Employee Compensation

- An Introduction
What is management of compensation
• What do we pay to whom?

• Why do we pay what we pay?

• When do we pay – frequency and timing?

• Who in the organization is going to decide and how?

 What is Compensation Management

The management of return for employee services and it

includes the tasks of deciding how much, to whom, when,
where, how and in what form.

(Tasks - Design, Develop, Deliver, Evaluate, Review)

The Message……

Compensation
has a
transactional
and a relational
element too
Components in Compensation
• Pay
• Allowances
• Benefits
• Statutory Payments
Vary by
• Nature and form
• Frequency
• eligibility
What are Components
• Components are a payment that employees receive in addition to
basic pay.

• They are received at a predetermined fixed interval (mostly) e.g.

monthly, quarterly, annually.

• Components are received in cash. They are to be distinguished from

benefits (which may be in cash or kind) as far as practice in India is
concerned.
Allowances, Benefits and Perquisites – Are they
different?
• Allowances – given in cash, paid with monthly salary e.g. HRA,
Conveyance Allowance

• Benefits- may be monetary or non-monetary e.g. paid leave, insurance

benefits can be in kind (if company takes an insurance policy on
behalf of employees) or cash (if company reimburses to individual
employee the insurance premium).

• Perquisites – these are benefits specific to particular roles e.g. housing,

car
Calculating Total Pay
• Monthly Take Home Pay : total monthly receipt less the applicable
statutory deductions (PF, ESI, Professional Tax)

• Gross Pay – all payments that are received in cash. This includes not
just the monthly salary but also the money received at other regular
intervals such as variable pay, leave travel allowance paid annually

• Cost to Company – includes cost of all benefits and all direct or

indirect costs e.g. employer’s contribution to provident fund,
contribution towards pension or superannuation fund
The Meaning of Total Reward

“An approach to reward management that emphasizes the need to

consider all aspects of the work experience of value to
employees, not just a few such as pay and employee benefits. It
aims to blend the financial and non-financial elements of reward
into a cohesive whole.”

Michael Armstrong
Components of Total Reward system
An Introduction to Job
Evaluation
• Differentiating criteria
- differentiating jobs
for the purpose of pay

• Rank order of jobs

• A Pay hierarchy
Job evaluation is …..
• ‘ .. The process of assessing the relative size of jobs within an
organisation’.

• ‘…. A systematic process for defining the relative worth or size of jobs
within an organisation in order to establish internal relativities ..’

• Size – how the job impacts organisation performance

The Outcomes of Job Evaluation
• Pay Levels – a pay structure (classification of jobs by value to the
organisation)

• Differentials – what is the degree of the difference between jobs

• Pay hierarchies – a rank order of jobs/job clusters

Designing a Pay Hierarchy
• Role analysis

• Identification of compensable factors – ways in which a role impacts

business of the company

• Placing a value to the compensable factors

• Creating a hierarchy
Performance Related Pay (PRP)
Some Questions …..
• What is ‘performance’
• Is there a need to define ‘performance’ – why?
• Why should ‘pay’ be related to ‘performance’ – to whose performance
should it be related?
• What part of pay should be related? How much of pay should be
related?
• Who decides who should get how much?
• Should employees know about this? At which stage should they be
brought into the picture?
Defining Performance

• The criteria – the measures of performance

• The need for alignment with organisation needs – establishing and

connecting with the right context – defining the performance metrics

• The need to distinguish between work or activity, performance and

contribution

• Designing a reliable system for measuring the defined performance

Performance Related Pay – The Reasons

• Originally, hierarchy and service based systems -relatively higher

focus on behaviour and process as compared to outcomes

• Competition becoming global – need to remain cost effective, efficient

and reliable in delivering quality

• Emergence and growth of the service and knowledge based industry-

the increasing dependence on ‘discretionary performance’ to deliver
quality
This is the macro context
Design Considerations in Performance Related Pay –

• Paying for the results and also how they are achieved – process outcomes and
ultimate outcomes
• Paying for future success and not just the present – contribution and performance
• ‘rewarding a combination of organisation, team and individual performance, rather
than concentrating wholly on the latter’
• Variety of rewards – monetary and non-monetary – catering to different
motivational needs
• Integration with other HRM policies and processes – learning and development,
performance management
• Incorporating all aspects of the reward strategy – alignment, objectives, processes
Areas of Inquiry
• Does performance related pay really motivate people? Does it really
affect individual performance?

• How does it contribute to organisation performance and effectiveness?

• Can there be a single best system?

Some Definitions (1)

• Performance Pay – financial or ‘financially measurable’ reward linked directly to

individual or organisational performance

• Individual performance related pay – pay directly linked to individual

performance (often given as an (wholly or partly) increase in basic pay)

• Performance Bonus/Variable Pay – non-recurring cash lump sums related to

performance achieved by the individual, team or organisation
Some Definitions (2)

• Competency related pay – pay related to increase in the demonstrated level of

competency in doing the job

• Profit sharing – schemes that share a proportion of the organisation’s profit with
the employees (on common basis)

• Gain sharing – schemes that share a set proportion of gain with the employees –
higher the gain, higher the proportion
Why Organisations Would Want To Introduce
Performance Related Pay
• Motivation – presumably motivate people to achieve higher levels of
performance

• Message – ‘you get what you pay for’, ‘this is what we value’, general
philosophical orientation

• Equity – a belief that pay should be related to what people contribute

How does it help organisations
• Establish a relationship between pay and performance, competence
• Support performance management systems
• Reinforce performance oriented culture
• Message – importance of performance and results
• Reward and reinforce individual and team effort
• ‘improve pay competitiveness’
Thank You
Managing Employee
Performance
HRM - Module III
The Sessions
Session No. Topic Description
13 Individual Performance Planning Introduction, Performance Planning
14 Appraising Individual Performance Performance Delivery
15 The Individual Performance Review Process Performance Review
16 Some Insights From Practice Presentations
 GOALS
• Specific- significant/simple
• Measureable- meaningful
• Achieveable- attainable/agreed
• Realistic-reasonable/result-oriented
• Time-bound- time-tested/time-limit
An Introduction to Performance Management
• What is Performance

• What is performance management

• The Performance Management Process

• Difference between Performance Management and Performance

Appraisal
Is this Performance
• Bennett Coleman – circulation, leadership, advertisement revenue,
Ahmedabad Edition

• Pantaloon Store – conversion, basket size, ticket size

• Jaipur Rugs – sales value, business revenue

• Jimmy Hillfiger – individual sales, LFL (last year) – individual and

store both
What is common across these examples
• Define it in measurable terms

• Alignment with what is related to business

• Individual, team and business level

• At a point in time and over time

The Conceptual Messages
Some Questions
• What is performance?
• Whose ‘performance’ are we talking
about – individual, team and
organization
• Alignment at each level to achieve
organizational goals
Some Answers
• Performance is a ‘multi-dimensional’ construct
– finance, people, technology, operating
practices – an integrated view is required;
changes in one will affect the other
• Performance is a ‘dynamic’ construct – what
we mean by ‘performance’ changes with
changing context – organization size,
technology, stage of the organization life
cycle, etc.
• Organisation cannot be seen in isolation of the
environment when talking of performance
• Performance has to be measured and planning
has to happen to enable achievement
Individual Performance Planning – The
Concepts
• Defining performance in a context – defining the performance metrics
and measures

• Performance Planning – stating corporate objectives – goal setting

 Performance Alignment
Organisational
& Institutional
Performance ORGANISATION
Business & TEAM
Operational
Performance

INDIVIDUAL
Individual
Performance
 A conceptual understanding of teams in the
context of Performance Management
CORPORATE
Define corporate objectives in such terms as ”Provide a reliable product to fit customer needs complemented
by helpful and efficient service and support” CORPORATE OBJECTIVES
FUNCTIONAL
Define aspects of customer service for which function is responsible in such terms as quality, value for money,
responsiveness and courtesy. Agree operational targets for function in each area METRIC
TEAM
Agree operational standards of service delivery and targets for improvement in each of the areas covered in
the functional strategy. Ensure targets are in line with and support the achievement of functional and
corporate strategic objectives and targets MEASURES

INDIVIDUAL
Agree individual standards for customer service and improvement targets that support the achievement of
team targets. Define competencies and skills required and agree to steps required to develop them
OBJECTIVES
Source : Michael Armstrong – Performance Management – key Strategies and Practical guidelines
Difference between Performance
Management and Performance Appraisal
PM PA
Strategic business Driven by HR
considerations
Assesses employee
Driven by line manager • Strengths
Ongoing feedback – process • Weaknesses

• So employee can improve Once a year - event

performance
Lacks ongoing feedback

Copyright © 2013 Pearson Education, Inc. publishing as

1-11
Prentice Hall
Performance Management – A Definition

• A process for establishing a shared understanding about what

is to be achieved, and how it is to be achieved, and an approach to

managing people that increases the probability of achieving

success.”
Aims and Objectives of Performance
Management
• Clarify what is to be achieved – planning for performance

• Create capability for performance achievement

• Reward and recognize performance

• Institutionalize a process of continuous review and feedback

• Involve staff members in the performance achievement process

Activities associated with Performance
Management
• Performance Planning – Goal Setting

• Create capability for achievement – training, feedback

• Review performance – performance appraisal

• Reward and Recognize performance

• Evolve shared understanding of performance goals and achievement

Performance Management
• What are the conditions in which performance
outcomes and accomplishments improve or decline

• How can conditions that improve outcomes and

accomplishments be created

• How can those conditions be maintained

Performance Management Process
Performance
Planning

Training &
Enabling,
facilitating Performance
Assessment

Performance
Performance Measurement
Feedback &
Assessment
 Module - 6
Performance Management
 Performance?
Performance = Function ( ability, motivation, environment)
Productivity enhancement

MOTIVATION
ENVIORNMENT ABILITY
• Job enrichment
• Empowerment • Recruitment
• Promotions
• Teams • Selection
• Coaching
• Leader’s support • Training
• Feedback
• Culture • Development
• Reward
 Performance Planning Annual Strategic Planning Meet
Level – 1
Corporate
Revenue/turnover Profitability ROI

Level – 2
SBU Market share New products/services Profitability/product

Level – 3 Quality objectives Margins/unit Operating cost

Division

Level – 4 Delivery
Asset utilization Rejection
Department

Level – 5 Job/task Improvement Self-development

Individual related goals related goals related goals
Performance Management in a Continuum
BSC Implementation levels – Where are we ?
How to cascade down BSC - measures
 Financial Objectives

Deliver stakeholder value(financial performance)

Achieve revenue growth
Achieve turnover
Improve efficiency and profitability
Achieve Synergy within group
Achieve Synergy by M&A and new ventures
Mitigate financial risk in post era of tax benefits
Optimize operating cost (reduction)
Improve confidence in financial partners/investors
 Customers’ Objectives

Improve customer confidence (Market share)

Broaden geographical footprint (Export market share)
Acquire, manage and grow key customers
Develop end to end solutions
Develop differentiated consumer brand
Improve customer centricity across organization
Improve and develop communication channels with customers
Brand neutralization
 Operational Objectives

Globalize operations
Transform supply chain to become nimble & swift (Lean)
Improve quality and productivity
Maximize operational efficiency
Strengthen management process for business plans, goal setting and business performance
reviews.
Strengthen stakeholder & improve brand equity index
Improve innovation in products and services
Transform R&D function & align with business
Improve price realization
Strengthen vendor confidence
Achieve inter & intra functional synergies by deploying ERP & Cost Information System
Strengthen vendor confidence
 Human Resources Objectives

Strengthen managerial band width

Foster high performance work culture (PMS)
Attract and retain talent
Identify & enhance performance drivers and enhance core
competencies (PCMS)
Leverage IT backbone
Institutionalize Academy of Excellence for empowerment
Institutionalize variable C&B policy linked to strategic objectives
Purposes Of Performance Appraisal
• Administrative purposes
• Developmental purposes
Purposes Of Performance Appraisal
• To give employees the opportunity to discuss performance and
performance standards regularly with their supervisor
• To provide the supervisor with a means of identifying the strength
and weakness of an employees performance
• To provide a format enabling the supervisor to recommend a specific
program designed to help an employee improve performance
• To provide a basis for salary recommendations
Reasons Appraisal Programs Sometimes Fail
• Manager lack information concerning an employee’s actual performance
• Standards by which to evaluate an employee’s performance are unclear
• Manager does not take the appraisal seriously
• Manager is not prepared for the appraisal review with employee
• Manager is not honest and sincere during the evaluation
• Manager lacks appraisal skills
• Employee does not receive on going performance feedback
• Insufficient resources are provided to reward performance
• There is ineffective discussion of employee development
• Manager uses unclear and ambiguous language in the evaluation process
Legal Guidelines For Performance Appraisal
• Performance ratings must be job-related, with performance standards
developed through job analysis.
• Employees must be given a written copy of their job standards in advance
of appraisals.
• Managers who conduct the appraisal must be able to observe the behavior
they are rating. This implies having a measurable standard with which to
compare employee behavior.
• Supervisors should be trained to use the appraisal form correctly. They
should be instructed in how to apply appraisal standards when making
judgments.
• Appraisals should be discussed openly with employees and counseling or
corrective guidance offered to help poor performers improve their
performance
• An appeals procedure should be established to enable employees to
express disagreement with the appraisal.
Who Should Appraise Performance – 360 Degree
• Manager and/or supervisor appraisal
Performance appraisal done by an employee’s manager and often reviewed by a manager one level
higher.
• Self-appraisal
Performance appraisal done by the employee being evaluated, generally on an appraisal form
completed by the employee prior to the performance interview.
• Subordinate appraisal
Performance appraisal of a superior by an employee, which is more appropriate for develop-mental
than for administrative purposes.
• Peer appraisal
Performance appraisal done by one's fellow employees, generally on forms that are compiled into a
single profile for use in the performance interview conducted by the employee's manager
• Team appraisal
Performance appraisal, based on TOM concepts, that recognizes team accomplishment rather than
individual performance
• Customer appraisal
Performance appraisal, which, like team appraisal, is based on TOM concepts and seeks evaluation
from both external and internal customers
Pros And Cons Of 360-Degree Appraisal
PROS
• The system is more comprehensive in that responses are gathered
from multiple perspectives.
• Quality of information is better. (Quality of respondents is more
important than quantity).
• It complements TQM initiatives by emphasizing internal/external
customers and teams.
• It may lessen bias/prejudice since feedback comes from more people,
not one individual.
• Feedback from peers and others may increase employee self-
development.
Pros And Cons Of 360-Degree Appraisal
CONS
• The system is complex in combining all the responses.
• Feedback can be intimidating and cause resentment if employee feels
the have "ganged up."
• There may be conflicting opinions, though they may all be accurate
from the respective standpoints.
• The system requires training to work effectively.
• Employees may collude or "game" the system by giving invalid
evaluations to one another.
• Appraisers may not be accountable if their evaluations are
anonymous.
Performance Appraisal Methods - Behavioral Methods
• Critical incident
Unusual event that denotes superior or inferior employee performance
in some part of the Job.
• Behaviourally anchored
A behavioral approach to performance appraisal that consists of a
series of vertical scales, one for each important dimension of job
performance.
• Behaviour observation scale (BOS)
A behavioral approach to performance appraisal that measures the
frequency of observed behavior
Results Methods – Productivity Measures
• Management by objectives (MBO)
Philosophy of management that rates performance on the basis of
employee achievement of goals set by mutual agreement of employee
and manager.
• Balanced Scorecard Method
Conducting the Appraisal Interview
• Ask for a Self-Assessment
• Invite Participation
• Express Appreciation
• Minimize Criticism
• Change the Behavior, not the Person
• Focus on Solving Problems
• Be Supportive
• Establish Goals
What is Training
• Training is a process to change employee behaviour at work through
the application of learning principles.

• A process through which people learn skills knowledge and attitude

and behaviour needed in order to perform their job effectively.
What is Training
• “Systematic development of attitude, knowledge and skill behaviour
pattern required by an individual in order to perform adequately a
given task or job.”

• “Training is a systematic process of changing knowledge, skill,

behaviour and/or motivation of employee to improve their
performance on the job as per the goals and objectives of the
organisation”.
Purpose of Training
Training

Learning Transference Change

Knowledge, Attitude, Skill, Motivation

The Training Process

• Training need analysis/assessment

• Specifying training objective

• Designing of the training initiative

• Evaluation
The Training Needs Analysis
• Organisation –
• current ( e.g. work performance, accidents, frequent breakdowns, system compliance, customer
satisfaction, etc.)

• future (e.g. business plans, expansion, technology and process change, culture development, ERP)

• Individual –
• task content (e.g. specific skill, expertise level),
• task performance and delivery (e.g. competencies and competency level, job
delivery, task related systems and processes)
• task management (e.g. time management, organising, planning)
• task behaviour (e.g. interpersonal skills, team work, attitudinal orientation)
Training Objectives
• Specify outcomes rather than processes ( e.g. change attitude v/s develop a
responsible attitude towards work; increase motivation v/s reduced levels of
absenteeism, improve CSI, )
• Convert broad outcomes into specific task or behaviour where needed
(e.g. deal with customers more courteously, get work done on time)
• Prioritise based on primary goals
• Answer – ‘if someone does all these things will he/she deliver
expected performance?’
Training Design
• Content – topics, subject matter

• Structure – continuous, intermittent, sequencing of content

• Method – on site/ off site, lecture/experiential

• Resources – trainer, infrastructure, teaching-learning aids, material

development
Choice of method depends upon……

• Purpose – knowledge can be provided through lectures but skills need

experimentation
• Nature of contents – concept can be given through classroom training but
application needs experimentation and experience
• Level of trainees – pre-training competency, sometimes even the hierarchical
level within organisations
• Resource availability – trainer expertise, financial (direct costs and also the
opportunity cost of having people away from the job), infrastructure (class room,
teaching aids)
Method must meet the following minimum
criteria ….
• Involve people – be participative

• Provide constant feedback to the participants

• Facilitate transfer of training

Different Methods
One can have the following differentiation

• Location - Off site and on-site

• Presentation – lectures, audio-visual

• Learning orientation – simulation, experiential

On Site Methods
• On the job training – learning by doing (coaching, job rotation, special
assignments).
• Quicker learning
• relatively inexpensive
• Follow structured process
On Site Methods(2)
• Apprenticeship training

• Informal learning

• Job instruction training (the job manual)

Off-site Methods
• Knowledge based – lecture, conferences, films, programmed learning
(help menu)

• Simulation methods – role play, business / management games, case

study

• Experiential training – sensitivity training, out-bound learning, change

management (OD)
Training Evaluation
• Reaction – did the trainees like it?

• Learning – what are they taking with them, what did they actually learn

• Behaviour – did on the job behaviour change?

• Results – go back to scorecard and the need assessment documents (training

effectiveness)
Adult Learning Cycle
Concrete Experience

Active Reflective
Experimentation Observation

Abstract
Conceptualisation
Happy Learning