year commencing on any day in the year 1977 and in respect of every subsequent accounting year a minimum bonus which shall be 8. He is also disentitled for bonus.is by the 1995 Amendment 11. Section 11: payment of Maximum bonus 1. 40 which ever was higher. miss-appropriation or sabotage of any property of the establishment. whether or not the employer has any allocable surplus in the accounting year.. The provisions of Section 10 newly inserted came into force with effect from the accounting year 1979 previously it was only 4% of Rs. He is disqualified far bonus.per month from Rs. If the dismissal of the employee is based on any other ground it will not disqualify him from claiming the Bonus Disqualifications. if dishonestly misappropriates or converts to his awn use any movable property which belongs to the employer. No minimum bonus is payable when an establishment is exempt under section 16 of the Act.violent behavior while on the premises of the establishment or for committing theft. 1946 punishable with dismissal. Sabotage – Can notes devices adopted by the employee obstructing or interfering with the process of industry with a view to reduce the profits of the employer. 3500/ . Misappropriation . Theft . Misappropriation or Sabotage Dismissal of the employee for commission of theft. An employee. Ltd. the allocable surplus exceeds the amount of minimum bonus payable to the employees under that Section. Riotous or Violent Behavior An employee who is dismissed an ground of riotous or violent behavior is disqualified to receive bonus.622.33% of the salary or wage earned by him during the accounting year or Rs. A . which ever is higher.08. Such riotous or violent behaviors must have been committed by the employee on the premises of the establishment. Maximum Bonus Set off and set on Section 11 explains about maximum bonus.an employee of XYZ co. 2. Examples 1. It is well settled law that minimum bonus has to be paid even if the company is in loss.Section 378 of the Indian Penal Code defines theft Every employee must perform his duties with loyalty and faithfulness.with effect from 1.1993. obtained the property of the company by playing fraud and deceitful means. 2500/. The expression “riotous and violent behavior” is wider in scope that riotous and disorderly behavior used in the Model Standing orders. Section 10-A of the Industrial Disputes Act and by the High Court under Articles 226 and 227 and Supreme Court under Article 136 of the Constitution. 1600/. It is now enhanced to Rs. 100/which ever is higher. b. If the commits any theft. The standing orders to the establishment in question should-have provided fraud as a ground for dismissal so as to attract the disqualification under Section 9(a).

Set on and Set off Allocable Surplus Section 15 explains about set on and set off of allocable surplus. b. sixth and seventh accounting year. bonus shall be payable only for such accounting year in which the employer derives profits from such establishment such bonus shall be calculated under the Act for that year and that too without applying the scheme of set off and set on under Section 15 of the Act 2. Special Provisions Regarding Certain Establishments Section 16 of the Act provides some benefits to newly set up establishment by exempting them from the obligation to pay bonus under the Act. Production or manufacture of goods during the trial running of any factory or during the prospective stage of any mine or any oil field shall not be treated as production or manufacture of goods under the provisions of section 16 the appropriate government will decide disputes on this after giving reasonable opportunity to the parties to represent their case and the decision of the government shall be final and not questionable before any court or other authority. Section 15. Non-Statutory Bonus Under Section 17. sixth accounting year. the amount set on the amount set off under the provision of section 15 shall be taken into account in accordance with the provisions of that section. if in a particular accounting year an employer has paid to an employee: a. be carried forward for being set on in the succeeding accounting year and so on up to and inclusive of the fourth accounting year to be utilized for the purpose of payment of bonus in the manner illustrated in the fourth schedule. name or ownership will not make the establishment a newly set up establishments shall be entitled to bonus under the Act in the following manner: 1. The modification are: a. 2. From the eight accounting year following the accounting year in which the employer starts selling goods produced in such establishment. Proportionate Reduction of Bonus in Certain Cases Computation of Number of Working Days Under Section 14 an employee shall be deemed to be working in an establishment in any accounting year also on the days on which he has been laid off or has been on leave with salary or wage or has been absent due to temporary disablement or the employee has been on maternity leave with salary or wages. interim bonus (ie) part of the bonus payable under this a act before the date on which such bonus becomes payable COMPENSATITION MANAGEMENT Under Section 13 where an employer has not worked for all the working days in any accounting year. A more charge in the location. Where in any accounting year any amount has been carried forward and set on or set off under this section then. there is no available surplus or the allocable surplus in respect of that year falls short of the amount of minimum bonus payable to the employee in the establishment under section 10. For the first five accounting years following the year in which the employer sells goods produced in such establishment. However in case of the employer of an existing establishment with different branches.bonus which shall be an amount in proportion to the salary or wage earned by the employee during the accounting year subject to maximum of 20% of such salary wage.622. in calculating bonus for the succeeding accounting year. 4. department etc. 3. the allocable surplus exceeds the amount of maximum bonus payable to the employees in the establishment under Sec. subject to a limit of 20% of the total salary or wage of the employees employed in the establishment in that accounting year. the set on and set off principle will be applicable as against the allocable surplus of the fifth. 1. Similarly the deficiency to pay even the minimum bonus under Section 10 may be set off in the succeeding year if there is excess after meeting the minimum bonus in that succeeding year. management.60/. such minimum amount or the deficiently. For the sixth accounting year. A fair reading of this section and fourth schedule gives a clear picture & understanding. then the excess shall. 2. set on and set off allocable surplus.or Rs. To an establishment mentioned in (i) above the provisions of Section 15 shall apply with some modification for die’ sixth and seventh accounting years. then. Under Section 15 the excess amount after giving the maximum bonus under Section 11 may be set on for the succeeding year. The principle of set on and set off as illustrate in the Fourth schedule shall apply to all other cases. 11. In computing the allocable surplus under this section. if such bonus is higher than 8 1/3 percent of salary or wage for the days he has worked in that accounting year. has been paying bonus to employees of all such departments or undertaking or branches on the basis of consolidated funds or profile of such branches then the employer shall be liable to pay bonus in accordance with the provisions of the Act for all the employees on the basis of the consolidated profits. shall be proportionately reduced.as the case may be. shall be carried forward for being set off in the succeeding accounting year and so on up to and inclusive of the fourth accounting year in the manner illustrated in the fourth schedule. 88 © Copy Right: Rai University 11. Where for any accounting year. For the seventh accounting year the set on or set off principle will be applicable in respect of the allocable surplus of the fifth. as the case maybe. Puja Bonus or other customary bonus b. not covered by sub section (1) or sub section (2) for the purpose of payment of bonus under the Act. the minimum bonus ofRs. Where for any accounting year.1001. the provision of Section 15 shall apply to such establishment as they apply to any other establishment.1 . the amount of set on or set off carried forward from the ear list accounting year shall first be taken into account. and there is no amount or sufficient amount carried forward and set on under section (i) which could be utilized for the purpose of payment of the minimum bonus. 3.

ii. Deduction of Certain Amount from the Bonus Payable Under the Act Section 18 empowers an employer to deduct the amount of financial loss from the bonus payable to an employee in a particular accounting year provided that the following conditions are satisfied. the liability depends exclusively on the express or the implied contract and its terms are governed by the custom or contract under which a claim thereto arrives. Therefore a claim made under the Act in a Civil Court could not be sustained. The income from such sale or service or both is not less than twenty percent of the gross income of the establishment in public sector for that accounting year. In case of customary or contractual bonus. The presumptions not conclusive but rebut table. Profit and Loss Section 23 raises a rebut table presumption about the accuracy of the settlement and particulars contained in the balance sheet. Application of the Act to establishment in public sector Under Section 20. When the dispute results in an award or settlement or an agreement. COMPENSATITION MANAGEMENT Appropriate Forum Section 22 envisages that where any dispute arises between an employer and its employees with respect to the bonus payable under the Act. incapable of being rebutted a presumption juries dejure. The authority may therefore. Employer should give application to the appropriate government. If there is dispute as to liability to pay bonus then the bonus must be made within one month from the date of award of such authority. In any accounting year such establishment in public sector sells any goods produced or manufactures by or renders any services in competition with an establishment in private sector. Payment of Bonus Under Section 19. on sufficient reasons. If satisfied the authority has to give an opportunity to the employer of being heard in opposition to the Application After hearing the parties the authority is enjoined to make an order directing the corporation or company as the case may be to give the trade 89 ii. the provisions of this Act shall apply in relation to an establishment in public sector like an establishment in private sector if: i. the tribunal is under a duty to decide the rate of bonus payable by the employer. However. the reference of such a dispute under U. Reference of disputes under the Act Section 22 contemplates two types of disputes under the Act.P.1 © Copy Right: Rai University . the government may extend the period of payment of bonus beyond the eight months. Dispute with respect to bonus payable-under the act. which can’t be called in question in judicial review. Such disputes are deemed to be industrial disputes as defined in Section 2(k) of the Industrial Disputes Act & in such cases settlement method under Industrial Disputes Act or under any corresponding law in the state will apply. If the said authority is satisfied that the statements and particulars contained in the balance sheet and the profit and loss account of the corporation or the company are not accurate it may take such steps as it thinks necessary to find out the accuracy of such statements and particulars. i. iii. The misconduct of the employee should have caused financial loss to the employer. call for the proof of the statements and particulars. Industrial Dispute Act is quite valid as it is a corresponding law relating to the investigation & settlement of industrial disputes in force in a state as envisaged under section 22 of payment of Bonus Act. Such extensions permissible on satisfaction of the following conditions i. the employer would be handicapped in carrying out the directions contained in the award. The satisfaction of the authority is subjective satisfaction. In the absence of the rate being specified. The financial loss should have been caused in the accounting year.622. i. ii.he shall be entitled to deduct the amount of bonus so paid from the amount of bonus payable by him to the employees under this act in respect of that Accounting year & the employee is entitled to receive only the balance. The employee should have been found guilty of such misconduct by holding a domestic enquiry. Application should disclose sufficient reasons iii. provided in any case it must not exceed two years. Presumption as to Balance Sheet. on being satisfied about the in accuracy of the statement or the particulars. The presumption is not hard and fast presumption. from the bonus pertaining to which the deduction is sought to be made. it was held that Section 22 of the Bonus is Act is clearly applicable. Duty of the Tribunal In a dispute referred under section 22 of the Act regarding the bonus payable under the Act. When a dispute between an employer and its employees in a beedi factory regarding payment of bonus arose. then such a dispute ought to be deemed to be an industrial dispute and it has to be dealt with under the industrial law as an industrial disputes. the employee can recover all the bonus due from the employer as per section 21 of the payment of Bonus Act. Application for Clarification Section 23 (2) entitles trade unions or where there are not trade unions the employees who are party to the dispute to seek clarification relating to any item in the balance sheet or the profit and loss account by making an application to the adjudicating authority upon such application being made the authority has to satisfy itself whether such clarification is necessary. In all other cases bonus must be paid within 8 months from the date of closing of the accounting year. the payment of bonus must be only in cash. Therefore. Government should hear the parties. profit and loss account for corporations and companies produced before the said authority. ii. Dispute with respect to the application of the act to on establishment in public sector between the employer & his employees. 11.

Any person required to furnish information or to produce documents. Examination of accounts registers. The new section applies to all agreements or settlements whether entered into before or after 25. Inspectors are deemed to be public servants under the penal code. Hence Section 23 gives power and jurisdiction to the tribunal to direct corporations and companies concerned to furnish clarification relating to any item in their balance sheet. ii. From the language of this provision it is clear that the burden of proof is on the prosecution. Mens has been made an ingredient of the offence. ii. Section 26 of the Act enjoins on every employer to prepare and maintain such registers. Under such agreement or settlement. But the burden of proof has been cast on the person charged with the offence. secretary or other officer of the company. Under Section 29(2) where an offences under the Act is committed by a company the officer who was in charge of and was responsible to the company for the conduct of business of the company shall be deemed to be guilty of the offence shall be liable to be proceeded against and punished as if he has committed the offence. Enter any establishment or premises for inspection iii. Profit & loss account. where an agreement or settlement has been entered in to by the employees with their employer before this amendment or where the employees enter into any agreement or settlement with their employer after the commencement of this amendment for payment of annual bonus linked with production instead of bonus based on profit than such employees shall be entitled to receive bonus due to them. if fails to do so will be contravening the law attracting the penal provision under Section 28 of the Act. with his consent or connivance. other documents of salary.1975 being the date when the amending ordinance came into force.By 1976 amendment Section 31-A is added to link payment of bonus with production or productivity under this. i. In other words the person charged with an offence under Sub section (i) has to prove that the offence was committed without his knowledge. Section 31-A relates to bonus linked with production in lieu of bonus based on profits: It does not speak about other kinds of bonus therefore. is attributable to any neglect on his part. wages or bonus. before a person can be deemed to be guilty of the offence. Proviso to Section 29(i) says that a person charged of an offence under Sub section (i) has the following defenses.1 90 © Copy Right: Rai University . i.9. Clause 1 of Section 99 imposes an absolute liability on the offences: But liability of a less strict nature is contemplated. records and other documents in such form & in such manner as may be prescribed by the rules under the Act. Such order of the authority shall be binding on the corporation or the company.union or the employees such clarification within a time to be specified in the direction. Offences by Companies Section 29 of the Act deals with offences committed by companies. It is a mandatory provision and the employer is under the duty to produce them when called upon by an Inspector to do so. Cognizance of Offence A court can take cognizance of the offence punishable under the Act only on a complaint made by or under the authority of appropriate Government. Maintenance of Registers. Discovery of documents etc. The second defense open to the accused is that even if he had the knowledge of the commission of the offence he exercised all due diligence to prevent the commission of the offence. it is subject to the statutory minimum and maximum bonus. However. Due Diligence Production Bonus 1976 Amendment. a fine up to one thousand rupees or both imprisonment and fine against a person who contravenes any of the provisions of this Act or any rule made there under or who fails to comply with a direction or requisition under this act or any rule made there under or who fails to comply with a direction or requisition under this Act. and not for the prosecution to prove that he had the knowledge. It is for the prosecution to prove that the offence has been committed with the consent or connivance or is attributable to any neglect on the part of the director manager. The section does not limit the power of the Tribunal to give such directions only after a hearing or after evidence is adduced: Such clarification can be given or furnished by making further discover or giving further particulars. manager. It is also provided that such employees shall not be entitled to be paid such bonus in excess of 20 percent of the salary or wage earned by them during the relevant accounting year. Any offence punishable under the 11. Section 29(2) includes more persons In the list of offenders for the offence committed by the comp_. Require an employer to furnish necessary information’s.622. Section 31-A is given over riding effect. such agreement or settlement whereby the employees relinquish their right to receive minimum bonus under Section to shall be null and void in so far as it deprives them to such right. iv. In addition to such person “any director. Want of Knowledge COMPENSATITION MANAGEMENT Machinery and Miscellaneous Matters Machinery Section 27 empowers the appropriate government to appoint Inspector for implementing the Act The Inspectors are given power to: i. the provision does not affect customary or traditional or contractual bonus. Records etc. ii. secretary or other officer of the company” may also be deemed to be guilty of the offence under this Act if the offence has bee n committed. This for the first time production bonus is statutorily recognized even though it is based on the agreement between parties. Penalty: Section 28 prescribes a penalty of imprisonment for a term of six months or. However. Violence of this is an offence under the Act.

the payment of Bonus Act. employees registered or listed under any scheme made under the Dock Workers (Regulation of employment) Act 1948 (9 of 1948) and employed by registered or listed employers. It does not interfere with customary. Coffee Board set up under Coffee Act only aids the marketing of coffee and helps the registered owners to earn profits. COMPENSATITION MANAGEMENT Rule Making Powers Under Section 58 the Central Government is vested with the power to frame rules to carry into effect the provisions of the Act. contractual bonus. both these conditions are cumulatively satisfied the employers of such institution will not be exempted from Bonus Act under Section 32. for all acts done in good faith or intended to be done in good faith provided the act is done under the Act. the rules shall thereafter have effect only in such modified form or be of no effect as the case may be. c. employees employed by the Life Insurance Corporation of India. and to bridge the gap between the wages and the living wages.622. The India Red Cross Society or any other Institution of alike nature (including its branches) Universities and-other educational institutions. The fact that the management might have made some profits in the past. Without taking evidence to show that the institution was “not for purpose of profit” the Tribunal gave this award. it is establishment not for the purpose of profit. Thus is Workmen of Tirumale Tirupathy Devasthanam Vs the Management The tribunal was required to adjudicate on the issue whether the Transport department operating under the Devasthanam is excluded under entry V (c) of Section 32 the question arose when the employee of the above transport department claimed bonus under the Act. d. The rules may provide for: a. b. Therefore. The preparation of registers. Institution (including hospital. any such modification or annulment shall be without prejudice to the validity of anything previously done under any of these rule. beside the right to ask the statutory bonus under Act 21 of 1965. v. against legal proceedings in court of law by way of suit or prosecution or otherwise. c. Act not to apply to certain classes of employees. employees employed by an establishment engaged fin any industry carried on by or under the authority of any department of the Central Government or State Government of a local authority. Seamen defined in clause (42) of section 3 of the Merchant shipping act 1958 (44 of I958) iii. If before the expiry of the session in which the rules is to be laid down or the session immediately following both the Houses agree in making any modification in the rules or both the Houses agree that the rules should not be made. 1965 is a step forwarded to achieve the target fixed by the Article 43 of the constitution. of its power by the Government under section 36 of the Bonus Act. and to give the social security to the employees. The authority for granting permission under the provisions to sub-clause (iii) of clause (i) of Section 2. falls with in the exception under section 32(v) (c) of the payment of bonus Act. However. & not a relevant consideration in the matter of exercise 11. Unless. ii. any other matter which is to be or may be prescribed. iv. b. This part of the award was set aside by the Supreme Court directing the Tribunal to decide the issue de novo after taking evidence and considering the dominant purpose of the institution. The powers which may be exercised by an Inspector under Clause(e) of Sub-section (2) of Section 27. Immunity to acts in good faith. The board does not earn profits to itself and it is not an institution formed for earning profits and therefore. records and documents may be mentioned under Section 26. Under entry V(s) two requirement must be satisfied namely: i. Section 32 of the A ct makes it clear that the provisions of this act will not be applicable to following clause of empl6yees.Act can be tried only by a court not inferior to a presidency or a Magistrate of the first class. The period of 30 days may be comprised in one session or in two successive sessions. chambers of commerce and social welfare institutions established not for purposes of profit) Conclusion The payment of Bonus Act 1965 is designed to make the proper distribution of profits between the employer and employees and to upgrade the wages to “Living Wages Standards”. Employees employed by: a. i. Section 31 confers immunity to Government and officers of Government. records and other documents and the form and manner in which such registers. that is an institution and ii. Rules Must be laid before the Houses of Parliament Subsection (3) prescribes that every rule made under this section shall be laid with maximum expediency before each house of Parliament while it is in session for a period of 30 days.1 © Copy Right: Rai University 91 .

and even in the organized and unorganized sections in industry. the needs of an industry in a developing economy. Differences in the efficiency of the labour. personal differentials because of job selling. they bring about a re-allocation of the labour force under changing circumstances. which may be due to inborn quality. Discuss the reasons and importance of wage differential. and a host of other subjective and objective factors operating at various levels. particularly in the jute mill industry. differences in productivity. Tutorial Activity 1. The rate of growth in productivity. By providing an. important incentive for labour mobility. 92 © Copy Right: Rai University 11. wage differentials are inevitable.1 . growth of the national income. Recent trends in wage differential in India. Wage differentials by. not on the ground that the work done is unequal but on the ground that the wages of women workers support a smaller family. too. it is not possible to analyze them in India. including manpower. Of late. Scarcity differentials (which may be due to specific skills and mental abilities) produce wage differentials. wage differentials reflect the different degrees of scarcity of the different categories of labour. especially in the unorganized sector of the economy. Reasons for Wage Differential Wage differentials arise because of the following factors: a. in the efficiency of management and in consumer preferences. and c. Wage differentials reflect difference in the physical and mental abilities of workers. • To know the importance of Wage Differential • To understand the reasons for Wage Differential • Prevalence of Wage Differential in India and the reasons for it Introduction Wage differentials have a great economic and social significance. Enable full employment of the resources of the economy to be attained. the capacity of an industry to pay. the extent of authoritarian regulations and the centralization of decision-making. the former were quite important and frequent in the past. which tend to eliminate inter-personal differentials in the country operate in this case as well. Cause labour to be allocated among different occupations. Social welfare activity depends. customs and traditions.622. of late. industries and. there has been a tendency towards the elimination of inter-firm differentials. The tendency appears to be towards the elimination of wage differentials because of government interference through the fixation of the minimum wages and. c. geographical areas in the economy in such a manner as to maximise the national product b. and as long as the former as inevitable.” As regards inter-firm and inter-industry differentials in India. and the requirements of social justice also directly or indirectly affect wage differentials.COMPENSATITION MANAGEMENT LESSON 15: INTRODUCTION TO THE IMPORTANCE OF WAGE DIFFERENTIALS AND WAGE DIFFERENTIALS IN INDIA Learning Objective d. wages are determined by conditions of demand (which reflect the productivity of workers) and conditions of supply (which reflect the attractiveness of jobs). The prevailing rates of wages.1 Questions 1. the general economic. Differences in the agreeableness or social esteem of employment. The nature and the extent of wage differentials are conditioned by a set of factors such as the conditions prevailing in the market. sex are quite common despite the fact the Constitution of India enjoins upon the State to direct its policy towards securing “equal pay for equal work” for men and women. industrial and social conditions in a country. The level of wages would depend upon the relative scarcity of supply in relation to demand. and since different categories cannot be reduced to the same degree of scarcity in the market. yet the main features of the Indian wage structure may be stated thus: As a characteristic of the unorganized labor market. awards of some industrial Tribunals provide for “different wages for men and women workers. Facilitate the most desirable rate of economic progress. 2. on such wage differentials as will: a. The forces. the extent of unionization and the relative bargaining power of the employers and workers. and conditions under which work may be done. Wage Differentials in India Due to the paucity of relevant data on wage differentials. that the cost of employing women workers is higher. for they are directly related to the allocation of the economic resources of a country. Differences in the nature of employment and occupations. The existence of non-competing groups due to difficulties in the way of the mobility of labour from low paid to high paid employments. in a large measure. Under competitive conditions. through the appointment of Wage Boards and pressures from trade unions. In other words. however. individual bargaining and wage discrimination have tended to persist in India. and the pace of economic development. education. and act as sign posts for labour mobility. b. would be so. the latter.

followed by the second in 1956-57. and COMPENSATITION MANAGEMENT Introduction 1. i. the RLE was integrated with the General Employment & Unemployment Survey of the NSSO in 1977-78 and all subsequent enquiries are now being conducted quinquennially to provide continuous data in the form of time series. Sample Design 1. the fourth in 1983.2 During the course of the Rural Labour Enquiries (RLE) data on various socio-economic aspects viz. Consumption Expenditure.Wage paid employment is the main source of their livelihood.) 1999-2000 Scope and Method of Enquiry understand the rural situation should be continued and intensified. household consumption expenditure. However. the third in 1977-78. by formulating and implementing various target oriented anti-poverty rural development programmes. The results of the latest Rural Labour Enquiry. With a view to narrowing down the gap between the successive rounds of the Enquiry. The scope of the subsequent enquiries was enlarged to cover all rural labour households instead of agricultural labour households alone covered in the first two enquiries. 1.S. The National Commission on Labour (1969) and the National Commission on Rural Labour (1991) have recommended that the periodic surveys undertaken by the Government to v. Wages and Earnings of Rural Labour Households. iii. ii. ii.7 A stratified multistage sampling design was adopted for selection of the sample units for the survey. the third enquiry in the series known as the first Rural Labour Enquiry (RLE) was conducted in 1963-65 followed by the second in 1974-75. Geographical Coverage 1.S. are being published in the following five reports. iv. The second National Commission on Labour (1999) has recommended that the Rural Labour Enquiries should be conducted more frequently. for which the field work was undertaken by the NSSO during its 55th Round Survey (July.4 The main objectives of the enquiry are i. the fifth in 1987-88. To provide upto date serial data on demographic structure. 1999 to June. 2000).3 The usefulness of the data thrown up by the Rural Labour Enquiries has been acknowledged by various Committees and Commissions from time to time. (ii) 768 interior villages of Nagaland situated beyond 5 Kms. indebtedness.8 Sampling frame for first stage units : The list of census villages as per 1991 population census (list of Census villages as per 1981 Census for the State of Jammu & Kashmir) constituted the sampling frame for selelction of sample FSUs for most of the states.1 About two-third of the total labour force in the country lives in rural areas. wages and earnings. Under these enquiries. Employment and Unemployment of Rural Labour Households. However. the first Agricultural Labour Enquiry (ALE) was conducted in 1950-51. 1.622.6 The survey covered the whole of the Indian Union. A few other areas of Jammu & Kashmir were also excluded from the survey coverage due to unfavourable field conditions. etc. excepting (i) Ladakh and Kargil districts of Jammu & Kashmir. Indebtedness among Rural Labour Households. for building up of reliable estimates of important socio-economic characteristics of rural labour in general and agricultural labour in particular. Scope 1. Hence. Wages & Earnings and Indebtedness of rural and agricultural labourers are collected. 1. The RLE is also aimed at throwing up data on household consumption expenditure of the rural/agricultural labourers for drawing weighting diagrams for updating the series of the Consumer Price Index Numbers for Agricultural/Rural Labourers. Employment & Unemployment. the data are collected and analysed for rural labour as a whole. the analysis is presented for agricultural labour separately. Consumption Expenditure of Rural Labour Households. General Characteristics of Rural Labour Households.5 The Enquiry relates to all rural labour households.Latest Updates on Rural Labor Conditions Rural Labour Enquiry Report on Wages & Earnings of Rural Labour Households (55th round of N. To provide data relating to consumption expenditure for derivation of weighting diagram for updating the series of CPI numbers for agricultural and rural labourers. provision has been made in the tabulation plan to get separate estimates for agricultural labour households. extent of employment & unemployment. the seventh in the series. and (iii) 172 villages in Andaman & Nicobar Islands which are inaccessible throughout the year. The first stage units (FSU) were the census villages (panchayat wards for Kerala). For the rural areas of 11.1 © Copy Right: Rai University 93 . Objectives 1. With this end in view. particularly in the rural areas. the sixth in 1993-94 and the seventh in 1999-2000. Sound data base is of utmost importance for formulating such action programmes. It has been the endeavour of the Government of India to alleviate the poverty. of the bus route. The ultimate statge units (USU) were the households. in order to enable comparison with the previous enquiries as also to understand problems of this segment which constitutes bulk of the rural labour.

While forming general strata. State/UT level rural sample size was allocated among the rural strata in proportion of population. From each such FSU. Sikkim.13 Formation of segments within FSU : The hamlet group having maximum concentration of non-agricultural enterprises was selected with certainty for listing of households.11 Selection of FSU’s : For each sub-round. 5 & 6 for sub-round 3. Udhampur and Doda districts of Jammu & Kashmir.). viz. Each of the above two strata was formed if at least 50 such FSU’s were there in the respective frames.Kerala. the same was done by more or less equalising the population of the different hg’s of the FSU. 1. for rural areas of Himachal Pradesh. the list of accessible villages constituted the sampling frame for Andaman & Nicobar Islands. For Nagaland. Each district with rural population of 2 million or more as per 1991 Census (1. whereas. these villages were included in the general strata. Sample size for the whole round for each State/UT was allocated equally among the 4 subrounds. however. efforts were made to treat each district with population less than 2 millions as a separate stratum. and (b) equal probability for rural stratum 1. the list of panchayat wards was used as the sampling frame for selection of panchayat wards. sample households visited in the previous sub-round for collecting data on employment-unemployment were revisited in the subsequent sub-round for collecting employmentunemployment details. sample first stage units from each stratum were selected in the form of 2 independent sub-samples by following circular systematic sampling with (a) probability proportional to population 94 for all rural strata other than stratum 1.1 . Stratum 2: FSU’s with population more than 15. 5 for P=600 to 999. two special strata were formed by considering villages (a) with very small population and (b) with very high population as stated below:Stratum 1: all FSU’s with population between 1 to 100.000 The above two strata were spread across a given State and were not confined to any particular administrative division within the State. Sub-sample numbers were 1 and 2 for subround 1. a total number of 10.10 Allocation of first stage units : At the all-India level. 1.15 Stratification of households : All the households listed in a segment were stratified into two second stage strata. and the rest which formed second stage stratum 2. © Copy Right: Rai University 11. One salient feature of the 55th round was the “rotation sampling scheme” which was adopted for the first time in the NSS for the purpose of collection of employment-unemployment data from central sample only. 3 & 4 for sub-round 2. of a bus route constituted the sampling frame. the FSU’s were further divided into a fixed number of hamlet-groups (hg’s) as stated below: Value of P No.I. 8 for P=1400 to 1599. and so on (procedure remaining unchanged as per enterprise criterion). the list of villages located within 5 Kms.384 FSU’s (6208 villages and 4176 urban blocks) was selected for survey in the central sample in the 55th round. From the remaining (D-1) hg’s of the FSU. were left out of the purview of the survey. 1. 1.8 million or more as per 1981 Census in case of Jammu & Kashmir) was as usual split into a number of strata. 1. In cases where hg’s were formed in the sample FSU.12 Selection of hamlet-groups (hg’s) : Depending upon the values of approximate present population (P) and approximate total number of non-agricultural enterprises (E) of the villages. 1 sub-sample of the sampled first stage units (FSU’s) of each sub-round was revisited in the subsequent sub-round. of hg’s formed in the FSU as per enterprise criterion 4 1 5 6 7 8 COMPENSATITION MANAGEMENT 1 Less than 1200 1200-1999 2000-2399 2400-2799 2800-3199 and so on 3 Less than 100 100-249 250-299 300-349 350-399 and so on However.622.14 Sampling frame of households : All households of segments 1 and 2 of the FSU were listed independently and this list of households of the segments 1 and 2 constituted the sampling frame for the purpose of selection of sample households from the corresponding segments. the higher of the two values obtained. 6 for P=1000 to 1199. 1. Further. of hg’s formed in the FSU as per population criterion 2 1 5 6 7 8 Value of E No. 2 more hg’s were selected circular systematically and these 2 selected hg’s together were referred to as segment 2 for doing a combined listing of households. and Poonch. This hamlet-group was referred to as segment 1. as per 1991 Census. Rajouri. If limitation of sample size did not allow forming so many strata. A household was classified as ‘affluent’ if the household owned certain items like motor car/jeep.T. Under this scheme. 7 for P=1200 to 1399. colour TV.. Otherwise. All the uninhabited villages of the country. ‘affluent households’ which formed second stage stratum 1. Stratum level allocation for both rural and urban areas of a sub-round were made in even numbers in order to facilitate selection of FSU’s in the form of 2 independent sub-samples. 1. The listing of households was done only in segments 1 and 2 of the FSU. as per population and enterprise criteria was taken as the number (D) of hamletgroups to be formed in the FSU. the number of hamlet-groups formed in the village as per population criterion was: 1 for P<600. smaller districts within a particular NSS region were merged to form a stratum. The FSU’s not requiring hg formation were treated as segment 1 for the purpose of data collection and estimation.9 Stratification of the first stage units : From the list of villages of each State/Union Territory (U. The actual State/UT level allocation of FSUs in the rural sector is given in Statement. and 7 & 8 for sub-round 4. initially.

or owned land/livestock in excess of certain limits. Andhra Pradesh Arunachal Pradesh Assam Bihar Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Karnataka Kerala Madhya Pradesh Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim No. Household Members Any person who is a normal resident of the sample household is considered to be a member of the household. It included temporary stayaways but excluded temporary visitors and guests. a hotel or a hostel is treated as a cluster of households where each individual boarder(with his dependants or guests) forms a separate household.S. rural households and persons surveyed under central sample Sl.17 A total of 3. 95 Statement .20 The important concepts and definitions adopted for the survey are as follows : i. Agricultural Labour Household Of the households which are initially classified as ‘Rural Labour Households’.385 rural households in 6046 villages were surveyed. 1999 to June.S. 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 2.622. iv. however. 5181 827 3462 7311 192 2479 1132 1634 1472 2763 2604 5144 4121 738 933 428 480 3477 2152 3229 1056 No. Sample Size 1. those deriving 50 percent or more of their total income from wage paid manual labour in agricultural activities are treated as agricultural labour households. The number of sample villages and sample rural households and persons surveyed in different States/Union-territories and all-India for rural sector are set out in the following statement: Concepts and Definitions 1. In the case of FSUs with hg formation. ii.telephone.385 17338 4853 57397 23508 1514 654 914 821 982 363 1222 3. State/U.I Number of villages.856 persons spread over 71. households in the frame of second stage stratum 2 were arranged by means of livelihood by land possessed classes for rural samples. Two households from second stage stratum 1 and ten households from second stage stratum 2 were selected from FSUs with no hg formation. police quarters. 2000 which was divided into 4 sub-rounds of three months duration each. of villages 3.of persons 5. v. Household Size The number of normally resident members of a household formed the size of the household. 22600 4314 19272 40109 944 12807 6502 7793 8322 14154 12324 28816 20399 3997 4901 2276 2441 17059 12067 19021 5173 11.1 © Copy Right: Rai University .16 Selection of households : Sample households were selected from the respective frames by circular systematic sampling with equal probability. iii. one household from second stage stratum 1 and three households from second stage stratum 2 were selected from segment 1 and one household from second stage stratum 1 and seven households from second stage stratum 2 were selected from segment 2. excluded from the scope of the survey. cantonments. asylums. Household A household is a group of persons normally living together and taking food from a common kitchen.18 The enquiry was integrated with the 55th round of the N. Rural Labour Household A household was classified as rural labour household if its major source of income during the last 365 days preceding the survey was more from wage paid manual labour (agricultural and/or non-agricultural) than either from paid non-manual employment or from self-employment. during the period July. etc. 1.856 COMPENSATITION MANAGEMENT All-India Period of Survey 1. Rural labour households include agricultural labour households also. The members of a household may or may not be related by blood to one another.74. any person who usually lives and takes the principal meals with the household is also considered a member of the household. relief camps are.No. Accordingly. hospitals.74. of households 4. For the purpose of systematic sampling. 22 23 24 25 26 27 28 29 30 31 32 Tamil Nadu Tripura Uttar Pradesh West Bengal A & N Islands Chandigarh D & N Haveli Daman & Diu Delhi Lakshadweep Pondicherry 352 86 791 384 24 16 16 15 16 7 24 6. Households maintained and fed directly by institutional bodies such as those in prisons.T. A boarding and lodging house. 432 74 291 611 16 208 96 140 131 232 240 432 352 64 80 39 40 293 184 272 88 No.046 4173 1031 9432 4550 273 180 192 180 187 84 288 71.

farming including cultivation. dairy farming. A similar procedure was adopted for assigning detailed activity code for persons categorised as engaged in non-economic activity and pursuing more than one non-economic activity. On the other hand. Activity Status It is the activity situation in which a person was found during a reference period with regard to the person’s participation in economic and non-economic activities. Exchange labour was also excluded. Broad activity statuses mentioned in (I) and (ii) above are associated with ‘being in labour force’ and the last with ’not being in the labour force’. vii. watchmen. etc.. peons. If a person categorised as engaged in economic activity by adopting one of the two criteria mentioned above was found to be pursuing more than one economic activity during the reference period.). are not considered as manual workers even though their jobs involve some amount of physical labour. viii. the identification uniquely under any one of the three broad activity statuses was done by adopting either the major time or priority criterion. However. tillage.e. 7. being not engaged in economic activity ( work) but either making tangible efforts to seek ’work’ or being available for ‘work’ if the ‘work’ is available. Salaries are also to be counted as wages. 1998) preceding the year of enquiry and included orchards and current fallows. In such an eventuality. worked as a casual wage labour in other types of works. production. did not work due to sickness though there was work in household enterprise. was not treated as a wage paid manual rural labourer. Identification of each individual into a unique situation could pose a problem when more than one of the three broad activity statuses listed above were concurrently obtained for a person. The former was used for classification of persons according to the ‘usual activity status’ approach and the latter for classification of persons according to the ‘current activity status’ approach. Agricultural Labour A person was treated as an agricultural labourer if he/she followed one or more of the following agricultural occupations in the capacity of a labourer on hire. doctors. though in manual work. worked in a household enterprise (self-employed) as an employer. a person could be in one or a combination of the following three broad activity statuses during a reference period: i. raising of livestock. worked as a regular salaried/wage employee. worked in a household enterprise (self-employed) as ‘helper’. encroached land etc. jobs essentially involving physical labour but also requiring a certain level of general. Within the labour force. d. 6.’ The term ‘wages’ included salary also. any practice performed on a farm as incidental to or in conjunction with farm operations (including any forestry or timbering and the preparation for market and delivery to storage or to market or to carriage for transportation to market of farm products). are considered as manual workers even though their work may not involve much physical labour. 5. c. Rural Labour Rural labourer is defined as ‘one who does manual work in rural areas in agricultural and/or non-agricultural occupation in return for wages in cash or kind. © Copy Right: Rai University 11. bee-keeping or poultry farming. engineers. Wage Paid Manual Labour A person who does manual work in return for wages in cash or kind or partly in cash and partly in kind (excluding exchange labour) is a wage paid manual labour. January to December. scientific or technical education are not to be termed as manual work. worked in a household enterprise (self-employed) as an own-account worker. working or being engaged in economic activity (work). The detailed activity categories under each of the three broad activity statuses used in the survey are stated below: COMPENSATITION MANAGEMENT Working (Or Employed) 1. xii. 4. or partly in cash and partly in kind. Any person who was self employed. cultivation. chowkidars. and iii. are to be treated as manual work. 2. etc. x. Manual Work A job essentially involving physical labour is considered as manual work. jobs not involving much of physical labour and at the same time not requiring much educational background. midwives. It might be noted that manual work in fisheries was excluded from the purview of the category of agricultural labour.vi.g. the appropriate detailed activity status code related to that activity in which relatively more time had been spent. b. 3. A person who is self-employed in manual work is not treated as a wage paid manual labour. e. ii. Thus. According to this. whether paid wholly in cash or kind or partly in cash and partly in kind. 96 Further. a. being not engaged in any economic activity (work) and also not available for ‘work’.1 . Each of the three broad activity statuses was further sub-divided into several detailed activity categories. worked as a casual wage labour in public of works. But. broad activity status (I) is associated with ‘employment‘ and that of (ii) with ‘unemployment’. growing and harvesting of any horticultural commodity. xi. Rural Labour Households with Cultivated Land A household with cultivated land.622. ix. either owned or taken on lease. was treated as household with land. professional. Land Possessed Land possessed means land owned (including land under ‘owned-like possession’) (+) land leased in (-) land leased out (+) any land held by the household which is neither owned nor leased in (e. carriage for transportation coming under the category (e) above referred only to the first stage of transportation from farm to the first stage of disposal. etc. Cultivated land was taken to mean the net area sown during the last calendar year (i. dentists.

etc. attended domestic duties and was also engaged in free collection of goods (vegetables. cattlefeed.e. where and when to produce) and economic independence (i.12and 20 are applicable only in the case of current weekly and current daily status approaches.1 © Copy Right: Rai University 97 . The essential feature of the self-employed is that they have autonomy (i. The status in which such economic activity is pursued is the subsidiary economic activity status of the person. the detailed activity status category of a person pursuing more than one such activity will be determined again on the basis of the relatively longer time spent. the status of ‘working’ gets priority over the status of ‘not working but seeking or available for work‘ which in turn gets priority over the status of ‘neither working nor available for work‘. Self-employed persons were categories as follows: i. Subsidiary Economic Activity Status A person whose principal usual status is determined on the basis of the major time criterion may have pursued some economic activity for a relatively shorter time (minor time) during the reference period of 365 days preceding the date of survey. Persons.622. by and large.e. prostitutes etc. did not work due to other reasons though there was work in household enterprise. Self-Employed Persons who operated their own farm or non-farm enterprises or were engaged independently in a profession or trade on ownaccount or with one or a few partners were deemed to be self-employed in household enterprises. scale of operation and money) for carrying out their operation.10. A person is considered ‘seeking or available for work (or unemployed)’ if during the reference week no economic activity was pursued by the person but he/she made efforts to get work or had been available for work any time during the reference week though not actively seeking work in the belief that no work was available.share of their labour and profit of the enterprise.No..) tailoring. A person is considered working (or employed) if he/she.. xv. thus. According to the priority criterion. however. have had unpaid helpers to assist them in the activity of the enterprise. during the reference period on the basis of major time criterion. xvi. The activity status on which a person spent relatively longer time (major time criterion) during the 365 days preceding the date of survey is considered the principal usual activity status of the person. a person may be pursing one economic/non-economic activity almost through out the year in the principal usual activity status and also simultaneously pursuing another economic activity for a relatively shorter period in a subsidiary capacity. Within the broad activity status so determined. had worked for at least one hour on at least one day during the 7 days preceding the date of survey. a person may be engaged for a relatively longer period during the last 365 days in economic/non-economic activity and for a relatively shorter period in another economic activity and COMPENSATITION MANAGEMENT ii. did not work due to sickness but had regular salaried/wage employment. did not seek but was available for work. A person who had neither worked nor was available for work any time during the reference week. market. attended educational institutions. 7. how.8. The fee or remuneration received by them comprised two parts . others. They could. etc. beggars. For the persons belonging to the labour force.8. 9. 12. 17. Not Working But Available For Work (Or Unemployed) 11. Having decided the broad current weekly activity status of a person on the basis of ‘priority’ criterion. 20. In case of multiple subsidiary economic activities. 14. for household use. weaving etc. during the reference period.) xiii. not able to work due to disability. remittance recipients. while pursuing any economic activity. the detailed current activity status is again decided on the basis of ‘major time criterion’ if a person is pursuing multiple economic activities.. (Sl. 19. their remuneration was determined wholly or mainly by sales or profits of the goods or services which were produced. the major two activities and their statuses based on the relatively longer time spent criterion will be considered . adjudged as not belonging to the labour force are assigned the broad activity status ‘neither working nor available for work’. did not work due to sickness (for casual workers only) in work in subsidiary capacity may arise out of the two following situations i.. Usual Activity Status The usual activity status relates to the activity status of a person during the reference period of 365 days preceding the date of survey. xiv.9. 16. renters. In other words. 18. fire-wood. 15. did not work due to other reasons but had regular salaried/ wage employment. Neither Working Nor Available For Work (Or Not In Labour Force) 13. attended domestic duties only. he/she is first categorised as belonging to the labour force or not. pensioners. It may be noted that engagement 11. Current Weekly Activity Status The current weekly activity status of a person is the activity status obtaining for a person during a reference period of 7 days preceding the date of survey. Own-account workers: those self-employed persons who operated their enterprises on their own account or with one or a few partners and who. 10. sought work.. It is decided on the basis of a certain priority cum major time criterion. To decide the principal usual activity of a person. roots. ran their enterprise without hiring any labour. is considered to be engaged in non-economic activities (or not in labour force) . the broad activity status of either ‘working’ or ‘not working but seeking and/or available for work’ is then ascertained again on the basis of the relatively longer time spent in the labour force during the 365 days preceding the date of survey.

ii. Employers: those self-employed persons who worked on their own account or with one or a few partners and, who, by and large, ran their enterprise by hiring labour; and iii. Helpers in household enterprise: those self-employed persons (mostly family members) who were engaged in their household enterprises, working full or part time and did not receive any regular salary or wages in return for the work performed. They did not run the household enterprise on their own but assisted the related person living in the same household in running the household enterprise. xvii. Earnings Earnings meant payments received in cash or kind or both cash as well as kind or those that are receivable for the work done during the reference week. The kind wages were evaluated at the current retail prices. Bonus and perquisites evaluated at retail prices were also included in earnings. Amount receivable as ‘over-time’ for the additional work done beyond normal working time was also included in the earnings. xviii. Indebted Households A household is considered as an indebted household if it has taken loan from others and part or whole of which had remained outstanding on the date of survey. Loan included borrowings in cash and/or kind and credit purchases made by the households. If the nature, source and purpose of two or more loans are similar, they are treated as a single loan. Borrowings in kind are evaluated at the retail prices prevailing in the local market at time of borrowing. An advance payment received for forward delivery of goods is also regarded as a loan. The dues on time of credit purchases, like newspaper, milk, services of dhobi, etc., are also treated as loans. xix. Household Consumption Expenditure The expenditure incurred by a household on domestic consumption during the reference period is the household’s consumer expenditure. The household consumer expenditure is the total of the monetary values of consumption of various groups of items, namely, (i) food, pan (betel leaves), tobacco, intoxicants and fuel & light, (ii) clothing and footwear, and (iii) miscellaneous goods and services and durable articles. For groups (i) and (ii), the total value of consumption is derived by aggregating the monetary value of goods actually consumed during the reference period. An item of clothing and footwear is considered to be consumed if it is brought into maiden or first use during the reference period. The consumption may be out of (a) purchases made during the reference period or earlier; (b) home grown stock; (c) receipts in exchange of goods and services; (d) any other receipt through gift, charity, borrowing; and (e) free collection. Home produce is evaluated at the ex farm or ex factory prices. For evaluating the consumption of the items of group (ii), i.e., items categorised as miscellaneous goods and services and durable goods, a different approach is followed. In this case, the expenditure made during the reference period for the purchase of goods and services is considered to be consumption. It is pertinent to mention here that the consumer expenditure of a household on food items relates to the actual consump-

tion by the normal resident members of the household and also by the guests, whether during ceremonies or otherwise. To avoid double counting, transfer payments like charity, loan, advance, etc., made by the household are not considered consumption for items of groups (i) and (ii), since transfer receipts of these items have been taken into account. However, the item ’cooked meals’ is an exception to the rule. xx. Children Persons below 15 years of age have been treated as children

COMPENSATITION MANAGEMENT

Present Report
1.21 This is the first report in the series of five reports to be brought out on the basis of seventh RLE covering different aspects of rural labour. It presents analysis of data on the wages and earnings of rural labour households. It contains the basic results on wages and earnings of workers of Labour Households at state and all-India level. It gives (a) earning strength and the number of wage earners in the average size of Labour Households; (b) data on wages and earnings of agricultural labour households workers in agricultural and non-agricultural operations; (c) earnings of workers (men, women and children) of agricultural labour households and rural labour households in different agricultural operations; (d) level of real earnings in agricultural operations during 1999-2000; and (e) comparison of wages of agricultural labour household workers with Minimum Wages fixed by the State Governments for agricultural operations as well as with wages paid to workers in organised sector (viz factories, mines & plantations).

98

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11.622.1

COMPENSATITION MANAGEMENT

LESSON 16: INTRODUCTION TO EXECUTIVE COMPENSATION AND COMPONENTS OF REMUNERATION
Learning Objective

• To understand the meaning and concept of Executive
Compensation

• To know the unique features of Executive Remuneration • To know the various components of Executive •
Remuneration To read articles on Executive Compensation

There are almost as many bonus systems as there are companies using this form of executive remuneration. If bonus constitutes short-term benefit, stock options are long-term benefits offered to executives. Stock options are attractive to shareholders too. Perquisites contribute a major source of income for executives. Straight salaries, bonuses, stock purchase plans and profitsharing are used to compensate major executives. Of these, the straight salary is the most common method. The salary is determined by mutual agreement between the individual and the employer. The sales effected, the cost of production, reduction in expenses and the profits made are also taken into account. Bonuses related to performance are also aid to executives at a certain percentage of the profits. The bonuses may average from 30 per cent- to 50 per cent of the basic salary. These bonuses operate most effectively in increasing motivation when the following conditions exist: The amount paid is closely related to the level of individual performance; The amount paid after taxes represents a clearly noticeable rise above the base salary level. The amount paid is closely related to the level of company performance; The amount paid is tied into the base salary in such a way that the combined earnings are equitable both in relation to internal and external standards; The amount paid is reduced drastically whenever an individual experiences a real and continuing decrease in performance effectiveness; The amount paid is based on an easily understandable system of allocation, and the individual is provided with complete information on the relationship between bonus and performance. Moreover, executives are compensated for the various expenses incurred by them, for taxation takes away a major portion of their salary. Such payments are in the form of: a. Medical care; b. Counsel and accountants to assist in legal, tax and financial problems; c. Facilities for entertaining customers and for dining out; d. Company recreational area (swimming pool and gymnasium); e. The cost of the education and training of executives, scholarships for their children, and allowances for business magazines and books; and

Executive Compensation
Introduction For the higher management, salaries are influenced by the size of a company performance of the company, by the specific industry, and in party by the contribution of the incumbent to the process of decision-making. The more profitable the organization is the firm, the better is the compensation paid to the executives. The industries that are more highly constrained by governmental regulation (banks, life insurance, railroads, public utilities) pay relatively less than those that are more free to carry on their business (private firms). Executive remuneration has certain unique features, such as: 1. It cannot be compared to the wage and salary schemes meant for other employees in organizations; 2. Executives are denied the privilege of having unionized strength; 3. Secrecy is maintained in respect of executive remuneration; 4. Executive pay is not supposed to be based on individual performance measure but rather on unit or organizational performance. 5. Executive remuneration is subject to statutory ceilings in some respects

Components of remuneration
See - rewards management by Armstrong Introduction Write Executive remuneration generally comprises four elements: i. Salary and allowance, ii. Bonus, iii. Incentives, iv. Perquisites. Description of Each Element Salary is the first component of executive remuneration. Salary is supposed to be determined through evaluation and serves as the basis for other types of benefits. Bonus plays an important role in today’s competitive executive payment programmes.
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f. Free well-furnished accommodation, conveyance and servants. All these go under the head of perquisites. Based upon his research findings on managerial pay, Megginson offers the following generalisations: Satisfaction with pay is a function of comparison with another’s pay, with downward comparisons’ having the greatest impact. A manager’s satisfaction with his income and its motivational effect appear to be directly related to anticipated pay raises. Those managers who expect large increases in future apparently are less satisfied with their existing level of income; those expecting little or no increases are more satisfied. The choice of merit, as opposed to seniority, as the basis for determining salary rates tends to increase with education and position. The actual determinants of pay differentials seem to be job level supervisory experience and professional experience. Managerial incentive compensation has tended to become flexible. If the various compensation media are to be used to motivate managers, there must be a return to a greater flexibility.

follow in terms of creation of infrastructure, communication, training the work force, continuing education and many such issues. Creating and identity of purpose and shared vision for the employees was critical as also the building of a number of assets. Given the expediencies of the trail-blazing phase in the 70s and the 80s, profit maximisation was not the only goal. The company, nevertheless, was profitable. In the 90s, with the globalisation of Indian software, there was a spurt of competitors with operational excellence as their capability. In this phase too, TCS continued to grow, but it had to grow higher than the competition, which was no longer small. It needed to go ahead and start looking at itself all over again. Evolution of EVA The current operating environment is characterised by players who are increasingly moving into globalisation and towards a more perfect market place. The industry is faced with stiff competition, consolidation, rapid technological advancement and obsolescence, high R&D costs and talent retention. As a strategy-focused organisation, TCS was looking at growth beyond competition, defining for themselves and expansion path that would sustain their leadership in a world shaped by continuously evolving market forces. They thus had to think above operational excellence into product innovation to evolve projections for multi-year growth framework. EVA seemed to provide the tool for this self-propelling growth model. The search lights now beamed on a different set of focus paths: How to grow at a rate higher than just the increase in numbers? How to sell competency and value rather than skills? How to manage commitment without over-committing? How to reduce wastage and increase efficiency to avoid the trappings of a very high cost organisation? The answer translated to measures at all levels. The total pre-occupation with customer’s satisfaction had to be re-turned to introduce an element of profit orientation. This needed a system of efficient resource management, better control of outstanding, performance evaluation that would link reward to revenue generation. The company had to make sure the operational and tactical levels were aligned with the strategic, so that customer satisfaction was reflected through higher revenues, and sales officers were responsive to selling the more valuable services of TCS rather than just meeting targets. To take proactive steps to enhance value for themselves as well as their customers, in around 1996, the company organised its structure into a three dimensional model (Exhibit) defined along industry practices (which are verticals like engineering, transportation, telecom), service practices (assignment themes such as eBusiness, outsourcing, architecture and technology consulting), and geographies (which are regional groupings). The TCS business units now belongs to one cell or span across multiple cells in this cubic grid. Each is a revenue generating unit outside the grid, which do not have a direct revenue earning capability. These include the corporate office support functions and R&D, which contribute in an indirect way towards the organisation’s earnings.

COMPENSATITION MANAGEMENT

Tutorial Activity 1.1
An Article on Empowerment and Growth The EVA story at TCS

-By S.Mahalingam
Tata Consultancy Services (TCS) employs over 15000 professionals, has offices in 23 countries and projects in 50 countries across the world, and revenues around $700 million. Among its clientele are number of Fortune 500 companies and it is in the league of 30 top IT consulting firms in the world. TCS today is an Indian enterprise with a global reach its hiring and people care practices are in line with the industry practices and the compensation model has been traditional. The company has now set its sights on becoming a truly global organisation. Its vision is to be among the top 10 IT consulting organisations in the world, a global employer of choice. It is looking towards institutionalising leading edge practices in hiring, training, and people care, with and innovative EVA based compensation model. The target model will be one that offers a high growth, high performance internal environment to empowered, proactive, high-brand consultants operating in a dynamic external environment. One important factor in understanding the context of TCS growth is that the company veritably set up the industry in India and metamorphosed in phases from an industry-builder to a lead-player in the industry it created. In the new market place it has defined for itself, it has to run alongside the new breed of competitors in the country on the one hand, and on the other, the established giants in the global league it is breaking into, as a logical culmination of its growth. In the initial phase, the mission within TCS, right from 1968 when the organisation came into being, appeared to the creation of the industry and the setting standards. The expansion of the market took place in the 70s and 80s when the company grappled with issues of fixing rates in different countries and the cost structure of the company was being formed internally. It was also part of a group which had its own tradition to
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The EVA Model In giving shape to the EVA model, an organisation needs to keep its focus towards the ultimate goal of aligning its people to the corporate mission, creating an entrepreneurial culture through an empowered work force, and building ownership with accountability. TCS worked out a EVA framework to align corporate value with the performance of the constituent business units and the individuals who comprised these. It translated to a compensation model, where the employee had a share in the corporate pie with add-ons from the profits of the Business Unit and the Individual Performance Factor. At the individual level, an employee needs to know the drivers to tweak to enhance the EVA of the company, of the business unit, and his own contribution towards all these. There are three basic drivers - revenue, cost, and capital charge. Revenue is driven by the r ate or license price put into the product, sales, billable hours, response time, and domain skills. On time delivery obviously has an impact on revenue because better delivery cycles improve the turnaround to the customers. Cost is managed through productivity, is affected by sales and marketing costs, recruitment and others. Receivables and training are the bulk of the capital charge. These are a representative list, and there are many others. The individual works towards the improvement of the benefit package, which essentially has three components - the Corporate EVA, the Business Unit EVA, and the Individual Performance Factor. Out of the total EVA payment a certain percentage goes to each employee on the basis of corporate EVA improvement. Secondly, if your business unit did better than another business unit, then automatically you got more than the other business unit. Again it is a team reward concept. The third one depends on the evaluation of individual performance. Strategic Benefits With the introduction of EVA, yet another plank has fallen in to place in the systemic efforts towards optimisation. Activity Based Costing, implemented 1992 onwards, was a major factor facilitating the smooth transition to EVA. Balance Scorecard was another adaptation in the journey towards excellence. TCS also participated in the Tata Business Excellence Model, (TBEM), which is really an adaptation of the Malcolm Baldridge award, for the Tata companies. Initiatives such as the process map, a metrics definition, a number of data collection points are other enablers in data driven management. With the introduction of EVA, the company has to take a fresh look at the integrated system in a holistic perspective, and evolve ways and means of optimising it. Implementation of EVA requires the integration of the planning and the tracking process. TCS sought to achieve this through a home grown tool called e-pilot, which essentially drills down from strategy to day-to-day activity. This facilitates the integrated planning approach, in defining the corporate EVA, linking it to the business unit/cell, and further to various components down the line, all the way to the drivers connected to each activity. With the drill-down of targets, the tracking becomes automated.

Incentive scheme A comprehensive EVA - based Incentive Compensation Plan has been designed for the employees. Building the incentive scheme requires a detailed exercise in arriving at the target EVA. The TCS model was defined backed by a market analysis and a study of 24 competitors, largely outside India. The framework had specifications for target EVA, with carefully defined EVA intervals and provision for the positioning of zero EVA. The gradation continued through incentives corresponding target attainment, the double incentive. Implementation now covers the whole consulting organisation. TCS is also implementing the bonus bank at the individual level. This exercise begins with a target bonus being earmarked for allocation on corporate target realisation, with a built in multiplication factor for exceeding the targeted EVA. When the corporate target is exceeded, a ‘potential bonus’ is declared. This accrues to the bonus bank of the individual as two components: Component A, the result of the share in the corporate pie; Component B, a composite factor depending on the business unit and individual performance. The accruals are cumulated over the years and the pay out each year is decided as a portion of this cumulative balance, leaving a surplus in the bonus bank. This concept of bonus bank allows an unlimited multi-year decision horizon, replacing the traditional thresholds and caps. It demands sustainable performance improvements, and maintains the important cumulative relationship between pay and performance. The firsthand experience was a revelations, as we saw how we actually get paid out from the increases, demonstrating the dictum that EVA pays for itself. The reward is that the size of the pie could become different as its gets enlarged and the individual and the corporation appears to benefit considerably. It ensures the channelisation of information across levels and each entity can see how it fares against targets. It enhances the sense of participation through the realisation of the share in the larger pie, and provides the motivation to contribute to enlarge the pie. EVA really forces the organisation to adopt a proper business planning approach, gets a focus on strategies, and helps monitor the accountability of people. In a nutshell, it gives a barometer on how the organisation is being run and mandates critical stocktaking to evolve on a continuous improvement path.

COMPENSATITION MANAGEMENT

Tutorial Activity 1.2
An Article on Human Capital -by S. Mahalingam
Originally published in Praxis (Business Line), May 2001. Pundits of Today Assert That it is the Human Capital That Energises the Creation of Wealth

We, the people of the modern ICE age, seem to have come full circle, to taking a look at ourselves. Management theories are veering round to a re-evaluation of that invaluable human factor and its critical contribution to the creation of wealth. In fact, they have gone one step further to stress that people are the wealth. Pundits of today assert that while the other forms of

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capital, including material, equipment, tools and technology, only represent inert potentialities, it is the human capital that converts this potential and energizes the creation of wealth. Let us take a peep into this fascinating attempt at pricing the priceless, or what was hitherto considered priceless simply because not many serious attempts were made at its valuation. What makes the challenge more interesting is that this form of capital is floating rather than fixed. No organization can own its human capital the way it owns its other assets. And, inevitably, there is a constant ‘flight of capital’. Here we have all the trappings of perpetual dynamics when compared to static assets whose tenure can be safely projected. Today, there is nothing sacrosanct about employer-employee relationships and a professional parting of ways is an accepted way of life. For instance, the only loyalty the silicon generation exhibits is to the Silicon Valley itself, not to any individual organization within its bounds. The imperatives of attrition have to be accorded due recognition, and this is the other dimension an organization has to focus on. Employers have to understand the value that is lost when a key employee leaves. So, we will also examine the cause of attrition in the new knowledge-oriented organization and what can be done to motivate loyalty. Capital Redefined An organization is made up of competencies which we can loosely call ‘capital’. Its key components are ‘customer capital’, ‘structural capital’ and ‘human capital’. Broadly a company’s strength arises out of its customer base which purchases its products. This customer capital triggers a number of key decisions such as new product and service packages, new designs in anticipation of customer preferences and new locations from which a number of customers could be profitably served. We have heard of a company being acquired purely because of the strength of its customer base. Besides customers, the strength of an organization arises out of the efficiency of its operations. This is characterized by the manner in which its processes are designed and operated. We can call this the structural capital. But the key strength comes out of its human capital. It is the expertise of its employees which ensures that customers are acquired and retained, and the processes work efficiently to satisfy the customer’s needs. We can say that human capital is the basis for the creation of customer and structural cap-ital. The accounting system does not capture the values of these forms of capital. Indeed, even a management information system hardly captures the accretion or depletion of these critical components in the functioning of an organization. For a Knowledge Base on the Knowledge Worker In the information technology (IT) industry, we started examining the issues relating to the human capital of an organization. If people hold the key to prosperity anywhere, it is more so in the IT industry which employs knowledge workers. Here, human capital is not merely one component of capital; it is the critical component that forms the basis for other forms of capital: People with their expertise are the sole creators

of value to the customer and people through their effort are the key to the optimization of its process efficiency. Perhaps the natural corollary to this is the high attrition rate in the IT industry. So IT organizations have a critical need to know the value they would forego when they are about to lose a person. This knowledge is important in taking appropriate action, in making counter-offers, in keeping up a constant preventive effort to fine-tune the compensation structure. All these should always be in line with the value being pro-vided by the employees. Bundle of Competencies An employee has a bundle of competencies, each of which needs to be valued. In the computer software field, with which I am most familiar, we classified competencies under five major heads - domain, technology, project management, initiative and leadership. A software project attempts to computerize applications such as production scheduling in a manufacturing organization, trade settlement in a stock exchange or recoveries for an insurance company. An analyst developing the requirements for the system must have expertise in the specific business area such as manufacturing, securities trading or insurance. We call this business knowledge the domain expertise. A software designer must be knowledgeable about the technology that provides the platform for the system and makes it work. Similarly, project management is an essential area of expertise for a person leading a part or whole of a project, to ensure that resources are marshaled to yield effective results in the required time. Besides these, what makes a person valuable to the organization is the consummate acumen for enterprise and execution - the generation of ideas and the speed of implementation. These come under the umbrella of initiative. Finally comes the quality of being an inspiration to others: Is a person a thought leader? The ability to apply a new technology in ways unanticipated is one example of displaying thought leadership. The Depth Dimension We have defined different categories in which the skill-level of a person can be classified. This will bring out the breadth of expertise. We need to also know the depth of experience. There are four levels of expertise that are termed exposed, experienced, expert and excellent. A person who has merely gone through a training programme is only exposed to the technology. If he has practiced that skill in one or more projects for an acceptable minimum period, he becomes experienced. An expert is one who is recognized by his peers to be knowledgeable, to whom they turn for resolution of complex problems. Excellence is attained and proclaimed when an outside committee of experts in the field recognizes a person’s expertise. This level is usually reached when a person passes an examination or is invited to become a member of an exclusive club of experts. Now for the verdict... Therefore, a person’s competency can be judged by looking at both the breadth and depth of his skills. The all-important question now is whether these skills are of value. For example,

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we did a detailed survey on what would result in increased commitment to the organization. There are supplementary factors too. such as improvement in the work environment and elimination of irritants largely brought about as a result of bureaucracy. we do not bother about the additional value that may accrue to a person as he moves up the competency ladder A person has a set of competencies and a value is assigned to each of these competencies. The senior management gets into the act only when a very experienced employee leaves. which intrinsically meant reduction in attrition. Human resources valuation has remained an academic exercise and largely ignored even in industries where the expertise of employees is the key differentiating factor. Therefore. Unfortunately. In my organization. The value of a person can certainly be a guiding factor in arriving at the appropriate compensation level. People who are relevant for today’s work may not be able to meet the challenges of tomorrow. has little market value. This human capital. unfortunately. We need to get them to forget some aspects of today’s competency and build the requirements of the future into them. there may be no escalation when a valuable employee leaves. we will not be able to respond to future needs. However.expertise in an old computer language. A skill has a value so long as it can fetch a return. with triggers for intimation to top management based on employee valuation. The organization’s response to this situation should be guided by the value being lost. an organization prospers from the quality of its people. We realized that increase in job satisfaction as well as increase in opportunities at higher levels of value had a positive influence.1 A major factor for a person’s loyalty to an organization is the compensation structure. To Retain Ms High Value When an employee leaves. the investment decisions of top management will not be restricted to the acquisition of brick-and-mortar assets. which has become obsolete. COMPENSATITION MANAGEMENT © Copy Right: Rai University 103 . as in most others. together with the customer and structural capital produces the revenue. But unless we adequately assess the value of human resources. The value therefore is contingent upon the use to which the expertise is put. In a world of constant technological changes. irrespective of whether he has a higher or lower value than a less experienced person. 2000. Why do employees leave an organization? Compensation is only one of the factors and. stored in a constantly updated data-base. An organization needs to look for a system for the scientific computation of employee values.. What kind of effort is needed to enhance satisfaction levels as well as eliminate irritants? It again depends on the potential value created or lost. Management can then be made to sit up and take notice whenever high-value employees leave. Is there a Magic Formula? Once we have determined that there is value. compensation across the board can be structured to be in line with this valuation system. a Java programmer). that is the only factor looked into. The sum total of it is the value of an employee and the sum total of the value of all employees is the human capital of the organization. These resulted in a person moving up the expertise ladder. One method is to look at possible returns over the next five years and thereafter discount the amount by an accepted percentage to arrive at the current value. irrespective of the years of service. an organization loses that much of capital as determined by the valuation given above. The attempt is to calculate the value of a competency at a point in time. In fact. This will require us to forecast the revenue that can be generated each year over the next five years for a person (for instance. Organizations are getting differentiated on the basis of the knowledge each possesses. but of building additional competencies in people. we need to establish its quantification. before January 1. Increasingly..622. The process of valuation is complex and challenging. Miles to go. there is value to a skill so long as it is usable and there is effective demand for people possessing that skill. In the soft-ware field. 11. this rare skill was of great importance to people who still had running systems that used these obsolete languages.

” The Bureau of Labour Statistics. the final report concluded that job evaluation holds some potential for solving problems of discrimination. Why to do Job Evaluation? Organizations usually begin the process of designing a wave structure by determining their job structure. The purpose of the job structure or hierarchy is to provide a basis for the pay structure. “job evaluation is a method which helps to establish a justified rank order of jobs as a whole Being a foundation for the setting of wages.” The relative worth of a job means value produced factors as responsibilities skill. so that differential wages may to jobs of different worth. Such discrimination may result from the use of different plans for different employee groups. It is not evaluating the merit of the worker who is the work. Employer associations have contributed greatly to the adoption of certain plans. But it is an important one often used. A study of job evaluation as a potential source of and/or a potential solution to sex discrimination in pay was made by the National Research Council under a contract from the Equal Employment Opportunity Commission. Job analysis applied to time study and selection. Although the preliminary report failed to take a position on job evaluation.O.L. g them and determining their relative 104 © Copy Right: Rai University .1 Definition of Job Evaluation Below are given some important definitions of job evaluation: The I. The spread of unionism has influenced the installation of job evaluation in that employers gave more attention to rationalized wage structures as unionism advanced. U. such as skills. It measures the differences between job difference between job requirements.” In the words of the Netherlands Committee of Experts on Job Evaluation. It rates the job and not the qualities of the individual worker on the which is the task of employee rating. The job structure. the objective being the setting of pay for wage administration purposes. their position in the job hierarchy. Both imply that organizations pay employees for contributions required by jobs. The study suggested that jobs held predominantly by women and minorities may be undervalued. is only one of the determinants of the wage structure. Whether formal job evaluation began with the United States Civil Service Commission in 1871 or with Frederick W. and some early employer job and pay classification systems. as seen in previous lessons. from the compensable factors employed. Job evaluation is the only one of the starting r establishing the relative differentiation of base wage rates. It presents an effort to determine the relative value of every job in a plant. We may define job evaluation as. Two often-cited principles of compensation are (1) equal pay for equal work and (2) more pay for more important work.622. Taylor in 1881. “job evaluation is a process of determining the worth of the various jobs within the organisation. It is the quantitative measurement of relative job worth for the purpose of establishing Consistent wage rate differentials by objective means. 11. and to determine what the fair wage for such a job should be. The War Labor Board during World War II encouraged the expansion of job evaluation as a method of reducing wage inequities. it merely fixes its relative worth. it is about 100 years old. effort and working conditions. The first point system was developed in the 1920s. defines job evaluation as “an attempt to determine and compare demands which the normal performance of a particular job makes on normal workers without taking into account the individual abilities or performance of the workers concerned.A.. Conceptual Discussion Job evaluation developed out of civil service classification practices. The evaluation may be achieved through the assignment of points or the use of some other systematic method for essential job requirements.” Kimball and Kimball define job evaluation as “an effort to determine the relative every job in a plant to determine what the far basic wage for such a job should be. and from the stereotypes associated with jobs. Job evaluation has received a good deal of attention in recent years as a result of social concern regarding discrimination.S. a process of analyzing and describing positions. To know the definition and concept of job evaluation To understand the need for job evaluation To know the objectives of job evaluation To study the prevalence of job evaluation To understand the responsibility of job evaluation and the various bodies responsible for it To analyse the relationship between job evaluation and job analysis Interaction Job evaluation is the process of methodically establishing a structure of jobs within an organization based on a systematic consideration of job content and requirements. According to Wendell French.COMPENSATITION MANAGEMENT LESSON 17: INTRODUCTION TO NATURE AND OBJECTIVES OF JOB EVALUATION Job Evaluation and Internal Equity Learning Objective • • • • • • value by comparing the duties of different s in terms of their different responsibilities and other requirements. from the weights assigned to factors. It does not set the price of a job. says that “job evaluation is the evaluation or rating of jobs to determine. experience and responsibility.

the relative importance of which varies from job to job: i. more rational wage structure. and improvement in. 4. To promote a fair. However. The principle upon I all job evaluation schemes are based is that of describing and assessing the value jobs in the firms in terms of a number of factors. usually employs job evaluation at the plant or company level. To provide incentives for employees to strive for higherlevel jobs. Job evaluation works best in large bureaucratic organizations. 11. To reduce pay grievances by reducing their scope and providing an agreed-upon means of resolving disputes. job evaluation is frequently used Holland has had a national job evaluation plan since 1948 as a basis for its national wages and incomes policy. accurate and impersonal descriptions of each distinct job or occupation in the entire plant.1 © Copy Right: Rai University 105 . it aims at determining the relative worth of a job. iv. COMPENSATITION MANAGEMENT Objectives of Job Evaluation The general purpose of job evaluation may include a number of more specific goals: 1. a 1982 International Labor Office publication states that in centrally controlled economies or in economies where wage or income controls exist. on agreed logical basis. iii. In the past twenty years these behemoths of the American economy have faced increasing problems remaining competitive. Establishing references for the settlement of grievances arising out of individual rates and for negotiations with a trade union on internal wage structure and differentials. In the past twenty years job evaluation has come under attack in the United States. To provide information for ‘work organization. ii. To provide a standard procedure for determining the relative worth of each job in a plant. 3. and d. The evidence on use of job evaluation in the United States shows that smaller companies are somewhat less likely to use job evaluation. It goes this by providing a ground for the following matters: a.Most organizations utilize job assignment as a major determinant of employee contributions. authority and responsibility of employees. career management. paying the people whose work is alike the same wages.e. 7.622. In fact. Job evaluation is concerned with jobs. To ensure that like wages are paid to all qualified employees for like work.e. b. employees’ selection. To provide an agreed-upon means of classifying new or changed jobs. Great Britain. says an I. Developing machinery for a systematic reviewing of job rates as job contents change. community or industry. b.. Australia and some Asian countries have installed some forms of job evaluation. working conditions. job evaluation also helps in: a. v. the primary purpose of job evaluation is to set wages and salary on the basis the relative work or jobs in the organisation. Equity and objective of salary administration. Job evaluation determines the relative position of the job in the organization hierarchy. To determine the rate of pay for each job which is fair and equitable with relation to other jobs in the plant. To provide a base for individual performance measurements. 6. Almost all government jurisdictions. To provide data on job relationships for use in internal and external selection. i. “the aim of the majority of systems of job evaluation is to establish. Providing standardization of. and establishing appropriate wage differentials between jobs calling for different skills and responsibilities. e. employ some form of job evaluation. Formal job evaluation or informal comparison of job content is the almost universal base of pay rates. To secure and maintain complete. To provide a basis for a simpler. vii. Union-management negotiations on wages. This has come about from a change in the American economy and the type of organizations that dominate the “new” economy of today. and Developing personnel statistics. Although recent evidence is not available. A job is a grouping of work tasks. and accurate consideration of all employees for advancement and transfer. To provide information for wage negotiations. Prevalence of Job Evaluation Job evaluation is used throughout the world. Clarifying the functions. like the United States. Effective wage and salary control. To provide a factual basis for the consideration of wage rates for similar jobs in a community and in an industry. the relative values of different jobs in a given plant or machinery. It is an arbitrary concept requiring careful definition in the organization. A formal wage structure. i. c.L.. Russia and some of the Eastern European countries make wide use of job classification. Report. it appears that job evaluation is more prevalent in the United States than elsewhere. except in very small organizations. however. Also. and other personnel functions. c. Comparison of wage and vary rates with those of other employees. seems to be standard organization practice. placement. and d. training and numerous other similar problems. personnel planning. vi. It is assumed that as long as job content remains unchanged. it may be performed by individuals of varying ability and proficiency. Besides setting wages. not people. defined as a rate or range of rates established for job classifications.O. 5. 2. Sweden and Germany have a number of industry-wide plans.

This allows employees to receive wage increases without having to move up to a new grade level that is tied to a higher organizational level. Several possibilities for implementing the process are apparent. let us study below the various bodies involved with the responsibility of Job evaluation: The Committee Approach This committee is given an explanation of job evaluation. as opposed to the job. less formal and have reduced their complexity. determines weighting. The new companies gaining a foothold in the economy are smaller and organizationally flexible. It is doubtful that this position can be justified. and evaluates jobs. One or more committees may be selected. Support for the program is essential because installation of it involves commitments of time. All this does not mean that organizations ignore the job as a determinant of wages. although a consultant. Consultants often have their own ready-made plans. Consultants Consultants are sometimes employed to install job evaluation plans. The use of market wage data for more and more jobs is increasing and made more practical as data has become readily available on the Internet. Successful consultants are careful to ensure that organization members are deeply involved in installing the plan and are able to operate the plan on their own. Much of this training involves following the steps in the process. COMPENSATITION MANAGEMENT Responsibility for Job Evaluation The installation and operation of job evaluation involves certain responsibilities. union members are regular members of the committee. Sometimes consultants are brought in to insure objectivity in union-management installations. Often this approval is obtained through a committee set up for this purpose. Such support is usually obtained by securing top management approval and the collaboration of other managers and organization members. In union-management installations.1 . Other members are typically other managers selected for their analytical ability. Compensation Department Involvement It is quite possible for the organization to assign installation and operation of a job evaluation plan to the compensation department. though. The actual work of job evaluation is usually done in committee in both large and small organizations. Representation of broad areas of the organization aids in communication and in gaining acceptance. Five members may be optimum. Within organizations. and the width of the grade levels increased dramatically. Consultants are most likely to be employed in small organizations where no member has the necessary expertise. effort. whether the task is accomplished by organization members alone or with the help of a consultant. Lastly. may assume the chair for part of the work. a rough time schedule. The committee makes the decision to install job evaluation. The committee usually selects 106 © Copy Right: Rai University 11. the purposes it is expected to accomplish. There has also been a demise of unions. Committees have the advantage of being able to pool the judgment of several individuals. These possibilities are not mutually exclusive. Those who favor this last approach emphasize the technical nature of the task. Employee representation in committees seems to aid in securing acceptance and in communication. chooses the method of comparing jobs. and assigns responsibility for the work. Sometimes the compensation professional heading the unit and a number of job analysts carry out the task. Committee members must be trained. the number of levels in the job evaluation plan is reduced. and perhaps an estimate of the cost of the program. because the objectivity of committee members rating jobs at levels higher than their own may be questioned. Vertical movement within organizations has slowed down and employees increasingly move to jobs in other organizations rather than stay with their current employer. a department may be set up or an existing one assigned. the compensable factors. In broadbanding. ten a maximum. It is also common to hire consultants to evaluate management jobs. Where the union is not involved employee representation is often rotated. Committee job ratings are a result of pooled judgments. The chair of the committee is usually a compensation professional. job evaluation systems have become simpler. and money.622. What has happened is that wage systems have become more flexible and weight skill and performance more heavily. They are also more likely to be employed when a complex rather than a simple plan is to be installed. they believe these advantages can be provided in other ways. or a consulting organization may be brought in. individuals now bargain for their own wages. if employed. A major trend in this direction has been broadbanding. This usually means either that ratings made individually are averaged or a consensus is reached as a result of discussion. Hence. A common procedure is to invite supervisors to committee meetings when jobs in their department are under study. and commitment to the project. fairness. While they may recognize the education and communication advantages of committees.The result is that they have downsized greatly and removed many layers of organization. decides on the scope of the project. But it is advisable to train committee members how to guard against personal bias and the common rating errors. organizations are putting more emphasis on employee skills and performance. They may also be reacting to the difficulty of getting operating managers to devote the time that the program requires. But job evaluation committees should be kept small to facilitate decision making.

Determining the internal job structure is the task of job evaluation. product market competition. Less well-known is the joint plan in the West Coast paper industry. Wage structures have to do with the internal alignment of jobs in a wage hierarchy. conditions of work. These factors vary from ones over which management has a great deal of control to ones in which management must simply be responsive. unions. What a particular job should be paid is greatly influenced by the value of judgement about the worth of a job. to establish the job hierarchy.1 © Copy Right: Rai University 107 . when determining their wage structure.622. When employees realise that this is happening. it is also not likely that organizations will always be able to develop optimum structures and that current structures will need adapting in the future. the bargained wage structure may follow the job structure resulting from job evaluation or represent a compromise. A well-known union-management job evaluation plan exists in the steel industry. however. and additional relevant information. authority relationships. recognizing the need for a logical hierarchy of jobs. Other employers invite union participation in the hopes of obtaining understanding and acceptance of the plan. This is reflected in the increasing use of employees on job evaluation committees and in the communication steps accompanying job evaluation installations. uses the information in job analysis to evaluate each job valuing its components and ascertaining relative job worth. Some job evaluation plans have been installed and maintained as a joint venture. This process compares jobs. and union demands. 4. 3. in other words. it is not the only determinant to influence the design of wage structures. Some unions profess to formally evaluate an organization’s jobs independently and then use the information as an aid in collective bargaining.Input by operating managers and perhaps employees during job evaluation installation is probably essential to acceptance of the results. reduce their efforts or perhaps adopt other modes of behaviour detrimental to the organisation. In practice. Employee acceptance is the primary criterion organizations use in determining the success of a job evaluation plan. Job evaluation on the other hand. If job values are not properly studied. that it restricts collective bargaining on wages. they become dissatisfied. To do this there must be a hierarchy or structure of jobs within the organization. the relative worth of a given collection of duties and responsibilities to the organisation is assessed. Some employers prefer this response. many labor markets are abstractions that do not provide a close fit for an organization’s jobs or wage-paying ability. not people. The findings are used in negotiating the wage structure. believing that job design and evaluation are management prerogatives. union participation in job evaluation has varied greatly. there seems to be no reason why a department cannot operate it with proper provision for settling grievances. so that a wage or salary hierarchy results. Many unions in organizations with job evaluation plans review the findings after installation by management and either present grievances on individual jobs or insist on bargaining the wage structure. called compensable factors. a great deal of attention is paid to the value of a job. that wages shouldn’t be based solely on job content. high valued jobs may receive less pay than low-valued jobs. that it is subjective. that management doesn’t administer the plan the way it explained it. Relationship Between Job Evaluation and Job Analysis Job evaluation is the output provided by job analysis. It involves. a person is paid for what he brings to a job his education. In other words. Furthermore. There is evidence that joint plans are more successful than unilateral plans. it is very likely that jobs would not be properly realized. and 5. training and experience provided that these are related to the requirements of the job which he is assigned. Job analysis describes the duties of a job. Acceptance and understanding are the expected results of involvement. Unions have criticized job evaluation on several grounds: 1. Job evaluation is a major tool that organizations use to make job comparisons when determining the relative equity of jobs 11. While the economics of the labor market is a major consideration. They may leave the organisation. If a union rejects an invitation to participate in job evaluation and ignores the plan. So it is a process by which jobs in an organisation are evaluated. Most surveys report organization satisfaction levels at 90 percent or better. Once the program is installed. Employee Acceptance of Job Evaluation Job evaluation is usually judged successful when employees. that supervisors do not or cannot explain the plan to employees. Given the variety of influences. i. the employer installs the plan unilaterally. and organizations report satisfaction with it. Some unions have ignored job evaluation plans installed unilaterally by management.e. Union Involvement in Job Evaluation Union involvement has the same rationale as that offered in our discussion of job evaluation committees. in terms of a set of criteria. But this is not always the case. Therefore. Most organizations also must consider laborcost ratios. COMPENSATITION MANAGEMENT Summary The discussion in this chapter showed that the development of a wage structure is the result of a number of influences. In the latter case. This process is adopted to help a management to maintain high levels of employee productivity and employee satisfaction. skills required. As seen earlier. a formal and systematic comparison of jobs in order to determine the worth of one job relative to another. When jobs are evaluated. in modern society. 2.

age. flexible and responsible to environment and market changes. peers and customers. The increasing use of such technologies in the US has led to decreasing costs which have made it more accessible. style of dressing etc. This leads us to a few questions…. which is the hub of such expertise. What is ECS? The technology fueling these type of new organization structures are the computer based communication technologies or Electronic Communication Systems. Also it has been found that telephone eliminates visual cues and screens off information which may be irrelevant such as sex. The choice of the medium for interview may also have a symbolic meaning for applicants. motivate and control employees through electronic mail? Some of these critical questions have been dealt with in the later part of this essay.1 The Lmpact of Electronic Communication Systems on HRM Practices such systems has benefited the process of performance evaluation.. In job evaluation there is an interesting conflict.g the number of e-mail messages sent in the US alone has grown from 776 billion in 1994 to 2. On one hand.. What skills are required when employees communicate within the organization via telephone and not face-to-face? Can one asses job applicants through videoconferencing? How can one train. ECS has proved to be an effective tool in collecting and collating vital information about employees from subordinates. This includes electronic mail.. With the much discussed flattening of organizations and diffused job specifications.Revenues for the videoconferencing industry were to the tune of $15 billion in 1999. computer conferencing and video conferencing which facilitate rapid. less clearly defined authorities and multidirectional communication patterns. It has also been observed that the candidate provides more candid responses in interviews conducted via such new channels. . and exchange of information across organizations.1 .6 trillion this year. The use of ECS has been expanding at an explosive rate e. this process requires technical expertise of a compensation professional.. technologies opens up new fronts in job training methods . Corporations are setting up videoconferencing rooms at a fast pace and using it as lower cost substitution for air travel. like wage surveys. Article by Abhishek Dasgupta of XLRI.within the organization.622. The Technologies Under ECS Include Audio Systems: Telephone Audio conferencing Voice mail World Wide Web phone systems Chat Systems: Internet relay chat Web chat Conferencing: Computer conferencing Web conferencing 108 © Copy Right: Rai University 11. Media transferring aural and visual data such as telephony and videoconferencing can provide low cost alternatives for interviewing reducing the nagging costs of travel. Electronic mail systems: e-mail e-mail with multimedia Videoconferencing: Desktop video Room based video conferencing Though most of these technologies have been available for quite sometime. Performance Evaluation ECS has transformed the way data is observed and information is collected.. Every organization is trying its very best to capture market shares using cutting-edge customized solutions. The place we go to work is also experiencing radical changes due to similar reasons. This productivity is attributed to large number of people participating simultaneously and its associated advantages. Implications of ECS on HRM practices Employee selection and recruitment A distance spanning medium like ECS introduces new changes in the way job interviews are conducted. Recent trends in organization structure suggest that they will become increasingly distributed. On the other hand. Recently conducted research has revealed that groups have been more productive in generating ideas through electronic communication as compared to face-to-face interaction. COMPENSATITION MANAGEMENT Tutorial Activity 1. . monitor.They also enable multimedia document exchange and storage.6 trillion in 1997 and is projected to reach 6. Firms conducting interviews by telephone might be perceived as cost effective or videoconferencing may impress upon technological sophistication. The networked organizations emphasize on the multidisciplinary work arrangements linking people across organizational boundaries. few have considered the impact of communication technologies on managing personnel.. This trend has also affected the way organizations are structured especially in the US. accommodation and incidentals. acceptability of job evaluation results relies on the perceptions of management and workers so that their participation would seem to be a necessity in job evaluation. On the other hand. thus the focus is on interview content and fosters the selection of a more diversified workforce. The filtering out of stereotypes and biases by such systems has benefited the process of performance evaluation. companies may be viewed as being disinterested or in deep financial straits. it has become difficult for managers to observe what their subordinates actually do. We are all living in a world where technology is changing practically every instance. multidirectional communication flow.

They were all assigned to 30 IT professionals each. They inhabit every corner of an organisation. extremely critical in performance appraisals is facilitated by such technologies in a much better way.it is up to our imagination to maximize its benefits through customization in the Indian environment. Their credibility has shrunk. What we need to do is to focus on the fact. Their job descriptions have indicated that they should socialise every new recruit. We have tried to identify its possible implications on managing personnel. the author found that there were 11 HR managers to handle 300 IT staff. Even a small-scale industry nowadays thinks of HR manager. identification with the organization and feeling of “our group”. Remote sites for videoconferencing. Shrinking Roles While the number of HR managers have grown dis-proportionately in the last few years. along with their roles and in some cases they have become power brokers.What are the job skills required to perform a job that relies on ECS? Well. etc.1 © Copy Right: Rai University 109 . computer managed games and simulations. As a result. Competence mapping. due to their administration-heavy roles. it is almost a norm to have one HR manager for every 50 IT professionals. most organisations have diverted a large number of their IR managers to the HR side as HR managers. The only hindrance lies in the fact that such communication is not free from tampering and secrecy is in question. Today in India and in other Asian countries. Also the cost effectiveness and relevance outside the US in underdeveloped economies like India needs to be explored. Thus. They were ill prepared for this jump. The exchange of information increases the personal self-esteem.. mentor them. HR managers are unable to meet the needs of some or several employees. In the last decade with globalisation and economic liberalisation. COMPENSATITION MANAGEMENT Tutorial Activity 1. reward systems management and performance appraisal and training have become the preoccupation of many of them. says TV Rao. insensitive to trends in the changing pattern of compensation and excessively concerned with monitoring the performance of new recruits. job evaluation and classification. There is evidence to show that willingness to give feedback increases when the feedback need not be delivered face-to-face. lacking an understanding of IT basics. putting hurdles all the time. In one of the audits of an IT company. The audit revealed that they are hated most by the IT professionals of the company. However most of the studies referred to belong to specific contexts and the generalisability of these practices is in question. Consequently every employee has high expectations from the HR department. Some of the relatively good HR managers have saved their image by restricting themselves to training and organisation development. may not be in the form as suggested above. reward system and keep in touch with them so as to enable them to contribute their best. videotaped lectures and interactive video training are relevant in providing “just in time training”. reward systems management and performance . Industrial Relations (IR) jobs have become redundant. Outsourcing came to their rescue and they kept themselves busy. In Conclusion Till now we have analysed the importance and impact of new technologies on the organizations of today. ECS is here to stay.g. Training and Development This topic brings us to the question . However.. and land up displeasing many.2 HR Managers and Employee Expectations Competence mapping. there are plenty of HR or HRD managers. Results of Surveys There are very few scientific studies available on HRD managers of today. Whatever may be the case. The availability of new technologies opens up new fronts in job training methods. Fresh graduates from the schools of social work were recruited and placed as HR managers.The provision of a shared screen system in the organization encourages member’s to associate the ideas as “our’s” or “the group’s”. It also reduces the concerns associated with delivery of “bad news” to the appraisee. It could be a combination of manual and new media to produce the eclectic mix. The fact that ECS has opened up a number of possibilities . technical knowledge is important but more important is the ability to convey ideas and information in writing rather than oral communication e. They could be negative or unprofitable in the long run. unsympathetic. The author has been involved in the HRD audit of several companies. These two case studies are good indication of the nature of HR . but more needs to be done to assess its full implications. The delivery of feedback. This is attributed to feeling of depersonalization and anonymity. organisational climate surveys. In the IT sector. their knowledge-base has remained very poor. Organisational life without them seems incomplete.622.. e-mail. India as a country is less systems-driven and more relationshipdriven. as they could not satisfy most line managers who thought they are excellent performers. They were considered inaccessible. performance appraisal. Employee-employee interaction is enhanced by ECS. Those in charge of performance appraisals have also suffered a great deal of image bashing. 11. employee satisfaction surveys. trying to find out agencies to whom they can outsource compensation surveys. The media effects on various HR practices has been taken more or less in as positive developments. job evaluation and classification. which promote development of the organization through mutual information exchange especially in large organizations. there is a new breed of HR managers in some organisations trying to find out how they can do an HRD-oriented IR.. Hacking of such data can be tremendously damaging to the organisation’s interests. explain to them the detailed process of their work.

was examined. felt that the importance given to HRD function by the top management is very high.1 . Put together. The line managers of this company. which have 30-odd staff. accounting for about 556 man days’ training. they had experience as shown in the table. One of the organisations.The following descriptions taken from some leading industries of India depict the situation. a total of 11 staff manned the corporate personnel function. 66 percent rated this as very high. COMPENSATITION MANAGEMENT 110 © Copy Right: Rai University 11. They included four senior managers at general manager/deputy general manager level. Only three of them were found to be members of appropriate professional bodies in HRD. Imagine the nature of qualifications they had acquired 25 years ago when no HRD existed. however. The only area where they had a reasonable degree of proficiency was found to be in performance management. The 16 HRD staff examined were found to have the following profile: An average age of 44 years with about a third of them over 50 years of age. This is a clear indication of the gross neglect of the HRD function. The chief of personnel was estimated to spend less than 29 percent of his total time on HRD activities. Only two of them had professional qualifications in HR. attended a total of 171 training programmes in the last five years. The HRD department is separate from the personnel administration and industrial relations departments of the company. In another study of a professionally managed company.622. only 45 man-days dealt with HRD-related themes. This case study is a good indication of the nature of HR and some common areas HRD managers are weak in. Two of them had qualifications in personnel management and four were trained in training and development. in all. They have. which employs nearly 16 HRD staff. Of the 556 man-days of training. None of them had any professional qualification in HRD. A few of them did not attend any programme after joining the company.

iv. In talking to foremen and employees. Either by making an intuitive “overview” i. or by comparing one job to another by focusing on certain ‘basic factors’. Often several basic factors are chosen initially and then subdivided into sub-factors. The success in selling it will depend on a clearcut explanation and illustration of the plan.which determine the definition of job content. Not only do these factors place jobs in the 11. According to Kress. Such factors are called compensable factors . Basic Procedure of Job Evaluation The basic procedure of job evaluation is to compare the content of jobs in relation to one another. problem solving and accountability. The fourth step is comparing jobs to develop a job structure. it is useful at this point to understand the steps in the process. iii. that determine how the jobs compare to each other. reaching and recording decisions. and 2..Through job analysis. but they also serve to inform job incumbents which contributions are rewarded. Foremen should participate in the rating of jobs in their own departments. and setting up the job hierarchy. This involves choosing and assigning decision makers. which may be common in each job. . Maximum co-operation can be obtained from employees when they themselves have an opportunity to discuss job ratings. Other perspectives are that job evaluation 1. these principles are: i. Any job rating plan must be sold to foremen and employees. responsibility and working conditions. any discussion of money value should be avoided. This view of job evaluation implies that its major purpose is to classify jobs and establish a job hierarchy based on job content. The elements selected for rating purposes should be easily explainable in terms and as few in number as will cover the necessary requisites for every job without any overlapping. While some other system (say Hay system in the States) focuses on know-how. ii.COMPENSATITION MANAGEMENT LESSON 18: INTRODUCTION TO PRINCIPLES AND PROCEDURE OF JOB EVALUATION PROGRAM Job Evaluation and Internal Equity Learning Objective • • • organization’s job hierarchy. The final step is pricing the job structure to arrive at a wage structure. The job contents may be decided upon in two ways. Each element should be rated on the basis of what the job itself requires. which should be kept in mind before putting the job evaluation programme into practice. choosing compensable factors is the heart of job evaluation. in terms of their skills or responsibility or some other requirement. The elements should be clearly defined and properly selected. Perhaps these views could all be accommodated by the recognition that job structures and wage structures are separate concepts and that the relationship between them is a decision that varies among organizations. This information is recorded in the precise.Too many occupational wages should not be established. viii.. and they also help determine the compensation paid for each job. consistent language of a job description. refer to the following table To learn the Details of the Principles of Job Evaluation To understand the Concept of Job Evaluation procedure To learn the Sequential procedure of Job Evaluation Interaction There are certain broad principles.in terms of specific job-related factors. vii. The third step in job evaluation is to select a method of appraising the organization’s jobs according to the factor(s) chosen. information on job content is obtained. It would be unwise to adopt an occupational wage for each total of point values. The second step is deciding what the organization “is paying for” . Rate the job and not the man. many wage structure determinants are used by organizations. Only point values and degrees of each element should be discussed. the “Equal Pay for Equal Work Act” (in USA) focuses on four factors: skills. The first step is a study of the jobs in the organization. v. Strictly speaking. The job structure is only one of these. this step is not part of job evaluation. i. As seen earlier in this chapter. For example. vi.e. and not going any deeper in why . For example.e. Introduction to Procedure of Job Evaluation After studying the principles of job Evaluation it is important to know the process and procedures involved in job evaluation.that is. In a sense. These compensable factors are the yardsticks used to determine the relative position of jobs. efforts.1 © Copy Right: Rai University 111 .622. together with an appreciation of worker requirements for successful performance of the job. The organisation might develop its own compensable factors or use those factors adopted by others. by deciding that one job is “more important” than another. The method should permit consistent placement of jobs containing more of the factors higher in the job hierarchy than jobs involving lesser amounts. links external and internal markets. what factor or factors place one job at a higher level in the job hierarchy than another. is a process used to gain consensus and acceptance of a pay structure.

The list will be reviewed and updated on a regular basis to maintain its accuracy. determining their value and preparing written instructions for evaluation. You are advised to contact your registration/certification body to negotiate a suitable transition time frame for the assessment of your own organization. and number pf degrees. It is expected that the process of upgrading registration/ certification will be a smooth transition that is incorporated into the applicable Registration or Certification Body’s regular audit routine. meeting the need for more user-friendly documents. Extensive surveys have been performed on a worldwide basis to understand the needs of all users of the quality management system standards. and to include new questions where appropriate. jobs can be evaluated more systematically. March 2001] Who is Responsible for Revising the Standards? The revision process is the responsibility of ISO Technical Committee (TC) 176 and is conducted on the basis of consensus among quality and industry experts nominated by ISO Member bodies.Table 1. and this includes a transition period of up to three years after the 15th of December 2000. March 2001] Will the Year 2000 Revision Affect my Organization’s Current Quality System Registration/Certification? Yes..1 Tutorial Activity 1. the National Institute of Personnel Management. 112 © Copy Right: Rai University .[FAQ 002. In addition. promoting the use of generic quality management principles by organizations. Select and Prepare a Job Evaluation Plan This means that a job must be broken down into its component parts i. Install the Programme This involves explaining it to employees and putting it into operation. and relating them to the money terms in order to ascertain their relative value. The new revisions take into account previous experience with quality management system standards (1987 and 1994 editions) and emerging insights into generic management systems. has laid down the following steps which should be taken to install a job evaluation programme: Analyse and Prepare Job Description This requires the preparation of a job description and also an analysis of job requirements for successful performance. Any additional costs may be considered as a value-added investment. of Degrees 8 8 8 8 8 8 8 8 Why were the Standards Revised? The major reasons for the year 2000 revisions of the standards include: • • • • • COMPENSATITION MANAGEMENT emphasizing the need to monitor customer satisfaction. elements needed for the performance of all jobs for which money is paid. the year 2000 revision of the ISO 9000 standards gives users the opportunity to further increase value to their activities and to improve their performance continually by focusing on the major processes within the organization. [FAQ 003. The strategy adopted by your organization to meet the requirements of ISO 9001:2000 should include an appropriate timing for upgrading your organization’s registration/ certification.1 : Compensable Factors Universal Factors Knowledge Sub-factors Education Experience Skill Interpretation Compliance Communication Interpersonal Managerial Asset No.622. sub-factors. They result in a closer alignment of quality management systems with the needs of organizations and better reflect the way organizations run their business activities. It is intended that this list will also provide a good source of information for new users of the standards. and decisionmaking.1 Frequently Asked Questions (FAQ’s) This list of Frequently Asked Questions (FAQ’s) has been updated after publication of the ISO 9000:2000 family of International Standards . Input has been obtained from experts and users of the ISO 9000 standards. In India. it should involve the selection of factors. and representing all interested parties. skills problem solving. The International Accreditation Forum (IAF has already established a set of guidelines for Certification Bodies/ Registrars to follow. 11. Problem-Solving Decision-Making When compensable factors are available. expressed during seminars and presentations around the world. stating the “human requirements” of the job in terms of condensable factors like education.e. Each job is compared with all the others using the same factors. and enhancement of their compatibility with ISO 14001. ISO’s rules of procedure (the ISO/IEC Directives) also specify that standards be periodically revised to ensure that those standards are current and satisfy the needs of the global community. Maintain the Programme Jobs cannot continue without updating new jobs and job changes in obedience to changing conditions and situations. [FAQ 001. assuring consistency between quality management system requirements and guidelines. Sometimes job specifications are based on these factors. March 2001] How Much is the Transition to the New Standards Going to Cost? One of the goals of ISO/TC 176 is to produce standards that will minimize any potential costs during a smooth transition. Classify Jobs This requires grouping for arranging jobs in a correct sequence in terms of value to the firm.

ISO/TC 176 has established a Working Group for interpretation. and that full reassessment will only take place once current certificates expire. which are better aligned with the philosophy and objectives of most quality award programs. which carries detailed information on the revised standards and is updated on a regular basis. this web site. ISO Central Secretariat in Switzerland is also maintaining a web site at http://www. March 2001] Where can I Obtain Information on the Revised Standards? There are a number of sources of information on the revision of ISO 9000 quality management system standards. Instead. other documented procedures may be required by your organization in order to manage the processes which are necessary for the effective operation of the quality management system. However. By that date. Factual approach to decision making. This will clearly vary depending on the size of the organization. no changes are required.622. It is expected that conformity to the new ISO 9001:2000 standard will be evaluated by certification bodies during regular surveillance visits. national standards bodies. wherever possible. March 2001] Where Does My Organization Go If It Needs Clarification or Interpretation of the Revised Standards? The starting point for any individual request for an interpretation should be with the enquirer’s national standards body. Many countries may have these available in local-language versions (see ISO Online) for a listing of member body. ISO/TC 176 and ISO/CASCO have agreed that there should be a 3 year ‘transition’ period during which accredited certification to the 1994 standards and ISO 9001:2000 may continue to coexist. depending on various factors such as the actual state of implementation of the quality management system. the revised standards include some new requirements and you should consider addressing them in your system at an appropriate opportunity.The cost of implementing any necessary changes in order to meet the new requirements of ISO 9001:2000 will vary from one organization to another. March 2001] Does the Revised Standards Address Financial Issues? Financial issues are not addressed in the ISO 9001:2000 standard. A joint group from the International Accreditation Forum. of course.ch that carries general information on the revised standards. March 2001] Where can My Organization Obtain Copies of the Revised Standards? Copies of the revised standards may be purchased from National Standards Bodies. contact details). including.(See the ISO web site http://www. [FAQ 007. i. [FAQ 010. the International Accreditation Forum’s (IAF) guidelines provide for the incorporation of audits to the new standard into surveillance visits for existing (1994) certifications. the national standards bodies. if So. It is expected that the benefits to all organizations will outweigh eventual costs associated with the transition. March 2001] Are the Revised Standards More Compatible with National Quality Award Criteria? The quality management principles are now the basis for the revised standards. reflects the way your organization works. [FAQ 09.iso. satisfies the needs and objectives of your organization. contact details). contact details). [FAQ 008.chfor a listing of the member bodies. This ‘transition period’ will end on 15 December 2003. The ISO 9004:2000 guidance standard emphasizes the © Copy Right: Rai University 113 . ISO central secretariat and TC 176 cannot accept direct requests from individuals for interpretations of the ISO 9000 standards. If your current quality management system is successfully implemented. These principles are: • • • • • • • • COMPENSATITION MANAGEMENT Customer focus. the national standards bodies.iso. however. if your current documented system does not address all of the new requirements. Process approach.e. March 2001] Will My Organization Have to Re-write All its Documentation? No. [FAQ 005. and Mutually beneficial supplier relationships.1 Will My Organization Have to Change Its Quality System and. addresses all of the new requirements. with a formal procedure to provide answers to the questions that are forwarded by the national standard bodies. Involvement of people. i. The International Standard ISO 9001:2000 has clarified the need for required documentation. [FAQ 004. Leadership.e. etc. i. all organizations wishing to retain accredited certification will have to have migrated their quality management system to being compliant with ISO 9001:2000. [FAQ 006. ISO/TC 176/SC2 has published a Transition Planning Guide to assist organisations in their migration. additional documentation may be necessary. the size and complexity of the organization. March 2001] 11. System approach to management. March 2001] Will My Organization Need a Full Reassessment for the Revised Standards? This is primarily an issue between your organization and your registration/certification body. [FAQ 011. the attitude and commitment of the top management. Regarding the costs of upgrading the certification. however. Continual improvement. When? It is not the intention that you should have to change the whole structure of your system or re-write all your procedures.e. Only 6 documented procedures are required by the standards for administration of the system. Your National Standards Body should be able to provide copies of the revised standards and registrars/certification bodies will be able to provide guidance on transitional registration arrangements (see the ISO web site for a listing of the member bodies. the kind of activities in which it is involved and their complexity.

telecommunications. In order to evaluate if the product meets customer needs and expectations. Measurements extended to system. March 2001] What are the Benefits of the Revised Standards? There are a number of major benefits with the revised quality management systems standards. March 2001] Will the Revised Standards Improve Customer Satisfaction? The quality management system described in the revised standard is based on quality management principles that include the “process approach” and “customer focus”. Increased attention to resource availability. may be referred to as the ‘process approach’ to management. which receives inputs and converts them to outputs. March 2001] What are the Main Changes to the Standards? The main changes that have been introduced in the consistent pair of quality management system standards are: A new process-oriented structure and a more logical sequence of the contents A continual improvement process as an important step to enhance the quality management system Increased emphasis on the role of top management. Monitoring of information on customer satisfaction as a measure of system performance. medical devices. Analysis of collected data on the performance of the quality management system [FAQ 015.[FAQ 014. Consideration of statutory and regulatory requirements. [FAQ 017. Establishment of measurable objectives at relevant functions and levels. The concept of “Application” of the standard has been introduced (in clause 1. and establishment of measurable objectives at relevant functions and levels. [FAQ 013. Increased compatibility with the environmental management system standard ISO 14001 Specific reference to quality management principles. Almost all activities and operations involved in making a product or providing a service are processes. The systematic identification and management of the various processes employed within an organization. March 2001] Why Has the Requirement for Monitoring of Customer Satisfaction Been Included in ISO 9001? “Customer satisfaction” is recognized as one of the driving criteria for any organization. to fulfill its policies and objectives. A requirement for the organization to monitor information on customer satisfaction as a measure of system performance. Consideration of the benefits and needs of all interested parties. and easily understandable Significant reduction in the amount of required documentation. The revised quality management system standards are based on just such a process approach. Continual COMPENSATITION MANAGEMENT 114 © Copy Right: Rai University 11. which includes its commitment to the development and improvement of the quality management system. clear in language. automotive. Terminology changes/improvements for easier interpretation. and particularly the interactions between such processes. in line with the guiding quality management principles. The adoption of these principles should provide customers with a higher level of confidence that products will meet their needs and increases their satisfaction. For organizations to function.financial resources needed for the implementation and improvement of a quality management system. Consideration of the needs of and benefits to all interested parties. Often the output from one process will directly form the input into the next process. consideration of legal and regulatory requirements. March 2001] What is a Process? Any activity or operation. Connection of quality management systems to organizational processes Provision of a natural move towards improved organizational performance Greater orientation toward continual improvement and customer satisfaction Compatibility with other management systems such as ISO 14000 Provision of a consistent basis to address the needs and interests of organizations in specific sectors (e. Addition of the concept of organizational self-assessment as a driver for improvement (ISO 9004:2000) .g. [FAQ 018. they have to define and manage numerous inter-linked processes. [FAQ 012.1 . can be considered as a process. Improvements can be made by taking action to address any identified issues and concerns. and product. in all sectors and to all sizes of organizations Simple to use. Determination of training effectiveness. etc) The concept of the consistent pair . March 2001] What New Requirements Have Been Introduced Into The Revised ISO 9001 Standard? The main new requirements include: Continual improvement Increased emphasis on the role of top management. processes.622. Among them are: Applicability to all product categories.ISO 9001 covering the requirements and ISO 9004 for going beyond the requirements in order to further improve the performance of the organization. it is necessary to monitor the extent of customer satisfaction.2) as a way to cope with the wide spectrum of organizations and activities. March 2001] What is Meant by “Continual Improvement”? “Continual improvement” requires an organization to focus on continually increasing the effectiveness and/or efficiency of its processes. Significant reduction in the amount of required documentation. readily translatable. [FAQ 016.

2 “Application”) documented and justified in the quality manual. for those products that are included in the certification scope. It is proposed that standards such as ISO 9004-2 and ISO 9004-3 be withdrawn and other documents (e. Where your current system does not address the applicable ISO 9001:2000 requirements.g.1 © Copy Right: Rai University . However.e. The revised standards are intended to be sufficiently generic so as to eliminate the need for specific guidance on their application. until 15 December 2003) of the revised standards. [FAQ 027. If design activities are required to demonstrate your organization’s capability to meet customer or statutory/ regulatory requirements for products covered by the quality 115 COMPENSATITION MANAGEMENT 11. including satisfaction of customers and others. [FAQ 019. [FAQ 022. This situation is currently under review by ISO/TC 176. There is confidence that management of the organization will be able to adopt the quality management system standards not only for certification purposes. noting the IAF-ISO/ CASCO-ISO/TC 176 agreement that accredited certification to the 1994 editions should remain possible for up to 3 years after the publication (i. The quality management concepts in ISO 9000-1 have been integrated into the ISO 9000:2000 standard. March 2001] What Will Happen to My Organization if it is Currently Registered/Certified to ISO 9002:1994? The organization is not obliged to include within the scope of its certification all the products that it provides. [FAQ 020. ISO 10013) may become technical reports at their next revisions. March 2001] My Organization is Currently Registered/Certified to ISO 9003. March 2001] What Happened to the 1994 Versions of ISO 9001. As a result. The standard allows for the exclusion of some requirements (via clause 1. the best results can be obtained by using the new ISO 9004:2000 in addition to ISO 9001:2000. You should perform a gap analysis based on the standard to determine what areas in your organization’s quality management system already comply with the revised requirements. [FAQ 024. copies of the 1994 editions will still be available on request from ISO and the national standards bodies during that period. The scope of registration/certification will need to reflect clearly the activities covered by the organization’s Quality Management System.2 Application. ISO 9000-3.improvement (where “continual” highlights that an improvement process requires progressive consolidation steps) responds to the growing needs and expectations of customers and ensures a dynamic evolution of the quality management system. and requirements may only be excluded if it can be shown that they do not affect the organization’s ability to provide product which meets customer and applicable statutory/regulatory requirements. What do We Need to do? There are significant differences between the ISO 9003 standard and the revised ISO 9001:2000 standard. For improved organizational efficiency. but also as a profitable investment.. but only if it can be shown that these requirements are not applicable to the organization. March 2001] How Will the Revised Standards Improve the Perception of ISO 9001 Certification/Registration? By demonstrating to organizations that the process of certification based on the new ISO 9001 standard adds value to their own business goals. [FAQ 021. ISO 10012 will remain as an international standard. March 2001] What Happened to ISO 8402 and ISO 9000-1? The terms and vocabulary previously found in the ISO 8402 standard are addressed in the ISO 9000:2000 (Quality Management Systems: Fundamentals and Vocabulary) standard. all applicable requirements of ISO 9001:2000 will need to be addressed. 9002 & 9003 ? The year 2000 publications have superseded corresponding 1994 versions of the standards. [FAQ 026.2 “Application”). The guiding quality management principles are intended to assist an organization in continual improvement. March 2001] What Will Happen to ISO 10012-1 and ISO 10012-2? Current plans are to maintain these measurement systems standards as part of the year 2000 ISO 9000 family. ISO 9004-2) in the ISO 9000 Family? The revised ISO 9001 and ISO 9004 quality management system standards have been prepared taking into account these and other guideline documents of the former ISO 9000 family. However. the revised standards (ISO 9001:2000 and ISO 9004:2000) are directed to the achievement of business results. however. March 2001] What Will Happen to the Guideline Documents (e. March 2001] Which Standard Will My Organization be Registered/Certified to? All organizations will be registered/certified to ISO 9001:2000. A work item has been approved for the merger of 10012-1 and 10012-2 into one standard. The new ISO 10012 standard is targetted for publication in early 2002. (See also the ISO/TC 176/SC2 Introduction and Support Package: Guidance on ISO 9001:2000 Clause 1. development and implementation of processes to ensure compliance will need to be made. [FAQ 023.622.g. Exclusions are limited to Section 7 (“Product Realization”). and any exclusion to non-applicable requirements of the standard (through 1. It is intended that the responsibility for some of the guideline standards (such as ISO 9000-3 and 9000-4) will be transferred to other ISO/IEC Technical Committees. March 2001] How Will the Implementation of the New Standards Help My Organization to Improve its Efficiency? ISO 9001:2000 aims at guaranteeing the effectiveness (but not necessary the efficiency) of the organization. (Note that the ISO 9000:2000 definition of “Product” includes services!). which should lead to efficiency throughout the organization. notably in the product realization activities. a market-wide improvement in the perception of ISO 9001 certification should be developed.) [FAQ 025. The rationale behind the revision process places great emphasis on making quality management systems closer to the processes of the organization and on continual improvement.

March 2001] Can Organizations Remain Certified/Registered to the 1994 Version of ISO 9001. professional associations. however. [FAQ 033. organizations may choose to continue or even seek new certification/registration to the 1994 versions of ISO 9001. 9002. particularly ISO 9004 in conjunction with ISO 9001.2 “Application”. [FAQ 031. Certification/registration body assessments to the latest draft of the revised standard may begin prior to publication of ISO 9001: 2000 as an International Standard. Certificates issued to the 1994 editions of ISO 9001. March 2001] My Organization is Applying Now for ISO 9001 Certification/Registration. or if your product is provided on the basis of established design. (See also the ISO/TC 176/SC2 Introduction and Support Package: Guidance on ISO 9001:2000 Clause 1. until 15 December 2003). (See the ISO web site http://www. March 2001] How Should My Organization Deal With the Transition to the Year 2000 Standards? Consultation on ‘transition’ arrangements between ISO TC 176. it is not intended to be used for third party certification purposes.) [FAQ 028. and 9003 into a single requirements standard (ISO 9001:2000) requires more emphasis for the scope to define the products. Provisions have been made to exclude nonapplicable requirements within Section 7 of the standard through clause 1. analyze the changes in the revised standards. you will need to discuss and justify the exclusion of these requirements with your certification/registration body.2 Application. services and processes covered by certification/registration. the nature of your products does not require you to perform design activities or if your product is provided on the basis of established design. March 2001] COMPENSATITION MANAGEMENT 116 © Copy Right: Rai University 11. which has consolidated the previous ISO 9001. ISO 9002. It is recommended that your organization familiarize your personnel with the quality management principles. and consider how those changes may affect your activities and related processes. you will still be registered to ISO 9001:2000. We strongly recommend that you read the new standards. then these design activities must be included in the scope of your registration/certification to the ISO 9001:2000 standard. i. The aligned structure of ISO 9001:2000 and ISO 9004:2000 will encourage organizations not only to look at their activities from a process standpoint. 9002.622. March 2001] What Should I do Now? You should contact your National Standards Body to obtain information. and ISO 9003. ISO 9002 and ISO 9003 are superseded. You will need to evaluate which specific requirements of ISO 9001:2000 are applicable to the nature of your business and the extent to which your present QMS meets those requirements. ISO 9002. and ensure that your quality management system effectively adds value to your organization’s activities. March 2001] How Will the Consistent Pair of Standards Affect a Registered/Certified Organization? The idea of a “consistent pair” of standards is the very core of the revision process. March 2001] How Do Certificates to the Revised ISO 9001:2000 Identify the Scope of the Quality Management System? It has always been necessary to define clearly the scope of registration/certification.1 .e.iso. If design activities are not required to demonstrate your organization’s capability to meet customer and applicable statutory /regulatory requirements. [FAQ 032.ch for a listing of the member bodies. for example. March 2001] Will I be Able to Certify/Register My Organization to ISO 9004:2000? No. but also to look beyond certification to a system which will be truly beneficial in improving operational performance. [FAQ 034. ISO 9001: 2000 will require auditors and other relevant certification body personnel to demonstrate new competencies. [FAQ 029. Any accredited certificates issued or renewed will. Certification bodies will need to take particular care in defining the scope of certificates issued to ISO 9001: 2000 and the permissible exclusions to the requirements of the standard. 9002 and 9003? Although organizations are encouraged to make the transition to ISO 9001:2000 certification as soon as possible. In this case.e. and the International Accreditation Forum (IAF) in September 1999 resulted in the following agreements: Accredited certificates to ISO 9001: 2000 shall not be granted until its publication as an International Standard.) [FAQ 030. [FAQ 036. ISO CASCO. only remain valid for a maximum of three years after the publication of ISO 9001:2000 (i. or ISO member organizations. You should be careful with the information that you receive from sources other than your National Standards Body. What Should I do? Continue with your plans to implement your system and to apply for certification. according to the IAF/ISO-CASCO/ISO-TC 176 Communiqué on transition policy. As ISO 9004:2000 is a guidance standard. The merging of ISO 9001.2 Application. (See also the ISO/TC 176/SC2 Introduction and Support Package: Guidance on ISO 9001:2000 Clause 1. and 9003 standards.management system certification. March 2001] What does My Organization Need to do if it is Currently Registered/Certified to ISO 9002:1994 or ISO 9003:1994? Since publication of ISO 9001:2000. you will need to justify the exclusion of the design and development requirements in your quality manual. the national standards bodies. contact details). [FAQ 035. If. or ISO 9003 shall have a maximum validity of three years from the date of publication of ISO 9001: 2000. A key element in the new ISO 9004 is the ability to perform self-evaluation. Third party QMS certifications/registrations are performed to ISO 9001:2000.

such as design activities) that may not be performed by the organization. and ISO 9003. Customers and users will benefit by receiving the products (see ISO 9000:2000) that are: Conforming to the requirements Dependable and reliable Available when needed Maintainable People in the organization will benefit by: Better working conditions Increased job satisfaction Improved health and safety Improved morale Improved stability of employment Owners and investors will benefit by: Increased return on investment Improved operational results Increased market share Increased profits Suppliers and partners will benefit by: Stability Growth Partnership and mutual understanding Society will benefit by: Fulfillment of legal and regulatory requirements Improved health and safety Reduced environmental impact Increased security [FAQ 038. To assure consistency between the ISO 9001 requirements and sector requirements. will be reviewed in due course. March 2001] How Will Interested Parties Benefit by the Organization Adopting the New ISO 9004? If the system is appropriately implemented. particularly with regard to terminology and content. March 2001] What’s the Relationship Between the Revised ISO 9001 and ISO 14001? The revised ISO 9001 has been developed to enhance compatibility with ISO 14001 Environmental management systems. a pilot study has been conducted using the development of an automotive industry document as the test vehicle. the individual organization will still need to be able demonstrate its capability to meet customer and applicable statutory or regulatory requirements for its products. If the need for such a document arises. on the exclusion of certain requirements for specific processes (i. [FAQ 037. and will need to consider this when determining the complexity of its quality management system. and is designed to be much more user-friendly for smaller organizations. [FAQ 041. through clause 1. both for quality management and environmental management systems. The planned publication date for this standard is the third quarter 2002.e. It is not expected that an ISO guideline will be prepared on this subject at the present time. A specific agreement between the two ISO Technical Committees (TC 176 and TC 207) has set up a joint working group to prepare a single standard on auditing activities. the two responsible ISO technical committees (TC 176 and TC 207) are preparing a single common auditing standard (ISO 19011). Due to this generic nature it may be that some industrial or commercial sectors will identify additional requirements to attend to their specific needs. This will provide the opportunity for further enhancement of the compatibility between the ISO 9000 and ISO 14000 standards. The full results of the pilot scheme. There is close collaboration between the technical experts of ISO/TC 176 and ISO/TC 207 (the Technical Committee responsible for the ISO 14000 series of standards). For the quality and environmental auditing guidance standards (ISO 10011 and ISO 14010/14011/14012).2 “Application”. medium. ISO 9002. those covered by clause 7. utilizing the eight Quality Management Principles. March 2001] Are There Any Guidelines Covering Joint Implementation of ISO 9001 and ISO 14001? It is expected that the revisions of the two standards will be compatible in terminology and content. A recent review of ISO 14001 and ISO 14004 by ISO/TC 207/ SC 1 has led to the initiation of a revision of those standards.622. and the working methods employed. ISO will consider the request as a new project. [FAQ 043. This new standard (ISO 19011) will replace the existing ISO 10011 and ISO 14010/14011/14012 documents.1 © Copy Right: Rai University 117 . [FAQ 040. scheduled for publication in the third quarter of 2002. and large organizations alike. ISO 9001:2000 provides some flexibility. [FAQ 042. March 2001] Will There be a Common Guideline Standard for Auditing QMS and EMS According to ISO 9001 and 14001? Yes. ISO/ TC 176/SC2 will be revising the Small Business Guide during 2001. [FAQ 039. March 2001] COMPENSATITION MANAGEMENT 11. devoid of the hardware and manufacturing bias of the current standard. However.How Does ISO 9001:2000 Relate to the Needs of Specific Business Sectors? The text of ISO 9001:2000 is more generic than the 1994 version in order to be applicable to different types of product and to organizations of different sizes. March 2001] What Will Happen to the ISO Handbook: ISO 9000 for Small Businesses? The small business handbook was published by ISO in 1996 and was intended to provide guidance from ISO/TC 176 for the 1994 versions of ISO 9001. ISO 9001:2000 applies a more generic approach. March 2001] How Will a Small Organization be Able to Adapt the Requirements of the Standard? What Flexibility Will be Allowed? The requirements of the revised ISO 9001 are applicable to small. all the interested parties will benefit from ISO 9004. The pilot project has successfully achieved the publication of an ISO technical specification (ISO/TS 16949).

622. more user-friendly. [FAQ 046. whether external or internal. etc. [FAQ 047. but has a register of experts. (Note: the definition of the term ‘product’ in ISO 9000:2000 also includes services. March 2001] I am a Qualified Quality Management Practitioner (Consultant. ISO 9001:2000 and ISO 9004:2000 have been written to reflect this definition.com) for further information. ISO 9004:2000 and the quality management principles. March 2001] My Organization is a Regulatory Body. will have to demonstrate their competence not only on the structure. March 2001] Where can I Find a Competent Speaker to Make a Presentation on the Revised Standards? ISO cannot provide speakers for individual organizations. You should contact the Secretary of ISO/TC 176/SC2 (charles_corrie@bsi-global. How are the New Standards Applicable to Us? The standards are applicable to all types of organizations. The eight Quality Management Principles A general understanding of the performance improvement guidelines of ISO 9004:2000 Familiarity with the latest draft of the auditing guidance standard (ISO 19011). who would be willing to make presentations to industry groups. According to the IAF/ ISO-CASCO/ ISO TC 176 Transition Policy. You should then examine the revised standards and determine if the changes are relevant to the regulations that you have issued and make recommendations to the legislative body. auditors must demonstrate competency in: The requirements of the ISO 9001:2000. you should familiarize yourself not only with the requirements of the new ISO 9001:2000. You must clearly understand your client’s activities and processes and appropriately interpret the requirements of the standards to add value to their operations. [FAQ 048. with language skills. but also on the underlying quality management principles. or Trainer). [FAQ 045. Auditor. The new standards are equally appropriate to all sectors. content and terminology of the revised standards. based on the remuneration of expenses only. and with less manufacturing bias.My Organization Provides Services. March 2001] What Needs to be Done to Ensure that Auditors are Ready to Work to the Revised Standards? Auditors. but also with the content and philosophies of ISO 9000:2000. The revised standards require that auditors are able to understand the organization’s activities and processes and appropriately audit against the requirements of the standard in relation to the organization’s objectives. What do I Need to do? As a minimum. What do We Need to do? You should review the regulations currently in effect and ensure that any references to the quality management system standards are appropriate.1 .) [FAQ 044. regional conferences. The concepts and terminology of the ISO 9000:2000. including service providers. March 2001] Notes: COMPENSATITION MANAGEMENT 118 © Copy Right: Rai University 11. The language in the revised standards is simpler.

Step 4: Ranking of all jobs. simple.5000-8000 Rs.COMPENSATITION MANAGEMENT LESSON 19: INTRODUCTION TO BASIC JOB EVALUATION METHODS/SYSTEMS &PACKAGED POINT PLANS Job Evaluation and Internal Equity According to this method. the following five steps are involved in system: Step 1: Preparation of job description. then the other jobs are roughly compared with these key jobs to establish a rough rating. All the jobs within a single group or classification receive the same wage or range of rates. Each job is then compared in detail with other similar jobs to establish its exact rank in the scale. Traditional Systems of Job Evaluation To understand the Ranking System To understand the Grading or Job Classification System To understand the Point System To understand the “Packaged” Point Plans To understand the Factor Comparison System Basic Job Evaluation methods/systems: Write Introduction Four Basic. although they may be useful. A more common practice is to arrange all the jobs according to their requirements by rating them and then to establish the group or classification. The ranking system. 3000-4500 Rs. The point system. usually a series of key jobs or bench-mark jobs (10 to 20 jobs. The principal differences between these methods reflect: 1. and 2. 11. therefore. 500-800 Learning Objective • • • • • • • Introduction to Basic Evaluation Systems To know Four Basic. Consideration of the ‘job as a whole.35006000 Rs. These jobs are then ranked from ‘lowest to highest’ or from ‘highest to the lowest’ are ranked first and then the next highest and next lowest and so forth until all the cards have been ranked. The usually adopted technique is to rank jobs according to “the whole job” rather than a number of condensable factors. They are more complex and are time consuming. 1000-2500 Rs. Step 5: Preparation of job classification from the rating: The total ranking is divided into an appropriate number of groups or classifications. 900-1800 Rs. Generally speaking. because they use quantitative techniques in listing the jobs. Sometimes. all jobs are arranged or ranked in the order of their importance from the simplest to the hardest..’ versus consideration of compassable factors’. Judging and comparing jobs with each Other rather than assigning numerical scores on a rating scale. particularly when the ranking of jobs is done by different individuals and there is a disagreement among them. The last two systems are called the analytical or quantitative systems. because they utilize non-quantitative methods of listing jobs in order of difficulty and are.622.3500-5000 Rs. The grading or job classification system. 3. Most organizations use a committee of raters. additional jobs between those already ranked may be assigned an appropriate place/wage rate. Step 2: Selection of Raters. The factor comparison system. factory workers. and 4. Registrar Assistant Registrar Clerk Grade I Clerk Grade II Class Four Servants Pay Scale Range Rs. each successive job being higher or lower than the previous one in the sequence. Step 3: Selection of rates and key jobs. It is not necessary to have job descriptions. and all the jobs in the organization are arranged into these. or in the reverse order. 4000-7000 Rs. traditional systems/mehtods of job evaluation: 1. The ranking system of job evaluation usually measures each job in comparison with other jobs in terms of the relative importance of the following five factors: The Ranking System Mechanism: Under this system. the ranking for a university may be like thus.2 : Ranking of University Personnel Ranking Order Professor Associate Professors Assistant Professors Registrar Dy. 4000-7000 Rs. etc). 2. which include all major departments and functions) are first rated. This eliminates need for directly comparing factory jobs and clerical jobs.e. Table 1. clerical workers.’ each of which contains a brief description of a job. Traditional Systems Of Job Evaluation There are four basic. menials. For this each rater may be given a set of ‘index card. The Plans commonly used today represent variations of these basic methods: After ranking. usually 8 to 12. a series of grades or zones are established. jobs may be usually ranked by department or in “Clusters” (i.1 © Copy Right: Rai University 119 . The first two systems are popularly known as the non-analytical or non-quantitative or summary systems.

damage to equipment. Mechanism: The following five steps are generally involved: i. confusion. For example. The system merely produces a job order and does not indicate to what extent lore important than the one below it. Common tasks.1 . the same time.to take decisions. It requires less time. complicated work requiring much independent thinking.622. The preparation of grade descriptions. Jobs are classified by grade definitions. It only gives us its rank or tells us that it is r or more difficult than another. Those handling or capable of taking a major decision on the work they do. different bases of comparison between rates occur. it is suitable for small organisations with clearly defined jobs.i. Demerits i. All the jobs in e same grade receive the same wage or range of rates. ii. jobs are grouped into classes or grades which represent different pay levels ranging from low to high. COMPENSATITION MANAGEMENT ii. which gives us basic job information. a number of pre-determined grades or classifications are first established by a committee and then the various jobs are assigned within each grade or Grade descriptions are the result of the basic job information which is usually ‘ed from a job analysis. each job is assigned to an appropriate grade level on the basis of the complexity of duties. responsibilities. Therefore. clusters or groups. It is far less expensive to put into effect than other systems. non-supervisory responsibilities and provisory responsibilities. dependable. Minimum experience requirement. Key jobs are assigned to an appropriate grade level and their relationship to each other studied. Table 1. Classification of all jobs. Table 1. knowledge and experience can identified by the process of job analysis. tends to be influenced by a variety of personal biases. 120 © Copy Right: Rai University 11. specially skilled for the job by having an exhaustive knowl edge of the details. etc. The process is initially based on judgment and. ii. discrepancies. ii. or related to. Selection of grades and’ key jobs. Often a rater’s judgment is strongly influenced by present wage iii. This method is simple to operate and understand. The system is simple. and the top executive in the top class. General grade descriptions are written for each classification. Since many workers think of jobs in. speed and accuracy. The use of fully described job classes meets the need for employing systematic criteria in ordering jobs to their importance. v. After formulating and studying job descriptions and job specifications. Merits i. and requires little effort for maintenance. so that different levels or grades of jobs IY be identified. and finally these are used as a standard for assigning all the other jobs particular pay scale. Each grade level must be distinct from the grade level adjacent to it. junior officers in a higher class. fewer forms and less work. menials may be put into one class. About 10 to 20 jobs are selected. Specific job requirements (such as skill. complaints. this method makes it easier for them to understand rankings. iv. easily understood. Probability and consequences of errors (in terms of waste. may or may not be held responsible for supervision. able to consider details outside the control. spoilage of product. Clerk Grade II Clerk Grade I Job Classification or Grading Method Under this system. works subject to a limited check. iii. and easy to explain to employees (or a union). unless it is carried to a detailed used by company. resourceful and able. and v. clerks in another. Not charged with the supervi sion of others to any extent. iv. Certain jobs may then be grouped together a common grade or classification. As there is no standard for an analysis of the whole job position. iii. therefore. it should represent a typical step in a continuous way and not a big jump or gap. The preparation of job descriptions. which elude all the major departments and functions and cover all the grades. iii. Senior clerk Head clerk Merits i. occasionally indepen dent thinking and action due to difficult work which require exceptional clerical ability and extensive knowledge of principles and fundamentals of the business of his department. ii. works under supervision. but it does not indicate how much higher or more lit. Must have the characteristics of a second class clerk and assume more responsibility. Technically varied work. effort and responsibility) are not normally analyzed separately. for it does not take much time or require technical help. Co-operation with associates outside the line of authority.). After establishing the grade level. usually derived from a job analysis. No supervision by others.3 gives us the gradations of five classes designed by a title label and increasing in value. Grading the key jobs. delays. Supervision and leadership of subordinates.3 Grades Clerk Grade III Description of Job Classification Pure routine concentration. Minimum education required.

622. 11. They are clustered. The system is rather rigid and unsuitable for a large organisation or for very varied work. the judgement in respect of a whole range of jobs may produce an incorrect classification. physician. but it is rarely used in an industry. The point to note is that the major factors are assigned total points and that each of these factors is broken up into sub-groups (with written definitions for each). although most companies use less than 15. Pay grades are determined for. only three factors Gob conditions. given 10 points. The common factors are: Education and training. It requires identifying a number of compassable factors (i. The sum of these points gives us an index of the relative significance of the jobs that are rated. interior decorator. Table 1. Insurance salesman. and to assign a point value to each level or degree. v. experience. The point system is based on the assumption possible to assign points to respective factors which are essential for evaluating individual’s job. physician.e. ii. The system becomes difficult to operate as the number of jobs increases.. the corresponding number of points of each factor are added and overall point value is obtained. iv. the second degree. v. automobile mechanics. Another company may use 4 factors (skill. accountant.1 © Copy Right: Rai University 121 . the factors which overlap in their meaning avoided and factors which are unique and relative to each other described in terms of varying degrees. personnel counseller. assigned 20 points. profit impact or some combination of these. mental skill. experience. As far as possible. chemist. It is relatively difficult to write a grade description. engineer. Demerits This system suffers from the following defects: i. office manager. external contacts. 6 to 12 months. Includes aviator. The grouping of jobs into classifications makes pay determination problems administratively easier to handle. and secretary. Artist. It is used in important government services and operates efficiently. confidential information and working conditions. planning for the supervision of others. It is difficult to know how much of a job’s rank is influenced by the man on the job. Step 3: The next step is to break down each factor into degrees or levels. may be sub-divided into 5 degrees. surveyor. and is assigned 25 points. Policeman. various characteristics of jobs) and then determining degree to which each of these factors is present in the job. physical skills and t. the same workers characteristics or traits (corresponding machines.iii. Although it represents an advance in accuracy over the ranking method. interior decorator. Since no detailed analysis of a job is done. The steps in this method followed are: Step 1: The jobs have to be determined first which are to be evaluated. iii.4 : Clustering of 22 Occupations on the basis of Common Factors in Five Groups (after Gonyea and Lunneborg) A – Business group Includes buyer. lawyer. The first degree. assigned 15 points. personnel manager. based 11m on factors in five groups. Medical lab technician. The number of factors used varies a great deal from company to company. the fourth degree 1 to 3 years. 3 to 6 months. internal contacts. Moreover. A different of points is usually assigned for each degree of each factors. The jobs which require: i. effort. radio opera tor. Sometimes. and these sub-groups are The Points System This method is the most widely used type of job evaluation plan. which is one of the most commonly used job factors. For example. policeman and engineer. the jobs might be broken up into perhaps 5 classes. similar activities. arranged in order of importance from high to low. it still leaves much to be desired because personal evaluations by executives (unskilled in such work) establish the major classes. and assigned to. Once the degree factor is determined. Gonyea and Lunneborg have clustered 22 occupations in five groups. If an organization consists of 500 people holding to different jobs. and described class by class. Step 2: For the purpose. Mechanism: This system requires a detailed examination of the jobs.Masculine group C. and the fifth degree is over 3 years. responsibility and job conditions). auto mechanic and wire less operator. the third degree. They should also be so defined and described that everyone associated with the plan gets the same meaning of the words that are used. physical ability and mental requirements) be used. ranging from as few as 3 to as many as 50.Service group E – Scientific Group ii. materials and instruments) and n the same kind of material (say wood or metal are placed in the same cluster or family. all the job classification. This same procedure is followed for each factor at each level or degree represented by an appropriate number of points. iv. writer. the factors selected are such as are common to all the jobs. and determine into which classes each job should be placed. a pre-determined number of factors are arbitrarily selected by raters. tools. COMPENSATITION MANAGEMENT B.Aesthetic Group D. social worker. This class description broadly reflects level of education. three months or less may be assigned 5 points.

. Physical Effort Job Conditions A... Mental Effort Very High 5 V.I.. Maths 3 6 to 9 Months 9 6 months to 1 yr.. 6 Average 3 Average 3 H......D 10 A 10 VIII.I 2 Slight 1 Less $ 1M 1 1 2 Less $ 1 M Slight I Slight 1 Slight 1 Slight 1 Slight 1 1 Slight Read & Write 1 1 to 3 Months 3 1 to 3 months 2 Low/Slight Date. Le Tourneau has given an example of job work point rating scale..... Mechanical Ability Very High 5 VI...J 6 D...G 4.F. xI.1 ....B.622.. $ 25 M to $ 10 M to $ 25 M 3 6 to 10 4 $10 m to $25 M to $ to 25M M4 5 High Average 4 3 High 4 High 4 High 4 High 4 Average 3 Average 3 Average 3 Average 3 XIV XV XVI 122 © Copy Right: Rai University 11.. Department .C...5 COMPENSATITION MANAGEMENT Some Items from the rating system developed by Le Tourneau with the scale values assigned to different factor (indicated by numbers) Rated by. ..L 4 F.E 6 Average 3 Addl Subjects 2 3 to 6 Months 6 3 months to 6 months 4 Below Average 2 Below Average .G 8 B. Hazards IX... Below 2 $1 M to $1OM 2 2 to 5 3 $ 1M to $10 M 2 Below Average 2 Below Average 2 Below Average 2 Below Average 2 Below Average 2 1 M 2 H..... Responsibility Equipment x......... Factor I..... Experience...... 8 High 4 High 4 E...... VII.... 10 IV. Chart 1.... Learning Period Over 3 yrs... Over 12 Months 12 III. XII XIII Responsibility Responsibility Complexity Effect on Attention to operations Know other operation Coordination Very High 5 Over $ /----50 M 5 Over 16 Persons Over $60M 5 very High 5 very High 5 Very High 5 Very High 5 Very High I 5 High 4 9 to 12 Months 12 1 to 3 yrs..........C 8 High 4 $ 50 M 4 11 to 15 5 Elem.assigned points within the total established for the major group. ........ Education School Check the Correct Item for Each Factor College 5 II.2 K. Job ..

its value is then translated into. experience. Responsibility: (vi) Equipment/process (vii) Material or product (viii) Safety of others (ix) Work of others 4. assembling. Job Conditions: (x) Working conditions (xi) Hazards No.A. as in operating machines. For example. dexterity. and job conditions.622. It is very largely training in the interpretation of sensory impressions. These contain ready-made factor and degree definitions and point assignments for a wide range of jobs. 11. 30 to 35 Rs. points Ire added to give the total value of a job. 6 to 10 Rs. write Equivalent 4yrs add and to 2 yrs H. Education relates to the schooling requirements. Table 1. 15 per cent. For each job or cluster of jobs some factors are more important than others. which can be used with little or no modification.7 Job Elements and Degree Value Points Assigned to Each Factor and Key to Grades (for Machine Operators) Factors 1. the ability to determine from the appearance of the firebed how coal should be shovelled over the surface would be a skill. Each factor has again been divided into sub-factors.” The opposite might be true of “factory jobs. which are essential for a satisfactory Performance of the job.1 © Copy Right: Rai University 123 .6 shows the job points translated into job rupees. 8 to 12 Rs. The experience factor pertains to the extent of job training. 35 to 45 Job Grade 1 2 3 4 5 6 7 8 COMPENSATITION MANAGEMENT Table 1. In a hand firing boiler. the knowledge of which key to depress for a sub-total would be a skill.’ have been spread over five degrees in an arithmetic progression of 14 points (Tables 1. 70 points allocated to ‘education. Physical demand . its value of a job. In the NMTA point system for hourly rated jobs.have each been assigned 70. 20 per cent. sorting etc. repetitive Movements. ii. Point Range 101-150 165-200 201-250 251-300 301-350 351-400 401-450 451-500 Hourly Basic Rate Range Rs. effort. (acquired) Facility in muscular co-ordination. For example. the ‘skill’ factor has been assigned 250 points. +2 subtract High School to 3 yrs Training Sample definition of factors used in points system “Packaged” Point Plans Developing a point plan for an individual organization is a time-consuming process.S. and the points allotted to each factor as distributed among the sub-factors on the basis of their relative importance in job performance. 15 per cent. In operating an adding machine. Effort: (iv) . responsibility. skill has been given 50 per cent weight age. Examples i. Out of these. exercise of judgment. the ability to determine the significance of a certain knock in the motor would be a skill. iii. 110 and 40 points respectively.7 and 1. (acquired) Specific job knowledge necessary for the muscular co-ordination acquired by the performance of a job and not to be confused with general education or specialized knowledge.Generally speaking.” Step 5: The next step is to assign money values to points. +4 Yrs Trade Training 70 Equivalent 4yrs University Training Equivalent Read. or executives. In automobile repairs. the four job factors common to the point method of job rating Ire skill. Initiatives and ingenuity appraise the independent action. its sub-factors education. initiative and ingenuity . often those evolved by famous group5 (as in America) are adopted for use. careful co-ordination. the “mental requirements” factor would carry more weight than “physical requirements. For this purpose. 10 to 15 Rs.8 Scale of Value for ‘Education’ Factor in NMTA Point System 14 28 42 56 Equivalent 4 yrs H. Moreover. (v) Mental/ visual demand 3. One of the most widely accepted point systems in NMTA (National Metal Traders Association of the U.S. Step 4: Determination of relative values or weights to assign to each factor.8) Skill A. effort. 25 to 30 Rs. which is necessary for I before he gains a satisfactory proficiency. Thus. Skill: (i) Education (ii) Experience (iii) Initiative and Ingenuity 2. responsibility 20 per cent and job conditions 15 per cent. 20 to 25 Rs. Hence. 15 to 20 Rs. terms of money with a pre-determined formula.S. responsibility and job conditions. The relative values of these are skill. of Points 250 70 110 70 75 50 25 100 25 25 25 25 50 25 14 22 14 10 5 5 5 5 5 10 5 28 44 28 20 10 10 10 10 10 20 10 42 66 42 30 15 15 15 15 15 30 15 56 88 56 40 20 20 20 20 20 40 20 70 110 70 50 25 25 25 25 25 50 50 1st Degree 2nd Degree 3rd Degree 4th Degree 5th Degree Table 1. 50 per cent.) utilizes the factors. B. measurement scales have been constructed which give points and definitions of the degree of particular factor. the of decisions or the amount of planning that a job requires.

noise. Analytical ability e. coordination. reasoning. 3. 3. For supervision. more of mental requirements is a must. such as intelligence. :) Physical status. relative amount and continuity of exposures to dust. including age. Primarily. Hours. fellow-workers. the factors and sub-factors given in Table 1. The degree 9f supervision received. it means the complexity of supervision given to subordinates. In the case of evaluation for managerial positions. Physical Requirements Consideration will have to be given to the presence. strength and eye-sight. lifting.S.622. but job A receives a much closer immediate supervision than B. height. For procedures c. accounting.50 points a. ventilation. both the amount exercised and degree of continuity should be taken into account. gets less.9 : Points Assigned to the Factors in National Office Managers’ Association Plan 1. Responsibility . i. sex. dirt. For company property b.9 gives us the points assigned to the factors in National Office Managers’ Association Plan. parts in process or finished goods. ability to get along with people and imagination. Table 1. engineering. pulling. General of special education b. For public contacts. 1. Physical or mental strain 5 5 10 15 15 75 125 50 160 40 40 95 35 80 50 COMPENSATITION MANAGEMENT Physical efforts. get much. then B would be entitled to a higher rating than A in the supervision factor. (inherent) Mental traits.10 : Factors and sub-factors used in Companies in the USA i. cold.physical work . facility for verbal expression. Hazards from the work or its surroundings. general information as to sports. gets much. Mental Requirements Either the possession of and/or the active application of the following: 1. • • • • • For money or negotiable securities.500 points a. etc. Position d. etc. To summaries the four degrees of supervision: Highest degree High degree Low degree Lowest degree Gives much. etc. such as knowledge of grammar and arithmetic. the number of subordinates is a secondary feature. Responsibility The responsibility factor. congestion. equipment and property. Cleanliness of work c. vibrations. control and approval characterize this kind of supervision. advertising. particularly factory and other manual work more physical efforts are while in higher jobs. processed materials. Planning. Gives none. and also measures the probability of damage to materials. Place of work b. Gives more. direction. wetness or other unpleasant conditions. for different items.10 have been used in a number of companies in the U. such as atmosphere. sitting.200 points a.A Table 1. For records. climbing. 2. ii. Skill . Continuity of work e. Table 1. (acquired) Specialized knowledge such as chemistry. fumes. world events. Memory d. walking. Training time on job c.250 points 2. For profit or loss. memory. • For raw materials. If jobs A & B gave no ‘supervision to subordinates. Responsibilities Initiative Accountability For personal relations For making policies For policy interpretation Working Conditions The working conditions factor appraises the surroundings or physical conditions under which a job must be done and the extent to which such conditions make the job disagreeable. Supervision 4. measures responsibility for preventing damage to machinery or equipment which may result from error or negligence. Dexterity g. 2. gets little. 124 © Copy Right: Rai University 11. instruction. noise. Environmental influences. Personal contact f.Effort In some jobs. weight. Accuracy 3. Effort . standing. Gives none. heat. Know-how Requirement of duties Knowledge Planning required Mental application Understanding required ii. tools. Elemental .1 . (acquired) General education. savings or methods improved. illumination.

In France. dexterity 3. the factors used for job evaluation scheme for manual workers at Telemecanique Electriue Plant. Job Conditions: (a) temperature oil. pp. Relationships Supervision exercised Demand for leadership Influence on policy-making Influence on method Table 1. Nanterre. 137-139).O. Job conditions: (a) temperature (b) water. Supplementary Factors for Management Jobs: 15.11 : In U. acid.K. 4. The workers’ acceptance of the system is favorable because it is more systematic and objective than other job evaluation methods. are: Table 1. Merits The system enjoys the following. 7. dirt. etc.. dust.. Dirt. 1. by analysis a job by factors it is usually possible to obtain a high measure of agreements on job value. Unsupervised work. Ibid. and these can be understood by all. 2. grease. Perseverance Mechanical sense Initiative Disparate attention Ability to visualize Physical Strength Muscular strength stamina agility sensory accuracy Acquired skills and Knowledge Education Training Experience Working Conditions (a) Physical: vibration. height. poor Light Exposure III.12 I. the factors used are: Table 1. Discretion 8. noise.e. poison. It gives us a numerical basis for wage differentials. Sense of responsibility (B) Mental: Noise. 6. Physical effort 4.Knowledge and experience 2. etc 8. Definitions are written in terms applicable to the type of jobs being evaluated.L. the Factors Used by Imperial Chemical Industries Ltd.Mental effort 3. Mental Requirement Good memory Ability to reason Speed of reaction Even temperature. grease.13 : German Democratic Republic Federal Republic of Germany 1. Responsibility for the Safety of others 11. Dust. Factors are rated by points which make it possible for one to be consistent in assigning money values to the total job points.622. Responsibility for products 12. merits: 1. Responsibility for mistakes 14. Human Contacts outside the Company II. 5. Responsibility for equipment 6. Physical Effort 5. Training 2. oil. Nervous strain 6. Adaptation 3. Difficulties of the Job 4. Mental Tension 6. 3. Job Risks 7. the system cannot be easily manipulated. Human responsibility V. glare. Small. Clothing & Equipment. Cold . Human Contacts within the Company 9. position. Factors Common to all Jobs: 1. Change Wetness. etc (c) gas. Prejudice and human judgment are minimized. Responsibility 7. Bodily strain 4. etc (d) noise. Job Evaluation COMPENSATITION MANAGEMENT For German Democratic Republic and Federal Republic of Germany..L.1 © Copy Right: Rai University 125 . darkness. etc. Once the scales are developed. Responsibility for authority 16.Factors Special to Jobs Predominantly Intellectual: 13. Responsibility for tools 11. i. Monotony. Responsibility for others 5. (b) dust (c) accident hazards (d) gas. Training and experience 2. below Ground isolation.Administration Original thinking Creative ability Managerial techniques iii. 8 It has the ability of handling a large number of jobs and enjoys stability as long as the factors remain relevant.O. Jobs can be easily placed in distinct -categories. Factors Relating to Environmental Conditions: 17. Factors of environment Source: I. Fumes. Skill. cold. they can be used for a long time. accident Risk Disease Risk (e) risk of accident (Source: I. Mental strain 5. Responsibility for judgment lV. The availability of a number of ready-made plans probably accounts for the wide points plans in job evaluation.dampness. Heat. nervours Tension. Factors Special to Jobs Predominantly Manual: 10.

Besides.’ Then. 2. and physical conditions (age. jobs are evaluated by means of standard yardstick of value. Usually five factors are used: 1. sorting. Mental requirements. and acquired job knowledge for an effective performance of the job. intelligence. and dexterity of fingers. each job is ranked several times – once each condensable factor selected. These ‘key’ jobs serve as standards against which all other jobs are measured. The people writing job specifications are generally Provided with a set of definitions which have been used in each of the condensable factor selected.1 . they should be definable in accurate and clear terms. and working conditions). considerable clerical work is entailed in recording and summarizing the rating scales. 4. The task of defining job factors and factor degrees is a timeconsuming and difficult task. 126 © Copy Right: Rai University 11. degrees and points. COMPENSATITION MANAGEMENT The Factor Comparison Method Under this system.622. The pay rate assigned to a job is obtained by adding the determined amounts as indicated by the money values shown in the five scales that individually set a job money value in relative comparison to fixed key jobs. pulling. Pay for such jobs should range from about the lowest to. Then these ratings are combined for each job in an over-all numerical rating for the job. labour. such jobs must be those on the pay of which analysts and executives do not disagree. Working conditions. skill requirements are concerned with acquired facility in muscular co-ordination. They are selected in such a way that they cover the range from the ‘low’ to the ‘high’ paid jobs. Physical requirements. and there must be complete agreement on job selected. noise. 3. Step 4 Valuing the Factors: The basic pay for each ‘key’ job is allocated to each factor. sex. to determine their relative importance and position in the scale of jobs. Responsibility and 5. Jobs with Key Jobs: All the other jobs are then compared with the key jobs. Ranking is made individually and then a meeting held to develop a consensus (among raters) on each job. Step 2 Selecting of Key-Jobs: Such jobs are those jobs which represent the range of jobs under study. height. supervision. and for which the pay rates are such as are agreed upon and are acceptable to both management and. Responsibility involves responsibility for raw and processed materials. Step 6 Establishing the Monetary Unit Value for all Jobs: Monetary values are assigned to each factor of every key job.Demerits The drawbacks of the system are: 1. This identical process is repeated for all the other factors. jobs may be ranked first in terms of factor ‘skill. at or near the highest. 2. If many rates are used. Usually. reasoning. Mental requirements involve inherent mental trait (such as memory.’ and so forth. profit and loss. factor by factor. This should reflect a range from the lowest to the highest. Step 5 Comparing all. and maintenance of records. hazards of work and its surroundings. to determine also their money value. Physical Requirements consist of physical effort (climbing. It is difficult to explain to supervisors and employees. ability to get acquired education. they are ranked according to their mental requirements. physical requirements. 3. 15 to 20 jobs are chosen against which to evaluate all the other jobs. ventilation. this system is used by most organizations because its greater accuracy possibly justifies the large expenditure of time and money. For example. These factors are universally considered to be components of all the jobs. eye-sight and strength). and acquired specialization of education or knowledge). Here analyst or the Evaluation Committee selects some ‘key’ or ‘benchmark’ jobs for which there are clearly understood job descriptions and counterparts in other organisations. Inspite of these drawbacks. It entails deciding which jobs have more of certain condensable factors than others. money securities. walking and lifting). 4. Skill requirements. weight. Workers find it difficult to fully comprehend the meaning of concepts and terms. and for which pay is determined to be ‘standard’ or ‘reference points’ and for which there is no controversy between the management and the employees. and hours of work. Step 3 Ranking of ‘Key’ Jobs: Several different members of the job Evaluation Committee rank the key jobs on each of the five factors (mental requirements. responsibility. Working Conditions include atmospheric conditions (illumination. tools. such as factors. Mechanism The major steps in this system consist of the following: Step 1 Clear-cut job descriptions are written and job specifications then developed: Preferably in terms of condensable factors. assembling. Again. The development and installing of the system calls of heavy expenditure. Next they ranked according to their ‘responsibility. equipment and property. Usually 10 to 30 jobs are picked up as ‘key’ jobs. Under this method. congestion). skill. It is difficult to determine the factor levels within factors and assign values to them.

The reliability and validity of the system are -greater than the same statistical measures obtained from group standardized job analysis plans.14 : Factors used in a Typical System Cents per hour 200 180 160 140 120 100 60 50 25 Mental Requirement Toolmaker* Toolmaker Skill requirements Labourer Physical requirement Electrician Toolmaker* Machinist Electrician! Assembler! Inspector Labourer! Responsibility Working conditions iii.40). Skill 2. and understood by. Wage levels change from time to time. job C in effort (Rs.50 4 1 1.15 : Key Jobs. and somewhat difficult to operate for anyone who is not acquainted with the general nature of job evaluation techniques. v. Responsibility 4. the sum total of all. Demerits The system suffers from the following shortcomings: i. Effort 3.622. then its correct rate of pay will be Rs.e. Yet using the same five factors for all organizations and for all jobs in an organization may not always be appropriate. There are no limits to the value which may be assigned to each factor. Working Conditions Job A correct Rate:Rs 20 10 5 3 2 Job B correct Rate:Rs 16 8 3 1 4 Job C correct Rate:Rs 14 7. Merits This system enjoys the following benefits: i. Jobs are compared to other jobs to determine a relative value. It is a fairly easy system to explain to employees. COMPENSATITION MANAGEMENT Inspector* Toolmaker * Toolmaker* Inspection Electrician Machinist! Assembler! Labourer! Electrician* Machinist! Assembler! Inspector Labourer! Machinist* Inspector Assembler! Machinist Electrician Assembler! Labourer! * ! Indicates key job Indiactes non-key or unanalyzed job The following example will clearly show how the system works: Suppose job E and job A are similar in skill (Rs. Money rates. vi.00).Table 1. The plan does not require a translation from points to money. tend to influence the actual rate more than the abstract point. The use of five factors is a growth of the technique developed by its originations. 1. The limited number of factors (usually 5) tends to reduce the possibility of overlapping and over-weighting of factors. v. iv. © Copy Right: Rai University 11.1 127 .50 Job D correct Rate:Rs 12 5 4 1 2 Job E correct Rate:Rs 24 11 6 4 3 This system is usually used to evaluate white collar. Jobs in which discrepancies are too wide are discarded as key jobs. The system is complex and cannot be easily explained to.45. ii. and their minor inconsistencies may be adjusted to bring all the jobs into alignment. and job D in working condition (Rs. Job Factors and Correct Rates of Jobs Job factor 1. job B in responsibility (Rs. professional and managerial positions.85). 6. vii. Table 1. ii. It is costly to install. 3. iv. iii. It is a systematic. It involves a comparative process wherein jobs are priced against other jobs rather than against some established numerical scale.20). when used as a basis of rating. 1.. quantifiable method for which detailed step by step instructions are available. every day non-supervisory organizational employee. i.

Before launching a job evaluation programme. They should understand it. ii. ii. geographical wage differentials. f. and Essentials of Success of Job Evaluation Programs When it is finally decided to install a formal system of job evaluation irrespective which system is decided upon. iii. and the management should endeavor to involve a broad range of employees from a number of departments. certain issues should be decided beforehand. iii. These are: i. e. sex. and the relative bargaining power of the management and the trade union) must be recognized and taken into consideration while launching a job evaluation programme. Whatever plan or system is selected for each group will arouse some fears or apprehensions. 128 All the relevant internal and external factors have been taken into account in arriving at the final form of the scheme. whether hourly paid job or salaried job employees) and up to what range? who will evaluate a job outside consultants or trade analysts or the personnel of the personnel department? How will the employees be consulted in regard to the method of putting the programme through? and does a proper atmosphere exist for launching of the programme? ii. iv. notice boards. d. the utmost care must be exercised to ensure that Human as well as technical aspects are taken into account. Adequate administrative control must be set up to ensure: i. it is necessary that all those to are concerned with job evaluation should be fully conversant with the techniques d implications of the different available systems. wage differentials. Separate pay structures should be maintained for major groups of employees. which category of employees are to be covered (i.COMPENSATITION MANAGEMENT LESSON 20: INTRODUCTION TO IMPLEMENTATION OF EVALUATED JOB Job Evaluation and Internal Equity • • • • • To understand the Essentials of Success of Job Evaluation Programmes To know the Advantages of Job Evaluation To learn the Limitations of Job Evaluation To understand the Implementation of the Evaluated Job Structure To know the Suggestions for improving of the Job Evaluation Programs According to the findings of the International Relations Sections of the Princeton University. They must accept the desirability of the plan. and be able to explain to their workers the purpose of the plan and how it works. other than job content..622. The following measures may be adopted: i. a centralized coordination of the scheme. and departmental heads. Supervisors as a group should receive a thorough training in advance of the actual introduction of the plan to enable them to explain the policies. There are: i. principles and procedures to anyone who wants to understand them. It must have the full approval and continued support and backing of the top management. Otherwise. effort and responsibilities. Advantages of Job Evaluation Knowles and Thomson state that job evaluation is useful in eliminating many of the evils to which nearly all systems of wage and salary payments are subject. For example. The management’s aims are clear to all concerned and that not only the manual workers but also all levels of supervision and management employees fully understand its implications. c . departmental meetings and letters to employees’ homes. iv. office workers. The wages that are offered must be at or about the prevailing rate in order that there may be a successful competition for capable people. The importance of factors.1 . ii. The management must give the widest publicity to every phase of the programme. a proper control of individual rate ranges. the details of the administration of the plan should be as simple as possible. in wage rate determination (employment market conditions. © Copy Right: Rai University 11. iii. It must have obtained the acceptance of trade unions. the following conditions are necessary for the successful operation of a job valuation programme: a. they will certainly not be able to convince the employees. the chances of success are doubtful. the evaluation of new and changed jobs. utilizing employee publications. it would be difficult to work out a plan equally applicable to factory workers.e. Supervisors should have full knowledge of the system. To overcome these. It must be carefully established by ensuring that: i. b. for if they are not convinced that it is useful. v. In order that a job evaluation system works efficiently. and the conduct of wage surveys to provide the necessary information about the intra-plant ranges. iv. Payment of high wages and salaries of persons who hold jobs and positions not requiring great skill. salesmen.

thereby pointing to the possibility of making more efficient use of the plant’s labour. Therefore. Payment of unequal wages and salaries on the basis of race. This is evident from the observations of Kerr and Fisher. While evaluating a wage structure.e. information system. it creates doubts and often fear in the minds of those whose jobs are being evaluated. iii. vi. and a change in any of these calls for a change in at least one or the other issue. Basically. Higher rates of pay for some jobs at the earlier stages than other jobs or the evaluation of a higher job higher in the organizational hierarchy at a lower rate than another job relatively lower in the organizational hierarchy often give rise to human relations problems and lead to grievances among those holding these jobs. rapid changes in technology and in the supply and demand of particular skills have given rise to problems of adjustment. Though many ways of applying the job evaluation techniques are available. vi. the method simplifies discussion of wages to be explained and justified. by how much? iii. In other words. This should be done to prevent the turnover of workers and avoid dissatisfaction amongst them. Job factors fluctuate because of changes in production technology. ii. the method often facilitates fitting them into the existing wage structure. and division of labour and such other factors. COMPENSATITION MANAGEMENT ii iii. The method replaces the many accidental factors. thus establishing a clear basis for negotiations. requires specialized technical personnel. It may help in. nurse and typist. ix. iv. be noted that a job evaluation system does not accomplish all the purpose. it provides a systematic catalogue of the jobs in an organisation. of wage bargaining by more impersonal and objective standards. religion or political differences. A large number of jobs are called red circle jobs. How many grades should be used? iv. v. sex. I. vii. Paying beginners less than they are entitled to receive in terms of what is required of them. Deciding rates of pay on the basis of seniority rather than ability. thus simplifying wage administration. In providing a yardstick. iv. 11.Job evaluation takes a long time to install. Some of these may be getting more and others less than the rate determined by job evaluation. v..1 © Copy Right: Rai University 129 . Implementation of the Evaluated Job Structure The evaluated job structure has to be translated into a structure of wage rates. occurring in less systematic procedures. it should be seen that the range is not too high and that the job evaluated wage curve does not have too many deviations from the existing industry wage line. and may be costly. Publication Claims Following Advantages for Job Evaluation i. viii.. to some extent. iv. When job evaluation results in substantial changes in the existing wage structure. it may be noted that the difference between the maximum and the minimum is referred to as the ‘wage range’ or ‘wage differential. Substantial differences exist between job factors and the factors emphasised in the market. “the jobs which tend to rate high as compared with the market are those of janitor.622. Such information also reveals that workers are engaged in jobs requiring less skill and other qualities than they possess. i. Should there be any overlapping between pay ranges for adjacent pay grades? If so. what should be the maximum and minimum wages for the grade. iii. In the case of new jobs. an objective method of ranking jobs relative to one another. which is indispensable for management purposes. When job evaluation is applied for the first time in any organization.ii. This depends upon: i. A job evaluation frequently favours groups different from those. Job evaluation is a logical and. removing inequalities in existing wage structures and in maintaining sound and consistent wage differentials in a plant or industry. the former places the emphasis not on force but on equity. which are favoured by the market. and it improves labour-management relations and workers’ morale. v. Giving a raise to persons whose performance does not justify the raise. These differences are wider in cases in which the average pay offered by a company is lower than that prevalent in other companies in the same industry or in the same geographical area. The method helps in removing grievances arising out of relative wages.L. As far as the first issue is concerned. These need to be probed. continuing attention and frequent evaluation of a job are essential. by which workers’ complaints or claims can be judged. It may. They observe. however. Payment of widely varied wages and salary for the same or closely related jobs and positions.O. while craft rates are relatively low. ii. Limitations of Job Evaluation These are: i. and vi. The range of wages to be paid. transfer and promotion procedures on the basis of comparative job requirements. rather it facilitates them. and does not reflect the time job value in future. On what basis will an individual employee be advanced in wages through the established pay range for the grade? These issues are inter-related. The method may lead to greater uniformity in wage rates. Weaker groups are better served by an evaluation plan than by the market. The information collected in the process of job description and analysis may also be used for the improvement of selection. It may also disrupt the existing social and psychological relationships. the evaluation of a job today is made on the basis of job factors. the possibility of implementing these changes in a relatively short period may be restricted by the financial limits within which the firm has to operate. vii.

g. First Degree Suggestions for Improving Working of Job Evaluation Programs We suggest the following measures and steps for improving the working of evaluation programmes: 1. 11. First Degree Upto 6 months. following an excellent performance. there should be some overlapping between the grades so that employees in the lower grades may. Too great an overlap may cause dissatisfaction amongst employees and minimize the rewards for superior performance. knowledge of general accounting fundamentals and of complicated shop procedures and processes. relative supply of and demand for labour.usually six. Moreover. However. initiative. This is because it is difficult to standardize jobs throughout an industry unless the plants in it are so familiar that they can be treated as being virtually a single firm. the overlapping between them would be greater 8. If more grades are adopted. and this is better . As regards the number of grades to be adopted in many wage structures. division and multiplication of decimals and fractions. Fifth Degree Graduation to determine the ability to understand and perform work of a specialized or technical nature. Promotions within a grade become more serious. working conditions. Ability to read. If the workers in a plant are unionized. commercial theory. A job evaluation scheme should be chosen cautiously.A wage range can be made with or without an overlap. These factors are sub-divided into degrees .622. The scheme should be introduced on a plant-to-plant basis than applied to a whole industry. Generally. The essence of successful administration of a scheme is flexibility. subtraction. 1. 7. experience. 4. physical effort. seniority clauses and grievance procedure. etc. Training This factor appraises the period of training needed by an average individual to perform his efficiently. COMPENSATITION MANAGEMENT Tutorial Activity 1. reflect those forces which are important in the market. which cannot be ignored if the scheme is to be successful. It is of major importance that-the number of job titles and classifications be kept to a minimum. an employee near the top of a lower grade gets higher wages than the employee in the higher grade. training. the number of grades considered are between 6 to 11. A scheme which provides for single rates and for definite ratios between the rates for classes of workers (A.understood by those engaged in industrial relations work than by Industrial Engineers. write and follow simple written or oral instructions.. workers tend to feel more insecure and cling to their present jobs because they may not have the qualifications for another job. e. and points are allocated to these. get higher wages than an employee working in a higher grade but showing a poor performance. business administration. though a too great overlap should be avoided. in that case. bargaining power of the parties and job conditions. Any anticipated changes in methods should be carried out before a scheme is installed and all modifications in it should be resisted until it becomes fully established. physics.) within a job grade is easier to administer than one which establishes rate ranges and has no fixed ratios. if possible. It should. for example. developed jointly by the company and the trade unions. it is highly desirable that any scheme adopted should be agreed to and. the accuracy may be secured up to six grades. principles of advanced drafting. A scheme is better administered by the Industrial Relations staff of a company than by the Industrial Engineers who may have developed it. If they are not. B. 6. visual attention. Sixth Degree Post-graduate research experience in any technical or specialized field. 9. 12 or more grades result in a higher accuracy. The better the state of industrial relations the easier it is to intr0duce a job evaluation scheme. 10. chemistry. knowledge of finance. 3. 5. It should be devised and administered with due regard to the conditions of the employment market. Third Degree High school education to determine knowledge of elementary accounting or general shop practice and manufacturing methods. therefore. The details of a scheme should be drawn up in such a way that they do not conflict with other provisions of a Collective Agreement such as.1 130 © Copy Right: Rai University . Education This factor appraises the educational background of an individual to determine whether he do the job satisfactorily. Fourth Degree Intermediate education to determine the ability to understand and perform work calling for a knowledge of general engineering principles. a scheme becomes too inflexible because of the narrow coverage of the job descriptions. journalism or any other technical or specialized field. responsibility. Second Degree Basic school education or its equivalent to do small arithmetical calculations involving addition. The scheme should be sold to all concerned and suggestions sought.1 Write-intro Factors Used in Rating Jobs The factors usually considered in any rating procedure are education. In preparing job descriptions it is a sound practice to emphasize in them the things which make one job different from another rather than to find a comprehensive statement of all the duties of the jobs. mental effort. 2. there should be no overlap because. and physical hazards. 2.C etc. Theoretically.

Responsibility This factor appraises the responsibility. Fifth Degree Extremely close work with intense and constant visual attention. the job calls for occasional decisions or actions following only general procedures in the absence of clear-cut procedures. Initiative This factor appraises the capacity for independent decision or action required of an individual. Third Degree Upto 3 months. Mental efforts This factor appraises the mental effort required of an individual to perform his job satisfactorily. of job. Sixth Degree Over 6 years. Second Degree Repetitive type. Fourth Degree Considerable organizing ability required. Fourth Degree 3 to 6 months. Fifth Degree Sustained and diversified mental effort required. as in an office job. Third Degree Some mental effort required. First Degree Elementary type of job. Fifth Degree Sustained and diversified mental effort required. Second Degree Minimum mental effort required to do a simple rating job. First Degree 4 to 6 years. Requires independent and original action to achieve the desired results. 5. 6. Second Degree Fairly close attention required. 4. Sixth Degree In addition to frequent simple decisions. Fifth Degree 15 to 18 months. First Degree Minimum visual attention required. Fourth Degree Requires more frequent simple decisions on the part of the employee. Visual Attention This factor appraises the extent and continuity of the visual attention needed on a job. First Degree Difficult and complex type of job. Very light physical effort required. Sixth Degree 18 to 21 months. First Degree Over 21 months. 8. Fourth Degree heavy physical activity required. equipment or materials used in the performance of a job. The employee receives detailed instructions and is expected to perform the job exactly. Sixth Degree 6 months to 2 years. Second Degree Ordinary visual attention required. Sixth Degree Extremely difficult and complex type of job requiring independent and original action to achieve the desired results. as indicated. Third Degree Considerable mental effort needed.Second Degree Third Degree COMPENSATITION MANAGEMENT 6 to 12 months. as also clarity “Of concepts and ideas. which goes with the job for preventing damage to tools. 7. Experience This factor appraises the length of period needed by an average employee with a previously specified educational standard to be able to perform the job satisfactorily. Fourth Degree 2 to 4 years. Physical Efforts This factor appraises the physical effort needed from an employee for a satisfactory performance of a job. Sixth Degree Extremely arduous physical effort required. Fifth Degree Great physical effort to lift or push heavy objects.622. Requires a close following of instructions and procedures. 11. but only when definite clear-cut precedents are available. Second Degree Light physical effort required. Third Degree Continuous physical activity required. Third Degree Close visual attention required to check the quality of products. 3. without deviations.1 © Copy Right: Rai University 131 . Fourth Degree 12 to 15 months.

9. Second Degree Probable damage to tools between Rs. etc. Sixth Degree If an accident takes place.or size of jobs and sometimes generic roles within an organization as a oasis for achieving internal equity. Fourth Degree More disagreeable conditions. This can vary in accordance with assessments of performance. Pay structures may cover all or only part of the organization. Pay structures also define the limits within which the pay of employees can progress within their grades or bands and how this progression takes place. 10. 100 for an average mishap. 100 and Rs. noise.000 per mishap. Pay structures are designed by reference to data from job evaluation. fumes. for example. be one structure for staff on salaries and another one for manual workers on wages (although this often invidious distinction is progressively disappearing). First Degree No hazard exists.First Degree Tutorial Activity 1.000 per mishap. 10. Fourth Degree Probable damage to tools up to Rs. Physical Hazards This factor appraises the accident or health hazards. Sixth Degree Continuous exposure to various intensely disagreeable conditions. Third Degree Probable damage to tools between Rs. The design process is not a scientific one Much judgment has to be exercised. an employee would receive severe cuts or burns.Write Pay Surveys and Job Evaluation External relativities are established by pay surveys and research which analyze and compare market rates in order to achieve external competitiveness. scales or spot rates (individual job rates).1 . Fifth Degree Probable damage to tools. Third Degree Constant exposure to one or more unpleasant conditions. There may. Fourth Fourth Degree The job is quite risky and the employee may catch some industrial disease. 5. First Degree Excellent working conditions.Working Conditions This factor appraises the physical environment under which a job is performed. which exist even though safety devices have been installed. competence or skill. bands. 200. cold. Internal relativities are assessed by job evaluation which considers the relative value. glare. 10. competence analysis and analysis of market practice by external benchmarking (pay surveys). dampness. Fifth Fifth Degree There may be loss of some part of the body in the accident.000 per mishap.2 Intro . particularly in pay markets under pressure through skills shortages. Second Degree Occasional exposure to dust or fumes. 132 © Copy Right: Rai University 11. They provide frameworks within which levels of pay for jobs and the differentials are described or defined in the form of grades. or market groups jobs in which rates of pay are influenced by market pressures so that to attract and retain people they have to be paid more than those in otherwise comparable jobs).622. Different structures may exist for separate job families (groups of jobs where the work is similar). 500. COMPENSATITION MANAGEMENT Probable damage to tools up to Rs. Structures may consist of an extended hierarchy of relatively narrow and / grades or a fairly small number of broad band (broadbanding). Fifth Degree Continuous exposure to disagreeable conditions. But this approach is becoming much more rare. Third Degree If an accident takes place. Sixth Degree Probable damage exceeding Rs. Progression may be up a fixed incremental scale or spine which defines the predetermined pay increases that employees can receive year by year on the basis of their time in the job. 200 to Rs. There may be tension when the often competing claims of external competitiveness and internal equity pave to be reconciled. Progression in a pay structure can also be along a pay or maturity curve which relates increases in pay to competence growth and/or higher levels of performance. the employee is more likely to be killed or permanently ed by injuries. Physical envorment includes heat. Second Degree Minor injuries may be sustained if an accident takes place. darkness. Pay Structures Pay surveys and job evaluation provide the data for the design and management of pay structures. dust. equipment and materials not to exceed Rs.

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LESSON 21: INTRODUCTION TO DETERMINANTS OF INCENTIVES
Principles of External and Internal Differential Rewards and Incentives incentives depends on three variables - the individual, work situation, and incentive plan. (i and iii) The Individual and the Incentives Different people value things differently. Enlightened managers realize that all people do not attach the same value to monetary incentives, bonuses, prizes or trips. Employees view these things differently because of age, marital status, economic need and future objectives. However, even though employee reaction to incentives varies greatly, incentives must have some redeeming merits. For example, there might be a number of monetary and nonmonetary incentive programmes to motivate employees. Money, gift certificates, praises, or merit pay are of the continuous parade of promotions. (ii) The Work Situation This is made up of four important elements: a. Technology, machine or work system, if speed of equipment operation can be varied, it can establish range of the incentive. b. Satisfying job assignments, a workers’ job may incorporate a number of activities that he finds satisfying. Incentives may take the form of earned time-off, greater flexibility in hours worked, extended vacation time and other privileges that an individual values. c. Feedback, a worker needs to be able to see the connection between his work and rewards. These responses provide important reinforcement. d. Equity, worker considers fairness or reasonableness as part of the exchange for his work. Incentives, in general, are important motivators. Their effectiveness depends upon three factors: drives, preference value, and, satisfying value of the goal objects. Misra says: “Beyond subistence level, becoming needs (self-actualization needs) possess greater preference value and are more satisfying than deficiency needs (which are necessary for survival). Below the subsistence level, however, the reverse holds true.” He makes the following generalizations: i. Incentives, whether they are monetary or non-monetary, tend to increase the level of motivation in a person.

Learning Objective
• • •

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

Meaning of Rewards and Incentives
An ‘incentive’ or ‘reward’ can be anything that attracts a employees’ attention and stimulates him to work. In the words of Burack and Smith, “An incentive scheme is a plan or programme to motivate individual or group performance. An incentive programme is most frequently built on monetary rewards {incentive pay or monetary bonus}, but may also include a variety of non-monetary rewards or prizes.” On the other hand, French says, the term “incentive system has a limited meaning that excludes many kinds of inducements offered to people to perform work, or to work up to or beyond acceptable standards. It does not include: i. wage and salary payments and merit pay; ii. over-time payments, pay for holiday work or differential according to shifts, i.e., all payments which could be considered incentives to perform work at undesirable times; and iii. premium pay for performing danger tasks. It is related with wage payment plans which tie wages directly or indirectly to standards of productivity or to the profitability of the organization or to both criteria.” The use of incentives assumes that people’s actions are related to their skills and ability to achieve important longer-run goals. Even though many organizations, by choice, or tradition or contract, allocate rewards on non-performance criteria, rewards should be regarded as a “payoff’ for performance. An Incentive Plan has the following important features: 1. An incentive plan may consist of both ‘monetary’ and ‘nonmonetary’ elements. Mixed elements can provide the diversity needed to match the needs of individual employees. 2. The timing, accuracy and frequency of incentives are the very basis of a successful incentive plans. 3. The plan requires that it should be properly communicated to the employees to encourage individual performance, provide feedback and encourage redirection.

ii. Financial incentives relate more effectively with basic motivation or deficiency needs. iii. Non-financial incentives are linked more closely with higher motivation, or becoming needs. iv. The higher the position of a person in an organization’s hierarchy, the greater is his vulnerability to non-financial incentives. “While budgetary restrictions and temporary improvements in performance place a limit on the potency of money as a
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Determinants of Incentives
These features are contingencies, which affect the suitability and design of incentives to varying degrees. The effective use of

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motivator, non-financial incentives involve only human ingenuity as investment and also insure a relatively stable acceleration in output. Monetary incentive imply external motivation, non-monetary incentives involve internal motivation. Both are important. It is a judicious mix-up of the two that tends to cement incentives with motivation.”

motivation, which English and English describe as “the general name for the fact that an organism’s acts are partly determined in direction and strength by its own nature...and/or internal state.” What is motivating to an individual is, then, determined by the individual. What is achievement to an individual is shaped by external forces - the supervisor, the company, for example. And how does the individual know he has achieved? He may have a sense of achievement, but it is the external reward for attaining the desired end that overtly tells him that others recognize his achievement - an essential condition to his internal motivation. In other words, objectives setting without tangible rewards is MBO in a vacuum. Rewards are tangible things by which the employee can measure whether or not, and how much, he has achieved, “grown,” and been recognized. Motivation depends on how well an individual’s needs are met. If achievement is one of those needs, the employee may be motivated by his own sense of achievement, but if his sense of achievement depends on confirmation by the rewards he receives for meeting objectives, then he will need the rewards, both as a confirmation and as a device to measure how well he has achieved. To put it a little more simply, if an individual has the need to achieve something and he accomplishes that something, he will be motivated. However, if he is told to do something, set dates for reaching objectives, and he does what he was “supposed to do” in a timely fashion, then unless he is rewarded, there is no inherent motivation in reaching the goal. In other words, even with mutually agreed upon goals, the employee must receive a raise, a private office, a company car, a bonus (ugh...but that’s later), or a pat on the back, the latter probably the only “true” motivator. What is needed is a greater incentive for the individual to set and meet objectives, to be fully involved in MBO as a process. MBO is usually thought of as a program, and a program has a beginning and an end. The fact that most MBO programs do have an end - die a natural death - may point to the underlying flaw in hypotheses companies have about management by objectives and what the employee will attain from them. The incentive should meet the individual’s needs, the driving forces that propel (motivate) an employee toward a goal that is most often self-centered, rather than company-oriented. Because motivation is internal, it is difficult to ascertain, but achievement is external to the individual, and achievement can be measured. Although I don’t believe that a primary goal of MBO was to measure achievement, it can certainly be used to do so. By itself, it may satisfy only the company’s needs. It aids in planning and control. It helps in assessing productivity, costs, overhead, and so on. If it doesn’t satisfy the individual’s needs, however, in the long run MBO won’t work for the organization either. MBO with a reward system is a viable approach to meeting corporate and individual needs, to meeting terms of the employer-employee “psychological contract.”

COMPENSATITION MANAGEMENT

Tutorial Activity 1.1
This Article below is to understand that aside from the external determinants of productivity - the market, raw materials, and ... could not control, the employer’s reaction to MBO/Rewards would become ...

Objectives, Expectations, Rewards
By E. A. Winning
Management and Employee Relations Consultant, E. A. Winning Associates, Inc.

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

incentives should be based on productivity, or value to the company. If bonuses are handed out across-the-board, they will satisfy only a few, and may actually de-motivate those who feel that they have been more productive than others who are receiving the same reward. Some of the defects of a bonus system may be avoided in a percentage system, which, all in all, is probably the most palatable and most productive when combined with MBO. The percentage of salary would be entirely an individual matter. The employee’s performance, and only his performance, would be the basis for such a reward. His performance would be measured by how well he met the objectives he was committed to and had “contracted” for with his supervisor. Since objectives can be set for anyone at any level in the company, all employees could benefit from such a program. Moreover, since a manager is supposed to be in control of his organization and his subordinates’ reaching or not reaching their objectives will reflect on his abilities, it is a fair system to use in both the evaluation of the manager’s performance and his reward. A percentage increase of salary can be seen as a type of bonus, but it is more specific and does not have some of the drawbacks of other bonus systems. It is related only to the individual’s performance and on what he has agreed to attain, and the distance-in-time objection can be eliminated if it is tied to fairly short-term objectives, if, for example, objectives are set on a quarterly basis, and percentage increases are given (or not given) at those intervals.

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The Problems of an MBO/Rewards System
There is no question that there are negative aspects in all incentive systems, and they are complicated by problems inherent in MBO (which, I hope I made clear is not a panacea for all rewards and motivational problems). The first question that comes up is that of the negative incentive, the reduction in salary or the loss of a bonus because the employee hasn’t met objectives. In theory, if an employee is to be rewarded for meeting objectives, then there should be a reduction or withdrawal of the reward for not meeting them. Years ago, I felt that the system should bend to some extent so that effort toward meeting objectives should be rewarded, at least minimally. In keeping with the loftier principle of never confusing effort with results, I must retrench. If the employee’s performance is based solely on meeting or not meeting objectives, then effort would mean nothing. However, employees are evaluated on a number of criteria, and therefore effort is only one of the factors involved. There are still some who would go so far as to give an individual a decrease in salary depending on the degree to which objectives were missed, and in an “entrepreneurial” context, this might be acceptable: If the individual has total control over his environment, the staffing, the budget, and the way the organization operated, like the self-employed business person, he should expect to reap the profits, but he should also expect to take any loss too.

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Setting objectives is a tricky business, however. Control of conditions is difficult enough at upper levels and sometimes nonexistent at lower ones. Aside from the external determinants of productivity - the market, raw materials, and the like much of an individual’s achievement may be contingent on that of others inside his company. If a reduction in salary were to be imposed, in part because of factors he could not control, the employer’s reaction to MBO/ Rewards would become evident in a number of ways: He would set easily attainable goals; he would argue that no objective can be counted on as being attainable in present-day circumstances; he would set objectives having due dates months past the times when they can be achieved; he might reduce the number of objectives; or he might just plain balk. Overcoming the Drawbacks in an MBO/Rewards System: Assuming that an MBO/Rewards system is decided on (and certainly not as the sole evaluation/rewards system), how can these problems be solved? First, as is customary in MBO, objectives are set by the supervisor and employee together to reflect the unit or corporate objectives. Ultimately, it’s the boss’ responsibility to see that objectives are reasonable and feasible, with dates that are neither too far off or too close, and that the number of objectives is realistic. Second, the number of objectives, their timing, and their rationale should be open to later negotiation and adjustment. Since it is difficult to fix objectives because of the control factor, the objectives should be flexible; the MBO process should allow for the changing of objectives that are “too easy,” but he should not agree to too-difficult objectives, either. To sum up, the points made here are these: MBO without an incentive program is a system without sound foundation. The individual is self-centered and needs a reward in order to meet management’s expectations of him. There are three types of incentive systems that may work along with MBO and make MBO a stronger tool. The positive aspects of MBO/Rewards outweigh the negative. The negative aspects can be handled. A crucial step in the MBO process is the discussion between supervisor and subordinate in setting objectives, a discussion that should include both the definition of responsibilities and a definition of expectations. Expectations are more than objectives. They are statements of desired behavior of both supervisor and subordinate. While the supervisor has expectations of the employee in terms of productivity and performance, the employee has expectations of the supervisor in terms of direction, support, training, and so on. If he is to achieve objectives that are aligned with corporate or department goals, then he must be given the opportunity to explain what he needs from his supervisor in order to meet those goals. And the expectation of the company that he will meet those goals will be considerably more realistic if the employee himself has the expectation of a tangible reward if he does meet them. “What’s there in it for me?” is a very human question.

Tutorial Activity 1.2
A Case Study on TERI Rewards Corporate Efforts
The Annual Awards Recognise the Efforts of Corporates in Environmental Management and Sustainable Initiatives

COMPENSATITION MANAGEMENT

In order to encourage environmental management and protection in the corporate sector, TERI instituted the Corporate Environmental Awards last year. Encouraged by the response and interest shown by corporates, TERI has decided to confer the awards annually. The objective of the awards is to recognise the leadership efforts of corporates in environmental management and sustainable initiatives, recognise innovative practices that promote sustainable development and further encourage and provide momentum to environmental initiatives. The awards are divided into three categories: Category 1: companies with a turnover of less than or equal to Rs 100 crore per annum; Category II: companies with a turnover of between Rs 100 crore and Rs 500 crore per annum; and Category III: companies with a turnover above or equal to Rs 500 crore per annum. The application fee for category I is Rs 500 per application; category II, Rs 2,000, and category III, Rs 5,000. Says R K Pachauri, director general, TERI, “The TERI Corporate Environmental Awards help corporates and Indian society in general in two major ways. Firstly, the awards recognise good practices and excellence in protecting the environment on the part of deserving corporate organisations. Secondly, the awards help to focus on the responsibility of business in protecting the environment and conserving our natural resources. Even those organisations that do not participate in the process will get to know about these awards and feel motivated to do their bit in the same cause. Overall, these awards will help to prepare businesses for the coming era when the corporate sector will have to face very stringent environmental standards to be imposed by the public at large and governments in particular. The bottomline of a company that prepares effectively for such a future will be healthier than that of one that does not.” Out of 110 applications received by TERI this year, 18 companies were shortlisted and the final awards will be given on June 17. The selection of the awards are based on a questionnaire filled by the company and a case study on the environmental initiative undertaken. After shortlisting the companies, experts from TERI visit the site to check on the authenticity of the environmental initiative. The case studies were evaluated on the basis of a few pre-set parameters, like pollution prevention - proactive practices, process improvements and modifications undertaken resulting in environmental improvement, waste reduction and energy or resource conservation. Scientific research and technological innovation - research or technological innovations that have been implemented or demonstrated for addressing environmental issues. Environmental benefits - success and effectiveness of the programme, both in terms of environmental and economic benefits. Potential model for business commitment - the replicability or

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transferability of the practices, outcomes or experience of the project. The jury members for selecting the awards are Justice J S Verma, former-chairperson, National Human Rights Commission and former chief justice of India; Vishwanath Anand, vicechairperson, National Environment Appellate Authority; Suman K Bery, director-general, National Council of Applied Economic Research; Sanjaya Baru, chief editor, The Financial Express; and R K Pachauri, director general, TERI. In Category I, five companies were shortlisted: M K Electric; Chemfab Alakalis Ltd; Shriram Alkali and Chemicals; The Orchid—An Ecotel Hotel and Hitech Arai. In Category II, five companies were shortlisted: Andhra Paper Mills Ltd; Sanghi Spinners India Ltd; Shree Cements Ltd; Star Paper Mills Ltd and Samcor Glass Ltd. In Category III, eight cases were shortlisted: Orient Paper Mills; Grasim Industries Ltd; Bharat Petroleum Corp. Ltd; Hindustan Lever Ltd; Chennai Petroleum Corp. Ltd; Harihar Polyfibres; Hindalco Industries Ltd and Hero Honda Motors Ltd. How are the TERI Corporate Environmental Awards different from other similar awards? Mr Pachauri explains, “I am not aware of any other award dealing with environmental performance where such rigorous evaluation and objective scrutiny is carried out in determining the winner. Not only is the technical and economic evaluation of each entry carried out by a team of researchers from TERI, but the final decision is taken by a very eminent panel of judges chaired by a former chief justice of India. It is the result of the objectivity and rigour of the process that has given these awards the prominence they have attained in a short period of time. Another feature of the award, which is worth mentioning, is the subdivision of companies on the basis of turnover. Hence, the performance of a small unit is not evaluated against that of a large enterprise, which may have very different managerial and technological capabilities. The awards are differentiated on the basis of size of the enterprise.” Last year, TERI received some 89 entries; this year, it is 110. Mr Pachauri does not think the numbers are low. “Firstly, a jump of over 25 per cent in the entries received in merely a year is a very encouraging development, but the figure of 110 entries consists of very serious contenders. We accept entries only with a modest processing fee. This eliminates those who may not be serious and those who have only trivial achievements to claim. Besides, the process is made known to all potential contenders, who would be persuaded that this is a high calibre process of selection signified by the very choice of the judges who form the selection panel. Also, the companies are aware that any claims that they make in their entries will be carefully investigated by TERI researchers by site visits and on-the-spot evaluation for all shortlisted candidates. This helps further to eliminate doubtful claims and trivial entries.” Last year, the Phulpur plant of Indian Farmers Fertiliser Cooperative Ltd (IFFCO) won the first award in category III of TERI Corporate Environmental Awards for setting up effluent projects for not only recycling, but also for zero liquid discharge. Says C P Srivastava, joint general manager, Projects, IFFCO, “We
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feel proud to be awarded as it recognises our efforts to keep the environment clean.” Please answer the questions below based on the case study above: 1. What is the objective of the case? 2. Discuss the objective of rewards. 3. Discuss the 3 categories of awards mentioned in the case. 4. What is the another important feature of the award apart leadership from efforts mentioned in the case?

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the rewards are also termed as ‘Intrinsic’ rewards and ‘Extrinsic’ rewards. it should probably forget about using pay to motivate performance. The worker may respond to money as a motivator if he believes the benefits will be greater than the expenses incurred by him. These satisfactions they want even more than high wages or job security. etc. On the other hand. So now let us study below the classification or types of Incentives/Rewards. flexible work hours. approval and congenial relations with their employers and fellow-workers. shorter work weeks. and allowing the worker greater freedom. interesting tasks. But these are maintenance factors rather than reward components.’ What they want. pensions). As it is. They are largely a result of the job that the worker does. pay for time not worked.” “Workers will normally respond to monetary incentives only to a certain point. regardless of the level one has attained and the organization or the amount of money he is earning.” “Money does appear to have a good deal of symbolic value. It would be unnecessary to belabor the point if it were not for a tendency for money drives to slip out of focus in a miasma of other values and other practices. overtime-work and holiday premium.” “Pay in one form or another is certainly one of the mainsprings of motivation in our society. Classification of Rewards or Incentives i. Fig. they must be made contingent upon performance. bonuses based on performance. A company must be willing and able to give certain employees very large raises and/or bonuses if pay is to motivate performance. The supporters of the view say that money is potentially an effective motivation. If the benefits perceived are less than the personal cost he will not respond to money as an incentive any further.622. The former are those that an individual receives for himself. indirect compensation. “ 138 © Copy Right: Rai University 11. To use money and other extrinsic reward as effective motivators. money can be instrumental in satisfying esteemed and recognition need as well basic physical needs.” “For some people. The most evangelical human relationist insists it is important while protesting that other things are too (and are perhaps in his view) nobler. Contrary to these observations. INCENTIVE PAYMENTS AND IT’S OBJECTIVES Principles of External and Internal Differential Rewards and Incentives “Money may potentially be an effective motivator. irrespective of performance. Indirect compensation. or is not willing to do so. Controversy prevails over the issue of ‘money’ only motivates the individual. services and perquisites. the latter rewards refer to direct compensation. and ii.COMPENSATITION MANAGEMENT LESSON 22: INTRODUCTION TO CLASSIFICATION OF REWARDS. Motivating people with financial rewards is not a picker’s game. and it does mean different people having differing biographies or backgrounds of training and experience. project structures.1 gives structure of rewards. 17. appreciation. The techniques of job enrichment. Learning Objective • • • • • • Introduction to classification or types of Rewards To understand classification of Rewards or Incentives To understand Incentive Payments To learn classification of Incentive Schemes To know wage Incentives To learn the objectives of wage Incentive Schemes Introduction to Classification or Types of Rewards As we all know that reward management is concerned with the development of appropriate organizational cultures. Money is not foreseen as having the ability to satisfy an urgent need. This is for two reasons: i. Indirect compensation includes protection programmes (insurance plans. Direct compensation includes the basic salary or wage that the individual is entitled to for his job. and job rotation can offer intrinsic rewards through providing interesting and challenging jobs. Direct compensation. If a company cannot afford to do this. underpinning core values and increasing the motivation and commitment of employees. Since they are made available to all employees. Sometimes. it must be repeated: Pay is the most important single motivator used in our organized society”. Beyond that point money becomes ineffective as an inciter of action. Employees in an industry are not ‘economic men’ so much as they are ‘ego men. is credit for work done. In effect. profit sharing and opportunities to purchase stock options.” “Using money as a motivator may decrease intrinsic motivation. a break-even point is reached in which additional money earnings become marginal or even undesirable because of the efforts and conditions demanded to earn the added income. Allen Port observes: “Money incentives alone do not bring the desired motivation.1 . and non-financial rewards. For example: ii. they will tend to retain people in the organization but not stimulate them to greater effort and higher performance. above all else.

reduced absenteeism and turnover and increased output.1 According to Suri.It may be summed up that a more reasonable interpretation would be that intrinsic motivation is increased by money if two conditions are met: i. Increased earnings would enable the employees to improve their standard of living and help the organization to improve their production capacity. a plant work force or all the employees of a firm are partially or wholly related to some measure of productivity Output. They also help in reduced supervision. “it is any formal and announced programme under which the income of an individual. it may be fair to conclude that pay holds motivational properties. “It is a term which refers to objectives in the external situation whose function is to increase or maintain. They are mentioned below as: 1.” But it is appropriate to call them “incentive systems of payments” emphasizing the point of motivation. Wage Incentives The term wage incentives has been used both in the restricted sense of participation and in the widest sense of financial motivation. However. the issue is considerably more complex than merely stating “money motivates. They are designed to stimulate human effort by rewarding the person. it is a method of sharing gains in productivity with workers by rewarding them financially for their increased rate of Output. Incentives do not create but only aim to increase the national momentum towards productivity. some already initiated activity. and Incentive Payments Incentives are monetary benefits paid to workmen in recognition of their outstanding performance.” According to the National Commission on Labour. Schemes where earnings differ at different levels of output. better utilization of equipment. Classification of Incentive Schemes It has been classified into four categories by ILO. Simultaneously. “Florence observes: “It refers to increased willingness as distinguished from capacity. reduced scrap.” In the words of Scott. We give below a few of these definitions. 2. The “International labour organization (ILO) refers to incentives as “payment by results. Schemes where earnings vary proportionately more than output. over and above the time rated remuneration. and 4. this definition is based on the principle that “an offer of additional money will motivate workers to work 139 © Copy Right: Rai University . for improvements in the present or targeted results. 17. that is. But with fixed remuneration. 3.” Fig.” “A wage incentive scheme is essentially a managerial device of increasing a worker’s productivity.3 Break Even Analysis of Perceived Personal Cost 11. The primary advantage of incentives is the inducement and motivation for higher efficiency and greater output. a small group. Schemes in which earnings vary in proportion to output. The monetary reward is perceived by the employee to be a function of his work behavior. it is difficult to motivate employees.” COMPENSATITION MANAGEMENT ii. either in duration or in intensity. reduced lost time. It has been defined differently by different authors. Further. the imparting of incentives to workers for higher production and productivity. “According to Hummel and Nickerson: “It refers to all the plans that provide extra pay for extra performance in addition to regular wages for a job.622. Schemes where earnings vary proportionately less than output. “wage incentives are extra financial motivation. The monetary reward closely follows performance so as to be reinforcing.

and a more effective personnel policy. goals. are likely to have a deeper and longer-term: effect because they are inherent in individuals and not imposed from outside. The concept of empowerment is strongly influenced by this aspect of motivation. goals. To increase a worker’s earnings without dragging the firm into a higher wage rate structure regardless of productivity. ii. This is what is done to and for people to motivate them. but management can enhance this process through its empowerment. action is taken to reach the goal and thus satisfy the need. The social context will also affect the level of motivation.”16 We may define a wage incentive as a system of payment under which the amount payable to a person is linked with his output. as discussed below. It is about: how behavior is initiated by needs and by expectations on the achievement of goals which will satisfy those needs. 140 © Copy Right: Rai University 11. In this activity we therefore examine motivation theory under the following headings: • • • This is derived from the content of the job. The intrinsic motivators. It can be described as the process of motivation by the work itself in so far as it satisfies people’s needs or at least leads them to expect that their goals will be achieved. Such a payment may also be called payment by results. but this will not necessarily last for long. attribution theory and selfefficacy. will satisfy the need. freedom to act. The extrinsic motivators can have an immediate and powerful effect. 2. Objectives of Wage Incentive Schemes Wage incentive schemes aim at the fulfillment of one or more of the following objectives: i. which are concerned with the quality of working life. The process of motivation can be initiated by someone recognizing an unsatisfied need. The factors affecting intrinsic motivation include responsibility (feeling the work is important and having control over one’s own resources).1 . iii. praise. although they may be encouraged by the organization. besides economic gains. To improve the profit of a firm through a reduction in the unit costs of labour and materials or both. Alternatively.1 Motivation and Financial and NonFinancial Rewards The Objective of the Tutorial Activity To understand that the development of reward management policies. structures and practice will be underpinned by assumptions about how people can best be motivated to deliver high levels of performance. A goal is then established which. The effectiveness of pay as an extrinsic motivator is a matter for continuing debate. interesting and challenging work and opportunities for advancement. types of motivation. The term incentive has gradually acquired a wide connotation and includes all the possible factors. this is the type of motivation to which people are referring. the six basic concepts of motivation relating to needs. • The Process of Motivation Motivation theory is concerned with what determines goaldirected behavior. reinforcement. Basic Concepts for Motivation The framework for non-financial motivators is provided by those concepts of motivation which are concerned with needs. how belief in one’s ability to carry out a specific task will actuate behavior which is expected to achieve the successful performance of that task. which will result in a stepped-up rate of Output. Intrinsic Motivation COMPENSATITION MANAGEMENT Tutorial Activity 1. which can possibly motivate human beings towards better and. This context will consist of the organization culture generally. attribution theory and self-efficacy. Intrinsic motivation is self-generated in that people seek the type of work that satisfies them.622. the implications of motivation theory for those concerned with the design and management of financial and nonfinancial reward policies and practices. Types of Motivation Motivation at work can take place in two ways: 1. it is thought. These assumptions may not be articulated but the reward philosophies and policies of an organization can be no better than the motivational theories and beliefs upon which they are based. People can be motivated by rewards and incentives which will enable them to satisfy their needs or will provide them with goals to attain (as long as those goals are worthwhile and attainable). scope to use and develop skills and abilities. Extrinsic Motivation the process of motivation. It arises when management provides such rewards as increased pay. how the achievement of goals and/or feedback on their achievement reinforces successful behavior. better production scheduling and performance control. expectations (expectancy theory). To avoid or minimize additional capital investment for the expansion of production capacity. But the needs of individuals and the goals associated with them vary so widely that it is difficult if not impossible to predict precisely how a particular reward or incentive will affect individual behavior. or promotion. greater performance. reinforcement. development and job design policies and practices. and a course of action is determined which is expected to lead towards the attainment of the goal. someone can be presented with a goal and if it is expected that achieving this goal will meet an unsatisfied need. but it also includes management style (the way in which individuals are managed) and the influence of the group or team in which the individual works. and iv To use wage incentives as a useful tool for securing a better utilization of manpower. expectations.harder and more skillfully for a greater part of their working item. When the motivating impact of payfor-performance schemes is discussed.

feedback ensures that people get a feeling of pride and satisfaction from the experience of achieving a challenging but fair goal. an incentive or bonus scheme . Self-efficacy Self-efficacy is the belief in one’s ability to perform a specific task. For example. This is a matter of managing the organization culture.622. which creates a sense of competence and reinforces people’s belief in themselves. communication. if they know what they need to do to benefit from them (and can do it) and if the opportunities are worth striving for. Managers can do a lot to influence attributions through feedback. Intrinsic motivation outcomes are more under the control of individuals. Expectancy Theory Expectancy theory as originally developed by Vroom states that for there to be a heightened motivation to perform. both intrinsic and extrinsic motivating factors. This is because motivation is a complex process. appraisal and guidance. expectations about rewards.the differences in the degree to which people believe in themselves. managers and co-workers can produce a wide variety of motivational forces which are difficult to predict and therefore to manage. if people want personal growth. First. • feel able to change their behavior. they will only be motivated by the opportunities available to them if they know what they are. of action rather than give up trying. and it is impossible to generalize on what the best mix of these is likely to be. responsibility. such expectations will vary greatly amongst individuals according to their previous experiences and perceptions of reward processes. Pay-for-performance schemes. value the reward sufficiently to justify the change in behavior. individuals have to: • • • individual needs and aspirations which are almost infinitely variable. who can place greater reliance on their past experiences to indicate the extent to which positive advantageous results are likely to be obtained by their behavior. to reinforce 141 © Copy Right: Rai University . first. No single lever such as performance-related pay exists which is guaranteed to act as an effective motivator. Expectancy theory explains why extrinsic motivation . alternatively.works only if the link between effort and reward is clear and the value of the reward is worth the effort.the ‘felt-fair’ principle applies to levels of pay in comparison with others in accordance with what people believe to be the relative size or importance of jobs and their perceptions of relative levels of performance or contribution. • Reinforcement Reinforcement theory suggests that successes in achieving goals and rewards act as positive incentives and reinforce the successful behavior. for example. It also explains why intrinsic motivation arising from the work itself can sometimes be more powerful than extrinsic motivation. attributions . The aims would be. recognition. goal-setting.1 • • • The second key message provided by motivation theory is the significance of expectations. there are no simplistic solutions to increasing motivation. Attribution Theory Attribution theory is concerned with how people interpret and explain their success or failure. will only be accepted as fair and may therefore only act as effective motivators if they are based on acceptable performance measures which are applied consistently. The key needs associated with work are those for achievement. self-efficacy . Self-efficacy is socially learned and developed from personal experience and performance feedback. Those with high self-efficacy will have the capacity to see a link between their own effort and performance and their rewards. thus creating a social context which is more likely to foster high motivation. to persist in the action and. Implications of Motivation Theory Motivation theory conveys two important messages. The implications of these two messages are considered below. Goals Goal theory was developed by Latham and Locke! on the basis of a 14-year research programme into goal-setting as a motivational technique. they should be challenging but reachable. in the face of failure. If they can attribute their achievement or lack of achievement to something over which 11. the goals are seen as a fair and reasonable. which is repeated the next time a similar need arises. It depends on: • • COMPENSATITION MANAGEMENT the goals should be specific.for example. equity and fairness . the social context where the influences of the organization culture. • Expectancy theory applies just as much to non-financial as to financial rewards. influence and personal growth. to try alternative courses. They claimed that the level of production in the companies they studied was increased by an average of 19 per cent as a result of goal-setting processes with the following characteristics: • • • • • they have control they are more likely either to repeat their successful behavior (this is a form of reinforcement) or. individuals participate fully in goal-setting. They are therefore more likely to take action. Creating the Right Climate It is necessary in general to create a climate which will enable high motivation to flourish. feel confident that a change in their behavior will produce a reward.Needs Needs theory states that behavior is motivated by unsatisfied needs. take steps to behave in ways they believe are more likely to succeed. feedback and reinforcement as motivating factors. feedback is used to gain commitment to even higher goals.the subjective and often distorted explanations people make of their successes or failures.

Managing Expectations It is necessary to manage expectations. to emphasize norms (accepted ways of behavior) relating to the ways in which people are managed and rewarded. He claimed that money is a so-called ‘hygiene factor’ which serves as a potential dissatisfier if not present in appropriate amounts. Goal-setting. feedback and reinforcement to be major features of the management and reward processes. 3.1 . second. while its impact on unfavorable feelings was long term extending over periods of several months. 2. the strength of the need and. a factor which prevents disease rather than promotes health. although they may work with some individuals. as Opsahl and Dunnette point out. on the assumption of homogeneity of values and motives amongst those it is intended to reward. Motivation using this approach has been and still is widely adopted and can be successful in some circumstances. But it should be borne in mind that the social context and the ways in which these incentives are managed for individuals will be key factors influencing their effectiveness. the degree to which people are confident that their behaviour will earn the money they want to satisfy the need. It is an instrument for gaining desired outcomes and its force will depend on two factors: first. Flexibility It should be remembered. There appears to be a strong case for flexibility. Money and Motivation The general theory of motivation described above has produced the following explanations of the relationship between money and motivation: the ‘economic man’ approach. The ‘Economic Man’ Approach According to this view. Financial Rewards Financial rewards need to be considered from three points of view: 1. The organization should provide for a mix of various types of intrinsic and extrinsic motivation and make use of both financial and non-financial incentives. In contrast. Feedback and Reinforcement Provision should be made for goal-setting. Herzberg’s two factor model. Recognizing Complexity Motivation policies should recognize the complexity of the motivation process and not attempt to adopt simplistic solutions to motivational problems.622.values concerning performance and competence. Of the unusually bad job feelings lasting several months. are unlikely to meet the needs of many of them. No reward offered through an incentive. instrumental theory. Performance management processes as described in Chapters 18 and 19 can fulfil this purpose well. We discuss these implications as they affect financial and nonfinancial reward policies and practices below. it was a factor 5 per cent of the time. that is. salary was mentioned as a major reason for the feelings 19 per cent of the time. In all of the definitions of unusually good job feelings.6 who suggested that money in itself has no 142 © Copy Right: Rai University 11. salary was reported as a causal factor 22 per cent of the time. It assumes that they will be motivated to work if rewards and penalties are tied directly to the results they achieve. The effectiveness of money as a motivator. in the words of McDougall. Of the unusually good feelings that lasted several months. was because its impact on favorable feeling was largely short term. But it is based exclusively on a system of external controls and fails to recognize a number of other human needs. The criteria which should be used when developing a financial reward system. Herzberg’s two factor model does not therefore provide a reliable basis for developing pay policies. people are primarily motivated by economic rewards. quick fixes designed to improve motivation such ‘as performance-related pay are unlikely to make much of an impact on overall organizational performance. and third. but not as a potential satisfier or positive motivator. to demonstrate the organization’s belief in empowerment providing people with the scope and ‘space’ to exercise responsibility and use their abilities to the full. The reasons why people are satisfied or dissatisfied with their rewards. of the short-term feelings. salary was named as a major cause of unusually bad job feelings only 13 per cent of the time. It also fails to appreciate the fact that the formal control system can be seriously affected by the informal relationship existing between employees. The instrumental role of money has been stressed by Gellerman. across-the-board system of remuneration. But. which is based on reinforcement theory. equity theory and expectancy theory. Herzberg’s Two Factor Model Herzberg’s two factor model of motivation was developing following an analysis of anecdotes of unusually satisfying or unusually dissatisfying job events provided by 200 engineers and accountants. Herzberg’s argument that money acts as a potential dissatisfier is mystifying. COMPENSATITION MANAGEMENT these data seem inconsistent with the interpretations and lend no substantial support to hypotheses of a so-called differential role for money in leading to job satisfaction or job dissatisfaction. both in terms of the mechanisms and administration of remuneration systems and in the form in which individuals receive their remuneration. it was mentioned only 18 per cent of the time (in contrast with the 22 per cent of long-term good feelings mentioned above). bonus or performance-related pay scheme will be effective as a motivator unless individuals believe it is worthwhile and they can reasonably expect to obtain it through their own efforts. Without the right climate. Instrumental Theory This theory states that money provides the means to achieve ends. second. Pay awards are contingent upon effective performance. that: attempts to apply a standardized. A further reason given by Herzberg for’ regarding salary as a ‘hygiene factor’. They Concluded that.

as mentioned above. the greater the value of a set of awards and the higher the probability that receiving each of these rewards depends upon effort.intrinsic meaning and acquires significant motivating power only when it comes to symbolize intangible goals. It is significant not only because of what they can buy with it but also as a highly tangible method of recognizing their worth. manual skills and know-how. But mere effort is not enough. ‘ Conclusions on the Role of Money as a Motivator COMPENSATITION MANAGEMENT Money is important to people because it is instrumental in satisfying a number of their most pressing needs. pay must be felt to match the level of work and the capacity of the individual to do it. thus improving their self-esteem and gaining the esteem of others. Application of Expectancy Theory Expectancy theory as described earlier in this chapter. autonomy. emphasizes that these feelings are based on comparisons. pay can reinforce desirable behavior. unconscious knowledge of these norms being shared among the population engaged in employment’. as perceived by the individual . and his current financial status’. But the effectiveness of money as a motivator depends on a number of circumstances. social esteem. career opportunities and the reputation of the organization will also be factors. Ability . Jacques called this the ‘feltfair’ principle. argues that satisfaction with pay is related to perceptions about the ratio between what one receives from the job (outcomes in the form of pay) to what one puts into it (inputs in the form of effort and skill) compared with the ratios obtained by others. People tend to want more. The values of the rewards to individuals in so far as they satisfy their needs for security.a man’s reaction to money ‘summarizes his biography to date. Pay can motivate. Pay is the key to attracting people to join an organization.1 © Copy Right: Rai University 143 . are paid). • 11. Causes of Satisfaction or Dissatisfaction with Pay Reactions to reward policies and practices will depend largely on the values and needs of individuals and on their employment conditions. rewards are commensurate with the perceptions of individuals about their ability.what the individual wants to do or thinks he or she is required to do. 2. to be equitable. their status. Equity theory. inside and outside the organization. and self-actualization. contribution and value to the organization (Out this perception is likely to be founded on information or beliefs about what other people. Money acts as a symbol in different ways for different persons. his early economic environment. a pay-for performance system has to meet very stringent conditions as defined by expectancy theory. It is therefore dangerous to generalize about the causes of satisfaction or dissatisfaction. It has to be effective effort if it is to produce the desired performance. attention has also to be paid to the non-financial motivators. Thus. as well as the equitable pay level for that work’. including the values and needs of individuals and their preferences for different types of financial or nonfinancial rewards. which will influence their desire to stay with the organization. although job interest. as developed by Adams. But to be effective. Research by Porter and Lawler and others has also shown that higher paid employees are likely to be more satisfied with their rewards but the satisfaction resulting from a large pay increase may be shortlived. Role perceptions . Equity theory is related to discrepancy theory which. and that 2) an individual is ‘unconsciously aware of his own potential capacity for work. ‘In this respect.9 He stated that: 1) there exists ‘an unrecognized system of norms of fair payment for any given level of work.622. Equity Theory Equity theory. individuals are satisfied with other aspects of their employment . These are good from the view ‘Point of the organization if they correspond with what it thinks the individual ought to be doing. Pay can also deliver messages on what the organization believes to be important. the greater the effort that will be put forth in a given situation. Other factors which may affect satisfaction or dissatisfaction with pay include the degree to which: • • individuals feel their rate of pay or increase has been determined fairly. As a tangible means of recognizing achievement. To achieve lasting motivation. his or her expectations about the relationships between effort and reward. Money is therefore a powerful force because it is linked directly or indirectly to the satisfaction of all the basic needs. and for the same person at different times . The significance of equity was also emphasized by Jaques. the views of Herzberg have been supported by research. as stated by Lawlers indicates that satisfaction with pay depends on the difference between the pay people receive and what they feel they ought to receive. External and internal comparisons will form the basis of these feelings. The probability that rewards depend on effort. promotion prospects. However. feelings about external and internal-equity (the ‘felt-fair’ principle) will strongly influence most people. opportunity to use and develop skills and relationships with their managers. which states that. This theory was developed by Porter and Lawler into an expectancy model which suggests that there are two factors determining the effort people put into their jobs: 1.in other words. states that motivation will be strong if individuals can reasonably expect that their efforts and contributions will produce worthwhile rewards. however. the various non-financial motives he has acquired.for example. The two variables additional to effort which affect task achievement are: 1. 2. They are poor if the views of the individual and the organization do not coincide. his competence training. Satisfaction with pay amongst existing employees is mainly related to feelings about equity and fairness. it seems reasonable to believe that.individual characteristics such as intelligence. at least.

recognition. individuals at all levels of organizations. those for achievement. allocation-to a high-profile project. influence and personal growth. and how the organization will help them to develop the skills and competences they need to receive the maximum benefit. can provide motivation by putting people into situations where their views can be expressed. employees understand how the financial reward system operates. Recognition is also provided by managers who listen to and act upon the suggestions of their team members and. through its policies for involvement.622. although the need for ‘affiliation’. Praise. not only to accept but also to seek responsibility. as far as possible. Achievement motivation can be increased by organizations through processes such as job design. The organization. The need for achievement is defined as the need for competitive success measured against a personal standard of excellence. to become what one believes one is capable of becoming’. This is essentially what empowerment is about and is in line with the concept of intrinsic motivation based on the content of the job. power and affiliation. This is the philosophy of continuous development. second. however. Many people now regard access to training as a . performance management. recognize the importance of continually upgrading their skills and of progressively developing their careers. individuals must receive meaningful feedback about their performance. especially achievement bonuses awarded immediately after the event. Providing motivation through increased responsibility is a matter of job design and the use of performance management processes.paying market rates may upset internal relativities). enlargement of the job to provide scope for more interesting and rewarding work. the need for power was a prime motivating force for managers. People need to know not only how well they have achieved their objectives or carried out their work but also that their achievements are appreciated. The availability of learning opportunities. and this is an important way in which mutually reinforcing processes of financial and non-financial rewards can operate. pay-for performance schemes. was always present. He defines self-fulfillment as ‘the need to develop potentialities and skills. if they are specifically related to fair. for achievement. Other actions which provide recognition include promotion. warm. and skill or competency-related pay schemes. how they benefit from it. through performance management and 144 © Copy Right: Rai University 11.e. they will go away and grow elsewhere). acknowledge their contribution. friendly relationships with others. although to different degrees. Increasingly. McClelland’s research established that alongside the need for achievement. created in the light of an understanding that direct motivation ‘Only takes place if the rewards are worthwhile. status symbols of one kind or another. ‘training and performance appraisals. responsibility. under proper conditions. The recognition processes in an organization can be integrated with financial rewards. however. And it is not the only form of recognition. This is another aspect of empowerment. should be given judiciously . Personal Growth In Maslow’s hierarchy of needs. Recognition Recognition is one of the most powerful motivators.key element in the overall reward package. Financial rewards. all of which can be part of the total reward process. The importance of recognition can be defined ‘as a key part of the value set of the organization and this would be reinforced by education. the job -must be perceived by individuals as requiring them to use abilities they value in order to perform the job effectively and third. pay-for-performance systems are. self-fulfillment or selfactualization is the highest need of all and is therefore the ultimate motivator. the selection of individuals for high prestige training courses and programmes and the emphasis placed by the organization on the acquisition of new COMPENSATITION MANAGEMENT • • Non-financial Rewards Non-financial rewards can be focused on the needs most people have. and defining the feedback they require. individuals must feel that they have a high degree of self-control over setting their own goals and over defining the paths to these goals. listened to and acted upon.it must be related to real achievements. preferably by evaluating their own performance. and if their expectations on the likelihood of receiving the reward are high. It is also related to the fundamental concept that individuals are motivated when they are provided with the means to achieve their goals. Ambitious and determined people will seek and find these opportunities for themselves. and various forms of status or esteem symbols. i. internally equitable as well as externally competitive (although there will always be a tension between these two criteria’. although the organization needs to clarify the scope for growth and development it can provide (if it does not. The philosophy behind motivating through responsibility was expressed as follows in McGregor’s theory Y: ‘The average human being learns. Responsibility People can be motivated by being given more responsibility for their own work.’ Influence People can be motivated by the drive to exert influence or to exercise power. objective and appropriate performance measures: if employees understand what they have to achieve. whether or not they are eaten up by ambition. Achievement Research carried out by McClelland of the needs of managerial staff resulted in the identification of three major needs.1 . sabbaticals and work-related trips abroad. The characteristics required in jobs if they are to be intrinsically motivating are that first.Financial Rewards Criteria The criteria for assessing the effectiveness of financial reward practices as means of motivation are that: • they are. importantly. are clearly symbols of recognition to which are attached tangible benefits. There are other forms of recognition such as long service awards.

can all act as powerful motivators. Therefore it is dangerous to generalize about which mix of motivators is likely to be most effective in individual cases. Hence one cannot rely on nostrums such as performance-related pay. But this customization win take place more effectively only if judicious use is made of achievement bonuses. experience. occupation and position in the organization. 11. pay increases related to the acquisition of specific skills and a performance management and reward process which concentrates on identifying individual needs and gaining the joint commitment of employees and their managers to satisfying them. Do you think that non-financial motivators can work more effectively when integrated with financial rewards in a total reward process? 2.622. skill-based pay. Do you agree that the needs of individuals vary almost infinitely depending upon their psychological makeup. job enrichment or performance management to work equally well for every person or in every organization.skills as well as the enhancement of existing ones.1 © Copy Right: Rai University 145 . These processes need to be ‘customized’ to meet the needs of both the organization and the people who work there. background. COMPENSATITION MANAGEMENT Questions for Discussion 1.

and cultivation of commercial crops received a new 11. ii. friends. quickest and surest means of increasing productivity. India is at a low level of technology. By the early 1990s. relatives .. The average Indian worker is financially very poor. but especially in cereals. and to price supports for farmers. required self-sufficiency in food production. security. The only practicable and self-sustaining means of improving manpower utilization is to introduce incentive schemes and stimulate human efforts to provide a positive motivation to greater Output. Food grains and pulses account for two-thirds of agricultural production in the mid1990s.. In the national interest. the necessity of raising the productivity of Indian labour is also getting due attention. When the indirect share of agricultural products in total exports. In this context.. Since independence in 1947.1 Prevalence of Wage Incentive Schemes in India In a country like India. the share of agriculture in the GDP has declined in comparison to the growth of the industrial and services sectors. Agricultural production has kept pace with the food needs of the growing population as the result of increased yields in almost all crops. India managed to get along with very few food imports because of the growth in food-grain production and the development of a large buffer stock against potential agricultural shortfalls. the role of financial incentives as a primary tool for motivating workers cannot be over-emphasized. more fertilizer. 146 © Copy Right: Rai University . and analysis of case studies of successful . The Third Plan emphasized the need for higher productivity and reduction in the unit cost of production. v. Besides. and that workers should be consulted before a system of payment by results was introduced in an establishment. it is felt that wage incentive schemes should be applied to all economic activity. is taken into account. Financial incentives therefore are likely to tempt him to work better. banks. However. Although increased irrigation has helped to lessen year-to-year fluctuations in farm production resulting from the vagaries of the monsoons. it has not eliminated those fluctuations. The efficiency of the Indian worker is very low. correct conditions and methods of work.. the direct share of agricultural and allied sectors in total exports is around 18 percent. The Second Plan recommended that the earnings beyond the minimum wage should be related to results. iii.” Need for Introducing Wage Incentive Schemes in India The need for introducing wage incentive schemes in India has been felt on the following grounds: i. This perception led to a program of agricultural improvement called the Green Revolution. The growth in food-grain production is a result of concentrated efforts to increase all the Green Revolution inputs needed for higher yields: better seed.622.. and political stability. government incentive schemes. despite three years of meager rainfall and a drought in the middle of the decade. the cropping pattern became more diversified. India was self-sufficient in food-grain production. such as cotton textiles and jute goods. In the mid-1990s. In the 1980s. it provides approximately one-third of the gross domestic product (GDP) and employs roughly two-thirds of the population. impart training and create suitable psychological and material incentives for workers. AGRICULTURE has always been INDIA’S most important economic sector. the First Plan recommended the introduction of incentive schemes to promote a more efficient working of industries with due safeguards for the interests of workers through the guarantee of a minimum wage and protection against fatigue and undue speed-up. Dependence on agricultural imports in the early 1960s convinced planners that India’s growing population. Moreover. COMPENSATITION MANAGEMENT Learning Objective • • To understand the Prevalence of Wage Incentive Schemes in India To know the Need for introducing Wage Incentive Schemes in India Tutorial Activity 1. After independence in 1947. A proper application of wage incentive schemes can so affect the prices that the community would be benefited. and wage incentives can help in promoting the use of electronic devices. The Study Group of the National Commission on Labour has recommended that “under our conditions. and needs to be raised. the percentage is much higher. to a public distribution system.UNIT III LESSON 23: INTRODUCTION TO WAGE INCENTIVES IN INDIA Principles of External and Internal Differential Rewards and Incentives iv. It put the responsibility on management to provide the most efficient equipment. improved irrigation.. agriculture still provides the bulk of wage goods required by the nonagricultural sector as well as numerous raw materials for industry. a wage incentive is concerned with an effective utilization of manpower which is the cheapest. Wage incentives can play an important part improving his efficiency. Moneylenders. as well as concerns about national independence.1 Scenario Agriculture still provides the bulk of wage goods required . and education of farmers.

e.6 million hectares were classified as cultivable wasteland. Problem Definition The farm management is the field closely related to agroeconomics. Expansion in crop production. rainfall. however. In recent years. the irritations giving training in ‘management’ are increasing by leaps and bounds. however. were gradually gaining importance. therefore. However. such as summer mung (a variety of lentil. systematic and a single system to provide all kinds of information needed by farmers To help farmers in decision making in farming business To provide a geographical view of the various agricultural lands in the country to facilitate easier information retrieval To focus and provide various decision making tools for production of crops Requirement Analysis Our agricultural scene is a changing rapidly since the mid-sixties when we experienced the ‘Green Revolution’. If we analyze. and incentives has had some impact on changing the traditional crop and livestock patterns in these subregions. There are large disparities among India’s states and territories in agricultural performance. which brought in the flood of milk in the country. which will provide an optimum production plan for a given farm taking into account the resources and the limitations in which it is being operated. we can notice that the traditional agriculture. making the gross sown area equivalent to almost 173 million hectares. play a critical role in determining whether the harvest will be bountiful. Agricultural Structure of India Field crops are planted on about 45 percent of the total landmass of India. There is good demand for ‘managers’ trained in these institutions.impetus in line with domestic demands and export requirements. soybeans. has to come almost entirely from increasing yields on lands already in some kind of agricultural use. There may be some sound reasons for this. About 29. There is no doubt that farmers adopting new technology are quite conscious about the management of their farm. These 45 million hectares constitute all the land left for expanding the sown area. there are no such Institutions for training persons in farm management. Now. Topography. this changing scene in agriculture. and the availability of water for irrigation have been major determinants of the crop and livestock patterns characteristic of the three major geographic regions of India . forested. with changing scenario in agriculture. no much attention is post to it.the Himalayas. In the traditional farming there was no much change in the cropping pattern. Nontraditional crops. policies. Traditional farming was more or less self-sufficient. It was followed by the ‘White Revolution’. much of it is unsuited for immediate cropping. the Indo-Gangetic Plain. and the Peninsula . pesticides. However. It was based on the experiences transmitted from father to the son. traditional farming is changing into modern farming. The monsoons. the need for guiding farmers in management of their farms assumes significance. soils. we are on way to ‘Yellow Revolution’ i. fertilizers. the latter plays a key role in formulating policy and providing financial resources for agriculture. Food and price policy also are decided by the central government. Approximately 108 million hectares were either developed for nonagricultural uses. Now farming is becoming market oriented.6 million hectares of the remaining land were classified as cultivable but fallow. there is general apathy about the farm management amongst the farmers. the introduction of new crops. the central government has played an active role in all aspects of agricultural development. or unsuited for agriculture because of topography. In agriculture sector. About 15 million hectares were permanent pastureland or were planted in various tree crops and groves. research and education.622. there is need for guiding the farmers in this economic aspect. and 15. He has to purchase many things such as high yielding seeds. COMPENSATITION MANAGEMENT Objectives The main objectives of the project are as follows: • • • • • To provide information to the farmers related to agriculture and farm management To develop a centralized. peanuts. revolution in fruit production. and sunflowers. from © Copy Right: Rai University 147 . In other sectors of the economy. with rare exceptions. However. Planning is centralized. However. One of the reasons for this may be that our farming is relatively a small-scale farming and the scattered one. machinery etc. An important fact behind these revolutions is the economic consideration. average. 11. the technical persons having engineering and other vocational background are turning towards MBA and allied courses. Which was a ‘way of life’ for our farmers is now becoming a ‘business proposition’.and their agro-ecological subregions.1 In any business proposition. Agro-scientists and the policy makers. Aim The aim of our project is to design and develop an agricultural information system. Government policy as regards irrigation. only some of which can be attributed to differences in climate or initial endowments of infrastructure such as irrigation. Thus. although agriculture is constitutionally the responsibility of the states rather than the central government. with the developments taking place due to five-year plans and technologies developments in agriculture. Farmers have been adopting the new technology in agriculture and related fields mainly because of these innovations pay more all compared to their tradition crops. Being a relatively young since. cultivation practices etc. almost 37 million hectares were double-cropped. Realizing the importance of agricultural production for economic development. The needs of the farmers are increasing. ‘management’ has become a catchword. Traditional farming is slowly becoming obsolete and uneconomic. or poor in any given year. management has to play a significant role. for various reasons. Now. part of the pulse family). and resource allocations are decided at the central level. and plan priorities. Of this cultivated land.

etc. the costs. returns. What to produce ? i. co-operatives. there are no good roads to go to distant markets.1 . etc. As a result. How much to borrow ? From whom to borrow ? There are some alternative sources viz. They include seeds of high yielding and hybrid varieties. think of demand supply position availability of market and prevailing prices. This is nothing but ‘Agro-economics’. Production: The decisions related to production activity are:- 148 © Copy Right: Rai University 11. To understand decision-making in farming. The farmer has to take decision and make choices relating to From whom to buy ? At what price to buy ? How much to buy? Whether to buy on cash or on credit ? Obtaining credit: Although the farm family supplies some finance. goat keeping or poultry or their combination. Moneylenders. He has to make right choice – At what rate to borrow ? What security/mortgage to offer ? How repayments to be made ? How to face risk situation ? Marketing the produce: When surplus produce is obtained or created. friends. traders. he has no transport facility. Farm family provides major part of labour and also provides some capital. How to produce ? Adoption of suitable technology . Role of Farmers Indian farmer plays following four rules simultaneously: He is an entrepreneur He is a Manager He is a Financer He is a Labourer or Worker.e. Acquiring inputs: In modern commercial farming. With increasing population. Therefore decision making on such farms is more difficult and complex than on specialized farming. But due to new technological developments in all the areas of production. 3. his produce is of small quantity. to supplement incomes from crop production. etc. fertilizers. markets. his investment and financial needs are increasing. it is not adequate considering larger financial requirements of modern agriculture. it is necessary to know the nature of Indian farming. income and profitability are summing significance. In that case. productivity of crops and livestock has increased substantially. Whom to sell ? There are various types of agencies such as villager trader. pesticides. etc and also think of producing marketable surpluses. The farmers grow 5-6 crops or even more on their farms. total production has increased several times and marketable surpluses with the farmers have also increased. To meet their Family Requirements To suit their soils on the farms and considering availability of resources including irrigation and market facilities. banks. Therefore. Acquiring inputs. improved implements and machinery. There is risk in borrowing. spices. vegetable. its disposal or marketing advantageously becomes necessary. whether to continue old technology or use new technology or combination of both. There are commercial and specialized agencies dealing in these inputs. The consideration of economic aspects in the production process is inevitable. In this connection he has to take following decisions. Indian farming is a diversified and mixed type of farming. Obtaining credit. He has to make choice from among them. The considerations of cost of production. As a result farming has assumed commercial proposition. He takes decisions in two capacities as an entrepreneur and a manager. milk. wide range of inputs are required. government incentive schemes. wholesale cum commission agents. Area of Decision Making There are four major areas of decision making: Production of crops and livestock. He has to take decision under most unfavourable situation. government (for selected commodities ). COMPENSATITION MANAGEMENT Decision Making in Farming Business Decision making in any business largely depends on the nature of business.622. This will also apply to production of cash/commercial crops. wholesale and organized markets are limited. He is also constrained by cash requirements for family expenditure. How much to produce ? To consider family requirements in respect of foodgrain. Following decisions are involved in the marketing of farm produce. farmer has to borrow from outside sources. They also follow mixed farming. he has to produce and get income to meet the costs and also to make some profit. fruits. rapid urbanization and growing export markets. Naturally. Marketing his produce. The farmer has to make choice within limited alternatives. that is they keep few milk animals and follow dairy and also undertake sheep or goat keeping poultry keeping. the competition is also likely to increase. Thus. plant growth regulators (hormones). Indian farming is a family type farming. Where to sell ? This is the most important decision because in rural areas big. and profits of the enterprise become significantly important. When to sell ? Immediately after harvest when pries are the lowest or wait for better prices. As far a individual farmer is concern. Whether to have dairy. 1.the market. Nature of Indian Farming Indian farming is basically a subsistence farming. 2. However. relatives. selection of crops and live-stock activity. the demand for farm products is increasing and is likely to increase in the near future.

He has very limited scope for decision making. We intend to provide an optimum plan for a given farm taking into account the resources and the limitations in which it is being operated. resource planning (land. He has almost no choice. farm costing. They are used to grow crops. Decision making is involved as to in which climatic conditions which crop should be sown It enhances the fertility of soil and thus results in increased production. technical know-how. the time has come that every activity on the farm has to be viewed from the perspective of economics. choice of crops. It helps the farmers in various agricultural tasks It harms the crop and decreases the over all production. pests and diseases. It removes the pests. taste. New non-traditional crops. Basic Components identified COMPENSATITION MANAGEMENT The various components/entities that we identified after our requirement analysis phase are described below in common language. Which farmers should know. soil and water management Decision-making is involved as to where which crop should be sown. It helps in decision-making and proper planning of the farm. there has been a technological breakthrough in agriculture in recent years. marketing. packaging etc. many nonfarming community entrepreneurs are also attracted towards agriculture. is that new generations of farmers who are more educated. linear programming are being used to get an idea about the resource. A large number of farm products are being produced for exports. He has to consider the economics of each enterprise separately also of the farm as a whole. and analysis of case studies of successful farmers. The statistical tools such a production function. new methods of cultivation are coming in very fast and farmers are adopting the same. color. The subject matter covers several aspects such as decision-making. Functions A farmer is involved in the activities of agricultural production. the problems faced by the farmer’s fare also increasing. and poultry) on the farm. farm. young and energetic have taken up to this enterprise. In solving the problems of individual farmers all these situational factors are to be taken into account. Entity FARMER CROPS SOIL IRRIGATION FACILTIES WEATHER CONDITIONS India is a vast country with varied climate. Brief description An individual person who cultivates land for his source of income Farmers grow different crops. The use of efficiency measures to evaluate the enterprise is also an important aspect of our system. Naturally.At what price to sell ? Here the position of farmer is very vulnerable. The plants suffer from this entity resulting in less production. Decision making is involved as to in which soil which crop should be sown Decision-making is involved as to in which area for which crop what irrigation facilities are to be used. insects etc that attack the crops It helps farmers to increase their income level. Various types of crops are sown all over India depending on a number of circumstances Crops are sown in the soil. This entity is used by the farmers to get rid of various crop diseases and pests The government for various types of crops makes this entity for the goodwill of the farmers.1 149 . Various types of soil are found all over India like alluvial soil. natural hazards. humidity etc. Farmers employ different irrigation facilities depending on number of circumstances There are different weather conditions like temperature. price fluctuations and so on. There are problems of soil and water management. This entity is used by the farmers to increase their productivity The farmers to make farming more convenient use this entity. economic criteria are to be applied. Along with the adoption of new technology in farming. finance. In addition to this. which one can notice in this complex changing scenario of agriculture. In addition. prices are fixed by traders and farmer is hardly consulted. individual farmer is having his own set up of resources and socio-economic situation. Farmer has several enterprises (such as crops. labour. farm accounting. However there are specifications about the size. and ecological conditions. they are more economics oriented. Now. Problems Faced by Farmers As indicated above. In finding the solutions for these problems. clay soil etc. marketing. in different parts of the country depending on the geographical situations. soils. They are very keen on getting more knowledge about the new technology. © Copy Right: Rai University FERTILIZERS AGRICULTURAL TECHNOLOGIES DISEASES PESTICIDES & INSECTICIDES AGRICUTURAL POLICIES AND SUBSIDIES 11. In unorganized markets. marketing. surplus production. Prices in organized markets (Regulated markets ) are fixed by open auction and he has to accept the price quoted by the highest bidder even this price may not be remunerative. quantity. Our System as a Solution to the Above Problems We propose an agriculture information system for guiding the farmers in this economic aspect. Many of them are innovative and experimenting of their own. dairy.622. farm planning. capital). An important ray of hope. new varieties of crops. Farmer has to consider all these aspects and consider the costs and returns before entering into the venture.

labor and skills in return for salary and benefits. development and learning and the work environment. What makes these rewards strategic is the care employers must take to align their design and effects with strategic objectives. and keeping skilled workers is not just about money any more. Farmers use agricultural policies and subsidies. agricultural technologies. irrigation facilities and agricultural technologies. such as the employee’s base salary or the Federal Employees Health Benefits Program. manage and retain an effective and efficient workforce. ANALYSIS AND STUDY (4 WEEKS) DESIGN (4 WEEKS) CODING (3 WEEKS) IMPLEMENTATION & TESTING (3 WEEKS) The bottom two quadrants. pesticides & insecticides . cover the areas that we traditionally think of as rewards the employer provides. Crops suffer from diseases.irrigation facilities to enhance his production Crops require a particular type of soil. these rewards are readily viewed in terms of having a monetary value. The entire project is divided in the following phases Phase 1 Study and Analysis Phase In this phase we shall visit various websites related to agriculture in India and make a thorough study of several books on agriculture. They are sometimes referred to as relational rewards because they tend to represent the relationship (vs. fertilizers. weather conditions. We shall follow the SDLC model for the development of the proposed system. and the term refers to the complete bundle of all employee reward elements. To attract. These are sometimes referred to as transactional rewards because they include the tangible results of the agreement between the employee and employer. hiring. or transaction. Transactional rewards play an important part in an employee’s decision about where to work and whether to stay with an organization. What are strategic rewards? How does performance management fit into a strategic rewards framework? What agencies are using a strategic rewards perspective? What are strategic rewards? Strategic rewards embrace everything that employees value in the employment setting. In this agreement. the transaction) between the 150 © Copy Right: Rai University 11. we also plan to interact with farmers so as to know their problems and to collect information regarding our project. insecticides & pesticides. We shall study the complete agricultural production process and analyze the drawbacks of the existing system and propose our system as a solution to them.622. There are different policies for different types of crops Tutorial Activity 1.” In today’s competitive employment market. This means rethinking how we can offer talented and highly-skilled employees the rewards that will help keep them engaged and focused on meeting strategic objectives. Therefore.Relationships Farmers sow crops Farmers buy fertilizers.1 Rewards and Incentives What are Strategic Rewards? Let us study in detail about the same in the case below that they “are not just about money any more. One view of Strategic Rewards as depicted here shows four quadrants of a strategic rewards framework: Compensation Base Salary Variable Pay Job Evaluation Performance Management Paid Time Off Development and Learning Training Career Development Learning Experiences Succession Planning Benefits Health Care Retirement Savings Other Insurance COMPENSATITION MANAGEMENT Software Development Methodology We plan to carry the design and implementation of this project in a completely step-by-step manner. cover areas that are increasingly recognized as critical contributors to employee satisfaction. Federal employers are learning to think in terms of broader strategic rewards. the employee agrees to provide time. Pesticides & insecticides remove diseases. Gantt Chart (14 WEEKS) The top two quadrants.1 . compensation and benefits. employers know that finding.Also we shall study the concept of databases and other material required to design and develop our system Phase 2 Design Phase Identification of entities and their relationships Development of logical n conceptual models Development of ER model for the proposed system Defining hardware and software requirements Phase 3 Coding phase Work Environment Work/Life Balance Leadership Performance Support Organizational Climate Implementation of system through actual code Phase 4 Implementation and Testing This phase will involve implementation of our system and testing it with various test cases n data sets.

They are important additional rewards that can significantly enhance an employee’s desire to remain with an organization. DCAA’s managers worked to retain its current workforce. monitoring. For example. coaching for improvement. How does performance management fit into a strategic rewards framework? The performance management policies. dependent care support. design. Represent those program areas where agencies have the greatest amount of flexibility to design programs specific to the needs of their employees. our General Schedule pay system includes a pay progression feature where within-grade pay increases are contingent on acceptable performance and where exceptionally high performance can be recognized with a quality step increase. To make the agency more attractive to potential hires. In addition to streamlining their recruitment process. These rewards: • • groups reported high levels of agreement with the following statements: I know what is expected of me at work. why not disability incentives and reservations . receive reimbursement for certain home-office expenses.. (planning) • • COMPENSATITION MANAGEMENT can emphasize the importance of the employee to the organization. show that good performance management practices create rewarding experiences for employees. but also developing and rewarding performance. Through monitoring performance. I have received recognition or praise for doing good work. they are not effectively managing employee performance and are not making best use of strategic rewards. NCUA uses its strategic rewards as part of its recruitment program. The Defense Contract Audit Agency (DCAA) and the National Credit Union Administration (NCUA) use strategic rewards to help attract and retain skilled employees. But only 0. In addition to actively recruiting new employees. managers reinvented the way they recruit. teamwork. when surveyed about work environment issues.2 Incentives for Inclusion By Lalitha Sridhar Under the Icebreaker scheme.4% of employees in India’s top 100 corporate houses are disabled. the tuition reimbursement program. In addition. an employer hiring a person . one of the strategic reward quadrants is also one of performance management’s key processes–development.1 © Copy Right: Rai University 151 . Performance management is listed specifically in the compensation quadrant to signify that credible measures of performance and using monetary rewards to reinforce results achievement are essential parts of effective performance-oriented pay. Using the strategic rewards approach. the Gallup organization. For example. they also put emphasis on the training new hires will receive. To many employees.. in the Federal Government. NCUA implemented a merit pay system that links annual pay raises directly with employee performance appraisals. If managers do not develop employees. NCUA has created programs that allow its employees to work from home. As the Defense Department’s audit agency. and well-trained supervisors providing quality leadership may make all the difference in the world when a person with a hard-to-find skill is considering your job offer or when an employee with valuable institutional experience is considering a competitor’s offer. flexible leave programs. but can have an equally important impact when an employee is trying to decide whether to accept other employment or remain with an agency. can get the person’s wage paid for .. and rating performance. and deliver the wide variety of things about the work situation that employees find rewarding. and mutual respect by using effective communication and leadership at all levels. To do this. opportunities to telecommute. managers create a learning environment that can be enriching and rewarding for employees. India’s first Draft Incentives Policy for the Disabled has just been presented to the government. Of course. Studies conducted by the Hay Group.. For example. programs. (rewarding) Are rarely seen in terms of their cash value. can influence the employee’s sense of loyalty. a cash award to recognize employees who volunteer to be in a travel status for more than 50 days a year). to all businesses. and others. participate in one of three flexible work schedules. it created a work environment of trust. At least 7 million disabled Indians are waiting for a job. DCAA’s human resources managers were faced with the challenge of hiring 600 entry-level auditors within 1½ years.. providing feedback. In the last 6 months. (developing) In the last 7 days.622. a supportive and engaging work environment is at least as important as health care benefits and pay. These are only two examples of the ways that Federal agencies are reexamining the way they think about. Good performance management practice also plays a vital role in relational rewards.e. and identifying developmental needs. It demands serious 11. meaningful employee involvement. employees in highly-productive work What agencies are using a strategic rewards perspective? Many agencies have adopted this approach to help them manage their workforce.employee and employer. For additional information on NCUA’s strategic rewards programs. and receive travel bonuses (i.. Tutorial Activity 1.. The agency uses a variety of awards to recognize its employees for their contribution to its organizational goals and objectives. The agency works hard to create a work environment that is family-friendly as well as challenging. and a 3to 5-year career ladder. and practices that agencies carry out play an essential role in strategic rewards. recruitment bonuses. performance management includes not only planning. someone at work has talked to me about my progress. flexible work schedules. Performance management also plays an important role in the work environment quadrant.

for example. Experts ask that when taxes and other laws are uniformly applicable to all businesses. receives 1/3 of the minimum wage. “I don’t mean to demean incentives but the disability sector can and should identify areas where their services are most suited and become available for them in a proactive way. why can tax benefit not be given for employment of persons with disability? According to the Persons with Disability Act. even though Denmark does not define what constitutes the disabled population. In India. This not only encourages workers to undertake continued education or rest. To prepare the ground. various subsidies. awareness. In developed countries. Activists believe it is necessary to understand established models that can be replicated in India. disability is tied to the longevity of the population. Director of the Confederation of Indian Industry (CII). the government should give incentives to employees both in public and private sectors to ensure that at least 5% of their workforce is composed of persons with disabilities. for setting up new units in backward areas etc. Asks Rajul Padmanabhan. and in 1977 the Government of India reserved 3% of vacancies in identified jobs in government and the public sector. less than 1% of children with disability receive education of any kind. Adds Anuradha Parakkat.but not for employment of disabled persons. In India. Companies in the IT (Information Technology). Rebates on interest on loans. since the setting up of the first SEE more than 40 years ago. legislation. in time to lobby for its adoption by the Union Budget of 2004-2005. the emphasis is on mainstreaming and that is what we need to emulate. reservations in land allotment and waiver of charges like electricity are other areas where disabled people can benefit from incentives. For example. subsidies are given to sugar. “Corporates will be more interested in COMPENSATITION MANAGEMENT © Copy Right: Rai University 11. Nevertheless. Industries in recession will not appreciate carrot-and-stick policies.1 .attention from the public and private sectors to the question of incentives and subsidies for the support and employment of the disabled. one in every 10 children is disabled. Persons with disabilities have access to a large number of measures to support them in the event of unemployment and to encourage them to re-enter the job market.63% of people with disabilities are aged 45 or more. In the EU. Firstly. but provides temporary employment for (disabled) substitutes. the leading advocacy group credited with moving a recalcitrant government to include disability in the 2001 Census. recommend the studies. training and recruitment. Unlike many people in developing and transition countries. an organisation that hires disabled people. As many as 52% of people with disabilities are economically inactive in the EU. Director of the National Centre for Promotion of Employment for Disabled People (NCPEDP).622. almost 40% of them are age 55 or older.00. an employer hiring a person with severe disability can get the person’s wage paid for during the first 6-9 months. Vice-President of Flash Support. Even though the first Special Employment Exchange (SEE) for the physically disabled was established in Mumbai in 1959. Overall. two critical research studies were commissioned. Mumbai and Guwahati by the NCPEDP.” This Incentives Policy initiative is being spearheaded by the three Disability Legislation Units set up in Chennai. ‘Lenient jobs’ is another supplementary employment scheme: a disabled person with 33% working ability. Deputy Director of Vidya Sagar (formerly the Spastics Society of India. the report says. But the implementation of this well-intentioned piece of legislation leaves much to be desired. There are important lessons we can learn from Europe. Key organisations and activists from the disability sector have come together to place the pioneering document before the government. Says Javed Abidi. A host of NGOs. telemarketing and BPO (Business Process Operations) sectors are particularly suited for employing disabled persons. senior bureaucrats. While 5-6% of India’s population is disabled. incentive policies in select European countries to promote the employment of disabled people were analysed. A particular strength of the disabled is that they are loyal employees. as compared with only 28% of non-disabled people.” The IT industry has attrition (turnover of personnel) rates of 30-40%. duty exemptions. a problematic issue for corporates. why not disability incentives and reservations? But.” Weighted deduction is allowed for employment-generation and scientific research. education and access for disabled people. horticulture and plantations . only about 1. fertiliser.000 disabled persons have been employed. the majority of workers in Europe are engaged in formal employment. representatives from industrial associations and chambers. which also oversees the National Disability Network to advocate better employment. Benefit systems involve major investments in funds and manpower of the kind hardly available in India. Chennai). says Ravi Shankar. 50 or 67% subsidy of wages in the event of a disabled employee taking leave from work. 1995. for example. Under the Icebreaker scheme. for infrastructure. Disability counsellors are assigned to each regional employment agency in an effort to better match disabled individuals with jobs in the open labour market via guidance. some problems appear to be universal. it focuses on compensation for individual needs. the vast majority of 152 disabilities have been acquired in middle or old age . Many offer work-fromhome options. “There has been a sustained and overall neglect of the needs of disabled people in India. Secondly. “When tax benefits can be given for exports. the Persons with Disabilities Act has completely left out the private sector. financial and corporate taxation experts and mediapersons recently congregated for the first time in order to present a Draft Incentives Policy for the Disabled to the Government of India. on the other hand. The Dutch concept of Flexjobs allows for 33. existing incentive policies in the Indian corporate sector promoting social and economic causes other than disability were studied. The subsidies are provided by the State to multiply jobs of this nature rather than put jobseekers on disability pension. if necessary.

and now runs a firm that audits some of their branches.” A 1999 study of 100 ‘top’ corporate houses in India showed that the average percentage of employees with disabilities is a dismal 0.are often unique. Incentives provide a larger. The government’s policy of categorising disabled people draws criticism too. I even have to pay a higher insurance premium!” Recommends Prakash Kuruvilla. Regional Head of HSBC (the Hongkong and Shanghai Banking Corporation).those who can deliver. COMPENSATITION MANAGEMENT 11.” An example can be found in Varada Kutti. the vast population of the rural disabled do not have access to technology and jobs that involve its application. The National Sample Survey of 1991 (results last available) itself said that there are 7 million employable disabled people waiting to get a job. Says Padmanabhan. I wouldn’t aspire to be a singer because I cannot sing. a chartered accountant who was rejected when he applied for a job as a clerk by the State Bank of India. at the same time. provide industry with incentives to hire them. Says Giridhar. if somebody gives me an opportunity. with options of either that number or a certain percentage. broader access. Many companies file ‘nil’ returns in the Compulsory Notification of Vacancies Act because they are afraid of the kind of pressure employment exchanges will exert on them. It doesn’t work like that at all. Director of Vidya Sagar. the fact that we have to match our ability to the available job opportunities is true for all of us . whichever is lower perhaps. Also. One good disabled recruit makes a far better impact than any number of policies. or part.4%. by the government.not just the disabled.” Countered Poonam Natarajan. An absolute number of positions is what is required. Two things are necessary: shift focus to employability of the disabled and. “The Apprentices Act can be explored and amended to include the disabled too. “A person with cerebral palsy cannot be slotted into particular options and slotted into ‘can do’ or ‘cannot do’ generalisations. Similiarly. I can find ways and means of doing what is required of me.” The next generation of corporate managers can be sensitised by introducing disabilities as a section in human resource management studies. There is tremendous demand for people who can be hired with no strings attached. very few permanent jobs are coming out. some urgently needed difference could be made. The abilities of disabled individuals . Individualising is happening at NGO levels anyway. If the Draft Incentives recommendations are accepted in whole. We have to accept the reality that with outsourcing. “We all know about recession but let not the disabled be the last in the queue. As a disabled person. wheelchair-bound advocate with the Forum for Just Law. Activists express concern that persons with mild disability are being neglected. Also. “Percentages mean nothing! Three per cent of 20 posts? Disabled people fall out of the net because the number is not even tangible. Headhunters assume we won’t be interested in the disabled but many who join as apprentices prove themselves very well.1 © Copy Right: Rai University 153 .even within victims of cerebral palsy .622.

Every employer wants his workmen to do the maximum work they are capable of doiri3. workers may be under pressure to work too hard and become dissatisfied. Merits The chief advantages of an incentive-wage plan are: i. and if too high. and c. they set a standard time for the completion of a definite output or piece 154 © Copy Right: Rai University 11. press for a considerable higher minimum wage. lower the cost of production. This is because of the fear that the job may be restudied and earnings reduced. therefore. Increased. and (iii) plans for managerial personnel . if done manually. there is a feeling among the workers that an increase in effort benefits only the employer even when they are employed on a piece-rate basis.because each of these categories of employees have separate and distinct I needs and specific plans tailored for each category may prove beneficial.622. The management should recognise that the effectiveness of an incentive depends on the total situation. (ii) plans for white-collar workers.1 . known as premium plans because they offer a premium for outstanding performance. and therefore. Labour and total costs per unit of output can be estimated more accurately in advance. Incentive Plans for Blue-Collar Workers: For Individuals a. All bonus of premium plans relate to two factors: one. relations with the trade Learning Objective • • • • • Introduction to wage Incentive Plans To know the Incentive Plans For Blue-Collar Workers: For Individuals To understand what successful wage Incentive Plan consists of To learn important wage Incentive Plans To understand Group Incentive Plans Introduction Write Wage Incentive Plans may be discussed as (i) plans for bluecollar workers. This feeling on the part of workers may be removed either through fear or through expectation of gain. v. v. in most cases. workers tend to regard their highest earnings as norms. Less direct supervision is needed to keep output up to a reasonable level. ii. they may slacken their efforts to avoid a revision of rates. b.COMPENSATITION MANAGEMENT LESSON 24: INTRODUCTION TO TYPES OF WAGE INCENTIVE PLANS Principles of External and Internal Differential Rewards and Incentives of work for a fixed wage. and bring a higher income to the workers. On the other hand. The result is that they never produce to their full capacity. put in the minimum necessary work. and. Jealousies may arise among workers because some are able to earn more than others or because fast workers are dissatisfied witJ:l the 310wer or older workers in the group. If they are too low. It is difficult to set piece or bonus rates accurately. which includes worker-management confidence. Demerits The plan suffers from the following defects: i. Incentive plans are. the fixing of a rate of percentage by which bonus would be earned by a worker over and above his set wage. The conflicting interests of employers and employees are unified. iv. iv. two. The amount and cost of clerical work increases. iii. Systems under which the rate of incentives is proportionately higher than the rate of increase in output. efficiency and smooth working can therefore be promoted and sustained. iii. Long Term Plans Description Short-Term Plans These systems may be broadly classified into three categories: a. vii. but a hope of earning a bonus does induce them to work harder and produce more. Quality tends to deteriorate unless there is a stricter system of checking and inspection. ii. A works study associated with payment by results is a direct stimulus to workers to improve the organisation of work and to eliminate lost time and other waste. Systems under which the rate of extra incentive is in proportion to the extra output. if the standard time is saved or the standard output is exceeded. When paid by result. Payment by results may lead to opposition or restriction on output when new machines and methods are proposed or introduced. There is a danger of disregarding safety regulations and thereby increasing the rate of accidents. A Successful Wage Incentives Plan Should Consist of the Following Key Points i. Short-Term Plans b. payment by results may generally be relied upon to yield increased output. It has been found that fear can never produce the desired effect. When well-designed and properly applied. Systems under which the extra incentive is proportionately at a lower rate than the increase in output. vi.

b.. viii. c.66 6.. From the point of view of the administration. the policy is one of drift.. The management should avoid action that resemble “rate cutting” because of the need to change method and rates from time to time. 4.. Profit Sharing. the number of units to be completed is 10. in this plan. receives Rs. iii. the worker is left alone to decide whether or not to produce more after the standard has been reached. The Bedeaux Point Plan. There must be a proper machinery for handling grievances. vii.1 © Copy Right: Rai University .00.. for. Co-Partnership System. it is optional for a workman to work on the premium plan or not.0. and Re. Demerits The disadvantages of the plan are: a. 4.00 18. Halsey Premium Plan. The bonus is based on the amount of time saved by the worker. at the same time.4. if he takes 8 hours to perform the work. The plan is simple in design and easy to introduce. of hrs saved. v. 0. Emerson Efficiency Plan. it does not create any heartburning among such workers as are unable to reach the standard. It guarantees a fixed time wage to slow workers’ and.00 The chief incentive plans are: i. iii. It depends upon past performance instead of making new standards.00 in 1 hour 14. The management should avoid any action that may ire interpreted unfair.00 COMPENSATITION MANAGEMENT Total Wages Rs. the two are 155 Description of Each Wage Incentive Plan Halsey Premium Plan This is a time-saved bonus plan which is ordinarily used when accurate performance standards have not been established.. Halsey Weir Premium Plan. The workers can beat the game by spurting on certain jobs to capture a premium and soldiering on other jobs to rest under the protection of the guarantee of day wages. The 100 Per cent Premium Plan. It is essential that the management pay in proportion to output. formula: Bonus = 1/2 of Merits The merits of this plan are: Timesaved × Daily wage Time taken a. Halsey-Weir Premium Plan This plan is similar to the Halsey Premium Plan except that 50 per cent of the time saved is given as premium to worker. If he performs the task in less than 8 hours he receives an extra premium on the time saved (i.Gnatt Task Plan. As the wages are guaranteed. once this output has risen above that required amount for guaranteed pay. v. 6 No.Rs. Bonus = 1/2 × Time Saved × Hourly Rate Rowan Premium Plan This plan differs from the Halsey Plan only in regard to the determination of the. and the hourly rate is 25 paise.union. Great care should be taken in setting up standards to avoid rates that are too loose or too right. The cost of labour is reduced because of the percentage premium system.00 10. the piece rate of pay gradually decreases with increased production.75 Total earnings. The plan is a combination of the day wage and the piece wage in a modified form. Taylor’s Differential Piece Rate Plan.bonus. Example Suppose the standard time is 20 hours.25 Example If 8 hours is the standard time of a job. He thus gets wages on the time rate basis. ii.Rs. His day’s wage is assured to him whether he earns a premium or not.622. provided that he is not so incompetent as to be useless. A standard output within a standard time is fixed on the basis of previous experience. In all other respects. Rowan Premium Plan. x.75 Amount of bonus. iv. he is paid on the basis of a time wage. 11. The management should train supervisors all the way down the line so that foremen and department managers are able to deal with problems within their own departments. Accelerating Premium Systems. c. He is entitled to a bonus calculating on the basis of 331/3 per cent of the time saved. xii. This may call for procedures for the participation of employees and negotiations with the trade union..00 in 2 hours 6. If he does not complete the standard output within the stipulated time. offers extra pay to efficient workers. iv..e. vi. Management should not introduce an incentive system until it has taken action to ensure full understanding of what is involved. Merrie’s Multiple Piece Rate Plan.50 is the guaranteed wage per hour.66 in 4 hours 2. Under this plan. Table 1 Premium (Half of the Time Saved) If the work is completed -do-do-do in 6 hours 0. vi. the working of the scheme will be: 14 Time taken (hrs).. Some Important Wage Incentive Plans Then. xi. the worker. ix.. 3. d. for 2 hours).50 Amount of wages recvd.. the quality of communication and of supervision and the traditions in an industry. 0. Re. Re. b. ii.

0.50 = Rs.66 in 4 hours 2. his total earnings would be: Rs. = Rs. the bonus he earns decreases.50 + (10 . the premium and total wages would be as follows: Table 2 Premium Rs. 4. The other is the lower rate for those who are below the standard. his total earnings will be Rs. If he completes the tasks of 10 hours and if the hourly rate is Re. and second.1 . 5. = (Hs + 2 Ha) Rh.. which means that a job should be completed in so many minutes. 5.00 Total Wages Rs. A definite hourly rate is paid for each task-hour of work performed.50 Weir or the Rowan Plan is equal. If the job is completed -do-do-do in 5 hours 0. i.80 x 0. the Rowan Plan a worker gets his maximum bonus when he completes the task in half the standard time allowed.01.00 in 3 hours 6. because of the limitation on earnings. On a proper determination of the standard depends the success of the scheme. It is particularly suitable for plants in which workers are assigned diverse kinds of jobs. therefore. be expected to take much interest in the plan. the complex method of premium calculation is generally unintelligible to the worker. and rates are expressed in time rates rather than in money (e. the time saved is expressed as la percentage of the time allowed. to remove the fear of wage cut. and the hourly rate of pay is increased by that percentage so that total earnings of the worker are the total number of hours multiplied by the increased hourly wages. He cannot. Rh. The plan aims at ensuring the permanence of the premium rate.00 + 100 = Rs. it does not provide an incentive for maximum productivity.00 per day wage. Such scientific determination ensures that the standard fixed is not unduly high and is within the easy reach of workers. 4. Ha = the actual time taken on a job. Rs + 1/2 (Hs . The premium is calculated on the basis of the proportion which the time saved bears to standard time.8) x 0.90 = Rs. 480 + Re. to give sufficient incentive to workmen to induce them to produce up to their full capacity. If he saves more than 50 per cent of the time.00 7. for a little time saving Rowan Plan gives more bonus than the Halsey or the Halsey-Weir Plans.Rh Hs Ha = (2 Hs.g. The 100 Per Cent Premium Plan Under this plan. However.the same.00. time.480) x . the worker is allowed one hour for its completion and receives a bonus of 75 per cent for the number of Bs.20 hour per piece). In the Rowan Plan. The Bedeaux Point Plan This plan is used when careful assessed performance standards have been established. It differs from the 100 per cent plan in that the basic unit of the time is the minute termed as B.70. The plan is identical with the straight piece-rate plan except for its higher guaranteed hourly rate and the use of task time as a unit of payment instead of a price per piece. Moreover. and his increase in wage is at a diminishing rate. a bonus) may serve as an incentive to come up to the standard. Every job is expressed in terms of Bs (after Bedeaux). time. under. if the rate per point is Re. There is one rate for those who reach the standard. This standard is determined on the basis of time and motion studies.Ha ) Rh Hs Hs = the hour allowed or standard time. the bonus earned under the Halsey156 © Copy Right: Rai University 11. but above 50 per cent of the time saved. Example If 8 hours are the standard time for doing a job and Rs. E= Ha. Rh Hs Total Earnings (E) E= Ha. All the points which a worker earns in a day are recorded. These premium plans may be classified as differential piecework systems and have been evolved with a view to giving the benefit to both parties. so that the hope of receiving a higher rate (that is. Suppose a worker earns 600 Bs in a day. The chief advantage of this plan is that it can be applied to any kind of a job. Taylor’s Differential Piece-Rate Plan This system was introduced by Taylor with two objects: First. they are given a higher rate to enable them to get the bonus. which is often cut by the employer when the worker’s efficiency increase beyond a certain limit. it is progressively higher. 0. task standards are set by time study or work sampling. 8 x 0. 4. Workers are expected to do certain units of work within a certain period of. E = Ha − Rh + ( Hs − Ha) Ha. It will be seen that. the Rowan Plan pays more than the Halsey Plan.. The worker is paid the full value of the time saved. 0. the overall production cost per piece falls when the output increases. If a particular work is rated at 60 Bs (or one B hour). saved.01. Rh.01 + 3/4 (600 . The bonus paid and the total earnings under each of these three schemes are given in Table 3 Table 3 Plan Halsey Halsey-Weir Rowan B= Bonus (B) B = 1/3 (Hs . Up to 50 per cent of the time saved.Ha). 5.00 7.66 6.Ha) Rh B = ½ (Hs – Ha) Rh (Hs − Ha) × Ha. and the bonus is calculated on that basis. As his extra earning is not in proportion to his usual wage rate. They are based on the fundamental principle that a worker’s earning should increase when his production rises above a pre-determined target. = 1/2 (Hh + Ha) Rh.Ha). 0. COMPENSATITION MANAGEMENT Formula: Bonus = Time saved × Time taken × Hourly rate Time Allowed The Rowan Plan has all the merits and demerits of the Halsey Plan except that. Rh = the worker rate per hour. shifted from one job or department to another.622.50. But under the Halsey and Halsey-Weir Plan.e. Rh + 1/3 (Hs .00 in 1 hour 14.

00 4. at the standard performance. a higher piece rate is paid but there is no bonus. The day wage is assured.12 ii.1 0. When a worker fails to turn out the required quantity of a product.10 0. a standard time is established for a standard task.00 7. Under this system.same piece rate but no bonus. a worker receives a bonus of 40 per cent and at 140 per cent efficiency the bonus is 60 per cent of the day wage. but in a complete co-partnership system. c. say 83% of standard output a piece-rate + 10% of time rate as bonus. Table 4 (Amount in Rs. The Gnatt Task and Bonus Plan This plan has been devised by H. The one who completes the work within the allotted time is paid wages at a rate which is 320 per cent higher than the basic one. This bonus goes on increasing till. There is no sudden rise in wages on achieving the standard of performance. ii. only the minimum guaranteed wage is to be paid. 4.32 1. at which stage he receives a nominal bonus. Thus.00 Bonus (Rs. Efficiency is determined by the ratio between the standard time fixed for a performance and the time actually taken by a worker. i.1 0. this wage + 20% of time-rate will be paid as a bonus. 11. and the bonus is allowed on the increased wage. Output standards and time standards are established for the performance of each job. 4. Below the standard performance. In addition to this workers with lower efficiency are not penalized. The payment of a fixed rate of interest on capital. this plan is seldom used now. b.1 0.50 3. There are different cases.) Worker A B C D E No. and for them the system is good.This system is designed to encourage the specially efficient worker with a higher rate of payment and to penalise the inefficient by a lower rate of payment.Gnatt and is the only one that pays a bonus percentage multiplied by the value of standard time. when the standard is exceeded. his efficiency is 50 per cent. Band C are better off. the effective piece rate remains the same when compared with that of A.00. too. the bonus comes to 20 per cent of the guaranteed wage.50 9.12 0.00 COMPENSATITION MANAGEMENT It is evident that workers A.1 0. Above 100% of standard output . Such a scheme is usually introduced in an organisation where the performance level is already high and management is aiming at 100% efficiency. The payment of the existing standard wages of labour. The division of the surplus profit between capital and labour in an agreed proportion. In practice.) Nil 2.L. if the period of 8 hours is the standard time for a task and if a worker performs it in 16 hours. shares responsibilities. Example If the standard task for a day is 8 units and the day wage is Rs. 1.90 0. who is just 100 per cent efficient. and iii. He who finishes the task in 8 hours has 100 per cent efficiency. Under this plan. Merrie’s Multiple Piece Rate System This system.00 Total Wages (Rs.80 1.1 Effective piece Rate 0. Co-Partnership System This system tries to eliminate friction between capital and labour. he simply gets his time rate without any bonus. Under this system. of units completed in Allotted time 10 9 8 11 12 % of efficiency 100 90 80 110 120 Total Amt. therefore. but the plan differs from Taylor’s Plan in that it offers three graded piece rates instead of two.00 4.10 0. Workers completing the job within the standard time or in less time receive wages for the standard time plus a bonus which ranges from 20 per cent to 50 per cent of the time allowed and not time saved.44 Basic Piece Rate 0.00 4. The remuneration based on efficiency rises gradually. the following factors are present: a. is based on the principle of a low piece rate for a slow worker and a higher piece rate for higher production. as they are in Taylor’s Differential Piece Rate. d. Management has some discretion in distributing the 20% of time rate over 17% of production above 83%. Up to. Example Let the standard time for the completion of 10 pieces of a job be 8 hours and the piece rate be Re.5 paise.00 6. Received 1.12 0. the bonus at 50 per cent and the total wages would be: Example: If the standard task for a day is 8 units and the day wage is Rs.) 4. The payment for a part of the worker’s labour by the allotment of a share in the capital.) 4. The basic wages rise proportionately as under ordinary piece wage system. fixed time rates are guaranteed. who are more than 100 per cent efficient.20 0. and iii. At 120 per cent efficiency. This system is most profitable for workers whose efficiency is very high.1 © Copy Right: Rai University 157 . Above 83% and up to 100% of standard output ~ same piece rate + 20% of time rate. there are also three stages of payment: i. but for D and E. Emerson Efficiency Plan Under this system. Then the basic hourly rate comes to 12. the bonus at 50 per cent and the total wages would be: Table 5 Unit of work If 6 units are completed in a day If 8 units are completed If 10 units – do – If 12 units –do – Task Wages (Rs.622.00 2. when he achieves 100 per cent efficiency. not only does a worker share in the profits of the undertaking but he also takes part in its control and.

lubricants.e. The sharing in the control of the business by the representatives of labour. Thirdly. Bonus can also be calculated on the increased value of sales where this result is obtained by increased production.by harder working. and the bonus is paid in proportion to which the actual output per manhour exceeds the standard. To enable the workers to participate in profit-sharing. The ‘Value added’ by manufacture at factory cost leading to cost reduction forms the basis for calculating the bonus. Each worker’s rewards are no longer based solely or directly on his own efforts. Accelerating Premium Systems There are the system which provide for a guaranteed minimum wage for output below standard. In this system.e. There are several reasons for adopting such a plan. A standard output per man-hour is laid down for a department or for the plant as a whole. The system arouses and sustains the interests of the workers in their work. group incentive plans are advantageous. fuels. The theory behind profit-sharing is. Long -Term Wage Incentive Plans Under such plans. By giving them a voice in the management of the factory it raises their status as well. each member of the group receives a ‘bonus’ based on the output of the group as a whole. Finally. etc. i. There is unevenness of performance of different members of the group and this may have resentment of active members against mere ‘passengers. since each member of the group has a vested interest in getting a new group member trained as well as quickly as possible. they are required to work a certain number of years and develop some seniority. Increasingly large earnings are conceded for above average output. Prof. Such schemes are generally adopted when much higher outputs than what are currently obtained are to be achieved. in turn. and group incentive payments vary less than individual ones. Features of Profit-sharing The main features of the profit-sharing schemes are: a. group production levels tend to be more stable than individual ones. 2. Seager observes: “Profit-sharing is an arrangement by which employees receive a share. COMPENSATITION MANAGEMENT Profit-Sharing Profit-sharing is regarded as a stepping stone to industrial democracy. A standard output. which will be returned to the workers through profit-sharing.. target production. Group incentive Plans are usually applied to small work groups. may be laid down for a month or a larger period and bonuses are paid if this is achieved. The Group Incentive Plans are usually: i. by which an employee receives a share fixed in advance of the profits. The agreement is voluntary and based on joint consultation made freely between the employers and the employees. fixed in advance of the profits.” The International Co-operative Congress held in Paris in 1889 considered the issue and defined profit-sharing as “an agreement (formal or informal) freely entered into. There tends to be less bickering among group members as to who has “tight” production standards and who has “loose” ones. and b. b. 3. the increment being different for each 1% increase in output.’ iii. To the extent that person does not see his effort leading to the desired reward a group plan is probably not as effective as an individual plan. This. can help eliminate some of the need for close supervision. saving in materials. 5 or 6 people who must assemble a component together. If the actual cost of production is lower than the ‘standard cost’ to the extent the workers are able to influence such reduction . ii.) and help keep shrinkers in line. . small increment in earnings are allowed. such plans also encourage co-operation among group members. they try to make it a very profitable enterprise. 158 © Copy Right: Rai University 11.1 . The Profit-sharing schemes. The Scanlon Plan. etc.” Profit-sharing usually involves the determination of an organization’s profits at the end of the fiscal year and the distribution of a percentage of the profits to workers qualified to share in the earnings. The percentage to be shared by the workers is often predetermined at the beginning of the work period and is communicated to the workers so that they have some knowledge of their potential gains. the production is pushed up higher and higher by discouraging low output and rewarding at an increasingly effective rate higher outputs. In such cases. The chief disadvantages of the group plans are: i. As they have become partners in the business. Sometimes (as on assembly lines) several jobs are inter-related. Here one worker’s performance reflects not only his own effort but that of his co-workers too. group incentive plans also facilitate on-the-job training. and ii. For low and average increases in output above the standard. The payment may be in the form of cash.622. a. stock of future credits of some amount over and above the normal remuneration that would otherwise be paid to employees in a given situation. Secondly. ostracism.a bonus whose money value is a percentage to the cost reduction is paid. Ill-feeling may be generated among the groups themselves where the technology is such that one group’s earnings depend on the performance of another group. that management feels its workers will fulfill their responsibilities more diligently if they realize that their efforts may result in higher profits. for example. the groups can bring pressure to bear on their members (through badgering. Very significant increases in earnings are given for really high output. Fourthly. the other conditions of work remaining the same. The incentives usually take three forms.

efficiency or merit.c. To eliminate waste in the use of materials and equipments. Moreover. The payment is of an uncertain nature because of the uncertainty of profits. It may be considered as a step short of joint consultation or co-partnership schemes.. which distinguish it from gainsharing and from an ordinary system of wage payment. Wage business affairs are managed and shared on a footing of equality. quarterly. b. These features are: a. it is something else. COMPENSATITION MANAGEMENT 11..e. disability. Although plans differ widely as to specific details. Combination by which a part of the profits is paid in cash and a part is deferred and placed in the employee’s account in a trust fund. which is to be applied in all circumstances. the total remuneration due to workers being equally divided among them or in some agreed proportion. This is the inner essence of profit-sharing which has often been overlooked. for benefits to dependants in the event of the death of an employee. a principle and technique of leadership. monthly. It may incorporate incentive features and produce results not possible by the implementation of other programmes. It should be noted that profit-sharing is not a system of wage payment as such. e.” From the point of view of the employees. employee productivity is the overriding objective of profit-sharing. To encourage employee thrift. b. death. Profit-sharing bonus on the other hand refers to the distribution of profits on the basis of a certain percentage of one’s monthly wages. To provide a group incentive for a larger output. but is a remuneration for collective effort. depending upon the type of plan which is adopted. To instill a sense of partnership among employees and employers and to increase employee interest in the company in which he works. c. The payment is sometimes regarded as windfall gain or as something to which a worker is entitled and not as something in recognition of his efficiency. The real objective of profit-sharing is to foster “the unity of interest and the spirit of co-operation. such as tenure or satisfy some other condition of service which may be determined by the management. Objectives of Profit-Sharing Profit-sharing is more than just another employee benefit. The critical ingredient in profit-sharing is the desire of the employees and the management to ensure the success of a programme. three basic types of profit-sharing plans are in use: a. and for other related benefits. Essentially this means “the creation of a mental climate in which a strong sense has to grow that the business is the business of all.1 © Copy Right: Rai University 159 . since it is the joint effort of the workers and the management and since the one cannot carry on a business without the help of the other. The payment is not based on individual work. Deferred profits are credited to employee accounts to be paid at the time of retirement or in particular circumstances (i. The proportion of the profits to be distributed among the employees is determined in advance. The amount to be distributed among the participants is computed on the basis of some agreed formula. f. From the view point of the organization.622. Deferred plans and combination plans contain features very similar to benefit plans which provide for retirement benefits and against loss of income following disability. and have created a climate for better employee relations. it is not voluntary and is not based on agreement. biannually or annually). c. Profit-sharing and bonus (also known as Profit-Sharing bonus) are two different things. in other cases. d. At the same time. there may actually be some losses. d. f. it may contribute to employee satisfaction because profitsharing provides for rewards which are related to employee needs. The programme is formulated at the top because profit-sharing is first and foremost. Current (cash) profits are paid directly to employees in cash or by cheque or in the form of stock as soon as profits are determined (e. e. A cash plan contributes directly to an employee’s immediate economic gain. The agreement on profit-sharing having been mutually accepted. It may be the most important part of a progressive personnel policy. thereby reducing the rate of turnover. A share in profits is payable at long intervals when the final accounts of a firm are prepared and its profit or loss ascertained. A profit-sharing scheme is generally introduced to achieve the following objectives: a. b. Profit-sharing is a distinctly progressive measure towards industrial harmony.” There are three main characteristics of labour remuneration in the form of profit-sharing. To promote industrial harmony and stabilization of the work force. Companies which offer this incentive have realized higher profits and increased efficiency. The amount to be distributed depends on the profits earned by an enterprise. g. severance or under withdrawal provisions during employment). profit-sharing may serve a multiple of objectives. The employees should have some minimum qualifications. d.g. for the former sharing implies sharing on an equal footing rather than yielding on the part of a management to a persistent demand. is binding and there is no room on the part of the employer to exercise discretion in a matter which is vital to the employees. Types of Profit-Sharing Employee profit-sharing is often regarded by employers as a supplementary benefit programme. Sometimes there may be no profits or very high profits. To attract desirable employees and retain them. c.

This aims at bringing about a direct and most intimate relationship between individual effort and reward. The plan is essentially a suggestion system and assumes that efficiency requires company-wise/ plant-wise co-operation. less over-time and employee insistence on efficient management. This mode of profit-sharing establishes a close relationship between the efforts of labour and rewards it receives. A network of departmental and plan screening committees are set up to evaluate employee and management costcutting suggestions. The Scanlon Plan This plan was developed in 1937 by Joseph Scanlon. In other words. supervisors. its payment will have to be made out of the balance left over after the above deductions. No scheme should be launched until business conditions are favorable.1 Sometimes the various departments of an industrial unit may have their separate profit-sharing schemes. However. Requisites for Profit-Sharing To be effective. if there are heterogeneous industrial units in a locality. Locality Basis The computation of surplus profit for distribution should be arrived at by deducting from it normal and additional depreciation and initial or development rebate. In practice. They are more effective where there is a relatively small number of participants. Individual Basis A worker receives a proportion of the profit which may have been earned by a business through the efforts of that particular worker. In the first two schemes. Usually all employees in the plant participate in the plan. 160 © Copy Right: Rai University . all employees usually share in 75% of the savings. The Scanlon plan has been successful where adopted. If a suggestion is implemented and successful. the purchasing power of the people has considerably increased. It tends to encourage a sense of partnership and sharing among workers. To demonstrate some measure of social justice to employees. there may be great difficulties in bringing about an adjustment in their share. generally less than 1. If additional bonus is to be paid. without profitability the profit-sharing scheme would not succeed. The purpose of profit-sharing is the achievement of industrial harmony. after providing for all these expenses. there should be comprehensive and flexible schemes for incentives and other kind of bonus which promote productivity. and managers make cost-cutting suggestions that are screened and evaluated by the various screening committees. where labour’s work is for a widely divergent nature. Forms of Profit-Sharing Profit-sharing may be on Industry Basis Until these essentials have become permanent features in an industry. 2. 11. Unit Basis This is the simplest way of giving a labourer a share in the profits of the individual undertaking in which he is employed. The plan was designed t to involve the workers in making suggestions for reducing the cost of operation and improving working methods and sharing in the gains of increased productivity. if a certain industrial unit somehow shows a loss in a particular year. The plan has two basic features: 1.33 Certain conditions need be fulfilled to make the plan successful: i. To ensure employee security. Moreover. Financial incentives aimed at cutting cost and thereby increasing efficiency are installed. The margin of profits should be adequate and substantial so that. unless working conditions in a business have been stabilized. Losses. by the adoption of sound distribution methods and by keeping constant vigilance over its functioning. It should be at least 6 per cent on paid-up capital. when they occur. there must be a surplus of a sizable amount to be distributed among the workers. with a charge of 10 per cent to be made for reserves. Department Basis The return on the capital invested in an enterprise should be that which would encourage partnership investment. A business or any industry may be stabilized by an expansion in production. and the rest 20% is set aside for the months in which labour costs exceed the standard. Workers. and h. its workers are not deprived of their remuneration because other units have made a good profit. a lecturer at the Massachusetts Institute of Technology and a trade union leader in a steel mill. Fair Return on Capital Industrial units in a particular locality may pool their profits to determine labour’s remuneration by way of profit-sharing.622. so that the replacement or modernization cost of plant and equipment is properly provided for. the reward of workers depends on the combined efforts of all in a number of units. no profitsharing scheme would be sound or anything more than a paper scheme. it is impossible to determine such profits. and profits are sufficiently high to ensure their distribution between workers and shareholders. Computation of Surplus Profit COMPENSATITION MANAGEMENT Here the profit of a number of industrial units in the same industry may be pooled together to determine the share of labourers. This aims at bringing about an even closer relationship between a worker’s efforts and the reward he receives. profit-sharing schemes should be based on the following considerations: Profitability of Industrial Units Industrial units should be profitable for. The workers in a particular department share in the profits made by that department.g.000. Such a scheme has the advantage of putting the whole labour force in a particular industry on a uniform basis. should also be deducted before the profits for the subsequent year are declared.

as there is a guaranteed minimum wage (in 1997 GMW =$5.00 × 1. piecework (or a sharing plan) above 100% performance. Piecework (incentive with 100% participation) Worker is paid directly for each piece produced (i.09 = $10. reducing competition and encouraging group spirit. This is especially useful for work cells or situations where individual performance can’t be easily measured (e. However. It is more successful where there are stable product lines and costs.e. profits. construction. that person will receive the new base rate. since overhead is a constant and will decrease as it is normalized per unit production.ii. that true piecework is not legal. Any benefits above standard performance. a 3piece plan is known as a Merrick plan. the incentive is not as strong as for other plans.). etc. On the other hand. However. This means that a worker will typically receive a base rate times the hours worked. shipbuilding. The most common plan is Improshare.1 © Copy Right: Rai University 161 . below which the base rate can not drop. Group incentive schemes Group output is measured and used to determine each group members pay.622.S. At first glance this appears to produce no benefit for the company. There should be a strong commitment to plan on the part of management particularly during the confusing phase in period. Gain Sharing plans . a 2-piece plan is known as a Taylor plan. If based on total budget: sales.09 = $10. With this plan. directly proportional to performance). the new base rate also drops. With this plan standards are frozen in a base period and any increased productivity is shared with no attempt to pinpoint whether employees and managers created the savings. costs. day-to-day pressures are taken off the worker. not IE work measurement based. Regardless of the person’s performance during that period. Standard hour plan Day work up to 100% performance. Also note. a flat section so that company doesn’t lose money known as a leveler. this is not true.g.09 new base rate = base rate × 1. There should be good supervision and healthy labour relations. a fifty-fifty sharing plan that gained in popularity in the 1970’s. and it requires extra bookkeeping.GMW. iii. some companies will maintain a lower threshold (at least the GMW).25/hr) under U. These schemes have advantages in allowing greater flexibility. However. iv.(incentives with other than 100% participation) These are practically always less than 100% participation and are called sharing plans.90 If the worker’s performance deteriorates. regardless of performance. the individual incentive is reduced (lab groups) and better workers may become discouraged COMPENSATITION MANAGEMENT 11. Example Worker performance = actual output/expected output = 175/ 160 = 1. law. etc. Measured day work A progressive record of a worker’s performance is used determine base pay for the next pay period. Summary of Wage Incentive Schemes A critical analysis and practical realities of the wage payment system The Extremes: Day work Worker is paid the same constant hourly rate (guaranteed minimum wage . (Plans with more than 100% participation is negative sharing and the company would typically loose money). Some odd variations include: extra incentive in the form of a kicker. will then be paid directly to the worker. = Scanlon and Rucker plans).

job security What Else they All Look for? Direct financial plans .1 .9 per cent. probably transplanted from European firms.622. stimulates morale. 162 © Copy Right: Rai University 11. pay. there is a tendency amongst workers to sacrifice quality for quantity. or the rate structure of incentive wage is not adequately progressive. or the fall-back on time rate wage is sufficiently high and workers do not have much inducement to put in greater effort beyond the standard norms. Wage incentive plans. 45 per cent in the U. this situation reflects the relative ineffectiveness of incentive plans. and Russia’s 87. The incentive schemes Learning objective • • • • • To know the Prevalent Systems of wage Incentives in India To understand the Precautions against ill effects of Incentive Systems To learn the Prerequisities of a Good Wage Incentive Scheme To know the reasons of the failure of Incentive Plans Requisites or guidelines for effective Incentive Plans Interaction Before discussing the prevalent systems & guidelines for effective incentive plans Let us first discuss that can workers be motivated with wage incentives? . job security. The group incentive system is more widely prevalent in the Indian industry than the system of individual incentive or a combination of both. Blue collar: pay. the percentage of workers paid by results is around 31 in India as compared to 42 per cent in the U. in cases where group incentive plans are in vogue.SA and 77 per cent in USSR for iron and steel industry.COMPENSATITION MANAGEMENT LESSON 25: INTRODUCTION TO PREVALENT SYSTEMS AND GUIDELINES FOR EFFECTIVE INCENTIVE PLANS Principles of External and Internal Differential Rewards and Incentives First. and which do not have a direct relationship between effort and wages on the other. interesting work 2. In industries like iron. a number of units may have unnecessarily complex incentive plans. promotions. For cotton textiles.wage incentives. for the direct link between effort and earnings is lost. Some of the incentive plans actually turn out to be regressive in practice in these final stages. workmen. Second. Second. White collar: interesting work. America’s 36. however only a small percentage of workers are paid on piece-rate basis. while there is no need for the rate structure of incentive wages to be progressive from the beginning.Yes/No/Depends What do blue collar and white collar employees hunt in motivating jobs? 1.. In addition to numerous slabs in the rate structure. are very low. methods. machines and materials involve a revision of norms and rates. First. as a percentage of the total wages of workers covered under the incentive plans. incentive schemes bring about a certain fixity in the operations and undermine flexibility. In 1961. other than the piece-rate system. a system becomes difficult to operate effectively. This calls for a strict system of checking and inspection. it was 10. In any case. Such changes in technology. Another incentive system that is prevalent in Indian industries is the payment of production bonus usually at a differential rate for the output produced in excess of the normal output for a unit of time. These maladies of the incentive plans betray a lack of wage to make them an effective tool of increasing productivity. Precautions Against Ill Effects of Incentive Systems Experience has shown that incentive schemes are not an unqualified blessing in themselves. The incentive scheme operates on a group or individual basis. which are not easily comprehensible to illiterate or semi-literate workers on the one hand. depending on the measurability of the work of individual workers and the inter dependence of their output performance. etc. bristle with some problems in their operation. pay proportional to output Indirect financial plans . steel and chemicals. while textiles have mainly the individual system of incentives. but could be taken for granted The Prevalent Systems in India The most widely prevalent incentive scheme in Indian industries is the piece-rate system. Engineering and chemicals have mostly the group system. which is an essential requirement in view of the rapid progress in technology. They are fraught with some dangers that have to be guarded against during the course of their evolution and implementation. Fourth.permanent. vacation. Third. The norms are generally fixed on the basis of job anaylsis and/or time studies. it needs to be so when workers show high levels of productivity. There may be several reasons for this situation: either the norms of standard work are fixed high and it is not possible for a worker to exceed them by a sizable percentage. there are often changing bases of calculation and distinctions between different types of employees . temporary staff. the percentage of workers paid on piece-rate in India is 70 against Britain’s 63. incentive earnings.fringe benefits. Moreover.K.

Moreover. iii. Thirdly. Quite often. Too many factors selected at a time may make it complicated. differences in earning will differ for workers according to the differences in their abilities and efforts. viii. COMPENSATITION MANAGEMENT ii. x. trade unions discourage ill feelings or jealousies amongst its members. promotion. Therefore. be impediments to improve productivity. which should ordinarily be taken into account while choosing a particular type of wage incentive scheme. i. it may turn out that indirect groups may receive higher incentive earnings than the main production group. ignored. Incentive schemes should be installed only when production has reached 60 per cent of the rated capacity. Certain specific factors may be selected as the basis for a scheme. and the gains of increased productivity should be shared both by the employer and the employed. To make the scheme effective. the management must concentrate on creating a proper industrial relations climate before’ introducing incentive schemes. advisable to ensure that a proper climate exists for the introduction of such schemes. there is a danger that workers would tend to overwork and undermine their heal. and the work contents of various jobs should be stabilised. therefore. i. be adequately provided with such revision in case of significant changes. The scheme chosen should be one which would result in overall economy for the establishment. in fact. At every stage. vi. trading etc. more often than not. iv. are: i. This may be checked by fixing a ceiling on incentive earnings. v. The quantum of incentive paid at the low levels of production and efficiency should be such as to ensure that earnings continuously increase when the targets are raised. The scheme should not be very’ costly in operation. incentive payments are just taken to be necessary part of the total wage packet. Performance standards and norms ‘for incentive payments should be set up at the average performance level of the employees. incentive schemes sometimes lead to jealousies and misunderstanding among the workers because the difference in their earnings.danger that safety regulations would be disregarded by workers and this may result in higher accident rates. and too much material handling. vii. Any hastily conceived or haphazardly introduced incentive scheme does more harm than good. even a well-conceived incentive scheme may not yield the optimum results. xi. mutual discussions and appropriate management action would be called for. ix..622. The management should strive to create a proper climate by adopting sound policies of recruitment. The adoption of objective assessment procedures and the use of functional responsibility are to be advocated in addition to such indices of productivity as wage cost per unit sale. such schemes naturally result in a number of personnel problems which may. there is a . The scheme should be based on a work study. The scheme should not undermine co-operation amongst the workers. incentive payments at a lower level of the performance are allowed only for limited time periods. etc. complicated calculations. Finally. The objectives of the scheme must be clear.. which are. therefore. It is. Prerequisities of a Good Wage Incentive Scheme The installation of an incentive scheme presupposes the existence of certain prerequisities. Incentive payment should be made as soon as possible after a job is completed. Some important considerations.should.e. Unless there is mutual understanding and concern for improving productivity. salary savings on inventory. The scheme should suit both the particular enterprise and its workers. all the workers and supervisors should be consulted so that they understand the objectives and benefits of the scheme and may contribute to its success. In principle. and hastily conceived schemes are introduced primarily because of pressures from workers and trade unions. right from the conception of the scheme to conducting studies. etc. a climate should be created in which the employees feel that the management is fair and just in its dealings with them on wage incentive matters.The scheme should have elasticity to take care of technological and other changes taking place from time to time and rectify errors that may have crept in at the time of its initial introduction. However. Fourthly. One study reported that almost 75% of the 163 © Copy Right: Rai University . welldefined.e. Unless the scheme i. they should not be too high nor too low. for disparity in earnings may create discontent.. Care should be taken to provide a suitable gestation mechanism in the scheme on a time-bound basis so that 11.e. of the workers in general. right from the inception of an enterprise. each individual or group should be paid according to effort and productivity. It should rather stimulate co-operation with a view to achieving the common objective of increasing the well-being of the business and.. therefore. it should not involve the maintenance of very elaborate records. it should be introduced after a proper consideration of the various preparatory measures. Incentives should not only increase production but also result in higher productivity and lower cost per unit. and these should be well understood at the levels of management and of workers. Therefore. xii.1 Incentive Plans for White Collar Workers/ Salesmen The salesmen are usually given incentives in the form of sales commissions. This may be solved by greater vigilance on the part of workers concerned. For this purpose. Such performance standards should be set as are within the control of employees.

the salesman is simply paid on weekly. Straight Commission Basis Under this method the salesmen are paid on the basis of sates effected.3 8.0 Under this.4 5. and misunderstanding often results in frustration.. aimed at increasing the motivation of employees.6 1. and salary plus bonus.3 0.4 5.e. Unfair Standards are a great hindrance in the way of motivating employees. The assumption the incentives are needed to motivate salesmen. high performance salesmen are generally attracted. and lower for the lower level executives.0 t25. straight commission. they are re!ieved of financial worries. and the company has less control over them. Failure of Incentive Plans Many of the incentive plans. 5.. they are paid for results and only for results.1 2. monthly.5 2. like: Salary Plus Commission Commission Plus Drawing Account where not only commission is paid but the salesman is also allowed to draw on future earnings to get him through low sales period.6 22. 3.8 4.5 2. i. COMPENSATITION MANAGEMENT ii. paid on more or less permanent basis). and also given a bonus for carrying out specified activities.2 10. In most cases incentives plans fail because one or both of these facts are not met. often fail to have their desired impact.6 1. In spite of these disadvantages.3 21. 3. ii. and combination plans. The principal reasons of failure are: 1.1 7.7 17. This is due to several reasons. But the main disadvantage is that salary is not related to performance. ostracism. these plans are widely used with several basic variations.0 56. products.5 1.1 . The advantages of this method are: i. or punishment ..3 1.7 5. If the group feels that plan is not in its interest it will through education.9 100. This is due to three factors: i. Therefore.3 100..5 7. each appropriate for different markets. So that it can direct salesman’s activities by detailing what services and salary component is being paid for. The salesmen know in advance what their income will be. Group Restrictions: Peer pressure is a double-edged sword when it comes to incentive plans.e. some criteria like increased sales) and two.1 12. wherein salesmen are paid a basic salary. If the group views the plan as fair.6 : Firms Using Incentive Plans for Salesmen37 % of Companies Industrial Other Products Commerce and Industry 1.4 100. The are several incentive plans. ii. iii.622. 6.2 13. But the disadvantages are: i. In order to motivate them. or on yearly basis.4 0.e. There are two types of bonus plans: one determined by formula (i. commission plus bonus.6 19. The size of bonus is much higher for top level executives. 8. only incentive value of money is being traded off for its security value. Salesmen’s income generally fluctuates widely. the worker must believe that his effort will lead to rewards and that he must want that reward. For top level management. most of which become apparent when it is considered that for motivation to take place. but all plans are basically variations of three types of plans: straight salary. 2. Combination Method of Salary and Commission Basis 164 © Copy Right: Rai University 11. Incentive Plan Consent Products All Industries Incentives for Management Employees In many orgnisations. 7. Such plans also tend to become very complicated. Salesmen tend to be less company-oriented and more money-oriented. Since salesmen are assured of minimum earnings. This lack of relationship reduced salesmen’s performance. 2.0 27.1 10. bonuses are generally tied to overall corporate results.rganisations surveyed paid salesmen on some type of incentive basis. ii. Table 17. the managers are paid bonus.5 20.7 100.0 8. etc. the standards must be viewed as fair and attainable.5 19. salesman not only get a fixed salary but also a commission in proportion to the sales effected. The unsupervised nature of most sales work.7 ----------6.see that Straight Salary Method Is not an incentive plan. Tradition in the market and iii. determined by some discretion used in allocation of bonus (i. 4. Cultivating dedicated customers and working to “push” hard-to-sell items are often neglected. The bonus plans are generally reviewed annually to make them more effective. 9. The disadvantage are: (i) This method tends to shift salesman’s emphasis to just making the sale rather than prospecting and cultivating long-term customer. The company has more control over its salesmen. The expenditure on salesmen is known beforehand. The advantages of this method are that: i.2 21. Straight salary Straight commission Draw straight commission Salary + commission Salary + Individual bonus Salary + group bonus Salary + commission + individual bonus Salary + commission + group bonus More than one method of payment Total 20. it can keep “Loafers” in line and maintain high production. where salesmen are paid primarily on the basis of commission but they are also given a bonus for activities like “slow moving” items. as there is sizable salary component in most combination plans. and (ii) Pay is not related to results.1 17. Fear of Rate Cut: There is fear in the minds of the employees that standards will be raised high or rates will be cut if they earn too much. Salesman focusses on making a sale on high volume items.

When to Use ‘Time’ or ‘Output’ Basis as an Incentive Plan? The employees may be paid on a ‘time’ basis under following circumstances: 1. the employees do not clearly understand them. and delays are few or consistent. They should be specific. Once the plan is operational. there should be one base rate for a job regardless of whether or not it is on ‘incentives. The job is standardised. Competitive conditions require that unit labour costs be definitely known and fixed in advance of production. 5. In other words. On the other hand. Employees do not understand the Plan: This happens when either the details of the plans are not communicated to employees or if communicated. incentive plan fails. There is a clear relationship between employee effort and quantity of output. 3. should be timely provided and the employee should have adequate controls over the work process. there should be about a 50-50 chance at reaching it). it is easily measured. such as when jobs are highly interrelated.. 4. and iv. When units of output are difficult to measure. and higher wages in comparison with outcomes associated with the straight payment systems. Other Causes: The inequitable wage structure with the organisation and the inter-group conflict also lead to noncooperation of the employees. equipment and absence of a sound organisation structure often break the effort reward link. if rewards are to be given for specific performance. Robert Opsahl and Marvin Dunnettee have concluded: “There is considerable evidence that installation of such plans usually results in greater output per man hour. The Reward Must be Clearly Identifiable Individual’s or groups’ contributions and efforts must be clearly identifiable.1 © Copy Right: Rai University 165 . 5. and the rules for attaining the standard (and incentives) should be clear to both manager and employees. plan is to be based.. Lack of Require Tools. Moreover. Some of the more important requisites/ specific guidelines for developing effective incentive plans are: Insure that Efforts and Rewards are Directly Related The incentive plan should reward employees in direct proportion to their performance and increased productivity.622.” But these plans will not be effective unless a careful planning is done and the plans properly implemented. the work-flow is regular. 4. Employees must also perceive that they can actually do the tasks required. COMPENSATITION MANAGEMENT Requisites or Guidelines for Effective Incentive Plans Monetary incentive plans do motivate employees. Quality is less important than quantity or. iii. The Reward Must be Valuable to the Employees Increased monetary earnings must have the potential to satisfy the existing needs of the worker if the worker is to be attracted to them. When precise advance knowledge of unit labour costs is not required by competitive conditions. They should be complete. but reasonable (i.production levels of group members is kept at a minimum. An Hourly Base Rate Must be Guaranteed At least the plant employees should be guaranteed the base rate.’ Clear Policies and Rules Must be developed Specific policies and rules concerning how employees will be paid. necessary tools. 6. Training. 2. if quality is important.e. 5. and at the same time administratively sound. ii. When there is no clear direct relationship between the worker’s effort and his output. such as on much-paced assembly lines. unless that is the intention. they should satisfy these conditions: i.” Standards Must be Guaranteed The standard should be viewed as a contract with the employees. the monetary incentives offered must be relative to current or visible future needs. Effective Standard Must be Set The standards of which the plan is to be based should be effective.e. training etc. the services of an Industrial Engineer or other Methods’ expert should be obtained who may” through careful observation and measurement. i. When employees have little control over the quantity of the output. When delays in the work are frequent and beyond employee’s control. define fair performance standards on which the. great caution should be used before decreasing the size of the incentive in any way. Methods and Procedures Must be Carefully Studied Since effective incentive plans are generally based on a meticulous work methods study. 3. Units of output can be measured. 11. the plans would not prove fruitful in motivating them. The Plan Must be Understandable and Easily Calculable by the Employees The incentive plan should be easily understood by the workers so that they can easily calculate personal cost benefit for various levels of effort put by them. Equipment etc: The lack of required machines and tools. equipment. If employees cannot understand how performance will lead to rewards. payment on ‘output’ basis would be preferable if: 1. . 2. This standard set has to be attainable. “Do not just focus on quantity and disregard quality. Standards are viewed as fair by the subordinates. They should be set high. lower unit cost. Several authors have suggested a list of requisites that monetary incentive plans should meet if the incentive method is to be attractive to the employee. and without that link. 4. When quality is a primary consideration as with engineering and other professional personnel. and 6.

that there are many things affecting profits that are outside his realm of control. He also feels. they even claim that a menstruating woman was found to be ‘unfavourable’ or ‘inauspicious’ for doing the work. Being economically at a disadvantage. demand for labour is immense.in many cases there is a time lag between the performance bonuses. although generally binding for one crop season only. However. 60% of whom could be classified as landless/marginal farmers who possess two acres of land or less. Some piece-rate methods meet most of these requirements successfully.Rewards Must be Consistent with Government Regulations The incentives offered must govern regulations regarding compensation. making the Hybrid Cotton Seed Industry literally one of a kind where child employment is concerned. The level of the reward and the frequency of it must meet minimum wage guidelines. Girls are hired on the basis of a long-term agreement in return for loans advanced to their parents by local seed producers in the employ of large national and multinational seed companies. gem polishing and limestone. This accounts for the practice of hiring young children in this industry. Others do not.5% have been employed by seed producers for the last five years. Often a worker sees little relationship between his own efforts and the rewards he receives. Profit sharing programmes also suffer weaknesses at times. 166 © Copy Right: Rai University 11.622. It Must Minimise Frictions between Workers Ideally. there is a perception that the work of hybrid seed production can only be done by girl children. and the desired reinforcement effect can be lost. the bulk of the children employed are girls. The cause-effect relationship may become muddled and confused. boys and adult females to work in hybrid seed fields. 3. glass bangles. What is even more startling is the fact that even the industries that are most likely to employ children don’t have more than 25% of their workforce belonging to that age group. 70% of the children employed currently were working in the same fields as the year before Out of the above. let us go through the case study below on a prevalent system of wage structure and wage level. The contracts are framed in such a way that the local farmers are under a great deal of pressure to execute production while exerting a great deal of control over the labour process. How Children Get Involved and Become Bonded Labour The production of Hybrid Cottonseeds is extremely labour intensive and capital intensive as well. Out of which. 57. it may be said that each incentive method must be weighed to determine its ability to meet the criteria stated above. Debt bondage.5% have been employed for the last 2 years and 12. Moreover.5 lakhs are employed in Andhra Pradesh. How and Why Female Children are Involved In the Production Process To begin with. Furthermore. many farmers are thus forced to take loans and advances from seed producers treating their children literally as collateral. even in this figure of 25%. Employee Participation May be Useful for Increasing the Effectiveness of Incentive Plans In sum. should be as frequent as possible preferably daily. Bonus paid after a period often fails to meet criterion 11 . This figure surpasses the total number of children employed in industries such as the carpet. the plan encourages workers to support each other rather than to be non-eo-operative. enter into contracts and agreements with big seed companies through middlemen called seed organizers. Reinforcement.1 . here a devastating irony raises its head: how something so beneficial could give rise to an exceedingly harmful practice of labour – Girl Child Bonded Labour. particularly in meeting criteria 1. Largely the farmers are the main cause for such perceptions claiming that it was not fitting for adult males. This industry depends practically entirely on girl children for its perpetuation. in terms of points accumulated or incentives given. 5 and 11. Most of the children employed in this industry belong to the Scheduled Caste/Scheduled Tribe families. Local farmers who produce the seed. The Magnitude of the Problem Approximately 4 lakh girl children (between the ages of 7 –14) are hired to work in cottonseed fields. or (at least) weekly. In fact.2 We all know that Indian economy is still a developing economy so with regard this particular topic. Rewards Must be Granted Promptly The incentive plan should provide for rewards to follow quickly after the performance that justifies the reward. This is reflected in the fact that: • • • COMPENSATITION MANAGEMENT Tutorial Activity 1. still manages to extend into years at a time till the loan is repaid. The Plan Must be within the Financial and Budgetary Capacity of the Organisation It must be compatible with the financial resources available. girls form 85-90% of the workforce employed in cottonseed fields which exceeds the girl: boy employment ratio of any other industry. This is evident in the fact that 95% of children employed in the area of study were bonded labourers working laboriously to pay off their parents debts. Additional Reinforcement Must be Provided The incentive plan can be more effective if high performance is encouraged and reinforced by management and subordinates. Girl Bonded Labour in Hybrid Cottonseed Production Davuluri VenkateswarluCotton production in India underwent a revolution with the introduction of hybrid seeds in the fag end of the sixties. this being a highly labour intensive activity. 2. Ergo. Not only did these seeds improve the quality and production of cotton but also created many more jobs relating to agriculture.

thus. They then proceed to enter into contracts with the parents of these girls to ensure themselves of a regular labour supply. The most attractive prospect of hiring girls is undoubtedly the fact that their remuneration can be fixed at a rate lower than that of any adult or boy. How do children get involved and become bonded labor? 3. poverty is not the only driving force behind parents who send their children to the cotton fields. The wage rate currently hovers at around 70% of the adult female wage.Moreover. The areas of Kurnool and Mahaboobnagar in Andhra Pradesh have been witness to elaborate methods of recruiting children. weakness. Impact of Education on These Children Education for these girls has taken a back seat. The wage rate currently hovers at around 70% of the adult female wage. The working hours aren’t specific although they average out to approximately nine to nine and a half hours a day. Here. peaking at 11-12 hours during the winter season when the work is maximum. Based on the findings. the rise in cost of production would not be phenomenal and could be borne by various people together: seed producers. Health Hazards Girls who work in the cottonseed fields are exposed to numerous health risks and complications. They then proceed to enter into contracts with the parents of these girls to ensure themselves of a regular labour supply. The income that is brought by these young girls can be done away with. fixed either monthly or daily are deducted from loans extended to their families. Such are the motives behind the employment of girls which in reality has nothing to do with the ability to perform the task. it would definitely be a step in the right direction. do not raise issues about the working conditions and can be kept in check by employers.622. employers then cultivate in the area/village where the supply of young female labour is abundant. it would totally obviate the need for girls to work. The working hours aren’t specific although they average out to approximately nine to nine and a half hours a day. There is also a rising trend of girls abandoning their studies for more permanent employment. Recruitment. which include exposure to pesticides that cause severe headaches. If more NGO’s would get into the fray. according to the various surveys conducted.1 © Copy Right: Rai University 167 . Here. It was found that even adults and boys performing the same tasks could deliver the same results. Wage Rates and Working Hours The process of recruitment of girls for Hybrid Cotton Seed Production entails prospective employers scouting around villages to find out whether there are prospective girls who could be employed. peaking at 11-12 hours during the winter Recruitment.Thus. the employers are known to invite children from other areas for a ‘labour camp’ and enforce a 12 hour workday. If underemployed adults would be taken on at appropriate wages. fixed either monthly or daily are deducted from loans extended to their families. Answer the Following the Questions Based on the Above Case Study 1. Moreover. the employers are known to invite children from other areas for a ‘labour camp’ and enforce a 12 hour workday. as 60% of the girls currently employed in cottonseed fields are school dropouts (taking into account the area under study). What do you understand by the term bonded labor? 2. the local farmers get the advantage of cheap labour that translates into larger profit margins for them. These wage rates. Employers have a strong bias towards the employment of girl children as the wages that are needed to be paid to them. The girl child would then use her hands to write instead of using them to perpetuate an existing and discriminatory system of labour. organizers and seed companies could all reduce their margins of profit by a bit to accommodate these increased costs. especially in the light of the fact that it is used for alcohol by adult males who are generally under employed and while away their time. a solution poses itself. Based on the findings.The reality however is an altogether different story. These wage rates. They also get the added benefit of more hours of work that these girls put in. Wage Rates and Working Hours The process of recruitment of girls for Hybrid Cotton Seed Production entails prospective employers scouting around villages to find out whether there are prospective girls who could be employed. convulsions and respiratory depression. The most attractive prospect of hiring girls is undoubtedly the fact that their remuneration can be fixed at a rate lower than that of any adult or boy. However. girls aren’t rebellious. employers then cultivate in the area/village where the supply of young female labour is abundant. are much lower. How and why female children are involved in the production process? COMPENSATITION MANAGEMENT 11. as compared to boys and adults. Possibility of Adults Replacing Children Most employers are of the opinion that replacing child labour with adult labour would lead to escalating production costs and an ultimate increase in the market price of the product. However. The areas of Kurnool and Mahaboobnagar in Andhra Pradesh have been witness to elaborate methods of recruiting children. the issue of girl child labour is yet not receiving its due attention. for every problem. Ultimately.

care must be taken in providing the “right” reward for each person.’ 6. a large desk and aristocratic furniture or a private bathroom. To help to communicate the organization’s values and performance expectations. 3. A person with strong need for affiliation may respond readily to job assignments that provide with opportunities to relate to socially attractive and satisfying individuals or groups. these non-monetary incentives might stimulate even more attention than the monetary ones. broad banding and effective performance management. 4. It cannot replace effective leadership.’ “The classification of such non-financial incentives tends to a smorgasbord of desirable ‘things’ that are potentially at disposal of the organisation. 7. motivated and committed workforce it needs.1 . 5. 168 © Copy Right: Rai University 11. Individuals proud of their past accomplishments may feel recognised and rewarded if their superiors extend opportunities for participation on more complex and more important job assignments. or a well located parking place with their name clearly painted underneath the “Reserved” sign . An employee with high-level desires for power may respond easily to opportunity whereby he can gain leadership and administrative responsibilities. 8. In short. 2. another finds superfluous. The opportunity to communicate with and relate to others is a factor many workers emphasize and seek. Motivate all members of the organization from the shopfloor to the board room through the judicious use of a combination of financial and non-financial rewards. a carpeted floor and wall paintings.all of which are status symbols. their own secretary and telephone. Workers in safety minded organisation are often attracted by competition on awards for best safety performance records.” As the old proverb goes: “One man’s food is another man’s poison” certainly applies to rewards. He may be stimulated by participative or free rein leadership in the decision-making process. Persons who are very status conscious. Aims of Reward Management Reward management aims to: 1. What one employee views as “something I have always wanted”. It cannot establish values. 8. The use of job enlargement provide added incentive to some employees because they feel capable of controlling wider sets of activities than they previously performed. management may look to many non-monetary incentives for effective motivation of those who are most needconscious. impressive job title. Persons proud pf their long service may be attracted by awards recognising their seniority. 3. But pay itself. Promote continuous development through competencerelated and skill-based pay schemes. Compete in the employment market by paying competitive rates which attract and retain good-quality employees. competent. 6. 7. the encouragement of multiskilling and by rewarding collaborative behaviours. many factors unrelated to money can also serve as ‘attention-getters’ and ‘encouragers of action. Therefore. their own visiting cards. What are Non-monetary Incentives? While monetary incentives often appear as important motivators. 4. In many cases. Promote teamwork through the use of team pay. drive and support desired behaviour by indicating what sort of behaviour will be rewarded and how this will be done through performance or variable pay and performance management processes. To support the achievement of the organization’s strategic and shorter term objectives by helping to ensure that it has the skilled. Support culture management and change by matching pay culture to organization culture and ensuring that reward management underpins the existing or desired organization culture and helps the organization respond to change. It cannot define what the change should be. can be motivated with the availability of a panelled office. Persons interested in enhancing their reputations and receiving recognition in the eyes of others may respond to verbal ‘praise’ or two publicized ‘awards. Some examples of non-monetary incentives: The need-motives for affiliation.622.COMPENSATITION MANAGEMENT LESSON 26: INTRODUCTION TO NON-MONETARY INCENTIVES Principles of External and Internal Differential Rewards and Incentives • • • To understand what are Non-Monetary Incentives? To know examples of Non-Monetary Incentives To understand the Aims of Reward Management 5. Encourage value-added performance by focusing performance pay and gain sharing schemes on areas where’ the maximum added value can be achieved. as Flannery state: ‘cannot drive change or lead the change process. For example. power and recognition in particular can be appealed to by such incentives. The creation of such rewards is only limited by managers’ ingenuity and ability to assess ‘payoffs’ that individuals within the organisation find desirable and which are within the managers jurisdition. 2. 1.

performance improvement: delivering an effective and efficient personal contribution. It is also highly desirable to conduct an attitude survey (as illustrated in Appendix A). d. supporting accountability for results and rewarding the achievement of. HR staff. • • • • • • a. could cover the following areas: • Basic philosophy and strategic principles. staff at all levels understand. f. Achieve fairness and equity by rewarding people consistently according to their competence and contribution. complexity and valid responses to market pressures? 2. policy on assessing the pay market practice needed to achieve recruitment and retention: • • • • locally (for locally recruited staff). employees and union representatives. b. communications. treating job evaluation as a process which can be adjusted to meet specific needs rather than a package which has to be applied rigidly. any reports and records on reward matters and discussions with managers. h. and believe to be fair and rational.622. processes and schemes.” 1. Overall reward management. Are the Fundamental Principles on Which the System and its Development is Based Linked to: COMPENSATITION MANAGEMENT a. culture. 12. Promote flexibility by replacing unduly hierarchical and rigid pay structures with more flexible and. regionally (for regionally recruited staff). internationally (where the. procedures. Overall perceptions. responsibility. recruitment: a reasonably attractive total package. strategic issues facing organizations. the benefits of reward management practices and ensuring that they are operated cost effectively. e. their performance and the organizational vision and values that their performance supports. nationally (for nationally recruited staff). integrity and commitment? 4. b. HR management strategy (see also 3 below). Compensation must inextricably be tied to people. in consultation with key stakeholders (management. effective team/group working. f. by reference to any projected changes in the culture of the organization? 3. training: rewarding skills acquisition and use. policy on pay levels needed to recruit and retain high-quality and committed staff (see also below). at least in outline. new performance goals. Reward Management: Diagnostic Checklist Basic Philosophy and Strategic Principles These questions deal with the high level. current and future needs. is based on the organization’s: mission. Cost considerations. equal pay for work of equal value. b. c. As Flannery points out: “Organizations are beginning to understand that pay should no longer be considered? Only in terms of specific jobs and current financial results. d. Is there a Clear and Articulated Link Between Reward Strategies and HR Strategy On: Tutorial Activity 1.1 © Copy Right: Rai University 169 . Individual reward policy and practice areas. promotion: rewarding the acceptance and successful delivery of greater responsibilities. e. Is there a Strategy for Ongoing Reward Management Which: • • • • Overall reward policies. as set out below.1 Evaluating Reward Process The Objective of the Tutorial Activity To understand that the evaluation of reward processes is best carried out by a diagnostic review which. this can be supplemented by focus group discussions with managers and employees to understand views in greater depth. avoiding the use of overmechanistic pay-for-performance schemes. making greater use of variable or ‘at risk’ pay and allowing employees more choice over the benefits they receive. Pay can play a significant part as an investment which will support the long-term success of the organization. It is an important tool for communicating and reinforcing new values and behaviours. a. operating values. c. reinforcing loyalty. unions). c. g. broad banded structures. 10. typically. The diagnostic review should be carried out by examining written strategy and policy statements.9. 11. development: rewarding the behaviours or competences associated with good performance and continued learning. b. staff. details of structures. avoidance of discrimination other than differences warranted by job/role size. 11. market is for specific ‘worldclass’ individuals). Provide value for money by evaluating the costs as well as. on the basis of current and future business strategies. the organization’s current needs and goals. organization design: the structures and processes needed to deliver organization strategy and’ the levels and distribution of work needed to do this. Have these Principles Been Developed: a.

Are pay responses the only way to retain people ‘at risk’? a. Is there a focus on complete equal treatment for similar jobs/jobs of the same size? c. notably IT support to enable greater efficiency? a. Can these be tracked without undue effort? c. i.e: d. How is equity measured and tracked? e. focusing too much on equity beyond what is feasible within the judgmental frameworks on which effective reward management depends? • Overall Reward Policies These questions focus on the articulation of overall reward policies. Is this analytical? b. Is this specifically communicated with market adjustments? h.g. or Should. Is there trust in the current performance management processes? Are people given the training and development needed to help improve performance? 6. Have other strategies.c. Are they close enough to employees . Who will assess and manage performance? h. How important is equity in the organization’s culture? b. becoming increasingly complex or cumbersome when the organization is trying to simplify the way it manages itself in other ways. eg through: • • • • Individual Reward Policy and Practice Areas These questions concentrate on specific areas of reward policy and practice. Is a Formal System of Job Evaluation Used to Determine Internal Relativities? If not. At what stage are specific market responses or market premiums paid? f. is there a preference for equal treatment in relation to contribution and performance? d. provides for a flexible response when different parts of the organization have different needs or face different pressures? 5.. The need to attract and retain high quality staff. The chosen place in a well defined. provision for proper responses to changing circumstances. Are. Would better performance actually generate more money for rewards? e. how will the cost implications be managed when the market declines? 9. analysis of where people come from and where they go. Are they subject to external or political influences in the short. What is the policy on levels of rewards. Are there any conflicts between practice and organization values. by region. Is the Strategy Congruent with the Culture of the Organization? a. avoiding duplication of effort. Would this be culturally appropriate? g. Is there scope for rewarding specific individual or team achievements? f. management of the system to protect its integrity and validity. Does the Strategy Provide a Sound Basis for the Development of Reward Policies. using new technology. medium or long term that take sensitive handling? d. The need for stability and sustained staff commitment? 8. How are They Determined? analysis of leavers or exit interviews. Is it clear to staff that market premia can go down as well as up? g. analysis of recruitment issues. surveyed and comparable pay market for-different grades.1 . e. such as improved performance management and development or improved working conditions.to be able to judge performance effectively? i. Or. Is the organization subject to skill shortages and areas of market pressure? b. across the whole organization? a. other market intelligence? c.especially those out in the field . Job evaluation 11. 7. pay surveys. Are there identifiable performance measures for the organization? b. Systems and Procedures. What is the Policy On-market Rates and Responses to Market Pressure? by location. levels and specialisms.622.: • • • rewarding service and experience rather than continuous performance improvement. c. b. j. 2. What is the Policy on Equity? a. Does this ensure reasonably fair and equal treatment: • • • 1. been tried? e. e. 3. providing long-term benefits when shorter term contracts are becoming more common. Reward Levels be Linked to the Organization’s Performance? COMPENSATITION MANAGEMENT a.: 10. monitoring and management of the cost of managing the system with a focus on: • • • cost effectiveness.g. How are these tracked. Is it related to skill sets/competences? 170 © Copy Right: Rai University 11. If not.

c. Is it defined in terms of relevant factors?
12. Are the Factors Used for Job Evaluation

a. relevant to the organization; b. relevant to the jobs they cover; c. unbiased in terms of sex, race or disability; d. relevant individually and not subject to ‘double counting’ (looking at the same areas from a different angle)?
13. Is the Scoring System

b. provide a logical framework or system for enabling consistent and defensible decisions to be made on the levels of pay and differentials of all the employees to be covered by the structure; c. make provision for the reasonable and sometimes inevitable fact that external market rate considerations may have to prevail over the requirements of strict internal equity, especially in the areas of skill shortage?
17. Is the Grade Structure Designed and Administered Properly?

COMPENSATITION MANAGEMENT

a. weighted effectively to reflect organizational values; b. able to provide sensible grade breaks between distinct levels of work? c. Do grade breaks fall into natural gaps in job scores? Pay Structure
14. What is the Overall Policy on the Pay Structure?

a. Are the grades clearly defined? Do they fit the way work is currently organized (eg) the number of levels in the organization)? b. Are the pay ranges wide enough to allow scope for pay progression in accordance with service (where relevant), competence and performance? c. Is there an adequate differential (say 15 to 20 per cent) between grades? d. Is there an overlap between grades to provide some flexibility and recognize the fact that an experienced individual at the top of one grade may be of more value to the organization than a newcomer in the grade above? e. Are consistent methods used to allocate jobs into grades, including decisions on recruitment, promotion and upgrading because of greater responsibility? f. Is there any evidence of inequities in the pay structure because of wrongly graded jobs? g. Are pay scales regularly reviewed against external data? If not, what are the factors which are used to determine annual adjustments in pay scales? Are these factors consistent across grades? h. Is there a balanced and cost-effective approach to the provision of employee benefits with status distinctions dictated only by ‘good’ market practice? i. j. Is there a consistent and fair basis for allocating benefits? Is there any evidence of salary levels falling ahead of or behind the market rates?

a. What is the rationale for the current pay/grade structure? b. Did it/does it reflect practice in comparable organizations in terms of:
• •

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

• •

c. Is the structure- flexible enough to cater for:
• • •

changes in pay/job market conditions? d. Or are there: too many people with no further progression or promotion opportunities, stuck on the grade maximum (even if well paid); few opportunities to respond to changes in market circumstances?

15. What Type of Specific Pay and Grade Structure or Structures Exist in the Organization?

k. If so, what are the causes and are they short term or long term in nature?
18. Is the System Regularly Maintained and Updated:

a. Graded salary scales? b. Pay spines? c. Spot rates? d. Pay curves?
16. Is the Pay Structure Relevant to the Needs of the Organization as a Whole or the Part of the Organization in Which They Operate, i.e. do they:

a. to take account of new jobs; b. to take account of the structural change in the organization?
19. Is ‘Grade Drift: a Problem (Are People Always Trying to Get Jobs Upgraded to Improve Pay Levels Without Sufficient Reason)?

a. How is this controlled? b. Are the controls adequate or are inconsistencies emerging? Pay Progression These questions consider all types of pay progression schemes within a graded structure, up a pay spine ‘or along a pay curve.

a. fit the circumstances and culture of the organization, in that it is flexible in organizations subject to rapid change or well defined and rigorously applied where order and predictability are of paramount importance;

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20. Is There a Consistent Method of Progressing Pay, eg According to:

Total Remuneration and Employee Benefits
24. What is the Policy on the Structure “And Balance of the Reward Package?

COMPENSATITION MANAGEMENT

a. length of service; b. experience (how is this assessed?); c. performance or contribution; d. work level;
21. Is the Rate of Progression Based on Fair and Consistent Methods of Assessment?

a. What is the mix between: • base salary;
• • • • • • • • • • • •

other cash rewards, eg bonuses (if paid); allowances of various kinds to compensate for specific circumstances; benefits, eg pensions and related relevant provisions, loans, mortgage assistance, moving allowances; sick pay and long-term disability provisions; medical provisions; leave; meals; employee advisory services, other non-cash items? Why? Is this cost effective? Do staff like having a choice over their package to meet personal requirements?

a. Are there effective links between performance-based progression and .the performance management and any competency framework that exists and related development planning? b. Does the approval process for any service-based progression ensure that under-performers do not get undeserved increments?
22. If a Performance-related Pay System is in Use

a. Is the relationship between contribution, effort and reward clearly defined and understood? b. Is there a credible, well-established and managed process of performance management to support pay decisions, as well as deliver the organization’s performance goals? c. Is the amount of performance-related pay sufficient to recognize the contribution not only of high-flyers but also of the reliable ‘core’ performers on whom most organizations depend? d. Do employees have a reasonable degree of control over the results which determine their reward levels? e. Do bonus earnings (if any) fluctuate too much or too little? f. Is the system easy to understand and administer? g. If it is causing problems, how are these being addressed? Pay Reviews
23. How are Pay Reviews Conducted?

b. Are any choices over the mix available?

c. Is the balance between different elements felt by management and staff to be: • about right;

in need of change?

Pensions
25. Does the Pension Scheme Properly Reflect Current:

a. employment patterns and demography; b. levels of employee mobility; c. comparable practice in similar organizations?
26. Can Pensions be ‘Topped Up’ Where Individuals Have Insufficient Service or Previous Provisions?

a. What arrangements are made for cost of living awards? b. To what extent are pay levels reviewed on the basis of market rate movements? c. Are there satisfactory arrangements to track market rates, both generally and for specific occupations? d. How much money, in terms of payroll percentage, has been and is likely to be made available for pay reviews? e. What arrangements are made to provide guidance on individual reviews related to performance or competence (if applicable)? f. How are budgets for pay reviews set and controlled? g. Are the budgeting arrangements satisfactory? h. What freedom do managers have to make their own pay decisions or recommendations at the annual pay review’? i. How is consistency and equity achieved?

a. Do the mechanisms reflect good market practice? b. Do they make sound financial sense for both employer and staff?
27. Are there Provisions for Partners/Dependants?

a. How do these compare against the market? b. Are the rules concerning their entitlements regularly reviewed? c. How is this communicated alongside the overall pension scheme?
28. Is the Pension Scheme Cost-base Sound or Will Demographic Change or Changing Employee Profiles Put Pressure on Affordability?

a. How are changes in this area being tracked? b. Who will decide on change and how?

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Cost Considerations These questions focus on the way costs are understood and managed.
29. What is the Level of Employment Costs and How are Costs Managed?

j.

How well or regularly is information gathered on this?

COMPENSATITION MANAGEMENT

k. Is there a sensible level of information sharing between comparable organizations? Overall Perceptions and communications These questions focus on perceptions and understanding.
31. Management Perceptions

a. What proportion of operating costs are employment costs? b. How does this compare to other comparable organizations in terms of magnitude? c. Are equivalent costs increasing? Why? Is this acceptable and defensible in current circumstances? d. How are pay budgets for the organization and its constituent parts compiled and agreed? e. Are effective costing/modelling procedures in place? f. Is there IT support for this so that ‘what ifs’ can be tested? g. How are the costs of benefits/allowances monitored? h. How are approvals given for progression/promotion? i. j. l. Which elements of the system have to change with any pay adjustment? How complex is this change process? How often are changes in the system required and what does the process of change cost in (if known):
• • •

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

effective; supporting the way people are recruited, managed and developed; giving the right messages to staff and potential recruits?

b. If not, what changes would they want to see and why?
32. Staff/Union Perceptions

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

k. Could it be simplified without causing undue inequity?

attitude surveys; interviews; focus groups; informal testing of views? What do they want to change? Why? Is this realistic, given current affordability/financial circumstances? How is the organization planning to respond?

man hours; computer time; communications to staff?

d. If they do not like the current system:

Ongoing Reward Management
30. How Well is Reward Management Carried Out?

a. Are responsibilities for elements of the system properly distributed and managed within the pay management department? b. Do the people who operate the pay system fully understand its purpose and operating principles and methodologies? c. Are full records/definitions of practice kept? d. Are decision-making processes about updating or changing the system straightforward and designed to produce robust and acceptable results? e. Are the right checks and balances in place at top executive levels and through the organization? f. Are computers effectively used to increase responsiveness, accuracy and effective modelling of policy changes? g. Are sound cost-management processes in place for pay budgeting, monitoring spend and controlling outcomes centrally and in local offices, where needed? h. Could any of the processes be simplified or made more efficient? i. What lessons are available from improvements already achieved in comparable organizations?

Communications
33. How Well are Reward Policies Communicated to Employees?

a. How well are managers briefed on current reward practice? b. Are staff aware of the total value of their pay and benefits package? c. What improvements in communication would they like to see?

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COMPENSATITION MANAGEMENT

LESSON 27: INTRODUCTION TO CAFETARIA STYLE OF COMPENSATION
Principles of External and Internal Differential Rewards and Incentives “average employee” in the organisation, by giving the employee the option to develop his own flexible compensation package, each package should be ideally tailored to the needs of the employee. In other words, cafeteria compensation can make maintenance items motivators. While adopting the programme, the management should remember that the most of younger employees are more concerned with “take-home pay” than with “retirement benefits.” On the other hand, older employees are “more concerned about retirement and pension programmes.” One of the major problems with compensation programme is that employees tend to think in the short rather than the long term. Hence, the management may be forced to pressure workers to make a decision that directly affects their”take-home” pay. Robert Good has observed: “If an employee selects the ‘wrong’ benefits package, the motivational purpose for the company is defeated. Moreover, even just a few bad choices can put the company at severe risk. It is a crushing de-motivator throughout the company when the news spread that X was laid up for weeks without pay or that Y is destitute because Z choose cash over survivors’ benefits. Even though the employees made these choices themselves, the company simply cannot allow such situation to come about. If a company undertakes the heavy and costly administration burden of installing a cafeteria compensation programme, it will be forced to step in and rectify ‘inequities’ even though the circumstances were created by the employees’ own free choice.” For an effective and successful working this programme requires more information to be provided to employees by management so that they will have adequate data with which to make their decision. This might increase administrative cost. Further, each employees benefits have to be carefully priced out and updated periodically. This programme has not gained much success even where it has been introduced.

Learning Objective
• • •

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

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

Tutorial Activity 1.1 An Article on Cafeteria Plans Grow In Popularity
Warner Norcross and Judd, LLP By Sue O Convoy Since their introduction in the early 1980'’s, cafeteria plans (also called “flexible benefits plans” or “Section 125 plans”) have become a popular method for employers to provide health and other benefits in a way that results in employee choice as well as tax savings for both the company and its workers.

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

COMPENSATITION MANAGEMENT

Tutorial Activity 1.2 An Article on the benefits of Employees
By Michelle Collins Cash is not enough today to recruit and retain top talent for your business. Providing an attractive benefits plan is just as important. While the costs can be exorbitant and the choices overwhelming, you can and should find ways to build a benefits program that works for your company. Here’s help. Find out what your employees want. It’s critical to recognize just how important a competitive benefits package can be in recruiting the best staff possible. Gone are the days when salary in and of itself was lure enough. “Competitive organizations, whether they are big or small, with benefits programs will be able to attract employees away [from you] - especially if you don’t provide the most fundamental
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” The two essentials for every plan: While you might be faced with a variety of requests.programs such as health care. the discomfort is palpable. a compensation and benefits lawyer in Atlanta. government. compromises are made in respect of decisions pertaining to performance management. tools and other resources. the most difficult decisions pertain to people-related issues. one finds that there is an apparent clamour for objectivity in appraising senior level personnel. The only costs that you will have to deal with are administrative.J. let your people know about it.or privatelyowned.com. the top man also agrees that some of those who have been included ought not to have been. It is popularly believed that private sector organisations are objective and clear in their people management decisions and it is the public enterprises that suffer from this malaise. “Give them a list of a dozen or so things that they can choose. Considerations of seniority. identification of non-performers. This way. too. Of course. someone has to foot the bill for your employee benefits. “The chance of them leaving a year from now is less than it is today. It is compromise all the way. employees pay for the benefits that they want on a pretax basis. 3. commitment and acceptability come into play and create problems for the decision maker. Other coverage such as dental.” Foight says.” Who Pays for All of This? One way or another. and even for rewarding exceptional performance. competence. how the brainstorming exercise progresses is another matter. Here are three other options: 1. Surprisingly.000. president of HR Architect in Los Angeles.such as medical care and retirement . “The longer that people stay. Split the Cost Another effective strategy is sharing the cost of essentials . the more likely they are to stay. COMPENSATITION MANAGEMENT Tutorial Activity 1. president of Garden State Brickface. For example. Usually this objectivity takes the form of a battery of tests and interviews. Canada’s premier business channel on the Internet. You’ll find those unique quirky things that are related to your population. It’s possible that subsidized or free parking could be more important to them than life insurance. Most of these officers are those who have served in these organisations for two decades or more and yet need to be assessed by measures such as these! It appears that the performance and exhibited competencies of these individuals have little or no bearing on their career mobility. So that’s one of the things on the top of our list. whenever I ask my clients to put together a group of people that would serve as a crack team for participating in an exercise on thinking about the future of the company. retirement plans offer an opportunity to hang onto valued employees. with articles. “People need to know that you’re spending money on these things. High Deductible Plan Offer to help with medical costs once they go beyond a certain dollar amount. such as $2. experts say that there are two essentials for every plan: medical coverage and a retirement plan. Michelle Collins is a staff writer at CanadaOne.” says Larry Landes. The next step in providing a winning benefits program is to find out what your group is looking for. Foight says this approach will cut down on the administration expenses and reduce the overall costs of the plan. It’s almost mandatory. “Most people want to know that they’re covered when they go into the hospital. Extra coverage such as disability and life insurance are available at the employee’s expense. it doesn’t have to be you who picks up the entire check. “Go to your employees and find out what they want. and leave them room to fill in things. too Once you’ve arrived at a plan that suits both you and your employees. While similar issues may be prevailing in other countries. You could even pass on the entire cost to your employees. with the stipulation that the money will mature over a certain period of time. You should offer to match or contribute some additional portion to what your employees put in. However.3 An Article on Challenges of People Management In many Indian organisations. They need to realize that and know that it is a benefit for them even if they choose not to participate in it.1 176 © Copy Right: Rai University . Usually a compromise is struck and we end up having a team significantly larger than it should have been.” says Fred Lange. The concern is not about the availability of such people but about the criteria for inclusion. I do not think the difference is significant and the reasons for such behaviour are common to managers across all ownership patterns of business. disability and life insurance often are considered extras. Lange recommends taking this level of awareness a step further and providing an itemized list with yearly tax statements. The promotion of personnel to top management positions in many public enterprises is done based on interviews and other evaluation methods. Windows & Siding in Roselle. The curious aspect in this whole exercise is the implicit naivete that most organisations display in equating quantification of 11. N.622. Meanwhile. in my perception the problem is more pronounced here. Communication matters.” says Lloyd Foight. a benefits consultant with the Ross Companies in New York. disability insurance and things like that. Similarly. In many private sector organisations.” says Bruce Wynn. Assessment techniques used for relatively junior personnel are used for evaluating the suitability of senior managers for top management positions. 2. the employees will know just what they’re getting and what you’ve spent on them. Cafeteria-style Benefits Here.between the company and its employees.

The engaging relationship of people management demands such effort and sensitivity. Only through such an engagement can it be expected that managers will own up their decisions on people. most managers find it difficult to stick their necks out for their juniors.subjective aspects with objectivity. As choice-making and accountability are two sides of the same coin. it is essential that there is continuous and credible sharing of expectations and feedback on performance throughout the year. They are more comfortable if the whole process is system driven. It has to be realised that any people management process is one of engagement. it is indeed a difficult task. desired direction nor make their team members do so. a majority of Indian managers avoid confronting the reality of making choices. managers can neither drive their organisation in a specific. which the assessed will also accept. To avoid such eventualities it is necessary for senior managers to realise that they have to be transparent and consistent in their people-related interactions and actions at all times.622. Relying on assessments made in a few days in preference to performance of large number of years is a pervasive organisational pathology. Whether it is a recommendation for a specific prestigious assignment or promotion. COMPENSATITION MANAGEMENT Notes: 11. at the senior levels of management. Specifically. Whether it is performance management or career planning of people. but everybody guessing.1 © Copy Right: Rai University 177 . But without making a choice and taking sides. More so if such choices deal with people. It has to be understood that performance management is not a year-end effort when the whole organisation goes into a tizzy and somehow gets over it leaving some happy and many unhappy. It is exactly this behavioural aspect that people in organisations perceive as unfair performance management processes. Avoiding the discomfort of confronting affected employees cannot be termed as responsible managerial behaviour. it is necessary for senior management personnel to accept ownership for their actions. Why is this so? In my view.

The firm’s ability to pay. distort either his own or other inputs or outputs. behave in some way as to change his own inputs or outputs. Among these factors are the following: 1. and v. Cost of living. to attract capable employees to the organization. 2. because wages and salaries often constitute the greatest single cost of doing business. we shall examine methods of varying individual through merit evaluation and incentive pay plans. the third chapter in this part will deal with the fastestgrowing segment of total compensation.622. If they are unequal. Productivity of the firm and the economy. ii. Though no science of pay exists. behave in the same way as to induce others to his own inputs or outputs. Such programs are more effective in maintaining a work force that they are in motivating higher levels of performance. iv. our discussion is divided into three chapters with the first subject being that of determination of base pay.COMPENSATITION MANAGEMENT LESSON 28: INTRODUCTION TO PROBLEMS OF EQUITY & BONUS Principles of External and Internal Differential Rewards and Incentives only is it one of the most complex duties. It may result in lower productivity. but it is also one of the most significant to both the organization and the employee. Government. This tension provides the basis for motivation. education and competence .Job One of the most difficult functions of personnel management is that of determining rates of monetary compensation.e. the provision of all types of supplementary pay or fringe benefits. Supply and demand for employee skills. If a person’s ration and that of others are perceived to be equal a state of equity is said to exist. systems of job evaluation are widely used to make this first important decision. Significant Factors Affecting Compensation Policy Though a considerable amount of guesswork and negotiation areinvolved in salary determination. the individual considers himself as ‘under rewarded’ or ‘over-rewarded’ when an employee envisions an equity. he may choose anyone or more of five alternatives: i. To get relief. certain factors have been extracted as having an important bearing upon the final dollar decision. employee compensation programs are designed to do three things: 1. increased absenteeism. Finally. They also compare their output-input ratio with the output-input ratio of their fellow-workers. 4. in 1929 employee compensation amounted to 58 percent of the nation’s income. Equity approach recognises that individuals are concerned not only with the absolute amount of money they are paid for their efforts but also with the relationship of this amount to what others are paid. iii. inequity exists i. In many cases. They make judgement as to the relationship between their inputs and outputs with those of the others. 3. As a consequence.one compares outputs . Each of these will be discussed briefly in order to demonstrate the exceedingly complex nature of compensation. organizations prefer that their employees perform at a rate higher than average. 5.such as salary levels.. Perhaps a Learning Objective • • • • Introduction To Compensation Policy To understand the Base Compensation – Job To know significant Significant Factors Affecting Compensation Policy To learn Equity and Compensation Introduction to Compensation Policy It is a general practice all over that employees make comparisons between themselves and their co-workers. and 6. 3. more absenteeism. They perceive what they get from a job situation (outputs) in relation to what they must put into it (inputs).possibly resulting in fighting the system. It is important to the employee because the paycheck often is the sole means of economic survival: it is also one of the most influential factors determining status in society. the employee may decrease his inputs while holding his output constant. When coupled with surveys of rates paid by competing firms. etc. the organization can establish a pay policy that will meet its desired goal of attracting sufficient personnel to accomplish work tasks. Not 178 © Copy Right: Rai University 11. choose a different comparison referent. to retain their service over an extended period of time. as one strives for what he perceives as equity and fairness. or increase his outputs while holding inputs constant . as well as systems of promoting group productivity through profit sharing and production bonuses. to motivate them toward superior performance. In the following chapter.1 . Based on one’s inputs such as effort. leave the job. Base Compensation . as compared with 75 percent in recent years. or other undesirable behaviours. 2. It is important to the organization. When people perceive an imbalance in their input output ratio relative to others tension is created. Labor organizations. As far as the organization is concerned. raises and other factors.

To strengthen their control over the supply of labor. It is not practicable to draw demand-and-supply curves for each job in an organization.8 percent in Great Britain. In the six highest-paying industries. If the firm is marginal and cannot afford to pay competitive rates. The increase in the strength of labor unions is due. in part. if anything works to decrease the supply of labor.5 percent. it is nevertheless true that a wage is a price for the services of a human being.9 percent as compared with 9 percent In Japan. unions seek such goals as union or closed shops. as discussed earlier. The reverse of each situation is likely to result in a decrease in employee compensation. However.1 percent in France. Ability to pay Labor unions have often demanded an increase in compensation on the basis that the firm is prosperous and able to pay.” It will be demonstrated later how the wage and salary survey of this going rate is incorporated into a job evaluation approach to wage determination. there will be a tendency to increase the compensation. its employees will generally leave it for better-paying jobs. If anything works to increase the employer’s demand for labor. only 14 per cent are recognized. the computed average annual productivity increases in manufacturing was set at 2. An even more serious problem is that the average annual productivity increase in the United States during a recent 11-year period has sunk to 1. the fundamental determinants of the wage rate for the individual firm issue from supply and demand. the validity of this guideline suddenly vanished. to the fact the employees’ interests had not been receiving attention equal to that given to other components of the enterprise. hourly pay has increased over 100 percent. such as wartime prosperity. and 2. This simple statement of the effect that the demand and supply of labor have on wages belies its complexity. such as restriction by a particular labor union.realization of these complexities will lead to a greater appreciation and acceptance of job evaluation despite its arbitrariness and scientific failings. resulting briefly in short-term wage and price controls.1 © Copy Right: Rai University . Admittedly. much attention has been paid to the effect of general productivity increases in the economy upon the specific compensation of huge aggregations of employees. approximately half of the full-time workers are organized. may choose to adopt a policy of paying above the competitive rate in order to attract a superior calibre of personnel. provided other factors. It should also be noted that the percentage of female employees is lowest among the highestpaying industries. In a strike for higher wages. and controlled entry into apprenticeship programs. With inflation reaching double digit levels. The firm desires these services. Productivity Beginning with the famed General Motors Contract with the United Automobile Workers (UAW) in 1948. this adjustment is neither immediate nor perfect because of problems of labor immobility and lack of perfect knowledge of alternatives. the labor union attempts to work primarily on the supply side. A part of this problem of pay speedup and productivity slowdown is characteristic of a maturing economy. there is little need to pay far more than the competitive rate to obtain personnel. If firms in general are prosperous and able to pay. If the firm is highly successful. is not completely correct. leading to the establishment of a ‘noninflationary’ guideline for wage increases of 3. there will be a tendency to increase the compensation. 5. But in general. Union leaders are often very adroit in selecting the appropriate time to strike as judged by the markets for the employer’s products. theoretically. Inequitable compensation to any or all will create trouble in maintaining the health of the organization. which is controlled by the individual worker or by a group of workers acting in concert. representatives of the federal government have attempted to use computed productivity gains as guidelines in the settlement of wage disputes between managements and unions. however. In the six lowest-paying industries. The impact of this strength is shown in Figure 12-1. In West Germany.622. a separate curve exists for each job.. and it must pay a price that will bring forth the supply. Such a firm. regulated or restricted 11.9 per cent. the employer’s demand for labor to meet a market need is pitted against a supply withheld by the union. Figure 12-1 : Labor Union and Earnings Median Weekly Earnings $289 433 423 422 414 410 407 114 170 174 185 188 189 Percent Represented by a Union 29 36 36 82 50 37 63 1 27 8 24 18 4 Percent Who are Women 39 20 15 7 23 22 15 90 79 55 61 59 16 substitution of capital for labor through technology. Between 1947 and 1966.2 percent. however. 5. In the battle against inflation. We shall discuss the charges of certain groups that the market going rate reflects fundamental biases towards female employees. The primary practical result of the operation of this law of supply and demand is the creation of the “going-wage rate. All compensation must come from products sold in a market that is usually competitive in nature. Supply and demand through the commodity approach to labor. the tendency is to bid up the price of labor as a whole. With growing inflation. such as those discussed below. the government approach of “jawboning” to influence negotiated settlements has been placed under serious handicaps. do not intervene. even though. service businesses now account for 70 179 COMPENSATITION MANAGEMENT All full-time workers Highest-paying industries Petroleum and coal products Mining Railroad transportation Aircraft and parts manufacture Ordnance Motor vehicle and equipment manufacture Lowest-paying industries Private households Apparel manufacture Eating and drinking places Leather and leather products Personal services Agriculture Labor Unions In the structure of economic relationships.2 During this same period.

Hours worked in excess of this standard must be compensated with the halftime penalty. the minimum wage is a rate established by the Department of Labor. a 50-hour workweek would result in straight-time pay of $200 (50 x $4) and overtime pay of $20 (10 x $2) for a total of $220. Homans’s exchange theory predicts greater feelings of equity between people whose exchanges are in equilibrium.1 . is widely accepted and followed by many’ employers and labor organizations. this approach tends to vary monetary income but freeze real income. It is an essential ingredient of long-term labor contracts unless provision is made to reopen the wage clause periodically. and increases in the penalty for overtime hours. it has been higher than that set by the Fair Labor Standards Act. Government Our varying levels of government often have very specific things to say about wages and salaries despite the theoretical and nebulous nature of equitable compensation. training. there are numerous state laws specifying minimum wages.’ usually in the form of a job evaluation plan. regardless of sex of employee. COMPENSATITION MANAGEMENT Equity and Compensation If our first goal of attracting capable employees to the organization is to be achieved.622. It is useful as a stopgap device in times of inflation when labor is pressed to keep up with the rise In prices. all in the interest of increasing total compensation for labor. often called the Wage and Hour Law. and 3. In addition to these three acts. but some 20 states have minimums of $3. a result with which labor is not content. Thus.3 percent advance in the Consumer Price Index. Though some have hailed the widespread use of productivity index as a major breakthrough in compensation. The law applies to enterprises engaged in interstate commerce with gross annual volumes of sales of at least $362. endurance of adverse working conditions. for example. If there is no prevailing wage for a majority. Usually these rates are lower than those placed in federal legislation. decreases in the standard workweek. the former applying to those with contracts whose value is in excess of $10. provides for quarterly cost-of-living adjustments amounting to a I-cent increase for every 0. there is no precise and accurate measure of productivity acceptable to all. Among the problems engendered by this approach are the following: 1. perceptions of equity are affected by two factor: 1.percent of an jobs. there are certain measurement problems in ascertaining cost-of-living increases. There are at least three major federal laws that deal directly with the subject of compensation. When an employee receives compensation from the employer. Among these are the following: 1. no cost-of-living formula will indicate what the base compensation should be. administrative. Equity is concerned with felt justice according to natural law or right. Adjustment of differences cannot take the form of reducing pay of the higher-paid person. The Fair Labor Standards Act. use of any index does not materially reduce controversy in bargaining since the index is used as the base from which to bargain. personnel must perceive that the compensation offered is fair and equitable.5 The standard straight-time period is the 8 hour workday rather than the week. The United Auto Workers agreement. The Equal pay Act of 1963 is an amendment to the Fair Labor Standards Act and specifies that equal work requiring equal skill. Employees assigned to executive. and responsibility under equal working conditions shall be accorded equal pay. if an employee’s rate is $4 an hour. education.4 One airline has been ordered to pay about $25 million in back wages to stewardesses who since 1968 were paid less than male employees doing the same work.35 or higher. Any differences must be rationally justified through systematic study. the reported percent increases are generally a long-term average and are not achieved each year. Cost-of-living adjustment of compensation constitutes no fundamental solution to equitable compensation to employees. Hours worked in excess of 40 per week must be compensated at the regular rate plus a penalty of half time.it merely indicates how that rate should vary. 3. 2. however. as in the case of productivity indexes. not all industries participate equally in productivity gains and 4. Cost of living Another formula hailed by many as the answer is the cost-ofliving adjustment of wages. Under these two acts. Productivity advances in services are more difficult to effect than in manufacturing. 2. the minimum wage has moved from 25 cents to 53. The Walsh-Healey and Davis-Bacon Acts apply to employees dealing with the federal government as contractors. Over 50 million employees are covered. the amount is determined on a weighted-average basis. the ratio of compensation to one’s inputs of fort. or professional positions are usually excluded from coverage by the act.35 per hour in 1982.500. these are several serious drawbacks to its use. The Consumer Price Index of the Bureau of Labor Statistics. specifies a minimum hourly wage and a standard workweek for all firms engaged in interstate commerce. Since the law’s inception in 1938. effort. Labor organizations constantly press for increases in the minimum wage.000 and the latter to those having public works contracts with values in excess of $2. The prevailing minimum wage is paid to a majority of workers in a particular craft in a specific geographic area. It can also be contended that the federal government is instrumental in salary determination through its insistence upon collective bargaining with organized labor as required by the Wagner and Taft-Hartley Acts. and so on 180 © Copy Right: Rai University 11.000.

and 9) clearly indicates that employee satisfaction is lower than in either the equity or over-reward situations. as it is variously called. overpaid did express more overall dissatisfaction than did those from equitably paid groups. Post Office and Schools by the end of the Second . they tended to decrease inputs over a period of time in comparison with those equitably paid as well as with those overpaid. and 6. or pay equity. Concerning the over-reward situations (cells I. Resulting dissatisfaction often leads to efforts to reestablish equilibrium. He led an experimental group of employees to believe that the pay allocated was significantly in excess of their qualifications. feelings of dissonance are likely to exist. There are many situations where job outputs are both intangible and intertwined in a dependent fashion with other jobs. the overpaid group tended to reduce dissonance by restricting output so that total pay was more in line with equity expectations. and so on. original research conducted by Adams suggested .that feelings of discomfort and guilt resulting from inequitably higher pay would lead-. COMPENSATITION MANAGEMENT Equity (3) moderate under reward (4) Equity (5) (6) Moderate under reward gross Under reward (9) (7) (8) (output background etc) ————( line of equity) In one experiment. Thus. 2. Incomparable Worth: Pay Equity Meets the Market Equal pay for equal value. or comparable worth.2 : Equity in Compensation Gross Over reward (1) Moderated Over reward moderated over award (2) Equity Other research has not demonstrated the same strength of impact upon an overpaid group as for an underpaid one.. it had better be able to evaluate performance levels in an objective manner. It is this condition that led Herzberg to conclude that pay cannot be. promoting labor organization. Employee contributions exceed their outcomes of money. the overpaid group. but such feelings were not translated into action. Thus even if conditions exist that would favor equity. The employee of average contribution is accorded an average’ increase in pay. a second study supported hypotheses with respect to underpaid personnel. leading to lower contributions or withdrawal from the firm. if a firm desires to “go public” with its salaries. In Figure 12-2. convincing self that pay is not out of line. 8.. In all other cells. To cope with possible feelings of inequity. Research conducted with respect to under-reward situations (6. an effective motivator of employee behavior. it will not be perceived if compensation is kept secret. For example. It has been observed that many organizations pursue a pay increase policy characterized by cells 4.2. Inferior personnel are moderately over-rewarded. quitting or frequently absenting oneself from the organization. various organizations follow a practice of imposing secrecy with respect to compensation received. however.622. trying to adversely affect the effort and pay of others. Figure 12. And in a final experiment.1 © Copy Right: Rai University 181 . leading to little or no change in behavior but effecting acceptable levels of employee satisfaction. The overpaid group however. Concerning satisfaction. tended to parallel the equity group in output. compensated on an hourly basis. In a second experiment under a system of incentive piecework. and 4). accompanied by strained relationships between superiors and subordinates. rather than the fundamental inability of pay to motivate. produced a quantity significantly in excess of an appropriately paid control group. and 7 would result in feelings of equity. public pay systems may well lead to lower performance and morale. there is some indication of guilt from receiving more compensation than deserved. such as “borrowing” from the supply room to increase rewards. This is particularly true for salaries of executives and other personnel not covered by union contracts. the overpaid group restricted its quantity but increased its quality in order that total pay received might be in line with contributions. Steven Rhoads attempts to demonstrate in this book why the 11. On the other hand. 5. 5. but those above and below average are allocated compensation amounts not significantly different. Unless some form of acceptable objective assessment can be developed. is becoming increasingly common in a world where any kind of administered intervention in the workings of the free market are regarded as inherently suspect. Research has shown that personnel often underestimate pay of higher-level managers and overestimate the pay of both peers and those one level below. nine different situations are proposed. Equity theory would hypothesize that the correlation of pay and contribution that exists in cells 3. Thus superior personnel are moderately under-rewarded.to actions to reduce dissonance. Tutorial Activity 1. 10 Figure 12-2 and equity theory would suggest that the problem may be one of improper design of compensation systems. Equity usually exists when a person perceives that the ratio of outcomes to inputs is in equilibrium both internally with respect to self and in relation to others. the comparison of this ratio with the perceived ratios of significant other people with whom direct contact is made.1 An Article on Pay Equity For all the problems of pay equity today there were similar schemes in operation in the British Civil Service.

it is not without problems. in the long term. Post Office and Schools by the end of the Second World War. On the other hand.1 . Based on case studies in England. The question arises. His review does indeed suggest that pay equity schemes are likely to go astray (as indeed are all pay schemes eventually). and he is surely right to question the utility of job evaluation consultants who seem to operate on faith rather than science. let alone how to measure. and the perfect market .or are we back to the functionalist arguments many of us thought we had left many years ago? The point is not that administered markets are subjectively governed and free markets objectively governed but that both forms are social constructions. examined through documentation and interviews. becomes just another interference with efficiency. For those ‘suffering’ from pay equity the result may appear to be a sudden boost in wages as the scheme drags the wages of women up to the level of men but. Oxford. in the long term. That said. but like the topic it covers. Rhodes argues that the arbitrariness of all pay equity systems inevitably dooms them in the same way that the Soviet command economy was doomed . here.they both proved to be uneconomic and. In the absence of any examples of that most elusive creature. In sum. And it cannot be claimed that ‘free markets’ generate objective criteria for rewards . the perfect market. COMPENSATITION MANAGEMENT 182 © Copy Right: Rai University 11. destroyed the interests not just of those administering the schemes but also those for whom the schemes were designed. Keith Grint Templeton College.which is similarly problematic. his claim that the problem lies in the absence of objective criteria for job evaluation is double edged. Australia and particularly Minnesota. and it is. For all the problems of pay equity today there were similar schemes in operation in the British Civil Service. and in the Post Office case by the end of the First. For those readers whose comparisons extend beyond pay equity there is a strong historical resonance here: all institutions that ‘interfere’ with the workings of the free market allegedly pose problems for all involved. but is not directly asked by Rhoads and therefore not answered by him: to what extent is pay equity itself a particular problem or just another alleged example of the Canute-like exercise by some to hold back the unstoppable sea of the free market? Rhoads’ work is primarily based on a series of case studies of existing pay equity schemes. Wage councils provide pay in excess of market conditions and the result is catastrophic for the very workers that councils seek to protect. It is the case that no consensus exists on what to measure. In sum. Rhoads’s argument is not without its merits. If economics was an objective exercise in mapping and measuring it is doubtful whether our collective economies would be in such a dire state. it merely means that employers of female labour up sticks and go elsewhere in search of the cheap labour they originally had. difficult to compare the specific effects of pay equity with other forms of market intervention.622. One might want to take this issue further since it seems that the argument rests on the less than ideal nature of these schemes against two mythical alternatives: the perfect equity scheme which does not and probably cannot exist. Yet the subjectivity of evaluation should not be counterpoised to the objectivity of the free market operations. this is an interesting book and one well worth reading for those researching or implementing or suffering from pay equity. These may not have been perfect but they certainly provided equitable pay without self-evidently undermining any of the institutions involved. the whim of politics and power as much as demand and supply.market is right and pay equity wrong. therefore. One might also want to suggest that a little history might not go astray here. one is surely right to remain sceptical of the claims that pay equity schemes (albeit flawed schemes) interfere with ‘normality’. pay equity. If governments tried to intervene and stop children working for long hours then factories and mines would be uneconomic and close down. Trade unions were similarly accused of boosting wages beyond the going rate to the extent that employers would simply go elsewhere for labour.

companies usually gave stock options only to “key” employees. Since options lapse if the employee leaves employ- Learning Objective • • • To know the concept of Profit Sharing How is Stock Option a Tool of Employee Motivation? Kinds of ownership Profit Sharing This method of profit sharing is usually applied only to managerial and executive personnel to avoid dealing with vast numbers. It was a situation like “Employment for Life” ( or imprisonment for life. The demerits associated with the scheme are: 11. Until a few years back. Generally speaking. No longer are employees willing to stay in the same company for life unless they are satisfied with the returns they get from their jobs. Companies set limits to the amount of stock that employees can buy. Introduction Stock ownership plans enables employees to acquire company stock often at concessional rate. This could range from better remuneration to growth prospects to a better working environment. Companies. “ finding ways to get ‘with it’ “. Sometimes. stay around till retirement and lead a happy life.. Falling share price could mean losses for employees The inability to cash in quickly can dampen the interest. Nowadays. In the past. A stock option gives an employee the right to purchase a set amount of shares at a fixed price for some years into the future. Motivates recipients to perform even better. Inculcates a sense of ownership and responsibility. Normally. also do not want to be stuck with inefficient employees but would like to have the best people around. preferably in an MNC. Only profitable companies can use the tool.such as agreeing to sell to the issuing company first until a stated period or until he is no longer with the firm. the rules for who gets options and how much they get are much looser than for ESOPs. There may be certain conditions with regard to the resale of the stock also . The first options are exercisable generally after a year. the option price is lower than the market price. in the last few years. the general idea amongst employees was to get a good job. Employee stock options are options issued to employees as a form of incentive compensation. The option to acquire shares is generally exercisable over a period of time. or as one may put it. known as vesting period ( generally ranging from 1 to 5 years ). Employers. Lack of transparency can earn accusations of favoritism. Offers a way for an organization to retain the best of the employees.. This method of profit sharing is usually applied only to managerial and executive personnel to avoid dealing with vast numbers. Employees were loyal to the Company they served and Companies. The cost of shares is usually deducted from the pay at source. by and large did not retrench employees. Human Resource Management Approach Stock option is a right issued by a corporation to an individual or an entity to buy a given amount of shares of company stock at a stated price .622. to make an ESOP attractive.COMPENSATITION MANAGEMENT LESSON 29: PROFIT SHARING AND STOCK OPTIONS Principles of External and Internal Differential Rewards and Incentives Inspite of the above associated demerits. more and more companies give options to most or all employees. Stock prices do not always reflect fundamentals of an organization. This price which could be the market price or some other price.. Suddenly. depending on how one views it ! ). One of the most common employee motivation and retention methods is through ESOPs or Employee Stock Options. They merits are: • • • • • • • • • • Links compensation package closely to performance. particularly new economy companies have been forced to rejig their work culture to become more employee-friendly. An ESOP is nothing but an option to buy the company’s share at a certain price. which is usually related to the wage or salary earned by the employees or it may be restricted to above certain wage levels. How is ESOP a Tool of Employee Motivation? The option of providing an employee with this benefit is done in two ways: A stock option is a right issued by a corporation to an individual or an entity to buy a given amount of shares of company stock at a stated price within a specified period of time. this option is being increasingly used by companies to command loyalty in industries marked with high managerial mobility as the scheme links a manager’s reward to his efficiency. They have been forced to find innovative ways to attract and retain good people. .1 © Copy Right: Rai University 183 . Establishes importance of team effort among employees. lots of things have changed. the worker’s share of profits is utilized to pay for the stock purchases. This method of profit sharing comes with its own merits and demerits..

productivity increases & profits rise. are retirement plans in which a trust funded by the employer owns company stock and employees cash out after they leave. This is a bonus that rewards employees based on the increase in value of the company’s stock. The knowledge that if he does well. Typically. most companies allow the employees to either sell 25 percent of their shares and pocket the difference or the employees can buy those shares from the trust at the price quoted when the shares were first allocated. Most companies do not allow the employees who have left them to hold such shares beyond five years. Efficiency enhances. But here. The shares are. with the company repaying the loan by making tax-deductible contributions to the ESOP. This has a multiplier effect since with highly motivated employees. The ESOP is the most tax-advantaged mechanism for companies to share ownership with employees.622. staff are allotted many shares through a trust with lock-in periods between one and five years.usually Wall Street or the London Stock Exchange. buy or instruct the trust to hold them. he or she pays ordinary income tax on the “spread” between the value of the stock and the price paid for it. This generally comes at a 10 to 15 percent discount over the market value. which is the 52-week average of the market price. even companies like ICICI and Hindustan Lever have an employee stock option plan. which is then allocated to accounts for indi184 © Copy Right: Rai University 11. Beneficial Ownership Under this scheme. Such schemes generally extend over a period of five years. After 12 months. ESOPs are a good motivation tools. While the major beneficiaries are employees of software and internet companies who get the shares of a company at a comparatively lower rate. Unlike ISOs. Similarly. Or else the trust continues. ESOPs can be used for a variety of purposes. An ISO generally allows the employee to defer taxation until the date the shares bought with the option are sold and to pay tax at the applicable capital gains tax rate rather than the (higher) ordinary income tax rates. ESOPs are good tools for companies at the growing stage to attract good employees. he can exercise his option of selling or buying 25 percent of the shares. Nonqualified Stock Options (NSOs) They are options that do not satisfy the Internal Revenue Code’s conditions for preferential tax treatment.ment before the vesting period is over. Other Types of Stock Options Phantom Stock This is another kind of stock option. NSOs can be given to non-employees. If he resigns after one year. the employee will have to either offload all the shares or buy them from the company at the original price. When the employee “exercises” the option by buying the stock. Stock Appreciation Rights (SARs) They are similar. however. staff are allocated shares of the parent company which may be listed abroad . a certain percentage of shares is freed up for employees to exercise their options which are three: sell. vidual participants. held by a trust. ESOPs work as an incentive for the employee to stick around for that time. At the end of the five-year term. However. such as: Broadly most companies follow two models. and in effect consist of phantom stock without phantom dividends. If the employee resigns before the one-year lock-in period. Employee Stock Ownership Plans (ESOPs) Employee stock ownership plans (ESOPs). the chances of the company doing well are extremely high. other sectors are gradually becoming aware of the benefits of ESOPs. Each year. Under this too.1 . The trust can borrow money to purchase the stock. the company receives a tax deduction on the spread. the stocks are never transferred in your name because Indians are not allowed to hold foreign stocks in their name. the company will prosper and eventually the shares will yield a higher return motivates the employee to put in more efforts. An ESOP is an employee benefit plan operating through a trust that accepts tax-deductible contributions from the company to accumulate company stock. after two years there are other alternatives and so on and so forth . the employee forfeits all the shares. new companies do not have much resources and paying ability. The company does not get a tax deduction. COMPENSATITION MANAGEMENT Kinds of Ownership There are two main types of stock options: Incentive Stock Options (ISO’s) They must satisfy the conditions of the Internal Revenue Code for preferential tax treatment. The ESOP can acquire both new and existing stock. Under this scheme. The only option an employee can exercise is to sell the shares at the end of the lock-in period and encash the difference. ESOPs make a lot of sense to such companies to get good employees since there is no cash outlay involved for the company. the dividend performance of the stock. The employee has rights over the shares only after a lock-in period of one year. the company allocates a number of shares to an employee at a price. Shadow Ownership This second scheme is offered by multinationals in India. In fact. They have to sell them back to the trust at a price that is an average of the eight preceding weeks. or both. It is a win-win situation for all.

dilutes other owners. It is very rarely practical for ESOPs to allow employees to purchase shares through the plan. STOCK OPTION Stock options do not work for this purpose. The company can use tax-deductible dollars to make the purchase. but the shares are bought at a discount. There is good theoretical reason to think that options would have the same effect as ESOPs. Stock options bring an infusion of cash when employees exercise their options. There is not any research on how employees react to options. Employees are buying either new shares of stock issued by the company or existing shares at a bargain price. although there is a great deal of anecdotal evidence that options do motivate people. The company repays the loan in pretax dollars by making contributions to the ESOP. If they are buying existing shares. but there is no hard evidence yet. Options allow you to provide however much ownership you want to whomever you want. the price would rarely be acceptable to the seller. They are ESOP Selling of Ownership An ESOP allows owners of closely held companies to sell to an ESOP and reinvest the proceeds from the sale on a tax -deferred basis.1 © Copy Right: Rai University 185 . offering options has become a prerequisite to getting good people. That. and get employees involved in decisions at the work level. The exercise of an option brings cash into the company if new shares are bought. buy new equipment. It cannot be based on individual merit. Allocation of shares must be by relative pay or some more level formula. The company uses these funds to buy other companies. An ESOP can borrow money to buy newly issued shares. or sometimes any people. share corporate performance information.The two approaches help an organization in different ways. providing the ESOP owns at least 30% of the company and certain other rules are met. provided that companies make financially significant contributions to the ESOP (at least 5% of pay per year).622. There is considerable research linking employee ownership to substantially improved corporate performance. An ESOP does not allow for discretion in who gets how much ownership. Many companies buy back existing shares equal to the number of options exercised. COMPENSATITION MANAGEMENT Requirement of Employees to Invest in the Company Finance Growth Motivation of Employees Attraction/Retention of Selected Employees Implementation of a stock option plan 11. but only if the employees are buying newly issued shares. however. or any other corporate purpose. bringing in no new capital. In many industries.

is not aligned with their profitability patterns and the anamoly needs to be rectified even though the aggregate figures do show that gross payout is roughly 20 per cent of the overall net profit. FIs and a host of PSUs.80/. This lead to situation where a part of the option shares.50/-. Rs. some operating in the infrastructure sector. North block is willing to accept a lower return on equity in case internally generated funds are required to finance genuine expansion projects. June 3: The finance ministry wants a revamp of the profit sharing and dividend paying policy in all undertakings in which the Government has substantial shareholding. he would have paid tax on Rs. These include the three development financial institutions. if necessary. with the exception of wholly-owned entities such as the insurance companies. all nationalised banks and central public sector undertakings (PSUs). is Rs 9482 crore. the value of any specified security allotted or transferred. This implied that the difference between the market price of such shares at the time of their issue to the employees and option price ( price at which the employee is entitled to get the shares ) was treated as a perquisite in the hands of employees at the time of exercise of the option and the employee had to pay income tax on this perquisite. Though his gain was only Rs.1 Latest Updates on Profit-sharing.Y.only. Continuing the above example. North block sources said that the proposals would be discussed with other ministries and taken to the cabinet. The idea may sound good on paper. Since the payout policy of an individual corporate entity is not always a function of profit after tax. 1961 provided that. In a meeting with top North Block officials presided over by finance secretary Vijay Kelkar last week. The estimated profit and dividend income in the current year. not a requirement for laying down a new dividend policy.1 . As such ESOP was considered as a perquisite forming part of salary and was taxed as salary income at the time of exercising the option. by any person free of cost or at a concessional rate to an individual who is or has been in employment of that person. will seek an exemption under the proposed norms.25/.would already have been paid by him.622. shall be treated as a perquisite. 1999-2000). E. when the employee had to sell the shares. the difference between his sales proceeds and the market price at the time of issue of shares to him was treated as capital gains on which he has to pay capital gains tax. By being forced to hike its dividend payout it could send out wrong signals to minority shareholders. Move may Boost Revenues Increasing the dividend payout from Government companies is a thinly veiled attempt at raising flagging Government revenues. The argument against laying down a specific dividend payment criteria is that a corporate entity should be providedthe freedom to chose its own payout policy without having to think of contributing to the government’s resource kitty.25/-.will be treated as taxable perquisite on which income tax has to be paid.Tutorial Activity 1.g. most employees had to sell the shares to pay the income tax.100/. The ministry plans to fix a Rs 1000-crore additional mobilisation target for the next fiscal by demanding higher payouts from its undertakings.even when he has actually made a loss. where the company signals its immediate potential.g. Dividend Norms for Undertakings may be Revamped by Santanu Saikia New Delhi. had to be sold just to pay the tax. E. The ministry is willing to grant exceptions to the 25 per cent ceiling on a a sectoral and case-by-case basis. 150.including surplus profits of the RBI. Since tax was imposed at the time of acquisition of shares. suppose the employee could sell the shares for Rs. It has rooted for a switch to a sector-wise profit-sharing formula and segmented dividend payment criteria for all PSUs. The ministry claims that the percentage profit share can be translated in terms of dividend on a proportional basis on equity held by the Government. Besides. are also to be laid down. depending upon profits generated. Public sector banks provide a measly 384 crore share of total profits while LIC and GIC contribute only 264 crore. income tax on ESOPs was levied at the time of issue of shares to the employee. And what if the employee can sell the shares at a price below Rs. But sector-wise profit sharing norms. if the employee actually sold the said shares later at Rs. Section 17(2)(iiia) of the Income Tax Act.5/-. tax on Rs. if the market price at the time of exercising the option was Rs. Similarly. Besides. the employee was not entitled to any relief. In such cases. While profit sharing is the norm with banks. having paid the tax on Rs. PSUs share their profits with the Government by way of dividends.25/. the value of shares went below the option price and he made a loss on sale of the shares.25/. a dividend payout becomes a sensitive corporate finance tool. A cabinet nod is. GIC and its subsidiaries and the three DFIs. An administrative fiat is enough. In case of listed Government companies with a minority shareholder interest.75/-. General Insurance Corporation (GIC) and its subsidiaries. however. Most employees were not happy with this scheme of things.75/-. directly or indirectly. Industry made representations to the Finance Minister to change the said provisions and provide for levying income tax at COMPENSATITION MANAGEMENT 186 © Copy Right: Rai University 11. but the companies paying up will be the exception rather than the norm as most. The ministry claims that the payout policy of several public sector banks. he would have to pay capital gains tax on Rs. if after paying income tax at the point of subscription. Taxation of ESOPs Until last year ( F. the ministry has decided to ask for maximum 25 per cent share in the profit after tax of PSUs as standard payout criteria.. certain sectors may not be able to provide the high 25 per cent share. The ministry is expecting opposition from PSUs and administrative ministries to its new proposal.per share and the option price is Rs.

less Rs. at the time of actual sale on the difference between actual sale price and the option price. it leads to a further issue of equity shares of the company. Properly used.75/-) and not at the time of exercising the option. are ESOPs the ultimate tool for company prosperity? Do ESOPs have no demerits ? Like most things in life. COMPENSATITION MANAGEMENT 11. rather than imposing the levy of tax at the time when the shares are issued to the employees. When ESOPs are exercised. E. this tool can be used for creating a win-win situation of all concerned.e.150/. if and when he actually sells the shares will have to pay capital gains tax on the difference between the actual sale proceeds and the fair market value on the date of gift. The difference between market price and the option price is nothing but a cost to the company and should be charged to the profit and loss account. In case of long term capital gains. Can ESOPs be Gifted? The answer to this is. Employees’ Stock Option Scheme helps a company to enter into a strategic and robust relationship with their employees on a voluntary basis and in a gracious manner for their genuine benefit and thereby encouraging other sectors also to utilise this option.(Rs. if the shares were sold for Rs.one point only.g. Moreover. The employee who is entitled to the ESOP may gift the options to any person. F.e.e. The reason for having this provision is that. 2000 . These friends / relatives sold the shares / warrants and either. Besides.150/-. The taxable capital gains would be the difference between the sale price and the issue price and such tax liability would be discharged from the sale proceeds of shares so sold. there are no Indian Accounting Standards which require the company to treat the option cost as any expenditure. let the money remain with the spouse. Instead of considering ESOP as a perk and imposing tax on it. the rate at which tax liability would be calculated depends upon whether it is a long-term capital gains or a short term capital gains. the donor will have to pay income tax on the notional gains on the date of gift i.f.2001 only impose capital gains tax at the time of sale of shares by the employee.e. ‘Yes’. Conclusion In a nutshell. in the past. he will have to pay capital gains tax on the difference between the fair market value of the gifted shares / warrants on the date of gift and the option price. ESOPs are nothing but an alternative employee remuneration plan for employees. Demerits With so many merits. The US GAAP has recognized that the option price is nothing but part of manpower costs and should be charged to the profit & loss account over the vesting period of the ESOPs. gifted back the sale proceeds to the employee. The donee. However. Considering the facts of the case.1 © Copy Right: Rai University 187 . excess of anything has its own problems. Finance Minister Yashwant Sinha conceded the industry’s long pending demand for taxing ESOP at the time of sale. no taxation at the time of exercising of options but only on final sale. if it has already been paid. i. This means that the equity of the company is being diluted further and has an adverse effect on the EPS (Earning Per Share). or in case of a close relative such as spouse. i. many employees gifted the option shares / warrants to relatives / friends without paying any tax.Y.75/.622. the employee would be liable for tax on Rs.. such gains shall be taxed at the rate of ten percent without indexation or at the rate of 20 % with indexation of acquisition price. the government will w. However.

cultural and recreational needs of workmen. for example.” “Perquisites other than Wages.” “Subwages.vacations and holidays. such as “Fringe Benefits.” The United States Chamber of Commerce includes five categories of services and benefits under the term fringe benefits. lunch periods. water.”.622. workers commonly receive such benefits as holidays with pay.” or “Social Charges. health insurance plans. This is fairly obvious in the case of public parks. There are also differences on whether the benefits which have been legally provided for should be included among the “fringes. unemployment insurance.paid vacation.” and is sometimes applied to a practice that may constitute a dubious benefit for workers.” “Non-Wage Labour Costs” or “Selected Supplementary Compensation Practices. Paid rest periods. service or sacrifice. etc. educational.” or “Transpecuniary Incentives. and v. The chief area of disagreement is between “wages” and “fringe” on the one hand and between “fringes” and “company personnel services” on the other. In addition. and welfare payments.” It is difficult to define what a fringe benefit is.” The other terms used are: “Extra Wages. ‘Employee benefits and services’ on the other hand. etc.” The International Labour Organization has defined “fringe benefits” as under: “Wages are often augmented by special cash benefits. The term also includes the monetary equivalent of free lighting. productive effort. disability pension. performance. whose performance meets at least minimum levels of acceptability. iii. The term encompasses a ii.COMPENSATITION MANAGEMENT LESSON 30: INTRODUCTION TO FEATURES OF FRINGE BENEFITS.” Different terms have been used for these benefits. for there is no agreement among the experts on its precise meaning. salaries and time-rated payments. The purpose of such benefits and services is to retain people in the organization and not to stimulate them to greater effort and higher performance. workmen’s compensation. and at keeping ‘absenteeism’ and ‘turnover’ to tolerable levels. waste-up time. OBJECTIVES OF FRINGE BENEFITS AND SERVICES PROGRAMME Principles of External and Internal Differential Fringe Benefits number of benefits . health insurance.” Cockman views employee benefits as “those benefits which are supplied by an employer to or for the benefits as “those benefits which are supplied by an employer to or for the benefits of an employee. pension. or by payments in kind that form part of the wage for expenditure on the goods and services.old-age pension. These are: i. profits and bonus. The provision of ‘benefits’ and services’ can be and are important in maintaining the employees and reducing or keeping turnover and absenteeism low.’ Benefits that have no relation to employment or wages should not be regarded as fringe benefits. which usually add up to something more than a “fringe.” The Glossary of Current Industrial Relations and Wage Terms has defined fringe benefits as “Supplements to wages received by workers at a cost to employers. which are provided for workers. welfare cess. Pension and group insurance. Payment for time not worked .” We may define fringe benefit thus: 188 © Copy Right: Rai University 11. fuel. Learning objective • • • • Introduction to the concept of Fringe Benefit To know the Terminology and Meaning of Fringe Benefit To learn Special Features of Fringe Benefit and Service Programmes Objectives of Fringe Benefit and Service Programmes Introduction to the Concept of Fringe Benefit Management is concerned with attracting and keeping employees. Terminology and Meaning These benefits are usually known as “fringe benefits” . and the contributions made by employers under such voluntary schemes as cater for the post-retirement. It is important to note that ‘financial’ incentives are paid to specific employees whose work is above standard. low-cost meals.as they are offered by the employer to the employee as a “Fringe.. and which are not in the form of wages. by the provision of medical and other services. Such additions to the wage proper are sometimes referred to as ‘fringe benefits. low-rent housing. separation pay.” “Wage Supplements. significance or connotation. public and fire protection. etc.” “Hidden Payroll. are available to all employees based on their membership in the organization. “Welfare Expenses.” According to the Employers’ Federation of India. and payments made under the Workmen’s Compensation Act. “fringe benefits include payments for non-working time. survivor benefits. They foster loyalty and act as a security base for the worker. even though they may constitute a significant part of the workers’ total income. medical. Christmas bonus. iv.1 . sanitation services. Legally required payments . and subsidized housing and related services. legally sanctioned payments on social security schemes. Belcher defines these benefits as “any wage cost not directly connected with the employees.

Fourthly. It is offered. For example.subsidizing non-vegetarian meals taken in the factory canteen . e. To keep in line with the prevailing practices of offering benefits and services which are given by similar concerns. 189 COMPENSATITION MANAGEMENT 11. For example.’ a labour cost should be intended by an employer as a benefit desired by his staff. it is. the expenditure incurred on providing better lighting arrangement with a view to increasing a worker’s efficiency is not counted as expenditure incurred on fringe benefits. c. An organization with the introduction of Fringes seeks to enhance employee morale.1 © Copy Right: Rai University . maternity benefits are offered to female workers who have put in a prescribed period of service with a particular employer. but if it is given to supplement his wages. and introduce changes without much resistance. It is a fringe benefit when it is enjoyed by all the employees. Special Features of Fringe Benefits It will be noted that there is some difference between ‘wages and fringe benefits. To provide for the needs of employees and protect them against certain hazards of life. his sickness. the hazards of life he encounters in the course of his work.is not a fringe benefit for vegetarian employees. 1944. it is not a fringe.. All workers should be given a living wage. for it is an expenditure which he incurs on supplementing the average money rates due to his employees who have been engaged on the basis of time schedules.usually weekly. To recruit and retain the best personnel. company purchasing service. To recognize the official trade union’s bargaining strength. definitely constitute a fringe benefit. Sometimes. conditions of work ensuring decent standard of life and fuller enjoyment to ensure social and cultural opportunities.” Article 43 of the Constitution of Indian provides: “.’ Firstly. however. for a strong trade union generally constrains an employer to adopt a sound benefits-and-services programme for his employees. Fringe benefits. For example. worker’s medical examination.622. a fringe must constitute a positive cost to the employer and should be incurred to finance an employee benefit. Objectives of Fringe Benefit and Service Programmes An organization designs and establishes a benefit-and-service programme to achieve the following ends: a. fortnightly or monthly. these benefits are not given to workers for any specific jobs they have performed but are offered to them to stimulate their interest in their work and to make their job more attractive and productive for them. a fringe benefit . legal aid.” The fringe benefits act as a social lever in helping conservation of this precious resource. In the circumstances everything which a company spends over and above “straight time pay” should be considered a fringe benefit. fringe benefits satisfy three goals. Secondly. fringe benefit represents a labour cost for the employer.’ But since the terms are also used interchangeably. The word ‘Benefit’ applies to those items for which a direct monetary value to the employee can be easily ascertained. housing. not on the basis of the hard work or long hours of work put in by an employee but on the basis of length of service. But wages are always fixed and paid regularly. pension. d.. b. a fringe is never a direct reward geared to the output. viz: 1. The word ‘Services. In the words of the Philadelphia Charter. Thirdly. They boost the earnings of the employees. To increase and improve employee morale and create a helpful and positive attitude on the part of workers towards their employers. In other words. to be termed a ‘fringe benefit. “Labour is not a commodity. To improve and furnish the organizational image in the eyes of the public with a view to improving its market position and bringing about product acceptance by it. even though the workers may gain financially as a result of their increased efficiency flowing from the provision of better lighting facilities. Schemes like housing. educational institutional and recreational activities bring benefits to the society at large. f. Only the legal or union-imposed or voluntary non-wage costs. wages are directly related to the work done and are paid regularly .’ on the other hand. Fifthly. on the other hand. encouraging them to greater productive efforts. g. remain cost effective. Fringe benefits help build up a good corporate image. effort or merit of an employee. They are better known now as ‘Benefits and services’ rather than as ‘Fringe Benefits. Subsidized meals. that is. when it can be replaced by money wages without determent to a worker’s productive efficiency. refers to such items as athletics. the longer an employee’s period of service. which can be computed into money wages. etc. as in the case of holiday pay. etc. If the benefit increases a worker’s efficiency. they are synonymous. Social Goal Human resource is the most precious of all resources. and put extra spending money in their hands.It is a benefit which Supplements the employees’ ordinary wages. It is entitled to a fair deal as an active participant in any programme of economic development and social reconstruction. sex. by guarding against its unnatural erosion and providing the climate for its development in a working environment. A labour cost is a “fringe” only when it is an avoidable factor. they are not merely so but are a substantial part of the expenditure incurred on wage and salary administration. To make the organization a dominant influence in the lives of its employees with a view to gaining their loyalty and cooperation. the larger the fringe benefits he enjoys. particularly those which an individual cannot himself provide for. Sixthly. medical insurance or separation pay. and which is of value to them and their families in so far as it materially increases their retirement benefit. Though these benefits are known as fringes. are considered to be fringes. are those payments or benefits which a worker enjoys in addition to the wages or salary he receives.

Good luck. large and small. Can College Tuition be a Fringe Benefit? Ask HR Guy Hello HR guy. In addition.1 . Or. etc. and you should get something of what you’re after. for training and development of the employees. Fortunately. the carrier may cancel the policy the next time it comes up for renewal. as there are many non-course expenses involved. But it’s different if you’re working on a degree. many large companies are focusing on making the consumer more cost sensitive and health-conscious. 190 © Copy Right: Rai University 11. there are a number Tutorial Activity 1. Fringe benefits do provide protection. Hello HR guy.this might mean a reduction in salary. Emphasize how long you’ve been there.2. suggest drawing up a contract that commits you to working for the firm for X years after graduation. Also. Nevertheless. will be looking at health care costs almost double of what they were at the start of the century. what other options could I suggest? Thank you. i. Contain the Costs As many sign professionals are all-too-aware. until such time as more of these favorable laws are passed. a whopping 88 percent of the corporate respondents predicted even more large increases in employee health care costs through 2006. I would like to ask the company if it would consider paying for my tuition since what I would be studying would be parallel with my work.not just vague “I’ll be a smarter. “mutual interest. as well as the direct benefits your training will provide the company . . So to boost your chances of getting tuition assistance. you’d be very lucky to get it to cover everything. Often they demand extensive medical information about each employee. I was wondering if tuition could be treated as a fringe benefit for working for a company. I was wondering if tuition could be treated as a fringe benefit for working for a company. I will continue to work at the company while in school at a reduced percentage.622. individual differences. HR Guy COMPENSATITION MANAGEMENT Tutorial Activity 1. especially if you’re in a tech-related field.and their owners. many companies are beginning to empower their employees to take charge of their own health care as you’ll see. And. but it would also lock in the tuition assistance. In other words.. better worker. may help make healthcare insurance an affordable option for many sign businesses . That means that by 2007. However. The short answer is: It depends on the company . Instead of focusing on making the system cut costs through managed care of HMOs alone. James James. 3. What can any sign professional or sign business owner or manager do to fight this tide? Clearly there is no silver bullet.2 Health Insurance: Fringe Benefit or Dead Weight By Mark Battersby Although health care costs may continue to rise.. it’s always in a company’s best interests to invest in their employees.” The management provides with an environment which will reasonably meet the economic. motivation and human dignity. No one wants the government to step in with convoluted solutions. though there’s usually a catch: Employers are afraid to see such employees leave after their studies are complete. Fortunately.. After all. social and psychological needs of the employees so that their cooperation could be obtained and productivity of the organization enhanced. several unique strategies developed in recent years. many companies. Of course I must consider the company’s position of not having a lot of extra money for G and A (general and accounting) funds and none of the projects have the funds for my tuition right now.e. Many firms will cover courses taken that have direct relevance to the job description. Go into it with several options and a willingness to compromise. Human Relations Goal The management.1 Can college tuition be a fringe benefit? Ask HR Guy . but with some good negotiating. be willing to negotiate on how much the firm chips in . So I was wondering if tuition could be a fringe benefit. ideal utilization of the non-human and human resources is imperative. It is a sad reality that few sign shops or sign-related businesses can afford to offer their employees healthcare insurance.and even. it’s suddenly lost an enormous investment. I have been working for the same research and development company for almost five years now and now have applied to go to graduate school. Macro-Economic Goal For maintaining the growth and stability in the economy of a country.with this economy. A Tillinghast-Towers Perrin survey showed that in 2002. if not discarding it altogether. opportunities for social interaction through cultural recreational facilities. yes. the individual situation. If anyone in the group has a pre-existing condition.. if someone in the sign business becomes seriously ill. and for good working conditions and assistance to supplement their main income. if it pays for your degree only to see you go to another employer soon after graduation. sometimes. there are some steps you can take to offset some of this necessary burden. during periods of contingencies of life.” but the sort of knowledge base you’ll acquire and the kinds of projects you’ll be able to work on. Double-digit increases in the cost of medical insurance are driving others to severely limit this popular fringe benefit. many states are trying to ease this burden by passing laws that make it easier for small businesses to get health insurance and to prohibit insurance carriers from discriminating against smaller firms. through motivation. combined with our tax laws. there could be a better chance if you could work it into your benefits package . insurance carriers that write policies for small businesses tend to charge very high premiums.. the carrier may refuse to write a policy. tries to develop and maintain “human relations”. you might be able to get a good chunk of your expenses covered.

the payoff with this strategy also applies to smaller sign businesses. Although this was a large business. a two percent plus shareholder’s wages from the S corporation are treated as the shareholder’s earned income derived from the trade or business with respect to the plan providing the health insurance coverage is established. What’s more. If their medical spending exceeds that. contributions made by the business to provide (through insurance or otherwise) accident and health benefits are not taxable to the employees. In some states. received regular screenings for breast and prostate cancer and took other common sense health measures. called a persona account or something similar. is entitled to deduct 100 percent of the amount paid for medical insurance for himself. even in today’s environment of steadily escalating costs. you’ve got substantial clout. For those who stopped smoking. are among the possibilities that every sign professional should explore. Today. Carrots and Sticks One employer recently dangled a temporary monetary incentive in front of employees willing to make staying healthy a priority. accident. etc. giving full coverage to those who use “in network” medical services. the company agreed to pickup 75 percent of their health insurance tab. The carrier issues a policy to the whole association. An employer’s deduction for contributions to a funded welfare benefit plan for sickness. for example. Actual losses charged to that reserve account are. amounts added to a self-insurance reserve account are not currently tax deductible. the employee pays his or her $15 co-pay and the doctors and hospitals have an employer’s blank check from there on in. Would a similar strategy. employees face a fairly high deductible before more conventional medical coverage kicks in.622. A growing number of small businesses are. double-digit hikes that others face. Consumer-driven Health Care A few. any group health plan that fails to satisfy the continuation coverage requirements or which discriminates in favor of key. decide to shop for better value. an employee-shareholder who owns more than two percent of the S corporation’s stock and who is thus treated as a partner. worked out with the help of competent advisers or your insurance company. In some areas and some fields they are already available to small businesses. In fact. Under today’s systems. If that money is used up. Finally If sign business owners and managers are waiting for Washington to solve their health care problems. one of a growing number of companies offering defined contribution products to employers. These plans typically grant employees an annual cash allotment. be just as effective in your workplace? Uncle’s Helping Hand Although tax deductible by a sign professional. even those with only a few employees. Single workers pay about $450 to participate in the plan provided by a private administrator. Your sign business may have only a few employees. his spouse and dependents. the operation’s workers’ compensation bill was close to 10 percent lower that it was less than a decade earlier. hospitalization or medical benefits is governed by the tax law Group health plans that fail to provide continuing coverage to qualified beneficiaries may subject employers to an excise tax. a more traditional managed care plan kicks in. but united with other members of a group or association and their employees. compared with 60 percent for others. In many of these plans that are offered by insurance companies. business owners or groups have set up health insurance networks among businesses that have nothing in common but their size and their location. Employee-shareholders owning more than two percent of the S corporation stock are treated in the same manner as partners in a partnership. Associations aren’t the only route to take.700 in annual health care expenses. the company faces only a three percent increase in health care premiums instead of the commonplace multi-year. In this situation. One midwest company added just such a personal health account plan last year. For purposes of this deduction. spouses and dependents.or highly-compensated employees may be subject to penalties in the form of an excise tax . trade organizations and groups offer health insurance plans for small business owners and their employees at lower rates. Participants buying coverage for one person have a yearly allotment of $750. they are responsible for the next $500. That offer prompted 90 percent of the company’s employees to opt for health. generally. to spend as they please for health. tenants and merchants’ associations. If the sign business’s so-called “welfare benefit plan” involves self-insurance. deductible. when confronted with the real price tag for their medical services. many experts say that COMPENSATITION MANAGEMENT 11. larger sign businesses are experimenting with so-called “defined contribution” products. your business’s coverage can’t be terminated unless the carrier cancels the entire association. Chambers of commerce. Employers hope to see savings from employees who. of course. self-employed sign professionals may deduct 100 percent of any amounts paid for health insurance coverage for themselves. Many business leagues. Once the employee hits $1. any unused portion rolls over and is added to the following year’s allotment. trade-groups and others. Under our income tax laws. This deduction is limited to the actual income earned from the sign business and reduced by a deduction for contributions made by the self-employed professional to a retirement plan. This way even the smallest one-person company can choose from the same menu of healthcare options that big companies enjoy. banding together with other businesses to enjoy economies of scale and gain more clout with insurance carriers.or denied a tax deduction.of cost-cutting options that every sign professional should explore.1 © Copy Right: Rai University 191 . Only those benefits received by employee-shareholders owning two percent or less of an S corporation’s stock are tax deductible by the corporation as a business expense. Associations are able to negotiate lower rates and improved coverage because the carrier doesn’t want to lose such a big chunk of business.

622. can anyone really afford healthcare protection and. Health care continues to be the subject of vigorous debate on Capitol Hill. The self-employed sign business owner. may claim a tax deduction for amounts spent on healthcare for employees. their spouse and dependents. All of which puts the question of health care insurance or coverage squarely back on the shoulders of every sign shop owner and manager. Congress may consider passing legislation that will create tax credits for uninsured individuals. if they can. partners and shareholders in sign businesses operating as S corporations can today deduct 100 percent of the amounts they spend on health care insurance for themselves. But. Other items on the agenda include expanding medical savings accounts and increasing prescription drug coverage for seniors. Some Democrats are talking about universal health care although the plans are short on detail and few of them offer much hope for smaller businesses. The business itself.1 . Employees. for how long? Notes: COMPENSATITION MANAGEMENT 192 © Copy Right: Rai University 11. of course.the wait may be a long one. can safely ignore health care payments made by their employer for tax purposes. the question remains.

the Philadelphia Declaration did influence the origin of these benefits. increasingly heavy urbanization and the growth of a capitalistic economy have made it difficult for most employees to protect themselves against the adverse impact of these developments. “Larger part of the industrial growth is obtained not from more capital investment but from improvements in men. f. ix. History and Growth Factors of Fringe Benefits Belcher says that “A Fringe is a catchword attributed to the Regional Director of the War Labour Board (USA) during World War II. injury and old age.” Contribution of Other Factors on the Concept of ‘Fringe Benefits’ For instance. The growth and strength of trade unions has substantially influenced the growth of company benefits and services. greater pressure has been placed upon competing organizations to match these benefits in order to attract and keep employees. The contribution of these three parties varies in accordance with the nature and purpose of the various employee benefits-andservices programmes. the Directive Principles of State Policy enshrined in the Constitution and the subsequent Five Year Plan documents laid considerable emphasis on improvement of wages. d. The reactions of the employees. made it imperative for employers to share equally with their employees the cost of old age. every individual is expected to be at least partially responsible for his own present and future well-being. Second. The ability to pay. the criteria governing such a programme are: a. particularly social! security legislation. at least partly. it was held that employers should accept responsibility for meeting some of the needs of their employees. key forces and their potential impact on benefits: Learning Objective • • • History And Growth factors of Fringe Benefits Contribution Of Other Factors On The Concept Of ‘Fringe Benefits Coverage of benefits Interaction After studying rewards and incentives in detail now let us study further the growth of Fringe benefits. First. COVERAGE OF BENEFITS Principles of External and Internal Differential Fringe Benefits Since it was workers who were responsible for production. Tax considerations. vi. The needs of the employees. A number of factors influence the decision to set up a particular employee benefits and services programme. e. As organizations have developed more elaborate fringe benefits programmes for their employees. 11. Rising prices and cost of living has brought about incessant demand for provision of extra benefits to the employees. b. In member countries of the I. We get from men pretty much what we invest in them. vii. According to Nielson.K. The management has increasingly realized its responsibility towards its employees and has come to the conclusion that the benefits of increase in productivity resulting from increasing industrialization should go. v. Recognition that fringe benefits are non-taxable rewards has been a major stimulus to their expansion. c. iii. industry is now expected to protect its workers from the hazards of life. The bargaining strength of the trade union. fringe benefits germinated as the byproduct of Industrial Revolution.L. to the employees who are responsible for it. The following table summarizes the factors. As a result. Social responsibility. sickness. the government is involved in supporting and financing worker assistance programmes. The idea caught on and is now widely used in spite of its limited value in describing the present practice. some benefits-and-services programmes were adopted by employers. evolution and implementation of a number of a compensation plans. The growing volume of labour legislation. Company benefits-and-services programmes are among some of the mechanisms which managers use to supply this security. Finally. In the U. Cost. g. survivor and disability benefits. A “tripartite” concept of individual protection has developed in recent years. iv..1 © Copy Right: Rai University 193 . Employers too have found that fringe benefits present attractive areas of negotiation when wage and salary increases are not feasible. social security benefits and other welfare measures. In India. viii. and h.Labour scarcity and competition for qualified personnel has led to the initiation. so that they may be protected against the insecurity arising from unemployment.” It sprang up as off-shoot of the industrial wage system. Rapid industrialization.622. ii. Public relations.. i.O.COMPENSATITION MANAGEMENT LESSON 31: INTRODUCTION TO HISTORY AND GROWTH FACTORS. for it was rightly recognized in the words of Peter Drucker.

or bulk buying of tickets by employers for distribution to staff. professional subscriptions or work related reading matter. Educational Programmes In-house study opportunities. Discounts or preferential terms on the organization’s own products services. New public welfare youthfulness of work force transplants. may receive: a mortgage subsidy: discounts on unit trusts or insurance products.Table 1 : Factors Likely to Shape Future Benefits and Their Relative Impact Relative Impact of Forces on Benefits Some Moderate Strong 1. Catering Services Most commonly. convincing fees and so on or assistance with house purchase – bridging loan. Christmas etc) although these may be granted by 194 © Copy Right: Rai University 11. Family-friendly Policies Such as workplace nurseries. Relative growth of minorities 2. Transport Assistance Examples may include loans for the purchase of annual season tickets.and those whose work requires extensive road travel (eg. on death) They are financed by contributions from the company. subsidized food and drink at the workplace or Luncheon Vouchers. regardless of whether it wants to or not. with facilities for contribution by employees as well. Many employers supplement the state benefit by additional sick pay schemes. Perhaps in the Form of Allowances to staff who have been transferred or relocated – removal and traveling expenses. Allowances For telephone costs. frustrations 6. Employees who have been continuously employed for 13 weeks are entitled to 15 days’ leave per annum. Growth in relative 3. especially among managerial staff for whom they have connotations of status. rising to 20 days for leave commencing after November 1999. Medical advances (e.622. termination. or sponsorship of external study (not necessarily work-related). which may be tailored to the organization’s particular objectives (looking after long serving employees. Growth in female component of work force 4. Extension of 2. COMPENSATITION MANAGEMENT Coverage of Benefits Benefits consist of items or awards which are supplementary to normal pay. lodging. Recreational Facilities It is a subsidy and organization of social and sports clubs or provision of facilities such’ as a gymnasium or bar. 7. More technological changes with institutional members and pressures. 2. life extension) programme 5. Better labour-force edu cation 1. Some medical services may also be provided at the workplace: for example eye and hearing tests (where relevant to the industrial context). Some – such as pensions and sick pay . Bank employees. There is no statutory right to ‘customary’ holidays (public holidays. the payment of these costs by the organization provides the employee with financial protection at retirement.1 . workmen’s compensation. new unions established unions work force 4. which has legislated for employees and employers alike to. so the common term ‘fringe benefits’ is perhaps misleading. sales and service staff). career break schemes. More urbanization contract terms. With few exceptions. Sick Pay It is understandable that sickness or other enforced absence from work would haunt workers with the prospect of lost earnings. building up rights to a guaranteed income on retirement (or to dependants. the hiring of any employee requires the organization to pay social security premiums. despite the reduction in tax incentives over the years . medical insurance and ‘perks’. or generosity from the outset to attract recruits’ Maternity Leave and Maternity Pay Benefit given to the female employees of the organization. It has been recognized that certain benefits must be supplied by the organization for its employees. Medical Benefits Say private medical and/or dental insurance. More leisure time. are more in the nature of optional extras and as such may be part of the recruitment retention and incentives strategies of the organization. Housing Assistance. 3. including sabbaticals and long-service leaves. bonus interest on accounts or savings plans. but it was only recently working Time Regulations 1998) that any formal entitlement to annual leave was formulated. or as a result of injury. Pressure from and increased participation in unionization. Entitlements include the following: Pension Provisions Pensions are generally regarded as the most important benefit after basic pay: they are a kind of deferred pay. Minority.Rise in individual 1. Participative planning 4. holiday versus-blue-collar occupations 3. Growth in white-collar influence vacations. term-time hours contracts. Holidays This is a benefit which is very much taken for granted. unless there was some son of provision for genuine sufferers. for example. and it also provides to the workers’ dependants in case of the employees’ death. bear some of the cost. Other benefits which may be offered include the following: Company Cars It is a highly-regarded benefit in the UK. Similarly. Certain provisions of the maintenance of adequate standards of living have been underwritten by the state. Additional holiday entitlements may be regarded as a fringe benefit. etc. Other benefits such as cars.g.are essential entitlements. preferential mortgage terms. They are awarded to anyone who meets certain qualifying conditions and as such are independent of the employer’s discretion and performance considerations. or reduced interest rates on overdrafts and loans.

office accommodation. Those which are key benefits. wash-up time. Paid rest period. surgical and hospital insurance. Deepavali. laundry allowance. b. f. retirement. Payment for Time not Worked Under these are included call-back and call-in pay.. pay for the time spent in offering evidence in a court of a law or other statutory bodies. On the basis of their identification. The idea is to allow the worker some mental and physical diversion from his job. Premium Payments for the period of time a worker has worked. and house purchase facilities. Holidays: Certain days in the year are stipulated as paid holidays. Countries like USA. including cafeteria subsidies. group life insurance. Payment for health and security benefits: These include retirement plans. profit-sharing plans. Republic Day. Payment for special duties. telephone. employee uniforms.622.’ Thanks giving. c. however.popularly known as a ‘Rest period’ or a ‘Coffee beak’ . security . foreign travel. Those which are offered on the basis of status . b. Insurance: Which may be life. made regularly to a former employee or his surviving dependants. payment for time spent on collective bargaining and on the redressal of grievances. pay for rest periods. It may be for individual or the group. house financing. secretarial services. excused absence. Holi. severance pay. has made a two-fold classification of fringe benefits: i. high repetition. Rest Period: Among office jobs and those jobs requiring heavy exertion. holidays. Accident insurance. Payments that have to be made under any specific legislation. survivor. supplemental employment benefits. etc. pay for religious holidays. lunch periods. 195 11. Supplemental unemployment benefits. counseling services. c. certain “breaks” . and get-ready time. however. dressing time. which includes payment for sick leave and for time during which an employee is under medical care. Vacations: Paid vacations vary from 15 days to 1 month in a year. New Years. savings plans. iv.insurance and medical benefits. c. Id. safety equipment or allowance. portal-to-portal time. e. clean-up time. iii. Employee Security Payments: These include: COMPENSATITION MANAGEMENT i. supper money or meal allowance. Labour day. including profit-sharing payments. etc. bonus in lieu of vacation. such as working on grievance redressal procedures and labour contract negotiations. ii. These are: a. Other items. the cost of living bonus. disability insurance. lunch periods. benefits may be classified as under: a. Pension Programmes: A pension represents a fixed payment. payment for holidays. Independence Day. d. that is. payment on daily or weekly basis. Gandhi Jayanti. vi. Sick Leave: provides an employee pay when he is out of work due to illness. work clothes.are allowed during the day to allow the worker to rest. witness time. rest periods. shift differentials. In Western. and ii. Full pay for a specified number of “permissible” sick days are granted to the employees. Severance Pay: This provides a one-time payment when an employee is terminated. Employers contribution stipulated in legal enactments: old age. voting time. payment for callall-time. v. attendance bonus. reporting pay. time taken to change clothing. health and accident. Dashara.K. holiday pay. travel time.car. are particularly included. Gurunanak Jayanti. profit sharing. health and unemployment insurance. Mahaveer Jayanti are gazetted holidays. USSR and U. bonus. Contributions to saving plans and health and welfare funds. call-back time. paid sick leave. b. accident and sickness insurance. payments under the Workmen’s Compensation Act. reporting pay. paid lunch periods.1 © Copy Right: Rai University . The rationale behind the paid vacation is to provide a break in which the employee can refresh himself. union credit. Payments under the Workmen’s Compensation Act. children’s educational facilities. entertainment facilities. share schemes. overtime pay. layoff pay. Leave of Absence: This covers leave of absence for which pay is provided. Educational leave is given to managers or management trainees during the training period. and unemployment compensation. for example. vacation pay. portal-to-portal time and wet-time. Pensions and such other payments as have been agreed upon. Payments for time during which an employee has not put in any work at all. Other expenditure. company scholarships. These are given to the employee after he has put in a specific period of time. on educational reimbursements. on which the employees are paid and they do not have to work. severance pay. health-in-the-family leave. provided an employee has fulfilled specific conditions of employment for a specific length of time. such as that incurred on making Christmas gifts or offering Christmas bonus. medical. and payment for the time spent on casting one’s vote at election time. d. In India.The National Association of Manufacturers has indicated the following classification of fringe benefits: a. disability. holiday. Christmas. parking space operations. Cockman. This is done on humanitarian ground. family allowance. and e. and work benefits . Bonus and Awards These consist of such financial amenities and advantages as holiday. Payment for time not worked. over-time and shift premiums. or diligent concentration. vacations. The United States Chamber or Commerce classifies benefit items into five categories. social security payments. Pensions. management training. medical time. Christmas. Payment for employee services. benefits. work-up time. old age and survivor insurance.

COMPENSATITION MANAGEMENT Tutorial Activity 1. 196 © Copy Right: Rai University 11. pensions and so on). 4. To encourage commitment to. It must always be recognized. profit-sharing bonus and service bonus. nevertheless. bonus for good quality workmanship. To attract and retain staff by the generosity and/or relevance of benefits offered. suggestion awards. of all the benefits mentioned below would you think were the most important to people? 1. waste elimination bonus. To demonstrate care for people and social responsibility (by giving above statutory sick pay. that however generous they are (benefits) can never be an adequate substitute for an Inadequate base rate or an illogical salary structure or for tangible recognition of the effect of inflation. Which. by allowing career breaks and sabbaticals). To offer rewards of perceived high value to the employee with discounted or marginal cost to the employer. 5. and buy facilitating career longevity (eg. To encourage desirable behaviors/values in employees (by subsidizing clothing.622.Diwali bonus. safety awards. and year-end bonus. 3. 2.1 . fitness programmes. and consumption of the organization’s own products (at a discounted rate) by employees. paternity leave.1 (Exercise: 15 minutes) There are a number of reasons why organizations offer benefits packages. education and so on).

including parking lots and bus services. enable employees to meet their self-actualization needs. social clubs. It may be pointed out here that no company provides all these benefits and services. 2. counseling services and referrals to community social services. entertainment programmes. and fully or partially subsidized food. picnics. The hours actually worked seems to be more productive.COMPENSATITION MANAGEMENT LESSON 32: INTRODUCTION TO EMPLOYEE SERVICES & FRINGE BENEFITS IN INDIA Principles of External and Internal Differential Fringe Benefits xi. Learning Objective • • • • Introduction to the Concept of Employee Services Special Features of Employee Service Programme Drawbacks of Employee Service Programme Fringe benefits in India Introduction to the Concept of Employee Services In addition to the above fringe benefits. including plant infirmaries. health insurance. For example. 5. comprising nurseries and day care centers for children.00 to 7. such as holidays.622. 4. legal aid. and scholarships for employees and their children. cafeterias. It reduces the tedium associated with the timing of the employees’ work and democratizes the work. v.’ Depending on their age. tuition fee refunds.1 © Copy Right: Rai University 197 . Housing services. the ratio of manhours worked to man hours paid increases. 3.00 to 3. which include contacts with other employers in the area. parties. Eating facilities. protective clothing and equipment. they may opt to work from 7. employee or at a significant reduction from what might have to be paid without the organization’s support. Among the benefits and services which are most commonly offered are life insurance. educational leave. their life styles and other forms of preference. credit unions. libraries and reading rooms. such as company-operated stores and discounts on company products and services. Transportation facilities.00 or 11. Some benefits. Special Features of Employee Service Programme 1. Absenteeism is reduced and sick-leave cut down. The distinction between the management and professional workers is reduced and more authority is delegated by supervisors. These services are provided at the discretion of the management and are generally of some concern to trade unions when they engage in collective bargaining with the employees. ix.00). which might irritate the workers. It is called ‘flexitime’ because the workers themselves determine their own starting and stopping time. income-tax service. including subsidies for the purchase and upkeep of work clothing and uniforms and of the various types of tools used by a worker in the course of his work. x. Since less time is lost due to tardiness. they make it possible for them to be away from their job.Recreational. ii. Educational services. Medical services. vii. organizations also provide a wealth of services that employees find desirable. xii. their educational and income levels. Purchasing services. pension. saving plans. Those that are provided are determined by the needs of employees and the preferences of a company. recreational areas. vacation and pension. These services are usually provided by the organization at no cost to the. rest periods and vacations. social and cultural programmes. Financial and legal services. and there is less slowing down toward the end of the work day. lunchrooms. including company-owned housing projects and subsidized housing. Drawbacks of Employee Service Programme i. Flexitime is complicated to administer and may be impossible to implement where large group of workers must work independently. different categories of employees need and demand different combinations of benefits and services. iv. Services related to the type of work performed. orchestras. beauty parlors. which include sponsorship for off duty courses. which include the provision of company restaurants. viii. vi. Outplacement services. It requires the use of time-clocks or other time records. vending machines. Flexitime: The workers are permitted to build up their ‘flexible work day’ around a core of mid-day hours (such as 11.00. including sponsoring of loan funds. help in writing up resumes. unemployment compensation. Child care facilities. Cafeteria Services: one of the recent developments in this field has been the formulation of the cafeterial compensation concept or what is known as ‘smorgasbord. participate in other 11. including athletics. canteens. and secretarial assistance. iii. ii. These services include: i.00 to 2. and group insurance plans. iii. clinics and hospitals.

they respectively accounted for 4.11. and accounted for 1. In the plantations and mining industries.3 million in wages and fringe benefits. A break-up of fringe benefits by types revealed that. compensation for a waiting period of three days. Some of these benefits are: Rifle allowance to watchmen. The social security benefits voluntarily provided by companies include provident fund. a typical young man generally desires to have direct wages and educational assistance. The bonus was of various kinds . however. free driving licences for drivers. accounting for a little more than 9 per cent of the total wage bill.42 and 32. service bonus. and that the latter was about 21. A considerable proportion of fringe benefits was in the shape of monetary bonus and constituted about 5 per cent of the wage bill.3 per cent of their total wage bill in that year.56).42) and aluminum.12 per cent in the mining and manufacturing industries respectively. while in the other two (mining and manufacturing industries).84 per cent of the wage bill) and plantations industries (24. Payments which had to be made under legislative enactments were between 6. The employers’ contribution to statutory provident fund constitutes by far the largest item of expenditure.42 per cent). and include gratuity and pension payments. while that on gratuity account was 0. followed by the cigarette industry (31.35 per cent). In the plantation industry. The latter’s expenditure on canteens.42. Voluntary Benefits Retirement benefits.81 per cent) and plantations (3. The cafeterial compensation concept generally involves the idea” that each employee ought to design and tailor his own indirect compensation programme by personally picking and choosing the benefits and services he would desire to have from among the many such benefits and services provided by his company. that which was paid for the time not worked and for profits and bonus was the highest. however.59 per cent.622. these welfare schemes formed 9.06 and 10.99 per cent of the wage bill). the mining industry (4. brass and copper industries (30. there was a wide range of other benefits as well.5 per cent of the total. payment on life insurance premia. Industries which spent a relatively larger sum on this item were cigarette manufacturing and distributing (10. The medical assistance schemes voluntarily provided by employers were the largest single item of expenditure. chemicals and allied industries (7.60 per cent). while voluntary welfare schemes accounted for 5. The plantations industry spent 4.36 per cent voluntarily incurred by them. The expenditure on maternity clothing in the manufacturing and mining industries. was about 0. petroleum refining and selling (7. In the mining industry. educational and cultural facilities.activities and share in other experiences even while they continue to receive their wages or salaries. which were included in the survey.80 per cent of the total expenditure of 5. etc.5 to 27.15 per cent). while an older employee often opts for pension and health insurance services. In the manufacturing industries.profits bonus.1 per cent and 7. and were comparatively low in the manufacturing sector (19.07 per cent spent by the mining industries. however. variations were considerable.40 per cent of the total wage bill in the plantations industry against 3. water and 11. Choice and decision generally depend upon the discretion of each individual employee and not on a management fiat or a centralized collective bargaining agreement. Apart from the general fringe benefits for employees.4 per cent of the total wage bill. For example.981 companies. the maintenance of canteens. The fringe benefits were high in the mining (24. in 1960. cafeterias. it was revealed that. attendance bonus. the 198 percentage of expenditure on this item varied between 3. compensation for injuries and disablement. Statutory Fringe Benefits These benefits are generally social security. paid a little over Rs. this percentage was 57 and slightly more than 50 respectively. the employer’s contribution to the employees’ provident fund account and health insurance scheme. In each of these three sectors.36 per cent of the wage bill. moreover. satisfy one’s need for esteem in that they are often looked upon as indicators of one’s personal worth.84 per cent spent by the manufacturing industries. The quantum of the bonus varied from sector to sector.148.24 per cent). These benefits.23 per cent of the total wage bill in the plantations. of payments for time not worked and of contributions by employers to social security benefits.4 per cent of the wage bill. subsidized food and housing.74 per cent and 4. The “other expenditure” incurred under statutory regulations and tribunal awards was on compensation paid to workers. gratuity payments.88. accounting for 4. however. medical care. welfare cess payments in the coal mining industry and on the supply of protective clothing in the plantations industry. free quarters. cycle allowance to peons. of the total amount paid on fringe benefits.70 per cent of its total wage bill against that of 0. gratuity and pension. the percentage of fringe benefits varied from 24. The expenditure on employees’ state insurance contributions by the manufacturing industries was 0.36 per cent.3 per cent of the wage bill).11 per cent) and shipbuilding (6. In the manufacturing sector.1 COMPENSATITION MANAGEMENT © Copy Right: Rai University . 2. while in the manufacturing sector it varied between 13. assistance to co-operative societies these are some of the benefits accounted for 9. Fringe Benefits in India When the Employers’ Federation of India conducted a study of fringe benefits in this country. mining and manufacturing industries put together.12 per cent and 3. Payments for Time not Worked These payments were fairly substantial in the manufacturing industry (5.78 per cent of its total wage bill on this particular voluntary service against only 0. nearly two-thirds of the benefits were in the form of profit and bonus.

on the terms and subject to the conditions set forth in this Agreement. travel concessions. activities would detract from or interfere with the fulfillment of her responsibilities or duties under this Agreement or require substantial time or services on the part of the Executive. be deemed to mean and include its successors and assigns) of the ONE PART AND [Employee’s Name]. Expenses a. co-operative bank facilities. Fringe Benefits. conveyance allowance when no transport is provided by the company. WHEREAS the Company is desirous of employing the Executive and the Executive wishes to accept employment with the Company. The Company will reimburse the Executive for the expenses involved with her acquisition and business-related use of a portable cellular telephone. assistance to buy spectacles. free libraries and facilities for inpatient hospital accommodations. the Company shall pay to the Executive the compensation set forth in Schedule A attached hereto. The Executive shall report to the General Manager.. with the prior concurrence of the General Manager to whom the Executive is to report. entity) which engages anywhere in India in a . unless it be repugnant to the context or meaning thereof. shall terminate on (specify date). Now it is agreed by and between the parties hereto as follows: 1. terminate her employment under this Agreement as of the date of the notice without any further payment or the furnishing of any benefit by the Company under this Agreement (other than accrued and unpaid basic salary and commissions and expenses and benefits which have accrued pursuant to any plan or by law). The Executive shall be entitled to Three (3) weeks paid vacation annually. The Company shall reimburse the Executive for all reasonable and necessary expenses incurred by her in connection with the performance of her services for the Company in accordance with the Company’s policies. provided by the Company to its employees generally and shall also be entitled to participate in all benefit plans. gift of a wrist watch after a meritorious service of ten years. 5. the Executive shall have failed or is unable to perform her duties for a period of Sixty (60) consecutive days. The Executive shall devote her best efforts and all of her business time to the performance of her duties under this Agreement and shall perform them faithfully. diligently and competently and in a manner consistent with the policies of the Company as determined from time to time by an officer of or President/CEO of the Company. 2. which expression shall. Indian Inhabitant residing at [address](hereinafter referred to as the “Executive”. presents to employees on the occasion of their marriage. (specify) Office of the Company. scholarships to employees’ children. as a (specify the category of employment/service) of the Company. if any. c. free uniforms to certain categories of employees. If. benevolent fund assistance if a worker is struck down by tuberculosis or cancer. with such duties and responsibilities as may be assigned to the Executive by the President/CEO of the Company and as are normally associated with a position of that nature.electricity. sale of company products at concessional rates. unless it be repugnant to the context or meaning thereof. shoe allowance of 20 paise and an allowance of 37 paise per hour if a worker attends education classes. as the result of any physical or mental disability.622. This consent shall not be unreasonably withheld. 4. employees’ tours of government projects. provision of snacks during night shifts. b. if any. by notice to the Executive subsequent thereto. Employment The Company shall employ the executive and the Executive shall serve the Company. upon submission of appropriate expense reports and documentation in accordance with the Company’s policies and procedures. The Executive shall be entitled to receive all health and pension benefits. The term of the Executive’s employment under this Agreement shall terminate upon her death without any further payment or the furnishing of any benefit by the COMPENSATITION MANAGEMENT Tutorial Activity 1. Free Psychometric test examples Sample Employment Agreement for Executives Employment Agreement for Executives This Agreement (hereinafter referred to as the “Agreement”) made and executed at [Place] this [Date].1 © Copy Right: Rai University 199 .. which expression shall. This Agreement may also be extended as needed by a written amendment as discussed in Clause 8. Compensation As full compensation for all services rendered by the Executive to the Company under this Agreement. b. 3.. by and between [Company’s Name] a company incorporated under the Companies Act. salary and commissions and expenses and benefits which have .1 Free Job Descriptions Good Interview Questions The Executive shall be . Disability or Death a. The Executive whilst working in the Company shall not engage in activities outside the scope of her employment if such 11.. This schedule may be amended from time to time in writing by the Company and the Executive. to be taken at times selected by her.. be deemed to mean and include its successors and assigns) of the OTHER PART. festival allowance. Term of Employment The Executive’s employment by the Company under this agreement shall commence on the date of this Agreement and subject to earlier termination pursuant to Clause 5 or 7. study leave. 1956 and having its registered office at [address](hereinafter referred to as the “Company”. provided by the Company to its employees generally. the Company may.. The Executive shall not serve as a director (or the equivalent position) of any company or other entity and shall not receive fees or any other remuneration for work performed either within or outside the scope of her employment without prior written consent of the President/CEO of the Company.

lists of present clients and customers and the names of individuals at each client or customer location with whom the Company deals. COMPENSATITION MANAGEMENT c. discoveries. in each case at any time during the past year of the term of the Executive’s employment under this Agreement. its subsidiaries. the services of any person who was a full-time employee of the Company. run books. procedures for computer access and passwords of the Company’s clients and customers. iii. records. such as giving testimony in support of the Executive’s inventorship. The Executive shall not. Notwithstanding any provision of this Agreement to the contrary. including. and all documentation normally related to the design or implementation of any computer programs developed by the Company relating to computer programs or systems installed either for customers or for internal use. the type of equipment or computer software they purchase or use. concepts. processes. systems flowcharts. e. salesperson. as from time to time may be necessary or useful in the Company’s opinion to apply for. the term “person” shall include natural persons. The Executive agrees for herself and her heirs. and to execute and deliver promptly to the Company such papers. partnership. The Executive hereby assigns and agrees to assign to the Company all her rights to and title and interest to all Inventions. the Company shall have the royalty-free right to use in its business. or political subdivisions thereof. upon request of the Company. During the term of the Executive’s employment under this agreement. All memoranda. corporations. Confidential Information. prospect lists for actual or potential clients and customers of the Company and contact persons at such actual or potential clients and customers. or other documentation. merchandising. either during the term of the Executive’s employment under this Agreement or for a period of One (1) year thereafter. iv. inventions. or solicit the business of any person who was a client or customer of the Company. have made. purchasing. maintain. methods. Inventions a. or other entity) which engages anywhere in India in a business which is conducted by the Company on the date of termination of her employment. secure. instrumentalities. ii. v. processes. either during the term of the Executive’s employment under this Agreement or thereafter. and governments. but not limited to. agent. use. screen. without expense to her. directly or indirectly. or otherwise). processes. individual proprietor. divisions. sole proprietorships. or use in any manner. iii. association. and assigns. and sell products. 200 © Copy Right: Rai University . user manuals. its subsidiaries. directly or indirectly. lender. employee. use. directly or indirectly. and documents. officer. its subsidiaries. divisions. or made available to her during the term of this Agreement concerning or in any way relating to the business or affairs of the Company. solicit. directly or indirectly. b. marketing. and information relating to those clients and customers which has been given to the Company by them or developed by the Company. extend.622. d.1 ii. Information subject to the provisions of this paragraph shall include. reissue. unincorporated organizations. consultant. or clients shall be the Company’s property and shall be delivered to the Company on the termination of this Agreement or at any other time at the request of the Company. or defend the Company’s worldwide rights in the Inventions or in any or all Indian patents and in any or all patents in any country foreign to the Indian. 6. i. any information acquired by the Executive during her employment by the Company with respect to any clients or customers of the Company or any confidential or secret aspect of the Company’s operations or affairs unless such information has become public knowledge other than by reason of actions (direct or indirect) of the Executive. For purposes of this Agreement. so as to secure to the Company the full benefits of the Inventions or discoveries and otherwise to carry into full force and effect the text and the intent of the assignment set out in Clause 6E(i) above. disclose to anyone (except in the regular course of the Company’s business or as required by law). and sell products. to at all times do such acts. without limitation: i. except that she may be employed by an affiliate of the Company and hold not more than 2% of the outstanding securities of any class of any publicly held company which is competitive with the business of the Company. lists of or information about personnel seeking employment with or who are employed by the Company. notes. partnerships. engage or be interested (as a stockholder. and selling. development. and services derived from any inventions. or affiliates. have made. or other documents made or composed by the Executive. business trusts. any other information relating to the Company’s research. and to make. or database layouts. or affiliates. joint ventures. instruments.Company under this Agreement (other than accrued and unpaid basic salary and commissions and expenses and benefits which have accrued pursuant to any plan or by law). or any agencies. file. relating to computer programs or systems installed. affiliates. divisions. program manuals. and services to make. director. the Executive shall not. The Executive shall not. broker. 11. partner. either individually or in or through any person (whether a corporation. associations. and ideas. whether or not patentable. Non-competition. personal representatives. successors. and to applications for Indian and foreign patents and Indian and foreign patents granted upon such Inventions and to all copyrightable material or other works related thereto. engineering.

Any waiver must be in writing. or other communication under this Agreement shall be in writing and shall be considered given when received and shall be delivered personally or mailed by Registered AD Post with. “Inventions” means inventions. in the event of any breach or threatened breach by the Executive of any provision of this Clause 6. or continue to provide any benefit (other than benefits which have accrued pursuant to any plan or by law) to the Executive under this Agreement. Repeated violation by the Executive of any of the written work rules or written policies of the Company after written notice of violation from the General Manager or the President of the Company. This Agreement shall be governed by and construed in accordance with Indian laws. conduct which is inconsistent with the Executive’s position and which results or is reasonably likely to result (in the opinion of the President of the Company) in an adverse effect (financial or otherwise) on the business or reputation of the Company or any of its subsidiaries. applicable to agreements made and performed in Indian. and shall be construed without regard to any presumption or other rule requiring construction against the party causing the Agreement to be drafted. Breach of standards adopted by the Company governing professional independence or conflicts of interest. conduct involving moral turpitude. the term “cause” shall mean: a. COMPENSATITION MANAGEMENT f. embezzlement. Termination The Company shall have the right to terminate this Agreement and the Executive’s employment with the Company for cause. processes. The Executive’s failure. as well as improvements thereof and know-how related thereto. the Company shall not be obligated to make any further payment to the Executive (other than accrued and unpaid base salary and commissions and expenses to the date of termination). without limitation. it shall not affect the validity or enforceability of that term or provision in any other jurisdiction. and cannot be modified. 8. If any term or provision of this Agreement is invalid or unenforceable in one jurisdiction. concerning any present or prospective activities of the Company with which the Executive becomes acquainted as a result of her employment by the Company. but not limited to. For purposes of this Clause 6E. or personnel. c. concepts. notice. Return Receipt to the parties at their respective addresses set forth below (or at such other address as a party may specify by notice to the other): (specify addresses) d. refusal. Fraud. such information will be communicated to the Executive within the 60-day period described above. as well as improvements thereof or know-how related thereto. whether patentable or not. b. e. and ideas. describing the alleged breach and offering the Executive a reasonable opportunity to cure same. Violation by the Executive of her obligations to the Company. or affiliates. written or oral. divisions. Any breach of the Executive’s obligations under this Agreement. The Executive acknowledges that the agreements provided in this Clause 6 were an inducement to the Company entering into this Agreement and that the remedy at law for breach of her covenants under this Clause 6 will be inadequate and. the Company shall release such invention or discovery to the Executive within Sixty (60) days after the Executive’s notice in writing is received by the Company request ing such release. in addition to all other remedies. but which are made or conceived by the Executive during her employment by the Company or with the use or assistance of the Company’s facilities. to an injunction restraining any such breach. This agreement contains a complete statement of all the arrangements between the Company and the Executive with respect to its subject matter. without limitation. 11. c. b. including. e. supersedes all previous agreements. discoveries. f. formulas. The invalidity or unenforceability of any term or provision of this Agreement shall not affect the validity or enforceability of the remaining terms or provisions of this Agreement which shall remain in full force and effect and any such invalid or unenforceable term or provision shall be given full effect as far as possible. g. If the Company determines that it has no present or future interest in any invention or discovery made by the Executive under this paragraph. Miscellaneous a. conduct of a felonious or criminal nature. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. or gross malfeasance on the part of the Executive.622. iv. Amendments may be made to this Agreement at any time if mutually agreed upon in writing. Any amendment.1 © Copy Right: Rai University 201 . The habitual use of drugs or intoxicants to an extent that it impairs the Executive’s ability to properly perform her duties.formulas. methods. 7. including. the Company shall be entitled. among them relating to its subject matter. amended. accordingly. and techniques. materials. or misappropriation of assets. theft. including. For purposes of this Agreement. that are not inventions as defined herein. If the employment of the Executive is terminated for cause. If the Company determines that it does or may in the future have an interest in any such invention or discovery. and techniques. or terminated orally. or neglect to perform her duties contemplated herein within a reasonable period under the circumstances after written notice from the General Manager. or the President of the Company. d.

1 . and shall inure to the benefit of the heirs and legal representatives of the Executive. This Agreement is not assignable by either party except that it shall inure to the benefit of and be binding upon any successor to the Company by merger or consolidation or the acquisition of all or substantially all of the Company’s assets.622. COMPENSATITION MANAGEMENT Note: 202 © Copy Right: Rai University 11.f. provided such successor assumes all of the obligations of the Company.

The relationship between a company’s benefits-and-services programmes and employee motivation for increased production is what weak. for which a different benefit structure is provided because of the fact that many legal considerations do not operate in their case. Moreover. tend to stick to their jobs. The main problem is the lack of employee participation. Reward management strategy is an extension of the organization’s business strategy. it seeks the advice of the various departments. however. it often pays very little attention to other aspects of personnel programmes. ii. Charge of Paternalism When too many benefits and services are offered to employees. The personnel department is generally responsible for the coordination of the plans for the administration of these benefits and services.1 © Copy Right: Rai University 203 . The final approval of the plans formulated for the management personnel. systematic plans and standards to determine the viability of the programmes. to assess environmental factors. calls for their suggestions and anticipates the emergence bf possible problems. Managers generally are not entitled to. particularly when they are not very productive. too. to assess competitiveness. Fads Become Fashionable With the introduction of these benefits and services in one company. many of the benefits and services to which employees in general are entitled. involving large outlays of direct and indirect financial expenditure. iii. v. nor are they governed by trade union considerations or agreements. For this purpose. Managers are not even aware of the organization’s policy towards benefits and their contribution to the quality of corporate life. Neglect of Other Personnel Functions When a management becomes more concerned about the provision and administration of benefits and services. For example. Organizations have seldom established objectives. ii. These are: i. and are not interested fn changing them. Excessive Expenditure The administration of these benefits and services is a fairly costly affair. These problems can be avoided if steps are taken: i. iv. iii. iv. Trade unions entertain a feeling of alleviation as the benefits are likely to erode their base. to control Future Trends in Reward Management The considerable developments in reward management that have taken place recently are associated with changes in the economic and competitive environments in which businesses operate and the ways in which they respond to these external challenges. Over-emphasis on these benefits and services may often develop a concern among the employees for their future security rather than for their present productivity. management personnel are generally required to contribute in part to their insurance.622.which is not really so. However. employees. Learning Objective • • • To know Benefit Programmes for Management To understand problems raised by Benefit Programmes To learn administration of Benefits and Services Introduction to the Concept of Benefit Programmes for Management Special considerations and policies apply to the benefit programmes for the management. and often involves a great deal of paper work. take little interest in the benefits programme and trade unions are almost hostile to the schemes. Managers. Credit unions and severance pay are examples of benefits which were once considered to be novel but are now commonplace in industry. the latter sometimes develop the feeling that these benefits and services are their “right” . v. to establish benefit objectives. nor do they expect. Tax exemptions become more important and meaningful for them as they advance in the management hierarchy. to communicate benefit information. a feeling develops that employers are playing the role of parents and the workers are looked upon as their children.COMPENSATITION MANAGEMENT LESSON 33: INTRODUCTION TO BENEFIT PROGRAMS FOR MANAGEMENT & ADMINISTRATION OF BENEFITS AND SERVICES Principles of External and Internal Differential Fringe Benefits them as well. management personnel do not receive overtime allowance or payment. trends in reward practices can only be forecast in the light of predictions on how business strategies and the programmes flowing form them are likely to develop. is the preogative of the top authority of an organization. pension and provident fund. Maintenance of the Least Productive Workers With an increase in benefits and services. other concerns vie with one another to introduce 11. Administration of Benefits and Services Organizations fumble while administering employee benefits and services. There is no doubt that changes in reward management over the last decade have been in response to changes in Problems Raised By Benefit Programmes Many problems arise when these programmes are adopted and administered. gratuity.

. team pay and flexible benefits. governments and recessions will come and go. Increasingly. anticipate and adapt his management style. does not . how to carry out simultaneously a number of different roles. But environmental and organizational demands are encouraging developments such as those set out by Murlis. competence-related pay. pay progression and the introduction of profit related pay. greater focus on external relativities. COMPENSATITION MANAGEMENT Tutorial Activity 1. Line management skilled in interpreting market data. at least in the short to. The backdrop to this setting is the controlled economy with a marginal income tax rate of 77 per 11. And. following the change in Government.622. And. Strong. namely: a more strategic focus. presented at the Ahmedabad Management Association in 1976.. job family modelling. In developing business strategies and the HR and reward strategies that flow from them. support for organizational change. the assessment of inputs (competences) as well as outputs in performance management processes. importantly. a more flexible approach to job evaluation. followed by competence-related pay (33 per cent).. mainly to allow more flexibility. 17 per cent planned to introduce a broad banded pay structure. making local pay decisions and operating and communicating the policies needed for this new environment. They have to achieve a balance between concentrating on their own areas of skill and responsibility and working together with others. Well-designed and implemented performance management processes that often embrace the use of competences and ‘so support development. Businesses which are still contemplating the changes required to improve the effectiveness of their reward processes will be taking account of these factors. can .. The 1996 IRS survey of 270 private ‘sector companies3 found that 54 per cent intended to revise their reward practices in the next 12 months.. broad banding. cost control. medium term. So the future does not necessarily include any quantum leaps in reward management policy and practice. The initiative most often mentioned was PRP. 30 per cent were making changes in their benefits packages. have . and recruitment and retention pressures. So far as business change is concerned. political or administrative. organizations have been driven by the need to satisfy demands for flexibility. what is important is not how responsibilities are divided but how people can pull together to pursue new opportunities’. and which link credibly to performance-related pay progression and other variable pay schemes.. continuous development and team work.business strategies and practices which in turn have responded to changes in the competitive environment. competencerelated pay and team pay. using value-added analysis techniques to ensure that each step carried out in a work process and decision sequences augment the previous step. To make the best use of their distinctive competences they have had to attract. as well as the achievement of objectives. irresponsible entrepreneurs and . and the ED and the possible single currency will make a difference. This will particularly apply to such developments as broad banding. indeed. It is interesting to remember the CBI/Hay 1995 survey findings2 that almost half the 480 UK organizations surveyed had changed some aspect of their pay strategy or policy in the previous two years.. is trying to get back to a stage in our company’s growth when we were moving into adolescence with all its anguish and angularities. The areas most affected were pay structure. retain motivate and develop distinctive people. locally based financial control and modelling systems to support decision making and help ensure the prevention of pay drift. cited _y 36 per cent of those contemplating a change. 13 per cent intended to introduce a formal performance management process.. Neuroses of Growth This paper. people have had to learn how to function in constantly changing roles. The need for more flexibility in pay and benefits is likely to become more urgent. the emphasis in the next few years is more likely to be on consolidating and testing innovations rather than on seeking new nostrums.1 © Copy Right: Rai University . Of course the pace of change will vary. Well-developed career management programmes that enable employees to see how they can manage their own progression in an environment where promotion’ is rarer and more significant when it happens. and when building experience in different roles is the way to progress.1 Thermax India A small fringe of dubious. The CBI/Hay survey established that ‘the most significant factor driving change in pay and benefit policy are the need to 204 strengthen the link to business performance. there may be changes in the attitudes to corporate governance’ and an increased emphasis on the responsibility of businesses to their stakeholders.governed the most important reward management developments in recent years. Well-validated salary market ‘anchors’ for the new roles. in authority. The CBI/Hay survey found that: 13 per cent of responding organizations planned to introduce team pay. It is these business trends which. These changes have been well summarized by Rosabeth Moss Kanter when she defines her model of the post entrepreneurial corporation as a leaner organization with fewer ‘extraneous’ staff which ‘focuses on doing only those things in which it has competence’ she suggests that the post entrepreneurial compotation ‘represents a triumph of process over structure… in contexts requiring speed and dexterity. which managers can review and use as background for pay budgeting and pay progression decisions. For these organizations.. there is no evidence that there will be any significant future difference in its nature or direction. they have to ensure that they get value for money from their reward practices. Businesses have had to look very hard at the ways in which they employ people.

If the organisation grows. the third management style and the fourth information and control systems. labour and working capital. COMPENSATITION MANAGEMENT 11. The entrepreneur is faced with the difficult choice of allowing the situation to drift into chronic maladjustment or consciously reorient his style or pass on leadership to an individual more in tune with the changed situation. Income Taxes In the current year (1992-1993) are 57. increased control over assets. he is enlarging his risks beyond what he considers a desirable level. Has he fulfilled.cent at the corporate and 85 per cent at the individual tax level. He had hoped to build some assets he could call his own. and many an entrepreneur would ask the basic question: Why grow at all? When you asked me to talk of building an enterprise. he has no personal assets worth talking about. power over other people. I do not think he ever aspired to become a millionaire. If he does not borrow more. that he has internalised the marginal costing principle long before most of us are initiated into the basics of accounting and that he is trained to smell an unwary buyer or an anxious seller with almost the same sureness as my pet Labrador puppy can sniff adrenalin. unless resolved. I hope you will extend your indulgence to a somewhat raw amateur at the game.5 per cent for corporations and 56 per cent for personal incomes. now becomes ill-adjusted to the needs and concerns of a complex organisation.1 © Copy Right: Rai University 205 . why does a person start an industry? The usual answer is that he comes from a family or community of entrepreneurs or traders or that he has surplus funds and would like a fling or that he has access to a technology he would like to exploit. to generate resources that would nourish the growth of his enterprise and provide a cushion for lean years. a number of conflicts and contradictions emergeconflicts between the entrepreneur and the organisation and between the organisation and the environment-which. he lisps percentages before he can say ‘mamma”. The theme of my paper is quite simply this: as an industrial unit grows. Has this activity helped him fulfil his personal objectives? If not. The first concerns values. are merely facilitating factorsthey are not the motivators. quarters. in Ahmedabad. 1/8ths and 1/16ths when his counterparts elsewhere are still learning that 2+2 make 4. The reward can take many forms: the satisfaction of being one’s own boss. As the unit grows. drive and singleness of purpose. a status in society.622. So let us consider the corporate assets. As a small industrial unit grows in terms of turnover. Let us call this the Generation Gap. natural entrepreneurs that you are. perhaps unsurpassed anywhere in the world. he can multiply in fractions of halves. This is an exceedingly traumatic experience for any entrepreneur. This we shall call the Doctor’s Dilemma. increased ownership of assets. Being the seasoned. the nominal value of his shares keeps rising with all the attendant liabilities of wealth tax and estates duty without any personal assets which are either liquid or which can be easily liquidated to meet these liabilities. does he at least have control over assets? Control over assets implies freedom to use these assets. Psychologists define neu