Performance Management and Reward Systems

Block

4
COMPENSATION AND REWARD MANAGEMENT

UNIT 10
Rewards and Recognition 1-19

UNIT 11
Reward Management 20-42

UNIT 12
Performance Management and Compensation 43-64

UNIT 13
Job Evaluation and Pay Structure 65-85

UNIT 14
Performance Competence and Skill Based Pay 86-110
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IFHE (Deemed-to-be-University), Hyderabad IFHE (Deemed-to-be-University), Hyderabad

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BLOCK 4: COMPENSATION AND REWARD
MANAGEMENT
The fourth block on the course on Performance Management and Reward System (PMRS)
examines the concept of rewards, their management, as well as their use in recognizing the
contributions made by employees. The block contains five units.

Compensation management is one of the most important and strategic aspects of

Performance Management. Both employers and employees are concerned about the same.
Employers want to design a compensation package and reward their employees in a manner
that is cost effective and at the same time attractive, and motivating to the employees to
retain them in the organizations. Employees, on the other hand, always look for a
compensation that awards rewards on a regular basis so as to reach higher positions. For
them compensation and rewards are related to their career growth and should be in line
with their performance,

Unit ten, Rewards and Recognition, delves into the various facets of rewards and
incentives. How to get the bases for determining incentives is examined next. The unit
closes with a section on the factors that determine pay.

Unit eleven, Reward Management, looks at the concept of rewards management and its
relation to HRM. This is followed by a thorough analysis of the rewards management
process. The unit discusses the various reward strategies and how they should be devised.
The unit closes with a discussion on how to evaluate the rewards system in an organization.

Unit twelve, Performance Management and Compensation, deals with the components and
objectives of compensation management. It emphasizes that compensation should be fair,
equitable and cost-effective to attract and retain talented employees. It deals with various
implications of compensation system on the performance of employees, with a special
emphasis on executive compensation.

Unit thirteen, Job Evaluation and Pay Structure, goes into an in-depth discussion on the
concept of Job Evaluation. The unit begins with bringing out the needs and objectives of
Job evaluation. This is followed by a discussion on the various methods of job evaluation.
The unit closes with a comprehensive discussion on the concept of pay and its related
components, such as pay structure and broad branding.

Unit fourteen, Performance Competence and Skill-based Pay, deals with an examination
of the concepts of pay, performance, competence and skill. It looks at the various incentive
schemes that are being increasingly used in organizations. The unit closes with a discussion
on team-based pay.

iii
 Unit 10
Rewards and Recognition
Structure
10.1 Introduction
10.2 Objectives
10.3 Meaning and Definition of Rewards
10.4 Purpose of Rewards
10.5 Incentives versus Rewards
10.6 Types of Incentives
10.7 Bases for Determining Incentives
10.8 Factors that Affect Levels of Pay
10.9 Summary
10.10 Glossary
10.11 Self-Assessment Test
10.12 Suggested Readings/Reference Material
10.13 Answers to Check Your Progress Questions

"Recognition is not a scarce resource. You can't use it up or run out of it."
- Susan M. Heathfield

10.1 Introduction
As has been propounded by Susan Heathfield, it may not be possible for an
organization to provide monetary rewards each time they want to appreciate and
recognize contributions of the employees. Recognition doesn’t cost much to the
manager but goes a long way in elevating the motivation and morale of the
employees. Mere saying thank you for a job well done, would have a profound
impact on employee performance especially if it was being done at all in the past.
In the previous unit, we discussed important organization measures and models.
In the organizational context, the extent of motivation of an individual is linked
to the rewards and the recognition provided by the organization. Each and every
individual differs from the other in their needs and expectations. The rewards
have to match up with the particular needs and expectations of the person
concerned. This means that the performance management system has to deliver
the rewards that match the expectations of individuals: organizations must ensure
that the rewards are timely, creative, and authentic.
This unit would focus on rewards and types of incentives. Further it would
examine the bases for determining incentives and the factors that affect the levels
of pay.
Block 4: Compensation and Reward Management

10.2 Objectives
After studying this unit, you should be able to:
 Explain the concept of rewards
 Describe the purpose served by rewards
 Differentiate between incentives and rewards
 Enumerate the various types of incentives
 Identify the bases used to determine incentives
 Appraise the factors that determine pay

10.3 Meaning and Definition of Rewards

Rewards are benefits given to employees for doing well at tasks that contribute
to the organizational goals. According to Bob Nelson, a reward is ‘benefit
resulting from some event or action, appreciation for a service rendered.’ Reward
management is concerned with the formulation and implementation of strategies
to reward on the basis of their contribution to the organization without any bias.
Reward management has increasingly adopted a ‘Total reward’ approach aims to
maximize the impact of initiatives on employee motivation. Total rewards would
combine the traditional quantifiable elements like salary, variable pay, and
benefits, with intangible non-cash elements such as scope to achieve and exercise
responsibility, career opportunity, and learning.

Example

Amidst the fight with Covid-19 with the onset of second wave in 2021, Indian
Inc. like Tata Steel, Mi India, Swiggy to name a few are fast enough to respond
by chalking out plans for fast-track inoculations for their employees and
families in line with the approvals for the same. This serves as an illustration
for employee benefits.
For more details, check out https://economictimes.indiatimes.com/ news/
company/corporate-trends/amid-covid-second- (accessed on 20/4/2022)

10.4 Purpose of Rewards

Rewards act as a catalyst to increase organizational performance. They deliver
the following benefits:
10.4.1 Act as a Retention Strategy
A well-designed rewards strategy acts as a tool for talent retention by meeting the
various needs and aspirations of its employees. Moreover, an effective rewards
management strategy can stimulate performance, which in turn can lead to
retention of talent.

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 Unit 10: Rewards and Recognition

For an effective rewards strategy, three things must be ensured:

 First, there should be desired recognition and compensation of individual
achievements with pay hikes, bonuses to name a few
 Second, group performance should ensure achievement of the desired
objectives.
 Third, the organization’s performance as a whole should be measured to
ensure profits and value addition.
It is held that the increased performance should result in greater profits that would
lead to an increase in share price over a period of time. Further, Employee Stock
Options (ESOPs) contribute to a great extent in retaining talented employees.
10.4.2 Efficiency Scaling
Organizations are becoming increasingly diverse in nature resulting in variation
in the level of performance throughout the organization. However, the
performance management system keeps a tab on the various activities taking
place and enables measurement or scaling of performance. Hence, the rewards
system systematically documents the efficiencies of individuals and teams and
helps to create a systematic procedure of performance and rewards throughout
the organization.
10.4.3 Act as a Morale Booster
Rewards of various kinds motivate employees to take an interest in the job as well
as the organization. For instance, rewards can be used to foster innovation or
encourage cost cutting: for a company that looks for innovation, the employees
will be motivated to cultivate a creative mindset. In the same way, cost reduction
can also be a goal to be achieved through rewards.
10.4.4 The ‘Feel Good’ Factor
An organization’s growth is related to the extent to which employees feel satisfied
while in the organization. It is closely related to employee psychology. Lack of
feel good factor may result in increase in attrition and job hopping. Thus, it is
essential that employees should be made to feel good about working with the
company. The ‘feel-good’ factor would depend on the amount of recognition that
an employee gets in various ways – through perks, facilities, or even a simple
thank you!
10.4.5 Promoting a Competitive Spirit
The competitive spirit refers to the predisposition among employees to put in their
best efforts at their job. It should be noted that workers put in efforts for
contributing small parts to realizing organizational goals. The contribution of
people with the right skills for the particular job helps in promoting competitive
spirit. They form into teams complementing each other, and sometimes even
going in for ‘stretch’ targets, where an employee would have to put in an extra
amount of effort to achieve the organizational goal.

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Block 4: Compensation and Reward Management

Example
Zappos Grant-a-Wish program allows its employees to submit and grant
wishes and is a great way to build a team and family spirit in the company (e.g.
learning how to play guitar, ride a motorcycle to name a few). In addition to
employees granting wishes, Zappos, as a company, grants wishes. One of the
most inspiring wishes granted was for an employee who wanted to become an
American citizen, but was unable to afford the citizenship program. Zappos
granted his wish and he went on to become a US citizen.
For more details, check out https://www.zappos.com/about (accessed on
20/2/2022)

Check Your Progress - 1

1. The concept of efficiency scaling deals with which of the following elements
of reward strategy?
a. Employee Stock Options
b. Tracking the efficiency of employees
c. Recruitment of employees
d. Ensuring a valid pay to the employees
e. Training of employees

10.5 Incentives versus Rewards

An incentive is described as a factor (financial or non-financial) leading a person
to opt for a particular choice as a motivator to perform a job, wherein the
performer selects a particular choice from among the available alternatives. In
effect, it says, ‘do this and you will be able to get that’. Thus, an incentive works
as a direct motivator. On the other hand, a reward gives a tangible recognition for
the accomplishment of a task. They act as an indirect motivator as people expect
further achievement to lead to rewards. It is observed that:
 Financial incentives motivate people to achieve objectives, improve
performance levels and enhance competence or skills. It is done through a
focus on specific targets and priorities.
 Financial rewards give recognition to people for their achievements. These
achievements may be got through attaining the prescribed targets or by
exceeding the given targets.
 Incentives give direct motivation. Rewards act as indirect motivators through
giving a tangible form of recognition. For example, while a shop floor
incentive which is given to an employee is an example of a financial
incentive, team-based lump sum payments would be a financial reward.

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 Unit 10: Rewards and Recognition

Example
Google’s outdoor sports facilities, free food and more are quite popular among
people, but there’s another perk that is quite lucrative about Google. If a U.S.
employee passes away while working for the tech giant, the employee’s spouse
or domestic partner receives 50% of the deceased’s salary, no matter how long
or short his tenure, every year for the next decade.
For more details, check out https://about.google/ (accessed on 20/4/2022)

10.5.1 Incentives
According to E.H. Burack, an incentive scheme is a plan or program to motivate
individuals or group performance. An incentive program is most frequently built
on incentive pay or bonus. But it may include a variety of non-monetary rewards
or prizes.
According to Dale Yoder, ‘Incentive wages relate earnings to productivity and
may use premiums, bonuses, or a variety of rates to compensate for superior
performance’.
According to Wendell French, the incentive system has a limited meaning that
excludes many kinds of inducements offered to people to perform at 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.
iii. Premium pay for performing dangerous tasks. The incentive system is related
to the way in which payment plans tie wages directly or indirectly to
standards of productivity or to the profitability of the organization or to both
criteria.
A common rationale underlying all compensation systems is that there is a change
in the individual’s pay in terms of productivity, profit, or the level of sales
achieved by the employee.
10.5.2 Advantages of Incentives
Incentives elevate the motivation and morale of the people. Both employers and
employees perceive several advantages of incentives which are given below:
 Good incentives motivate the employee to perform better in order to enhance
productivity. Employees become more innovative, bringing new ideas into
the organization. Moreover, they bring various wasteful practices and
problems to the notice of the management.
 Incentives are based on the standpoint of the equity theory: Individuals
always compare their incentives with that of others in relation to their inputs.

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Block 4: Compensation and Reward Management

 A spirit of mutual cooperation is created: as the activities of the workers

become interdependent, any obstruction created by even a single worker
affects output.
 Incentive systems are based on the philosophy of behavior modification. For
instance, the system provides a desirable outcome (pay) which tends to
reinforce appropriate behavior positively.
 The morale of the workers increases when they are offered incentives for
good performance.
 Relations between employees and management improve if employees are
rewarded fairly for their contribution with increased productivity.
 Incentives work on objective ratings rather than subjective ratings by
superiors.
10.5.3 Disadvantages of Incentives
Despite its advantages, administering incentives may have many disadvantages
as well:
 In the absence of a ceiling on incentive earnings, some workers may work
overtime and spoil their health.
 Incentives motivate people to produce more. This may sometimes come at
the cost of quality of the products.
 The incentives lead to an increase in the costs to an organization, along with
the increase in productivity
 The introduction and administration of incentive plans requires additional
staff.
 Sometimes the production flow may get hampered due to the faults of the
management. In that case, workers may insist on compensation.
 Peer conflicts may arise if some workers earn more than others. In order to
produce more, workers may disregard safety concerns.

Activity 10.1
Macko Manufacturing
At Macko Manufacturing, which supplies custom built steel structures for sky-
scrapers, the incentive and compensation structure has created a culture of
haves-vs. have-nots. At the top end, the designers get the largest pay packets
and stock options; at the bottom, are the welding and polishing staff who are
left to fend themselves for daily survival. The company has devised new pay
schemes that make this gulf even wider, by giving a much higher pay to the
structure designers who work at more prestigious projects such as the Khalifa
in Dubai.

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 Unit 10: Rewards and Recognition

You have been appointed as the new HR manager at Macko. How would you
ensure a fair disbursement of incentives to all employees and reduce the gap
between haves and have nots?
Answer:

Check Your Progress - 2

2. Which of the following is included under incentives?

a. Wages
b. Pay for doing dangerous tasks
c. Payments to work at undesirable times
d. Bonus
e. Overtime pay

10.6 Types of Incentives

Incentives are classified in various ways. According to one view, they can be
classified as positive and negative. Another way of looking at incentives is to
classify them as financial and non-financial incentives.
Positive and negative incentives are:
 While positive incentives are agreeable factors, negative incentives are
disagreeable factors in a work situation to avoid when an individual strives
to accomplish the standards required on his/her part.
 Positive incentives include employee stock options, profit sharing plans, paid
time off, bonuses expected promotions, continuity of employment, approval
of superior to name a few whereas the negative incentives may include the
fear of lay-off, being discharged from work, reduction in wages, and
disapproval of the employer.
Essentials of financial and non-financial incentives are as given below:
 Financial incentives include employee stock options, profit sharing plans,
paid time off, bonuses and cash awards. The non-financial incentives are
based on the philosophy that work is natural for people who tend to perform
an additional amount of it due to a force other than money. The various types
of the non-financial incentives include: flexible work hours, training

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Block 4: Compensation and Reward Management

opportunities and, continuity of employment, approval of superior, etc.,

relationships with superior, advancement on the job, job security, good
quality of supervision, job satisfaction and enrichment, praise and
recognition, knowledge of results, experience of progress.
 Financial incentives are payments for improved productivity, attendance, and
general improvement in employee performance. Financial incentive schemes
are direct and indirect in nature.
 In direct financial incentive schemes, the payments are based on the
employee’s own performance or contribution to the job such as: production
incentive schemes, attendance bonus, profit sharing bonus to name a few.
 In case of indirect financial incentives, the payments are not directly related
to the employee’s contribution but the schemes are subsidized. Examples are
gratuity schemes and leave travel concession.
 The non-financial incentives aim at giving psychological benefits to workers.
There may be monetary rewards, but only indirectly. Financial incentives can
also serve as ‘attention getters’ and ‘encouragers’ of action’. The non-
financial incentives give psychological satisfaction more than the financial
incentives.
 The non-financial incentives are usually seen as the outcome of an
enlightened management: The provision for better working conditions,
encouragement and appreciation of good work, and a general atmosphere of
willingness and cooperation in dealing with common problems, all contribute
to excellence in all areas of work and higher productivity.
The various non-financial incentives are discussed here:
10.6.1 Supervisory Relationship
Though many factors affect how well an employee performs on the job, the most
decisive factor is the supervisory relationship. A supervisor’s attitude can affect
employee performance. Industrial psychologists consider supervisory
relationship as a drive conducive to active performance.
Supervisors should aim at building more satisfying relationships with the workers
as employees largely depend upon the skills of the supervisor to manage and get
the work done. Employees would produce more if they are guided properly by an
able supervisor. Most importantly, there should be a spirit of a team work in the
organization, in order to achieve good results.
10.6.2 Advancement and Security
As employees gain experience at work, they consider promotions, growth and job
security more important than salary. However, in general, workers attach more
importance to money than to any other single factor.

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 Unit 10: Rewards and Recognition

10.6.3 Job Enrichment

This is a way to motivate employees by giving them increased responsibility and
variety in their jobs. Job enrichment allows employees to have more control over
planning their work and how to accomplish it. Greater control ensures that a better
job gets done. Thus, job enrichment taps into the need for employees to do a good
job and be appreciated for their work.
10.6.4 Praise and Blame
As a means of ego satisfaction, praise acts as a more powerful incentive than
blame. However, praise has a better impact if it is felt as being received as
recognition - and not as a means to control recipient behaviour. Disapproval or
blame in public damages the ego and lowers the prestige of the individuals, while
it is beneficial if it is expressed in private.
10.6.5 Knowledge of Result and Experience of Progress
Knowledge of prior work performance motivates the individual to produce more.
It also affects team performance by facilitating communication and problem-
solving. This is especially relevant where teammates are required to coordinate
their efforts.
10.6.6 Cooperation and Competition
Cooperation and competition are part and parcel of any working system but
performance of the employees in the organization is higher when competition is
on health grounds.
10.6.7 Level of Aspiration and Nature of Goal
A high level of aspiration of people operates as a determinant of success while a
low level of aspiration hampers their motivation to go ahead. However, there must
be an optimal balance between ability and level of aspiration. Similarly, the goal-
oriented behavior forms an effective non-financial incentive. There is a need to
integrate individuals and organizational goals to accomplish effective
performance.
10.6.8 Experience of Achievement
An experience of achievement through tasks completion provides job satisfaction
to the individual. Job involvement of the employees can be created by assigning
tasks with definite completion points.
Exhibit 10.1 illustrates the reward and incentives provided by Accenture.

Exhibit 10.1: Rewards and Incentives Programs at Accenture

Accenture has a mix of financial rewards to recognize the unique skills of the
employees and facilitate career progression. The personal blend of base pay,
bonus and equity is tailored to the market where the employees live and work.
Contd….

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Block 4: Compensation and Reward Management

Added to it, Accenture offers a comprehensive suite of programs to make it

easier to stay physically, emotionally and financially healthy. As a part of it,
the company provides medical coverage, dental and vision coverage and
wellness programs.
 The families at Accenture are supported by a robust offering of benefits
including fertility benefits, support for adoption and surrogacy and
caregiver concierge services.
 Parental leave of 16 weeks paid maternity leave, 8 weeks paid time off for
primary care givers and 2 weeks for secondary caregivers.
 Subsidized back-up dependent care, as well as a concierge service, is
available for children, spouses or elderly family members.
 Primary caregivers, both men and women, may work locally for one year
following their return from the birth or adoption of a child.
 Flexible work arrangements help employees achieve work/life balance
while also meeting Accenture’s business needs.
 Paid time off and holidays encompasses traditional vacation time along
with paid sick leave with days varying based on level and tenure.
 For ensuring financial security, Accenture provides opportunity to take
advantage of saving plans, employee share purchase plans, life insurance,
spending accounts for eligible health and dependent day care expenses.
 Disability coverage at Accenture amounts to up to 180 days along with
disability insurance.
Accenture offers additional benefits and programs including free annual flu
shots, a legal services plan, personal excess liability insurance, identity theft
insurance, pet insurance, gym membership discounts, and an online mall
providing discounts on various retail offerings.
Source: https://www.accenture.com/us-en/careers/local/total-rewards (accessed on 20/4/2022)

Activity 10.2
Is this a Good Incentive System?
Razorhead Chemicals is a leading bulk chemicals producer in the United
States. It is known for a distinctively egalitarian organizational culture. For
instance, the junior and middle level employees that work and supervise its
plants are divided into work-groups of 30 people. A bonus is given to each
group only when the desired production levels and attendance is reached. The
rules can be strict, sometimes, if an employee is even late by 10 minutes, the
entire group loses its bonus for the week. Employees also have to ensure that
the chemical manufacturing plant does not have unnecessary shut-downs, if it
happens, the bonus is lost. This has made employees take care of equipment
and instilled a sense of ownership in them, which, in turn, has led to high
productivity.

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 Unit 10: Rewards and Recognition

The senior level employees have only one compensation plan. There is the
marked absence of hefty pay cheques. In fact, the senior level executives have
the lowest basic pay in the entire organization. The senior level employees can
achieve returns on share-holder’s equity in case the company performs
extremely well.
Razor head gives an extraordinary bonus to all its employees. However, senior
level officers are not entitled to extra-ordinary bonus.
The entire organization is highly egalitarian – there are no plush corporate jets
or chauffeur driven cars for senior employees. There are no marks of status
such as executive dining rooms or executive parking places. All employees
have the same holidays and insurance program. Razorhead Chemicals
attributes its solid profits to this egalitarian and performance-based philosophy.
What do you think is the role played by the incentive system in this
organization? Mention the disadvantages of the incentive system also.

Answer:

Check Your Progress - 3

3. Which of the following does not come under financial incentive plans?
a. Profit sharing plan
b. Price rate
c. Differential price rate
d. Gratuity schemes
e. Appreciation for good work
4. Factors such as attitude, advancement, security, quality of supervision, job
satisfaction and enrichment, praise, and recognition come under:
a. Positive incentives
b. Financial incentives
c. Non-financial incentives
d. Other incentives
e. Negative incentives

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Block 4: Compensation and Reward Management

5. Non-financial incentives aim at giving which type of reward to the workers?

a. Physiological
b. Psychological
c. Sociological
d. Chronological
e. Financial
6. Non-financial incentives are the outcome of which type of management?
a. Dominating
b. Enlightened
c. Exploitative
d. Cost-conscious
e. Hierarchical
7. What type of incentive is job enrichment?
a. Non-financial
b. Financial
c. Satisfying
d. Wanting
e. Negative
8. Competition improves performance only when it is free from which of the
following elements?
a. Unhealthy rivalry
b. Achievement
c. Target setting
d. An urge to move ahead
e. Rivalry

10.7 Bases for Determining Incentives

The incentive plan is framed on the basis of two variables. They are the individual
and the work situation.
10.7.1 The Individual
Different people value things differently. Enlightened managers realize that all
people do not attach the same value to monetary incentives, bonuses, prizes, or
trips.

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 Unit 10: Rewards and Recognition

Different things will motivate different people as ‘one man’s food is other man’s
poison’. Individuals are unique and all individuals cannot be motivated by a
single incentive plan. For some individuals, the monetary reward may be the
motivating factor and for some it may be the non-monetary incentives that are
more important.
10.7.2 The Work Situation
The work situation is made up of four important elements. They are: technology,
satisfying job assignments, feedback, and equity.
a. Technology: Based on the technology and the machine a person is operating
the range of an incentive may vary.
b. Satisfying job assignments: A worker’s job may incorporate a number of
activities that he/she 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: Workers need to be able to see the connection between their work
and rewards. These responses provide important reinforcement.
d. Equity: Workers consider fairness or reasonableness in exchange for their
work.

Example
The currency of Zappos employees is called “Zollars”. They have to earn their
Zollars and are used as a way to recognize employees for times when a co-
worker or manager feels they’ve gone above and beyond. Employees can spend
their Zollars on Zappos branded merchandise such as sweatshirts, glasses, and
sun shades or they can buy movie tickets, donate them for a charitable purpose
or enter them into a raffle for bigger prizes.
For more details, check out https://www.zappos.com/about/ (accessed on
20/4/2022)

10.8 Factors that Affect Levels of Pay

Reward management policies and practices need to be developed on the basis of
an understanding of the internal and external influences on the pay.
The internal influences on pay include organizational influences and the external
influences include extra organizational influences.
10.8.1 Internal Influences
Internal Value of Job
Pay is related to the relative contribution or internal value of the jobs that the
employee performs.

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Block 4: Compensation and Reward Management

External Value of Job

This depends on the market rates, in accordance with the policy of the
organization on how it wants its own rates to relate to market levels. It also
depends on the amount of money required to retain its talented workforce. . The
business will decide whether it is a high payer, prepared to pay above market
rates, or low payer, having to accept, probably for financial reasons, that it must
pay less than the market rate.
Employee’s Value
If the employees’ value is high in the market, they may be paid higher than the
market price. It is then perceived that they make a significant contribution, that
they excel in their job, or that they have a higher level of skill or competence than
other employees.
Organizational Affordability
The pay also depends upon the organizational affordability to pay employees and
also the ability of trade unions to bargain more for the employees.
If the trade unions are powerful, the organization would have to pay according to
their demands. The bargaining capacity of the trade unions decide the pay
structure of the employees.
10.8.2 External Influences
The economic determinant of pay is supply and demand. The pay levels are
further explained by the economic wage, human capital, and agency theories.
Supply and Demand of Human Resources
Several theories explain the supply and demand of human resources. Supply and
demand also influence the pay. According to the Classical Economic Competitive
Theory, the pay levels in the labour markets are determined by supply and
demand considerations. Other factors remaining constant, if the supply of labour
exceeds the demand, the pay level goes down; if the demand for labour exceeds
the supply, the pay level increases.
The significance of this theory is that it focuses its attention on external pressure.
The classical theory is used as a justification for concentrating on external
competitiveness at the expense of internal equity, in the belief that ‘a job is worth
what the market says it is worth’.
The Economic Wage Theory
This theory says that the firm pays more than market rates by motivating superior
performance, attracting better candidates, and reducing labour turnover and
persuading workers that they are being treated fairly.
The Human Capital Theory
This sees the workers as embodying a set of skills which can be ‘rented out’ to
employers. The knowledge, skills and experience the employees possess,

14
 Unit 10: Rewards and Recognition

generate a certain stock of productive capital. From a pay point of view it is

believed that human resources are an asset to organization and they add value to
the firm. Individuals expect a return on their own investment, and the firms
recognize that the increased value of the employees should be rewarded.
The Agency Theory
In its purest form, this theory recognizes that in most firms there is a separation
between the owners (the principals) and the agents (the managers). However, the
principal may not have complete control over their agents. The Agency Theory
also indicates that it is desirable to operate a system of incentives to motivate its
employees. This process of ‘incentives distribution consists of paying for
measurable results that are deemed to be in the best interests of the owners. This
process helps in measuring performance, such as: earning per share rather than
being concerned with the behaviour that led up to them.

Example
The pay packages of the executive directors at HSBC Holdings were linked to
the need to expurgate the carbon emissions of the bank and assist their clients
for achieving the same, failing which there would be a reduction in their pay
packages through 2023 (Courtesy Bloomberg Survey). This is an instance of
external influence on pay.
For more details, check out https://www.businesstimes.com.sg/banking-
finance/banker-bonuses-tied-to-esg-metrics-are- (accessed on 20/4/2022)

Check Your Progress - 4

9. Which of the following is not an element of a work situation?
a. Technology
b. Satisfying job assignments
c. Feedback
d. Equity
e. Primary relationships
10. Which of the following options best describe the concept of the Agency
Theory?
a. Separation between the interests of the owners (the principals, the agents
and the managers)
b. Separation between the interests of the senior management and the junior
management
c. Separation between the interests of the owner and the advertising agency
d. Separation between the interests of the owners and the trade union leaders
e. Separation between the owners and employees

15
Block 4: Compensation and Reward Management

10.9 Summary
 Rewards act as a catalyst on the human mindset, leading to an increase in the
reality of performance of employees, provided they are managed within a
framework of scientific objective parameters.
 It has been proved that effective management of rewards could act as a
stimulant for human performance, thereby raising the scope of talent
retention.
 The reward package can be molded as a retention strategy only when it is
done in three steps. They are: (i) Recognizing and compensating, (ii) Group
performance towards objectives, and (iii) Organization’s performance and
business profit.
 An incentive is described as a factor that leads a person to prefer a particular
choice to the other available alternatives. Incentives can be of two types:
financial and non-financial incentives.
 Financial incentives are payments for improved productivity, attendance, and
general improvement in employee performance. Non-financial incentives are
the outcomes of an enlightened management.
 Incentive plans are formulated based on the three variables: individual work,
work situation, and types of incentive.
 Factors affecting incentives are classified into two categories: internal factors
and external factors.
 Incentives are classified financial and non-financial incentives. The incentive
plan is framed on the basis of two variables. They are the individual and the
work situation.
 Pay in organizations can be influenced by internal or external influences. The
internal influences look into the internal and external value of the job,
employee’s value, organizational affordability and trade unions
 The external influences would look into the supply and demand of human
resources, economic wage theory, human capital theory and agency theory.

10.10 Glossary
Classical economic competitive theory: According to this theory, the pay levels
in labour markets are determined by supply and demand considerations. Other
factors remaining constant, if the supply of labour exceeds the demand, the pay
level goes down; if the demand for labour exceeds supply, the pay level increases.
The theory focuses its attention on external pressure and the perceived need for
‘competitive pay’ that is, pay that matches or exceeds market rates.
External Value of Job: This depends on the market rates, in accordance with the
policy of the organization on how it wants its own rates to relate to market levels.
It also depends on the amount of money required to retain its talented workforce.

16
 Unit 10: Rewards and Recognition

Feel-good factor: Employees when feel good about working with the company,
it is referred to as feel-good factor
Incentive: is a factor (financial or non-financial) that leads a person to prefer a
particular choice to the other available alternatives.
Internal Value of Job: Pay is related to the relative contribution or internal value
of the jobs that the employee performs.
Reward: is a benefit resulting from some event or action, an appreciation for a
service rendered.
The agency theory: In its purest form, this theory recognizes that in most firms
there is a separation between the owners (the principals) and the agents (the
managers). However, the principals may not have complete control over their
agents. The Agency Theory also indicates that it is desirable to operate a system
of incentives to motivate and reward acceptable behaviour.
The economic wage theory: This theory says that the firm pays more than
market rates because it believes that high pay levels will contribute to an increase
in productivity by motivating superior performance, attracting better candidates,
reducing labour turnover, and persuading workers that they are being treated
fairly.
The human capital theory: Ehrenberg and Smith (1994) conceptualized workers
as embodying a set of skills which can be ‘rented out’ to employers. The
knowledge and skills a worker has, which comes from education and training,
including the training that experience brings generate a certain stock of
productive capital. From a pay point of view, the implication for Human Capital
Theory is that investment in people adds value to the firm. Individuals expect a
return on their own investment, and the firms recognize that the increased value
of the employees should be rewarded.

10.11 Self-Assessment Test

1. Rewards are being increasingly used by organizations. What are rewards?
What are the benefits that are expected to accrue from rewards?
2. An incentive is described as a factor (financial or non-financial) that leads a
person to prefer a particular choice to the other available alternatives. What
types of incentives are available? What are the advantages of having
incentives?
3. How are incentives plans designed on the basis of the individual and the work
situation?
4. The reward management policies and practices need to be developed on the
basis of an understanding of the internal and external influence on the pay.
What are the internal and external influences on pay? Describe in detail.

17
Block 4: Compensation and Reward Management

10.12 Suggested Readings/Reference Material

1. John Shields, Jim Rooney, Michelle Brown, Sarah Kaine; Managing
Employee Performance and Reward: Systems, Practices and Prospects, 3rd
Edition, Cambridge University Press, 2020
2. Susan L. Verhulst, David A. DeCenzo, Rama Shankar Yadav; Human
Resource Management, 13th Edition, Wiley, 2021
3. Durai Pillai, Total Reward Strategy: Retain Your Best Talent, 1st Edition,
Notion Press, 2020
4. Stephen J Perkins, Sarah Jones, Reward Management: Alternatives,
Consequences and Contexts, 4th Edition, Kogan Page, 2020
5. Kevin R. Murphy, Jeanette N. Cleveland, Madision E. Hanscom,
Performance Appraisal and Management, Sage Publications, 2020

10.13 Answers to Check Your Progress Questions

1. (b) Tracking the efficiency of the employees
The concept of efficiency scaling tracks the efficiency of the employees.
2. (d) Bonus
Bonus is paid as an incentive to employees. Incentives do not include:
wages, pay for doing dangerous tasks, payment to work at undesirable
times and overtime pay.
3. (e) Appreciation for good work
Appreciation for good work is a non-financial incentive and does not
come under financial incentives.
4. (c) Non-financial incentives
Factors such as attitude, advancement, security, quality of supervision,
job satisfaction and enrichment, praise and recognition come under non-
financial incentives.
5. (b) Psychological
Non-financial incentives act as a psychological reward to the workers.
6. (b) Enlightened
Non-financial incentives are the outcome of an enlightened
management.
7. (a) Non-financial
Job enrichment is a vertical expansion of the job which provides a
challenge to the individuals. It thus forms a significant non-financial
incentive.

18
 Unit 10: Rewards and Recognition

8. (a) Unhealthy rivalry

People work well as a group under conditions of cooperation than under
conditions of competition. Competition improves performance where it
is free from unhealthy rivalry.
9. (e) Primary relationships
The work situation is made up of four important elements -technology,
satisfying job assignments, feedback, and equity. Primary relationships
is not an element of work situation.
10. (a) Separation between the interests of the owners (the principals, the
agents and the managers)
The basic concept of the Agency Theory is a separation between the
interests of the owners (the principals) and the agents (the managers).

19
 Unit 11
Reward Management
Structure
11.1 Introduction
11.2 Objectives
11.3 Meaning of Rewards Management
11.4 The Reward System
11.5 Reward Management and Human Resource Management
11.6 Reward Strategy
11.7 Reward Policy
11.8 Reward Management Process
11.9 Evaluating the Reward System
11.10 Innovations in Reward Management
11.11 Reward Systems and Legal Issues
11.12 Summary
11.13 Glossary
11.14 Self-Assessment Test
11.15 Suggested Readings/Reference Material
11.16 Answers to Check Your Progress Questions

“If you don’t create a great rewarding place for people to work, they won’t do
great work.”
- Ari Weinzweig

11.1 Introduction
As has been popularized by Ari Weinzweig, administering reward is the best way
to help the employees understand that they are valued and helps in fostering a
culture of engagement, commitment and performance. In the previous unit,
various facets of rewards and incentives were discussed along with the bases for
determining incentives and pay.
There needs to be a comprehensive system of reward management in the
organization. This would help in retaining the existing employees and attracting
right kind of talent into the organization, not to forget the contributions to
organization productivity. The focus of this unit would be on the concept of
reward management and its process and relationship with HRM. Further this unit
would focus on the legal issues in reward management.
 Unit 11: Reward Management

11.2 Objectives
After studying this unit, you should be able to:
 Examine the reward system
 Analyze the relationship between reward management and HRM
 Describe the rewards management process
 Formulate a rewards strategy
 Explain the evaluation of reward system

11.3 Meaning of Reward Management

Reward management implies employees must receive rewards in proportion to
their contribution. The philosophy of rewards management holds that employees
are to be rewarded fairly and equitably, on a continuous basis. Their value or
contribution to the organization should be taken into account. To achieve this
outcome, reward management formulates and implements desirable policies in
every organization.
Reward management deals with the formulation, implementation, and evaluation
of a reward process in an organization. Reward management policies are to be
communicated to all its stakeholders.
Reward management takes a ‘total reward’ perspective. It recognizes that there
are numerous ways of rewarding people. The preferences of individuals have to
be taken into account and integrated in order to maximize the effectiveness of
reward policies and practices.
The aims of reward management are:
 Creating a performance orientation by rewarding employees according to the
value created by them.
 Promoting right behavior by rewarding the right things.
 Attracting, retaining, and developing talented workforce.
 Ensuring consistently high levels of motivation among employees.
The aims of reward management are achieved through alignment between various
rewards practices: There should be an alignment of reward practices – both with
employee values and the business goals. The same can be achieved by
implementing the following:
 Ensuring equal pay for equal work
 Emphasis should be on fair treatment where the employees feel that they are
fairly treated
 Ensuring greater transparency in the reward management practice in an
organization.

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Block 4: Compensation and Reward Management

Example
Infosys believes in high-performance work ethics and rewards employees
through a range of monetary and non-monetary rewards. One such initiative is
InfyGold, a unique multi-partner employee discount programme where
employees are awarded redeemeable InfyGold plus points for excellence in
their projects. They can use them across 2000 plus brands that are curated for
them. This provides employees the freedom of choice and takes customization
of rewards to the next level.
For more details, check out https://www.infosys.com/newsroom/(accessed on
21/4/2022)

11.4 The Reward System

According to Armstrong, the reward system has interrelated processes as well as
activities which ensure maximum returns.
The reward system comprises the overall reward strategy of the organization, the
reward policy being currently followed, the approach toward total rewards
represents transparency and equity. It also balances the importance given to
ensure external competitiveness versus internal equity.
We look at each of these aspects here:
 The reward strategy sets out the aims of the reward policies of the
organization in the longer term.
 Another important aspect of the reward policy is that a comparison is always
made between the internal rates of pay and the market rate to assess total
reward and the use of contingent rewards. Total reward aims to achieve a
greater impact on the motivation and commitment of employees as they
include both financial and non-financial rewards.
 Contingent rewards are additional financial rewards which are related to
performance, and abilities of employees. Contingent pay can be for an
individual, teams, or the entire organization.
 External competitiveness is ensured by identifying rates of pay for
comparable jobs within the organization.

Example
Netflix follows the incentive compensation model that is highly
entrepreneurial and rewards tangible successes, inciting producers and
directors to make sure that their work performs well. It is qualitative in terms
of its bonuses for awards won, but also quantitative as well because it rewards
success in terms of numbers of views for “mainstream” films.
For more details, check out https://about.netflix.com/ (accessed on 22/4/2022)

22
 Unit 11: Reward Management

11.5 Reward Management and Human Resource Management

Reward management has always been an integral part of human resource
management due to the following reasons:
 Rewards management supports the accomplishment of business strategy. It
deals with the long-term issues of how people should be valued for their
performance.
 The ‘total reward’ approach adopted by organizations recognizes the various
ways of rewarding people, which can be financial or non-financial. The aim
should be that the reward policies have the maximum effect.

Example
Employees can earn Zollars or "Zappos dollars" for their performance and the
same can be used to redeem Zappos branded merchandise, such as a gym bag,
desk fan, or water bottle, which are sold through the company’s internal Zollar
Store. They can also donate them to other employees. The Zapponian who
awards the Zollar to another employee has to fill out the recipient’s name along
with the reason of why they are giving the Zollar, which makes the recognition
meaningful. It gives employees a warm, fuzzy feeling that every time they
spend Zollars it can help others out which, in turn, makes the employee happy
for being part of something bigger than themselves.
For more details, checkout https://www.zapposinsights.com (accessed on
22/4/2022)

Check Your Progress - 1

1. How does reward management attempt to achieve its goals?
a. By ensuring greater transparency and consistency
b. By not aligning various practices
c. By emphasizing unfair treatment
d. By not ensuring greater level of equity
e. By rewarding employees as per their needs

11.6 Reward Strategy

The reward strategy sets out the reward policies in order to accomplish business
objectives. Thus, it is concerned with how the organization will go about giving
rewards for the coming two or three years. Armstrong feels, “Reward strategy
provides specific directions on how the organization will develop and design
programs that will ensure that it rewards the behavior and performance outcomes
that support the achievement of its business goals.”

23
Block 4: Compensation and Reward Management

Through the use of a rewards strategy, the organization ensures that rewards turn
into a mechanism for integrating the efforts of its various units towards achieving
its strategic objectives.
However, while setting and implementing the strategy, the costs should not be
more than the perceived benefits. Effective good rewards strategy must ensure
three things:
1. There should be clearly defined goals and a well-defined link between the
reward strategy and the business objectives.
2. The rewards program should be able to meet the needs of the organization.
3. There have to be supportive HR and reward processes in place in the
organization.
We now examine various aspects of reward strategies:
11.6.1 Alignment with Organizational Needs
The fundamental criterion behind an effective rewards strategy is supporting the
overall corporate strategy wherein reward policies and processes should be in
alignment with organizational needs. It should give a sense of purpose and
direction to the organization.
Following are the features of effective reward strategies:
 An effective rewards strategy visualizes organizational goals. An effective
rewards strategy links reward plans with corporate goals. An effective
rewards strategy has flexibility in achieving goals.
 An effective rewards strategy reinforces organizational values.
 An effective rewards strategy is formulated only after considering the
resources available.
 An effective rewards strategy ensures that the organizational objectives are
achieved to a significant extent.
 An effective rewards strategy examines the extent to which it can drive
culture change.
 An effective rewards strategy aligns individual or team competence with
organizational core competencies.
 An effective rewards strategy ensures that rewards give the right messages
about the organizational priorities.
 An effective rewards strategy has the required flexibility, given the
competitive and turbulent environment.
 An effective rewards strategy ensures that the reward processes fit into
employees’ individual needs and expectations.
 Lastly, effective reward strategies have a backup plan in case it fails to
achieve the desired objectives.

24
 Unit 11: Reward Management

11.6.2 Developing a Reward Strategy

Theoretically, the formulation of a reward strategy can be conceived as a linear
process. Beginning with the conception of the business strategy that seeks to
satisfy stake-holder expectations as well as achieve value addition, the required
human resources strategy is conceived.
Human resource strategies aim to recruit, develop, and retain talented, skilled and
motivated talented people the organization needs in order to achieve its aims.
The reward strategy clarifies what the organization wants and is prepared to pay
in order to encourage and support desired behavior. It develops and maintains
competitive pay policies that attract and retain quality people.
However, in practice, the formulation of strategy is seldom rational or linear. For
practitioners, strategic planning is often reduced to analyzing events in light of
the organization’s expectations.
This should not mean that organizations should simply ‘react’ to events and never
plan. It is essential that there be a defined and clearly understood sense of purpose
and direction existing in the organization. The development of reward strategy is
shown in Figure 11.1.
Figure 11.1: The Development of Reward Strategy

Business Strategy

 Satisfy needs and expectations of stake-holders

 Provide added value to customers


HR Strategy

Obtain, develop, and retain the skilled, motivated and committed people the
organization needs

Reward strategy

 Define what the organization wants and is prepared to pay in order to

encourage and support desired behaviour.
 Develop and maintain competitive pay policies which will attract and
retain high quality people.
 Adopt a total rewards approach which includes a mix of rewards that best
meets business and individual’s needs.

Source: Michael Armstrong, 2004, A Hand Book of Human Resource Management Practice, New
Delhi, Pearson Education Pvt. Ltd.
https://www.academia.edu/32280546/ARMSTRONGS_HANDBOOK_OF_HUMAN_RESOURCE
_MANAGEMENT_PRACTICE_i (accessed on 22/4/2022)

25
Block 4: Compensation and Reward Management

Exhibit 11.1 illustrates the reward system at Zappos.

Exhibit 11.1: Reward System at Zappos

In the Zappos Family, peer-to-peer employee rewards programs help build a
positive team spirit. Zapponians get an opportunity to appreciate the good
work done by their organizational members. This speaks about the culture at
Zappos. A Zapponian can be acknowledged for his efforts, if he goes that extra
mile to help out another team member or WOWing a customer. A system of
employees rewarding their peers talks about the culture at Zappos. Some of the
employee reward programs that are affordable and scalable are:
Master of WOW Parking
In Vegas, it is a treat to get a covered parking spot close to the entrance of one
of the four buildings of the Zappos for a week.
The same can be facilitated by nominating an employee by submitting a brief
story to the ZCON Team (Zappos’ concierge) on how they were WOW’d by a
fellow colleague. WOW parking is chosen once a week (usually Friday) for a
one-week period. Any Zappos employee can award the parking spot to a lucky
employee. It can be given to a teammate, team lead, someone who opened a
door for them, someone who always smiles, or maybe to the person who
magically cleans the restrooms or the break room.
Co-worker Bonus Program
Employees can reward each other with a $50 co-worker bonus. Zapponians can
show their fellow co-workers how much they appreciate them with moola.
Each Zapponian can give one bonus per calendar month, but they can receive
more than one as long as they are from different employees. Having employees
give bonuses allows both the giver and the receiver to spread happiness.
Hero Award
The Zappos Hero award works in combination with the co-worker bonus
program. Zappos HERO is an employee who embraces their core values to the
fullest and lives to deliver WOW to their fellow Zapponians. They are chosen
by the leadership team which is made up of all the heads of departments along
with the CEO, CFO, and “no title.”

Source: https://www.zapposinsights.com/ (accessed on 22/4/2022)

11.6.3 Evaluating the Effectiveness of Reward Strategy

Duncan Brown1has suggested that reward strategy delivery should be evaluated
by rating it against various objectives. This is given in Table 11.1.

1
https://www.employment-studies.co.uk/resource/measuring-effectiveness-pay-and-reward-practices
(accessed on 22/4/2022)

26
 Unit 11: Reward Management

Table 11.1: Evaluating the Effectiveness of Reward Strategy

Rating Scale = 10
Incredible Scale = 5
Objectives
OK Scale = 1
Appalling
Reinforces the realization of business goals
Reinforces organizational values
Recruits and trains staff of required calibre
Strong relationship between pay and contribution
Motivating the employees
Cost effective
Well communicated, understood, and supported by employees
Managed effectively in practice by line managers
Simple and efficient to operate and maintain
Flexible enough to react to change
Reinforces the achievement of business goals
Reinforces organizational values
Recruits and trains staff of required calibre
Positive relationship between pay and contribution
Employee motivation
Cost effective
Well communicated, understood, and supported by employees
Managed effectively in practice by line managers
Simple and efficient to operate and maintain work
Flexible enough to react to change

Activity 11.1
Based on the above given format for evaluating the effectiveness of Reward
Strategy, assign some imaginary scores about the reward strategy being
followed in an organization and analyze how effective the reward strategy is.
Answer:

11.6.4 Recent Developments in Reward Strategy

According to Armstrong and Brown, there has been a shift in the strategic concept
of reward. Of late, there has been a shift away from the traditional concept of the
reward system as a complex, inflexible, and mechanistic system to a reward
process which is organic and much simpler.
Moreover, the strategy is now much more inclusive: instead of the emphasis being
on an entirely business-driven focus, there has been a marked shift for achieving

27
Block 4: Compensation and Reward Management

greater alignment with the laid out strategies of the organization, while keeping
in mind the employee needs and environmental requirements.
The new approach towards rewards is much more practical as it gives importance
to achieving the best fit with the organization, instead of going after the
conventional best practices approach. In the process, there is a greater degree of
communication and involvement throughout the organization, than the earlier
top-down approach.
Most importantly, the reward process believes in evolutionary change, rather than
achieving sudden drastic changes. Reward as a driver of cultural change in an
organization has changed. They are being used more like a system to limit short-
run damage as many a time incentives work best to meet specified performance
goals and to motivate people to perform better. This implies a much reduced role
of planning in the reward system and a greater shift towards practicing reward
management as more of a short-run process. This shift towards thinking of the
reward system and strategy from a short-run perspective is much more
pronounced in the UK than in the US.

Check Your Progress - 2

2. Which of the following ensures that the rewards policy supports the
achievement of an organization’s business goals?
a. Radical strategy
b. Reward strategy
c. Cyclical strategy
d. Bonus strategy
e. Business strategy
3. Which of the following is the term for referring to the perception about the
process of reward policy?
a. Circular
b. Never ending
c. Linear
d. Diagonal
e. Vertical
4. Which of the following is not considered in the recent shifts in the reward
strategy of an organization?
a. Employee needs
b. Environmental needs
c. Business needs
d. Organizational needs
e. Trade union needs

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 Unit 11: Reward Management

5. Which of these characterizes the new approach toward the rewards strategy?
a. Achieving the best fit
b. Following the best practices approach
c. Leaving the policy to adjust to the circumstances
d. Going after the conventional best practices approach
e. Not having greater degree of communication and involvement

11.7 Reward Policy

Reward policies give the guidelines for the implementation of the reward strategy
through the design and management of the reward system. The reward philosophy
plays a very important role in setting and setting reward policies in every
organization. Armstrong has highlighted the following factors as concerning
reward policies:

11.7.1 Level of Pay or Remuneration

The structure of the company influences the pay levels as well as the differentials
and the number of steps or grades that should exist in the pay hierarchy.

11.7.2 Market Rate and Equity

There is often a conflict between the need to match market rates and the desire to
maintain an internal equitable pay structure. The market sometimes determines
the pay of the employees. Companies in order to attract and retain talented
employees who have high market rates may, to a degree, have to sacrifice its
ideals of internal equity to the realism of the market-place.

11.7.3 Differential Rewards

The policy will need to maintain whether or not the organization wants to pay for
performance, competence or contribution, and if so, how much and under what
circumstances. The policy may also indicate the approach to be used in relating
pay to individual, team, or organizational performance.

11.7.4 Flexibility
Reward policies should also take in to account the extent to which the reward
processes are in line with the fast changing external conditions along with the
changes or variations in the needs of the company or its employees.

11.7.5 Involving Employees in Reward Policy

In order to make the reward policy more effective, the employee’s involvement
should be added to it. This will help management to understand the type of
rewards the employees would prefer.

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Block 4: Compensation and Reward Management

11.7.6 Communicating to Employees

The reward policy should be communicated to the individuals, teams, and
representative bodies. The communication should ensure that the various aspects
of the reward processes are brought out. Along with this, how the reward
processes would be used and how they would affect the employees should be
communicated. Lastly, the role the individuals and teams would be expected to
play should also be highlighted.
11.7.7 Transparency
If there is transparency in pay policies there will be corresponding boost in the
morale of the employees. Only then employees will feel that the reward
management processes of an organization are fair if they know how they are rated
and evaluated for their pay and rewards. Lack of understanding only breeds
suspicion and hostility. Transparency can be achieved through the involvement
and communication of the employees in the reward setting process.
11.7.8 Relating Rewards to Business Performance
The reward policy refers to the link between business performance and pay. It
will cover the extent to which pay varies based on results. It is essential to ensure
that the reward strategy spurs employee performance in order to achieve better
results. The reward policy should have a component of recognizing the
contribution made by employees.

Example
Accenture awards leadership equity grants to recognize exceptional
performance or achievement of a significant career milestone.
For more details, check out https://www.accenture.com/us-en/careers/
local/total-rewards (accessed on 22/4/2022)

Activity: 11.2
Wonnacott and Wonnacott
Wonnacott and Wonnacott is a leading financial services firm in the United
States. During the financial downturn, it received substantial funding from the
government to prevent it from collapse. However, during the same period, the
firm gave away billions of dollars as bonus payments to its executives. This
created substantial resentment among the general public, who accused the firm
of promoting a culture of ‘greed’. However, the firm said it was helpless on
this count as the bonus payments were legally binding on it and had been
negotiated at a time when the economy was booming. The firm’s bonus
contracts are set to expire in a month’s time. This gives it a good opportunity

30
 Unit 11: Reward Management

to put in place a rewards system that is in tune with the expectations of the tax
paying public that wants to slash the pay of the ‘fat cats’. You are the director
of Human Resources at Wonnacott and Wonnacott.
Based on the meetings you have had with the CEO, it is clear that the firm must
continue to get business at a fast pace, if it has to survive. This means that the
firm will require the very top performing executives, whom the public has
begun to increasingly dislike. However, your experience in the financial
services industry tells you that top performing executives do not come cheap –
they would have to be given substantial rewards to stay at the firm. In this
situation, what is the rewards policy that you would devise for Wonnacott and
Wonnacott?
Answer:

Check Your Progress - 3

6. Tension can prevail in the reward system due to the conflicting requirement
of which of these?
a. Market rate and internal equity of pay in the organization.
b. The internal equity of remuneration.
c. The market determined rate of interest
d. Flexibility
e. Transparency in reward system
7. Transparency in the rewards process is created through which of the
following elements?
a. Communication and involvement.
b. Abstract process
c. Collective bargaining.
d. External competitiveness.
e. Internal equity

11.8 Reward Management Process

The reward management process covers both financial and non-financial rewards.
The process of reward management is led by business needs. The philosophy of
the reward management must be to satisfy the needs of the employees and identify
them as the shareholders of the organization.

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Block 4: Compensation and Reward Management

11.8.1 Financial Reward Process

The processes of financial rewards are related to the basic and variable pay and with
the provision of benefits and pensions. There are various dimensions of the
financial rewards process such as base pay, pay survey and job evaluation, pay
structures, contingent pay, employee benefit, and pensions and total remuneration.
Base Pay
The base or basic pay is the price for the job as determined by the internal and
external employment markets. If performance pay and rewards for competence
or skill or service increments are combined with an employee’s base rate, then it
becomes the level of pay for that employee.
The size of cash bonuses is usually set in relation to base pay, as are the level of
pension contributions and the size and nature of other benefits. Levels of pay are
influenced by external and internal relativities. External relativities are the levels
of pay for similar jobs in the external labor market – market rates. Internal
relativities reflect the relative value of jobs and people within the organization’s
internal labor market.
Pay Surveys and Job Evaluation
Pay surveys and research establish external relativities that analyze and compare
market rates in order to achieve external competitiveness.
The internal relativities are judged by job evaluation. The relative values or size
of jobs within an organization are considered as a basis for achieving internal
equity structures.
Benefits of pay surveys and job evaluation are:
 Pay surveys and job evaluation provide the necessary data to design and
manage pay structures.
 They provide frameworks within which levels of pay for jobs and the
differentials are described or defined in the form of grades, bands, scales, or
spot rates (individual job rates).
 Pay structures also define the limits within which the pay of employees can
progress within their grades or bands. This can vary with assessments of
performance, competence, or skill. Progression may be up a fixed incremental
scale or spine which explains the predetermined pay increases that can be
received by employees’ year by year on the basis of their time in the job.
 Different structures may exist for different job families. Job families are those
groups of jobs where the nature of work is similar, or market groups.
Structures may consist of an extended hierarchy of relatively narrow grades
or a fairly small number of broad bands.
Pay structures are designed from job evaluation, competence analysis, and
analysis of market practice by external benchmarking (pay surveys). The design
is not a scientific one and depends upon judgement.

32
 Unit 11: Reward Management

Contingent Pay
Contingent or differential pay is pay which is influenced by the level of
performance of individuals, teams, or the organization and/or individual levels of
competence or skill. When it takes the form of performance or competence-
related pay, it may be consolidated into base pay. Contingent pay is not
consolidated into the base rate and is typically not pensionable. In this case, it is
often referred to as ‘variable pay’ and, because it is related to potentially variable
factors and has to be re-earned at the next pay review, it is sometimes called pay-
at-risk.
Employee Benefits and Pensions
Employee benefits are many such as pensions, death in service benefits, sick pay,
company cars, or permanent health insurance which are provided in addition to
the routine cash pay. They can also include benefits such as annual holidays,
child-care provisions, and subsidized meals.
Total Remuneration
The sum of base pay, variable pay, and the value of employee benefits and
pension constitute total remuneration. This represents the complete worth of
financial rewards to individuals.
11.8.2 Non-financial Reward Process
The non-financial rewards usually involve a nominal cost but lead to substantial
goodwill. However, before giving out non-financial rewards, it is essential to
know what the employees would want. For instance, it may happen that more
mature employees would like recognition and praise, while the younger ones
would like extra time off to enjoy themselves. The extent of non-financial rewards
is limited by the creativity one can have.
Companies offer benefits ranging from movie tickets to visits to the dentists,
holiday destinations, or a meal at a restaurant of their choice with their friends.
There can be summer events for all the employees and their families that include
things like a friendly cricket match to a hiking expedition.
It should be ensured that financial and non-financial components should be
judiciously included in reward management. Non-financial rewards focus on
people’s need for recognition, achievement, responsibility, and personal growth,
and therefore they contribute to increases in motivation, commitment, and
improved performance. They can make a deeper and longer-lasting impact on
motivation and commitment.
11.8.3 Performance Management Process
Performance management includes personal development plans, management,
and coaching. There are periodic reviews of achievements performance in
relation to those plans.

33
Block 4: Compensation and Reward Management

The purpose of performance management is to develop competence and skill and

improve performance. Though performance management has been traditionally
concerned with appraisals, it has become increasingly holistic and been extended
to the assessment of inputs – knowledge, skill, and competence as well. A
distinction is sometimes made between knowledge and skills as inputs to
performance, and competency i.e., the behavior that generates excellent
performance, in the conversion of inputs to outputs.
The measurement and management of performance at organization, team, and
individual level can be done by the Balanced Scorecard approach which was
devised by Kaplan and Norton. This approach involves looking at the business
from four related perspectives: customer, internal processes, innovativeness and
learning, and finance. This process can be extended to teams and towards a
longer-term perspective.
These performance management reviews may generate ratings which influence
variable pay decisions. They also provide non-financial motivation through
feedback which recognizes achievement. In this process, 360-degree feedbacks
that give remarks from various sources – from managers to peer groups and direct
reports by the manager – can be used. Performance agreements and reviews
identify performance gaps and analyze training needs. Through this, they enable
personal development of the individual which in turn lead to improved
performance. (Refer Figure 11.2 for reward management process).
Figure 11.2: Reward Management Process

Non-Financial
Rewards

Employee
Benefits

Market
Surveys

Pay Level
Business Rewards and Total Improved
Strategy Strategy Relativities Performance
Remunerations

Job
Evaluation

Performance
Pay
Performance Employee
Management Development

Source: Michael Armstrong, 2004, Hand Book of Reward Management- Remuneration strategy and
Practice, New Delhi, Kogan Page India Pvt. Ltd.

34
 Unit 11: Reward Management

Pay is an important component for both performance management and reward

management.

Example

HRSMART solution of Capgemini provides better tracking and management

of human capital and efficient workforce and performance management,
critical to the overall functioning of the organization. Its big data capability
improves the processing of unstructured data, including social media sentiment
and history and enables predictive analysis of likely attrition.
For more details, check out https://www.capgemini.com/service/digital-
services (accessed on 22/4/2022)

11.9 Evaluating the Reward System

The reward system should be audited regularly to assess its effectiveness, and its
relevance to the present and future needs of the organization. The audit should
include an assessment of opinions about the reward system by its key users and
those who are affected by it. This would lead to a diagnosis of the strengths and
weaknesses of the reward system and an assessment of what needs to be done and
why.
The personnel department continuously monitors the operation of the reward
system through audits by using compa-ratios and attrition analysis. The internal
and external relativities need to be monitored thoroughly to check the
performance of the reward system.
The internal relativities are monitored by carrying out periodic studies of the
differentials that exist vertically within departments or between categories of
employees. The external relativities are monitored by tracking movements in
market rates by studying published data and conducting pay surveys.
No reward innovations should take place unless a cost - benefit analysis has
forecast that they will add value. The audit and monitoring process should
establish the extent to which the predicted benefits have been obtained and check
on the cost on the forecast.
A compa-ratio measures the relationship in a graded pay structure between actual
and policy rates of pay as a percentage. The policy value is the midpoint or
reference point in a pay range which represents the ‘target rate’ for a fully
competent individual in any job in the grade. Compa-ratios are used to define
where an individual is placed in a pay range. The analysis of compa-ratios
indicates the actions that might have to be taken if compa-ratios are too high or
too low compared with the policy level. This process is sometimes called
‘midpoint management’.

35
Block 4: Compensation and Reward Management

Compa-ratios are calculated as follows:

Actual Rate of Pay
X 100
Mid Reference Point of Range

A compa-ratio of 100 per cent means that actual and policy pay are the same.
Compa-ratios which are higher and lower than 100 per cent mean that pay is
above or below respectively, of the policy target rate.
Compa-ratios establish the difference between policy and practice and the reasons
for such differences need to be established.

Example
Google conducted employee survey and found that cash prizes are evaluated
on a cognitive level, and seen through practical eyes, whereas a non-cash prize
invokes emotional response. This led Google to discontinue its big cash awards
up to $1 million -- for its top performers as it discovered that the program
fostered jealousy and resentment -- not the positive response that they had in
mind. So Google phased out the cash rewards program and rolled out a new
rewards program that offered experiences -- everything from dinners out to
new tech gadgets to trips to Hawaii. Employees said they found the new
program more fun, more memorable, and more thoughtful than the cash
awards.
Source: ICFAI Research Center

11.10 Innovations in Reward Management

Organizations devise unique and innovative ways of rewarding employees to
motivate them for excellent performance.
Armstrong et al, propound that reward management is not just a soft art but
requires scientific and evidence-based methodologies. Many companies though
use balanced score card and benchmarking, yet do not have concrete evidence to
justify their reward practices.
Evidence-Based Reward Management (EBRM), researched by Armstrong et al,
is based on facts rather than opinion, on understanding rather than assumption,
on grounded theory rather than dogma. EBRM model illustrates what can be done
to increase the effectiveness of reward systems, which follows the following
steps:
 Setting objectives and success criteria
 Conducting reward reviews
 Measuring the impact of reward
 Evaluating the impact
 Developing, implementing and applying reward policies and practices on the
basis of evidence

36
 Unit 11: Reward Management

It has been propounded that there cannot be one best method for reward
management and only the needs and circumstances of organizations determine
the best reward policy. The following Table 11.2 illustrates the fact.
Table 11.2: Successful Reward policies

Organization Reward policy that brought success

DSG Re-design of executive incentive plan to enhance the line-of-
International sight between individual performance, group performance
and reward
Kent country Success due to strong and united political direction from top
Council with a high involvement and adapting to local circumstances
KPMG Focus on rewarding performance and meeting the needs of a
large and young diverse workforce
McDonalds Regularly reviewing and changing reward policies and
adopting processes of consultation and change management
for reward effectiveness
Standard Linking achievement of business goals with a human capital
Chartered scorecard which gathers, organizes and reports key trends
Bank
The NSPCC Aligning culture and values of organization with values of
the people in the organization
A Technology Understanding of culture and change processes and making
Company reward development as an evolutionary process
Sources: Michael Armstrong, Duncan Brown and Peter Reilly, Increasing the effectiveness of
reward management- An evidence-based approach, Institute for employment Studies, UK, 2009
https://www.employment-studies.co.uk/system/files/resources/files/hrp6.pdf (accessed on
21/4/2022)

The innovative EBRM framework comprised 10Cs as given below:

 Competitive externally to recruit and retain
 Convergent with business strategies
 Contribution and performance rewarded
 Customized to needs of different employees
 Communicated well and understood and valued by employees
 Commits-engages and motivates employees
 Cost effective and affordable
 Changes in response to different needs
 Controlled-efficient to manage and administer
 Compliant legally, internally, equitable, fair

37
Block 4: Compensation and Reward Management

The EBRM approach emphasizes evidence based methodology for reward

management. It further establishes that each organization is unique and reward
policy should be based on their needs and circumstances.
Many companies feel that rewards reflect organization’s culture and creativity
and compete with each other in offering innovative rewards to employees such as
flexi-time, tele-commuting, personal appreciation, membership cards, gift
vouchers, parties with families, picnics, conducting competitions and awarding
prizes etc.

Example
Reward Gateway, an employee engagement platform, provides employees
with millions of choices for their reward redemption via simple, seamless
integration with Amazon. Real-time access to the breadth of Amazon’s
products means employees will always find just what they want – and receive
it quickly via Amazon’s world-class delivery – for a truly rewarding
experience.
For more details, check out https://www.rewardgateway.com/integrations
(accessed on 21/4/2022)

11.11 Reward Systems and Legal Issues

In designing and implementing performance management systems, care needs to
be taken that the system is fair and acceptable to employees and above all is legal.
Important Legal Principles Affecting Performance Management
While awarding rewards, organizations should bear in mind the principles and
legal issues related to performance management:
 Employment at will - This means that the employer can end the relationship
with the company subject to his contract period and public policy issues.
 Negligence - Legal problems arise if employees or employers do not adhere
to the statements given in the employee manuals, contracts or other materials.
 Defamation - Defamation is disclosure of false information. It becomes a
legal issue if the employer defames or damages the reputation of the
employee negligently or intentionally with false statements and discloses
them to a third party, who may be a potential future employer to the
employee.
 Misrepresentation - If employers give false information about favorable
performance of the employee, knowing that it is not so, causing damage to
others. Misrepresenting information which is not true becomes a legal issue.
 Adverse Impact - If an unintentional discrimination takes place on a
particular section of employees on their performance and evaluation,

38
 Unit 11: Reward Management

it becomes a legal issue. For instance, if women are evaluated on networking

for managerial jobs, probably, they will be ranked low.
 Illegal discrimination - If evaluators evaluate performance on non-related
performance factors, it is an illegal discrimination.
This emphasizes the fact that employees should participate in the design and
implementation of performance management system.

Example
In 2021, over 1,000 Microsoft employees shared their salaries in a leaked
spreadsheet in a push for pay transparency. Dozens of women in technical roles
at Microsoft started an email thread sharing stories about disparities in
compensation and promotions at the company and then compiled a pay
spreadsheet to document the inequities.
For more details, check out https://www.businessinsider.in/tech/enterprise
/news/ (accessed on 21/4/2022)

Check Your Progress - 4

8. Which of these are components of non-financial incentives?

a. Contingent pay
b. Employee benefits
c. Base pay
d. Variable pay
e. Praise and recognition
9. Which of these best describes ‘frameworks within which levels of pay for
jobs and the differentials are described’?
a. Pay structures
b. Pay survey
c. Job evaluation
d. Job specification
e. Job description
10. What do compa-ratios measure?
a. The relationship between the actual and policy rates of pay as a
percentage
b. The ‘mid-point’ pay range
c. Target rate for a competent employee
d. Actual rate of pay
e. Policy rate of pay

39
Block 4: Compensation and Reward Management

11.12 Summary
 Reward management is the development, implementation, maintenance,
communication, and evaluation of the reward process.
 The basic purpose of the reward strategy is to support the corporate strategy
and align reward policies and processes with organizational needs.
 The factors with which the reward policies need to be considered are levels
of pay, market rate and equity, differential rewards, flexibility, involving
employees, communicating to employees, and transparency.
 The process of reward management covers financial and non -financial
rewards which are led by business needs.
 The reward system has to be audited regularly to assess its effectiveness. The
operation of the reward system is monitored continuously by the HR
Department through audits using compa-ratio analysis
 EBRM model illustrates what can be done to increase the effectiveness of
reward systems.
 In designing and implementing performance management systems, care
needs to be taken that those systems are fair and acceptable to employees and
they are also legally sound. For this standardized procedures are to be adopted

11.13 Glossary
Base pay: The base or basic pay is the price for the job as determined by the
internal and external employment markets.
Compa-ratio: A compa-ratio measures the relationship in a graded pay structure
between actual and policy rates of pay as a percentage
Contingent pay: Contingent or differential pay is pay which is influenced by the
level of performance of individuals, teams, or the organization and/or individual
levels of competence or skill.
Job evaluation: Job evaluation considers the relative values or size of jobs and
sometimes generic roles within an organization as a basis for achieving internal
equity.
Pay structures: Pay structures define the frameworks within which levels of pay
for jobs and the differentials are described or defined in the form of grades, bands,
scales, or spot rates.
Pay surveys: Pay surveys and research analyze and compare market rates in order
to achieve external competitiveness.
Reward management: Reward management is the development,
implementation, maintenance, communication, and evaluation of a reward
process.

40
 Unit 11: Reward Management

Reward strategy: Reward strategy defines the purpose of the organization on

how the reward policies and processes of the organization should be developed
to meet business needs.
Total remuneration: The sum of base pay, variable pay, and the value of
employee benefits and pension constitute total remuneration.

11.14 Self-Assessment Test

1. Reward management has become an integral part of HRM. What are the ways
in which rewards management is linked with HRM?
2. How would you conceptualize a rewards strategy?
3. What is the purpose of a rewards strategy? What would be the characteristics
of an effective rewards strategy?
4. The philosophy of rewards management is to satisfy the needs of the
employees and identify them as the shareholders of the organization. What
would be the components of such a rewards management process?

11.15 Suggested Readings/Reference Material

1. John Shields, Jim Rooney, Michelle Brown, Sarah Kaine; Managing
Employee Performance and Reward: Systems, Practices and Prospects, 3rd
Edition, Cambridge University Press, 2020
2. Susan L. Verhulst, David A. DeCenzo, Rama Shankar Yadav; Human
Resource Management, 13th Edition, Wiley, 2021
3. Durai Pillai, Total Reward Strategy: Retain Your Best Talent, 1st Edition,
Notion Press, 2020
4. Stephen J Perkins, Sarah Jones, Reward Management: Alternatives,
Consequences and Contexts, 4th Edition, Kogan Page, 2020
5. Kevin R. Murphy, Jeanette N. Cleveland, Madision E. Hanscom,
Performance Appraisal and Management, Sage Publications, 2020

11.16 Answers to Check Your Progress Questions

1. (d) By ensuring greater transparency and consistency
By ensuring greater transparency and consistency, reward management
attempts to achieve its goals.
2. (b) Reward strategy
The rewards strategy sets out the rewards policies and processes of the
organization in the context of accomplishing its business objectives.
Thus, it is concerned with how the organization would go about giving
rewards over the next two or three years. According to Armstrong,
“Reward strategy provides specific directions on how the organization

41
Block 4: Compensation and Reward Management

will develop and design programs that will ensure that it rewards the
behavior and performance outcomes that support the achievement of its
business goals”.
3. (c) Linear
Theoretically, the formation of a reward strategy can be conceived as a
linear process.
4. (e) Trade union needs
Trade union needs are not considered in the recent shifts in the reward
strategy of an organization.
5. (a) Achieving the best fit
The new approach toward reward strategy is much more practical. It
gives greater importance to achieving the best fit with the organization,
instead of going after a conventional best practices approach.
6. (a) Market rate and internal equity of pay in the organization
There is often a conflict between the need to match market rates and the
desire to maintain an internally equitable pay structure. The market
sometimes determines the pay of the individuals. Any company that has
to attract and retain valuable employees that have high market rates may,
to a degree, have to sacrifice its ideals of internal equity to the realism
of the marketplace.
7. (a) Communication and involvement
Transparency can be achieved through involvement and communication
of the employees in the reward setting process.
8. (e) Praise and recognition
Praise and recognition are non-financial incentives.
9. (a) Pay structures
Pay structures provide the frameworks within which levels of pay for
jobs and the differentials can be described.
10. (a) The relationship between the actual and policy rates of pay as a
percentage
Compa-ratios measure the relationship between the actual and policy
rates of pay as a percentage.

42
 Unit 12
Performance Management and Compensation
Structure
12.1. Introduction
12.2. Objectives
12.3. Components and Objective of Compensation Management
12.4. Role of Work analysis- Work Evaluation in Deciding Compensation
12.5. Components of CTC
12.6. Diagnosing the Current Situation
12.7. Market Comparisons
12.8. Preparing Compensation Revision Plans
12.9. Tax Considerations
12.10. Pension Plans
12.11. Executive Compensation
12.12. Different Types of Compensation
12.13. Summary
12.14. Glossary
12.15. Self-Assessment Test
12.16. Suggested Readings/Reference Material
12.17. Answers to Check Your Progress Questions
“The best compensation for doing things is the ability to do more.”
- Napoleon Hill

12.1 Introduction
As has been popularized by Napoleon Hill, productivity in relation to the
compensation starts with employees feeling valued which in turn elevates
employee motivation. In the previous unit, the focus was on the concept of reward
management and its process and relationship with HRM. Further, the legal issues
in reward management were also discussed.
Compensation refers to the returns employees receive for their contributions to
the company and can be both financial and non-financial. These returns are of
different types and may be both financial and non-financial. Compensation
management is also known as wage and salary administration, reward
management and remuneration management.
Block 4: Compensation and Reward Management

The basic aim of compensation management is to establish and implement sound

policies with regard to employee compensation. The objectives of performance
management are closely related to reward systems. The important objectives of
performance management are to provide valid information regarding employees,
to take managerial decisions with respect to employees’ salary adjustments,
promotions, retention or termination, recognition of excellent performance,
identification of poor performers, layoffs and giving merit incentives.
In this unit we would discuss about the objectives and components of
compensation and the essentials of preparing compensation revision plans.
Further the unit would focus on different types of compensation.

12.2 Objectives
After studying this unit, you should be able to:
 Describe the basics of compensation management
 Explain work analysis
 Analyze the impact of cost to company
 Appraise the preparation and communication of compensation revision plan
 Examine the intricacies of executive compensation plans

12.3 Components and Objectives of Compensation Management

Different people view pay in different ways. For some pay is a measure of justice,
for some employers it is an expense and for employees it is a return for the
services rendered. Some consider it as a reward for the job done
Compensation is what employees receive for their contribution to the
organization. The generally accepted meaning of compensation is all forms of
financial returns, tangible services and benefits employees receive as a part of an
employment relationship.
These returns are two types - total compensation, which includes cash
compensation and benefits; the second one is relational returns that include
recognition, security, challenging work and learning opportunity
12.3.1 The objectives of Compensation Management
The objectives of compensation management are:
 Compensation should be equitable and each person should be paid fairly and
fair treatment is to be given for all employees, taking in to consideration their
efforts, abilities and training.
 Compensation should be such that it attracts and retains talented employees.
 Balanced-pay benefits and other rewards should provide a justifiable reward
package. It should strike a balance between the needs of the employees and
the capabilities of the organization.

44
 Unit 12: Performance Management and Compensation

 Compensation should be cost effective. The pay should be such that it is

within the affordability range of the company. It should be optimum with a
linkage to performance and affordability.
 Compensation should be able to meet the basic needs of the employee and
secure enough to lead a dignified life.
 Compensation should be such that it enhances performance and efficiency of
the employee and increases quality of the products and services.
 Compensation should be in compliance with government laws and
regulations, and if global, compliance with all laws of other countries.
 Compensation should motivate employees for superior performance and
productive work.
 Compensation should be consistent and acceptable to the employees and
should take into consideration the internal factors like the criticality of the job
and performance of the employee and externally it should be at par with
industry. The employee should feel that the compensation is reasonable and
worthy.
Figure 12.1 shows total returns for work.
Figure 12.1: Total Returns for Work

Total Returns

Relational
Returns

Total
Recognition
Compensation
and Status
Learning
Opportunities
Employment
Benefits Security
Cash
Compensationn
Allowances Challenging
Work
Long-term Income Work/Life
Base Incentives Protection Focus

Merit/Cost of Short-term
Living Incentives

Source: George Milkovich, Jerry Newman, Carolyn Milkovich: Compensation, McGraw-Hill

Education, 9th Edition, 2008

12.3.2 Components of Compensation

The components of compensation are:
 Wage and salary: This is the fixed pay.
 Incentives: This refers to the additional payments to employee besides wages
and salary often linked with productivity and performance.

45
Block 4: Compensation and Reward Management

 Fringe benefits: The fringe benefits include provident fund, gratuity and
pension, medical benefits, accident relief, health, life insurance, job uniforms,
canteen facility and the like.
 Perquisites: Perquisites or perks include company car, residential
accommodation, paid holiday trips, stock options, club membership and the
like.

Example
Over and above the easy and flexible working hours, employees at Microsoft
are provided with medical, vision and dental care, physical well-being
programs, disability support employee stock purchase plan, loan refinancing
program, group legal plan and family support care to name a few.
For more details, check out https://careers.microsoft.com/us/en/usbenefits
(accessed on 23/4/2022)

12.4 Role of Work Analysis - Work Evaluation in Deciding

Compensation
Work analysis also known as job analysis, plays a vital role in compensation
management and performance management. Work analysis is the systematic
process of collecting information that identifies similarities and differences in the
work.
Work Analysis is useful in providing:
 Information relating to the different aspects of the jobs and
 Information regarding what activities to perform in a particular job,
 Indication how to perform them,
 The skills and responsibilities to assume in order to perform them well
 Its impact in achieving the individual and organizational performance
expectations
Features of work analysis or job analysis are:
 It tries to identify the content of a job in terms of activities involved and
attributes or job requirements needed to perform the activities
 It provides information to organizations which helps to determine which
employees are best fitted for specific jobs.
 It helps to understand what the important tasks of the job are, how they are
carried out
 It enumerates the necessary human qualities needed to complete the job
successfully
 Job analysis involves the analyst describing the duties of the incumbent
 Job analysis deals with the nature and conditions of work

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 Unit 12: Performance Management and Compensation

 Job analysis is crucial for first, helping individuals develop their careers, and
also for helping organizations develop their employees in order to maximize
talent.
 The outcomes of job analysis are key influences in designing learning,
developing performance interventions, and improving processes.
 It helps to develop programs to recruit, select, train, and appraise people for
the job as it will exist in the future.
In simple terms, the deliverables of job analysis are job specification and job
description which provide the following details:
 The purpose of the job
 The physical and mental activities the worker undertakes
 The nature of the job - The tasks and activities to be performed by the job
holder
 The qualifications required by the job holder to perform the job
All this helps in fixing compensation for each job.
The three Ps of Compensation Management are:
1. Compensation for Position - Takes into account the qualifications, education
and training one possesses to offer a particular position
2. Compensation for Person - To determine the pay structure that is both
equitable and competitive. The competencies of the person are important
here.
3. Compensation for Performance - The basis for fixing a pay is the
performance of the person-how well he/she performed or reached the targets.
Work Evaluation in Deciding Compensation
Different wages/salaries are paid to different worth of jobs. The relative worth of
a job means relative value produced. Depending upon different responsibilities,
skills, efforts, and working conditions, compensation is decided.
Job is evaluated on the basis of the following factors:
 Know-how - Includes technical, human and managerial know-how
 Problem-solving and Accountability - How much accountability rests with
the job
 Education - How much knowledge is required
 Experience - How much experience is required to handle the job
 Complexity of the job - How much time is taken for learning and adapting to
the work and how complex the job is to handle
 Scope of job - The length and breadth of the job
 Supervision received - How much guidance is required
 Authority exercised - How much authority is vested with the job

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Block 4: Compensation and Reward Management

All these factors are required to determine and evaluate a job for which
appropriate techniques are to be used.
Job Evaluation Techniques
There are three ways in which jobs are generally evaluated.
1. The Point Method - In point method each factor is defined and assigned
certain points based on the value the factor carries to the company. The
relative importance of each factor is weighted to know the worth of the job.
2. Simple Ranking Plans - In this method each component is ranked from lowest
to highest to know the worth of the job.
3. Paired Comparisons - Two jobs are paired and compared and if there are
many jobs, a comparison will be made for every two jobs and valued. Jobs
with higher scores/points are considered more valuable than jobs with lesser
scores/points.

Example
Alphabet Inc’s Google had a plan to discontinue its Engineering Residency
Program that was designed for entry-level engineers from underrepresented
backgrounds. But the participants complained of “systemic pay inequities”
(Courtesy: Reuters). Then Google carried out extensive job evaluation to
address the same.
For more details, check out: https://www.reuters.com/technology/exclusive-
google-drops-engineering-residency-after-protests-over-inequities-2021-06-
22/ (accessed on 23//4/2022)

12.5 Components of CTC

It is a known fact that compensation is closely associated with performance of
employees. Organizations analyze how much they have to spend on an employee
for getting the required performance. This type of analysis continues till the
employee retires because cost to company (CTC) and performance of an
employee are positively correlated.
Cost to Company- CTC is the amount that costs the company or the amount the
company spends – directly or indirectly – because of employing the person.
Thus, CTC is the money given to employee plus the money spent by the company
because of employing the person, which is inclusive of salary paid to the
employee plus deductions. To understand clearly, let us explain the terms
associated with CTC:
 Gross Salary - Amount of salary paid after adding all benefits and allowances
before deducting tax.
 Net salary - It is generally the take home salary after deductions made by the
employer.

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 Unit 12: Performance Management and Compensation

 CTC - The cost incurred by the employer, in other words, all the costs
associated with an employment contract. CTC includes compulsory
deductions or contributions made by the company like Provident Fund,
Medical Insurance and expenses incurred for hiring, maintaining and
retaining the employee.
Let us look at the components of CTC:
 Basic Pa y - Fixed compensation paid as basic salary
 Dearness Allowance (DA) - refers to allowances paid to employees in order
to face the increasing dearness of essential commodities
 Allowances - include Incentives or bonuses, Conveyance allowance, House
Rent Allowance (HRA). Medical allowance, Leave Travel Allowance or
Concession (LTA/LTC), Vehicle Allowance, Telephone / Mobile Phone
Allowance and Special Allowances All the above are a part in-hand salary,
and therefore, are a part of CTC pay as well.
 Deductions - Include deductions like Provident Fund, Medical Insurance.
Generally, an employee has to contribute 12% of basic salary towards
provident fund (PF). Employer makes an equal contribution (12% of the
basic). PF is an expense that a company incurs on the employee every month.
PF rules vary from company to company as also according to the rules
stipulated by the government.
 Performance–Linked Pay - Many companies pay their employees, generally
annually, on the basis of productivity and performance of the employee.
 Taxes – Deductions are made and credited to the Income Tax department
The Ministry of Labour and Employment, Government of India has, with effect
from 1 September 2014, brought into force several important amendments to the
following existing schemes:
These amendments have enhanced the applicability, scope and benefits provided
to employees under the EPF Act. It has also increased the liability of the
employers who would now be responsible to enroll additional eligible employees
and to contribute on the increased statutory wage ceiling.

Example
In 2021, McDonald’s Corp announced its performance-linked pay for its
managers. It tied its executive bonuses to diversity and inclusion goals.
For details, check out https://economictimes.indiatimes.com (accessed on
23/04/2022)

12.6 Diagnosing the Current Situation

It is essential to diagnose the current situation for taking up decisions with regard
to performance and enhancing the compensation of employees.

49
Block 4: Compensation and Reward Management

For taking critical decisions and taking up action plans for future development,
organizations conduct current situational analysis. In the context of compensation
management, current situational analysis refers to the analysis of current
compensation system so as to develop a compensation strategy for future
development. Preparing a comprehensive and impartial compensation structure is
key to attracting and retaining talent. For this, the current situation needs to be
analyzed. It comprises the following steps:
1. Assessing the existing internal environment- getting up-to-date information
on important aspects of job in line with:
a. Job positions
b. Job description for each position
c. Job rating of each position
d. Employee’s current pay
2. Analysing employee data in terms of:
a. Number of vacant positions
b. Number of requirements position wise
c. Present salaries paid
d. SWOT analysis of the employees
3. Market comparison to identify:
a. Current rate paid to similar positions in other organizations in the same
industry.
b. Skill shortage
c. Compare present rate with market rate
d. Find average pay rate through statistical analysis-regression line
4. Actionable to examine:
a. The gaps
b. Action-orientation to bridge the gaps
c. Pay equity and framing rational pay policies
d. Adapting internally equitable and externally competitive philosophy
and practice for paying employees

Example
As per the reports of moneycontrol, Cognizant attrition rate touched record
high of 31%; and the company made 100,000 lateral hires in 2021. Jan
Siegmund, CFO of Cognizant said that these costs weighed on its results for
the next several quarters as management focuses on comprehensive initiatives
like job promotions, job rotations and many more. This serves as an illustration
for pay revisions.
Source: ICFAI Research Center

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 Unit 12: Performance Management and Compensation

12.7 Market Comparisons

Organizations keep a constant watch on prevailing market rates for specific jobs.
In other words, organizations analyze how much is to be paid for different jobs
requiring different types of efforts and performance. Prevailing market rates are
taken in to consideration before fixing compensation for different jobs.
Enterprises are driven by market forces. Each job hence has a market rate and it
is common for every job holder and also every job provider to compare
compensation with the market rate. Companies determine compensation of
employees in relation to market price, depending upon their internal factors.
Accordingly, they are classified in three ways:
 Market Lead- where employees are compensated higher than market rate
 Market Lag- where employees are compensated lesser than the market rate
 Market Match-where employees are compensated at par with market rate
Generally, companies rely on standard company surveys and keep them as a
benchmark for fixing compensation of employees. Company surveys provide
information about competing companies and company practices. Companies try
to integrate internal job structure with external market pay rates.
Market comparisons help the organizations in:
 Hiring and retaining competent employees
 Promoting worker productivity
 Developing an adequate and acceptable pay structure
 Recognizing market trends in the market place
 Defending pay practices in a court of law

Example
In the annual “Googlegeist” survey 2022, Google workers gave their employer
particularly poor marks on compensation compared to pay for similar jobs at
other companies. Employees also said that they face growing bureaucracy that
slows them down, survey results showed.
For details, check out https://www.cnbc.com/2022/03/14/ (accessed on
23/4/2022)

Check Your Progress - 1

1. Which of the following comes under relation returns of compensation
management?
a. Bonus
b. Increment
c. Challenging work
d. Incentive
e. Salary

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Block 4: Compensation and Reward Management

2. Ramesh, MD of company X was provided with the facility of company car

to and fro from his home. To which category of compensation this facility
belongs to?
a. Wages
b. Incentives
c. Fringe benefits
d. Perquisites
e. Bonus
3. Ram before joining an MNC was briefed by his boss on what is to be done
and how it is to be done in his job. What was the boss trying to explain to
Ram?
a. Job description
b. Job specification
c. Job analysis
d. Job evaluation
e. Job briefing
4. Which of the following is referred to the amount of salary paid after adding
all benefits and allowances before deducting tax?
a. Net salary
b. CTC
c. Gross Salary
d. Compensation
e. Total salary
5. Zarina Begum, B. Pham with three years’ experience in Ranbaxy is being
paid a compensation of INR 80000 per month. She tried to analyze her
compensation and found that in a pharmaceutical company a person with
similar qualification and experience is being paid INR. 65000. Which of the
following is the compensation plan in Ranbaxy?
a. Market lead
b. Market lag
c. Market match
d. Market ego
e. Market trend

12.8 Preparing Compensation Revision Plans

After making market comparisons, compensation revision plans are to be
prepared. Comparisons tell the gaps in compensation components. One has to
identify not only the financial aspects but also the existing gaps in skills,
knowledge and competencies. These gaps negatively affect the performance of
organizations. After assessing the existing gaps, revision plans are to be prepared.

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 Unit 12: Performance Management and Compensation

Efforts should be made to attract talented people by offering competitive

compensation and retain the existing talented pool by revising their
compensation. Compensation revision plans should contain best in class
compensation which is fair and equitable. The word of caution is revision plans
should not only match with the goals and objectives of the company but also
company’s financial capabilities.
12.8.1 Communicating and Implementing Compensation Revision Plans
After revising the plans, all revision plans should be communicated to all stake-
holders. Communication should go through varied channels so that it reaches the
potential candidates.
The following steps need to be taken before communicating the revision plans to
its stakeholders:
 Preparation - A thorough preparation is required for communicating the
revision plans to the stakeholders. They should work on the points to be
communicated and be prepared to face questions from stakeholders. They
must be prepared with justifying the revision plans worked on and must be
thorough with the implications of plans. They should make sure about the
affordability of these measures to the company.
 Conducting meetings for communication - Meetings are to be conducted with
the stakeholders in an amicable and conducive environment. All their queries
should be clarified. The meetings should end with a positive note for
implementation.
 It is not always possible to communicate face to face to stakeholders. Care
should be taken to communicate to all stakeholders through different
channels.
 A consensus for implementation should be arrived at.
The following steps need to be taken for implementing compensation revision
plans:
 Serious efforts should be put for implementation of revision plans
 The revision plans should come into force in earliest possible time.
As such communicating and implementing compensation revision plans remain
as an important aspect of compensation management

Example

Tata Consultancy Services (TCS), India’s largest information technology (IT)

firm, rolled out salary hikes for all of its over 469,000 employees from April
2021 – the second raise in six months. TCS was the first IT services player to
announce salary hikes for FY22.
Source: ICFAI Research Center

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Block 4: Compensation and Reward Management

12.9 Tax Considerations

As discussed earlier, not all the compensation reaches the employee. Many
deductions take place. From the CTC, PF and taxes are important deductions that
organizations make, the former for the security during old age and the latter is
what the employee needs to pay to the Government. But while paying taxes to the
government, several considerations are given to employees.
Tax considerations are those allowances which are exempted from paying taxes.
They are known as tax exemptions or applicable deductions or tax benefits. Pay
packets are restructured in such a way that they are exempted from paying taxes.
For instance, expenses like house rent, medical, transport, education, house loans,
insurances are various examples which warrant tax concessions.
The purpose of providing tax considerations is to enable employees to have
maximum value for the given compensation package. Government stipulates
rules and regulations from time to time either to add or delete provisions for tax
payment.
Taxes are major revenue for any government. Individuals, corporate, estates,
trusts are required to pay income taxes. Taxable income is the difference between
the gross income and deductions. From time to time, the calculations of income
tax are changing. The Finance Minister while presenting annual budget
underlines the tax exemptions, which are applicable for that financial year, which
starts from 1st of April.
Tax exemption calculations vary depending on gender, marital status and number
of dependents. Likewise, nature of capital gains and also nature of business/work
undertaken also impact tax deductions.
Exhibit 12.1 illustrates the income tax slabs for FY 2022-23.

Exhibit 12.1: Income Tax Slabs for FY 2022-23

The finance minister, Nirmala Sitharaman, did not announce any change in the
tax slabs or rates in Budget 2022.
Income Tax slabs and rates for resident individuals are as follows:
 For income upto Rs. 2.5 lakh – Nil
 From Rs. 2,50,001 to Rs. 5,00,000 - 5%
 From Rs. 5,00,001 to Rs. 7.5 lakh - 10%
 From Rs. 7,50,001 to Rs. 10 lakh -15%
 From Rs. 10,00,001 to Rs. 12.5 lakh - 20%
 From Rs. 12,50,001 to Rs. 15 lakh - 25%
 From Rs. 15,00,001 and above - 30%
Contd….

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 Unit 12: Performance Management and Compensation

Tax rebate of up to Rs. 12,500 is available to an individual taxpayer under

section 87A of the Income-tax Act, 1961. This would effectively mean that
individuals having net taxable income of up to Rs. 5 lakh would not pay any
income tax.
A cess at the rate of 4 percent is added on the income tax amount. Further
surcharge is levied at different income tax rates if the total income exceeds Rs.
50 lakh in a financial year.
Under the old income tax regime, basic tax exemption limit for an individual
taxpayer depends on their age and residential status. However, in the new tax
regime, the basic exemption limit is Rs. 2.5 lakh in a financial year.
Source: https://economictimes.indiatimes.com/ (accessed on 24/04/2022)

12.10 Pension Plans

A retirement plan is a financial arrangement designed to replace employment
income upon retirement. These plans may be set up by employers, insurance
companies, trade unions, the government, or other institutions.
Retirement Plans in USA
The Employee Retirement Income Security Act of 1974, or ERISA, is a federal
law that sets minimum standards for pension plans in private industry.
The benefits of ERISA are enumerated below:
 It protects the assets of millions of Americans so that funds placed in
retirement plans during their working lives will be there when they retire.
 It sets minimum standards for participation and the law specifies minimum
number of years of service to become eligible for participation.
 It gives participants the right to sue for benefits and breaches if violated. It
guarantees payment of certain benefits if a defined plan is terminated.
There are three kinds of retirement plans.
1. Pension Plans
Pension plans are deferred arrangements. They are in existence for a long
time in civil service and government organizations. They provide payments
over a prescribed schedule. The actual amount of the pension depends on the
employee’s base pay and length of service. Pension plans are two types -
defined benefits plan and defined contribution plan.
 Defined benefits plan – Under this plan an employee’s pension is
calculated on average earnings in the highest 3 years of employment
multiplied with 2% times the total years of service. It is not unusual for
an employee with around 30 years of service to receive 50 to 60% of his
salary as pension under this plan.

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Block 4: Compensation and Reward Management

 Defined contribution plan  Under this plan, an employee’s pension

depends on the actual amount contributed and the increased earnings of
the invested funds. For example, if an employee contributed 5% of his
salary with around 30 years of service, he will receive 15% of his salary
as pension.
Retirement Plans in India
Pension plans in India are intended to provide financial security during old
age when people will not have a regular source of income. Retirement plan
ensures that people will be able to maintain a decent standard of living during
post retirement life. Pension plans help employees to get lump sum amount
as regular income through annuity plan on retirement by saving certain
amount during their working period.
National Pension System
NPS (National Pension System) is launched by Government of India in 2004
with a view to provide old age income and old age security to its employees.
Initially in 2004, it was applicable to new entrants of Central Government
services except the Armed Forces. Later State Governments also followed the
suit. The scheme was made available to all citizens with effect from 1st May
2009 on voluntary basis. Since December 2011, NPS was provided to the
employees of corporate sector also.
A unique Permanent Retirement Account Number (PRAN) is allotted to each
employee upon joining NPS. NPS accumulates savings into subscribers’
accounts during the tenure of the subscriber and the accumulated amount is
used at retirement as a pension for the rest of his life.
The Government of India added in NPS a new scheme named Atal Pension
Yojana (APY) for the welfare of all citizens working in the unorganized
sector during 2015. The minimum age of joining APY is 18 years and
maximum age is 40 years.
Funding of APY-Government would provide:
(i) Fixed pension guarantee for the subscribers
(ii) Co-contribute 50% of the total contribution or Rs. 1000 per annum,
whichever is lower, to eligible subscribers
(iii) Would also reimburse the promotional and development activities
including incentive to the contribution collection agencies to encourage
people to join the APY.
Basic Issues Considered in Pension Plans are:
 Standard Retirement Age - Generally the standard retirement age ranges
between 60-65, depending on the type of organization.
 Size of benefits - The amount of benefits employees receive are increasing
from year to year as organizations take in to consideration cost of living
index and inflation rates.

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 Unit 12: Performance Management and Compensation

 Discrimination in plan design - There was discrimination earlier against

women in fixing pension rate. Many legal suits were taken up to end this
practice.
 Early Retirement - Reduced pensions are provided to people who retire
early, but with stipulated years of service.
2. Profit-sharing
It is a plan that gives employees a share in the profits of the company and under
the plan each employee receives a percentage of the profits earned by the
company. It provides a sense of ownership in the company to the employees.
For exceeding financial goals, profits are distributed equally among all
employees in proportion to their incomes. Profit sharing plans can be a
powerful tool in promoting financial security to employees after retirement.
3. Stock-bonus Plans
In a qualified stock bonus plan, employer contributes stock to the plan,
similar to that of a defined contribution plan. Many pension plans permit an
employee to receive pension to the spouse after his death as reduced pension.
Employee Stock Ownership Plan (ESOP)
An employee stock ownership plan (ESOP) is an employee-owner method
that provides ownership to employees with an interest in the company in an
ESOP. It is a contributory retirement plan, where employees participate in
corporate ownership. Companies provide their employees with stock
ownership, often at no up-front cost to the employees. ESOP shares, however,
are part of employees’ remuneration for work performed. Shares are allocated
to employees and may be held in an ESOP trust until the employee retires or
leaves the company. Under ESOP, employer contributes stock to an
employee stock bonus trust (ESOT).
ESOPs are two types -
Stock bonus ESOP: In a stock bonus ESOP, employee contributes company
stock to the ESOT.
Leveraged or leverageable ESOP: In a leveraged ESOP, the employer uses
the special privileges granted to an ESOT to obtain funding for various
purposes. The stock becomes part of an employee profit-sharing or retirement
program. Employees receive the stock upon retirement along with special tax
credits for the value of the stock the company bought for the employees.
Savings or Thrift Plan
Many organizations have developed savings or thrift plans for their
employees. Under these plans, employees set aside certain amounts of
earnings in order to have a secure and happy retirement. The organization
contributes 50-100% amount saved by the employee. These amounts are
eligible for tax exemptions. There will be a ceiling on savings, which should
not exceed 25% of the salary of the employees.

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Block 4: Compensation and Reward Management

Individual Retirement Account (IRA)

Individuals who do not participate in any retirement plans are eligible for
IRA. The employee can contribute up to $3000 under this plan and the
amount increases year by year. The contributions under IRA are tax
deductible. The IRA owner has the freedom to select his own investment
plan.
Simplified Employee Pension Plans (SEP)
SEP permits employers to establish a qualified IRA program for employees
of 25 years age. These plans are similar to qualified plans
Savings Incentive Match Plan for Employees (SIMPLE)
SIMPLE is meant for employees with less than $5000 income per month and
in a company with less than 100 employees. Employee using SIMPLE plan
should not contribute to any other qualified plan. Both employee and
employer contribute to the saving with lot of flexibility.
Keogh (HR-10) Plan
This is meant for self-employed persons such as partners or sole proprietors
for themselves or their employees. There are three types in this plan:
 Profit-sharing plan
 Money-purchase plan
 Paired-plan
Roth and Education IRAs
All incomes under this plan are tax free and there is no age limit to
contribution. The money is to be used only for education purposes.
College Savings Plan
This plan also provides enhanced options for education savings and earnings
on these plans are tax free. There are no income restrictions to participation.
Example
In July, 2021, the Chief Executive Officer of Flipkart Group, Kalyan
Krishnamurthy announced a buyback of 5% of the past three years’ vested
options leading to a spending of about 600 crores thereby enabling the
employees to liquidate up to 10% of their vested shares given by the
management in the earlier years depending upon their individual holding
pattern.
For more information, check out https://economictimes.indiatimes.com/tech/
(accessed on 23/4/2022)

12.11 Executive Compensation

Executives play a vital role in organization development; hence, their
compensation should also match their position. Executives belong to the highest

58
 Unit 12: Performance Management and Compensation

decision-making group such as CEOs, full-time Directors, Senior Managers etc.

In India and all other countries, executive compensation is a point of discussion-
how much it should be, what their components are and how it is to be fixed.
Factors affecting executive compensation are:
 Complexity of the job they hold - This complexity entails them for higher
compensation.
 Competencies required - Executives have to handle crucial situations and are
responsible for the overall development of the organization, requiring
superior competencies.
 Capacity to pay - Higher executive pay is directly related to the affordability
of the company.
 Organizational philosophy - Executive compensation depicts the image and
philosophy of the company.
 International impact - Many of the international companies look at executive
compensation for a tie-up with the organizations.
 Legal implications - Several legal implications are involved with executive
compensation.

Example
The 2021, Executive Rewards Survey in India by Aon, states that the median
CEO compensation in India ranges from Rs. 15 crores for owner promoters to
Rs. 3.63 crores to the Indian private companies, barring the long-term
incentives.
For details, check out https://www.business-standard.com/article/
management/aon-survey-projects-6-salary-hike-in-2021-for-senior-
executives-in-india- (accessed on 23/04/2022)

12.12 Different Types of Compensation

Compensation may be of different types. The same have been enumerated below:
 Seniority pay: It is a traditional practice to fix employee’s pay on the basis of
seniority or length of service. This is the essence of human capital theory
which states that employee’s knowledge and skills generate productive
capital known as human capital.
 Merit Pay: Wage increase granted to employees on the basis of performance.
It is based on subjective appraisal of employee performance. Only when
performance appraisals are conducted efficiently, merit pay has certain value.
This helps in retaining company’s valued employees.
 Lump-sum bonus: Granted for performance as one-time payment
 Incentive pay: Incentive pay or variable pay rewards employees for partially
or completely attaining a pre-determined work objective. There are three
types of incentive pays:

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Block 4: Compensation and Reward Management

 Individual incentive: It is variable pay for individual performance

 Group incentive plans: It is paid to groups for a particular achievement
 Company-wide plans: It is paid to employees for company’s performance
over a period of time
 Pay for performance: These are generally rewarded to employees for
acquiring job related competencies, knowledge or skills rather than for
demonstrating successful job performance. There are two types in it- pay for
knowledge and skill based pay. Both skill and knowledge based pay programs
reward employees when they apply their knowledge and skills productively
in their jobs.
 Gain sharing: Gains made by companies (as depicted by increased
productivity, increased customer satisfaction or better safety records) are
distributed to departments that contributed to the gains. Gain sharing is given
to the employees, usually as a lump sum bonus. There are three major types
of gain sharing:
 Scanlon plan: This is paid on the basis of labor costs.
 Rucker plan: This is paid on the basis of labour costs, raw materials and
monthly service costs.
 Improshare: This is paid for completing the work at or sooner than
production standard.
Different types of pay discussed above show that there are large number of
types and organizations, as per their norms, stipulations and rules follow any
one or few of them.

Example
In 2021, Accenture announced a week’s base salary to be paid to the employees
below the managing director and thus indicating that the IT service sector is
back on the growth path despite the ongoing Covid-19 pandemic. This serves
as an illustration for bonus.
Source: ICFAI Research Center

Check Your Progress - 2

6. Sushmita, aged 45, working for an Insurance company is paid 30000 per
month. What could be her tax deductions, considering that all her income is
taxable?
a. No tax
b. 10%
c. 20%
d. 30%
e. 35%

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 Unit 12: Performance Management and Compensation

7. Which of the following refers to the federal law that sets minimum standards
for pension plans in private industry?
a. COLA
b. IRA
c. SIMPLE
d. CODA
e. ERISA
8. What is the plan that provides ownership to employees with stock ownership?
a. COLA
b. ERISA
c. ESOP
d. CODA
e. IRA
9. Which of the following is the most important factor for calculating pension
of an employee?
a. Location
b. Size of the company
c. Large income
d. Length of service
e. Personality
10. Individuals who do not participate in any retirement plans are eligible for
which type of plan?
a. COLA
b. ERISA
c. ESOP
d. CODA
e. IRA

12.13 Summary
 Compensation management is an important component of performance
management. Compensation should be fair and equitable so that employees
lead a dignified life.
 It should be cost effective and attract and retain talented people.
 Compensation is of two types- monetary and relational.
 Compensation includes wage/salary, incentives, fringe benefits and
perquisites.

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Block 4: Compensation and Reward Management

 In addition to salaries companies offer several benefits to employees while at

work and also at retirement. -
 As executives are responsible for the major growth of the organizations,
special emphasis is given to their compensation.
 The whole unit is concentrated on the various implications of compensation
system.

12.14 Glossary
Cost to Company - CTC is the money given to employee plus the money spent
by the company because of employing the person.
Employee Retirement Income Security Act or ERISA - It is a federal law that
sets minimum standards for pension plans in private industry
Employee Stock Ownership Plan (ESOP) - An employee stock ownership plan
(ESOP) is a contributory retirement plan, where employees participate in
corporate ownership
Gain sharing - Gains made by companies as depicted by increased productivity,
increased customer satisfaction or better safety records; are distributed to
departments that contributed to the gains.
Job Analysis - Process of studying and collecting information relating to the
operations and responsibilities of a specific job.
Job Description - It tells what is to be done, how it is to be done and why. It is
an organized statement of the duties and responsibilities of a specific job.
Job Evaluation - It is a systematic and orderly process of determining the worth
of a job in relation to other jobs.
Job Specification - It specifies the minimum qualities required for acceptable
performance.
Profit-sharing - It is a plan that gives employees a share in the profits of the
company and under the plan each employee receives a percentage of the profits
earned by the company

12.15 Self-Assessment Test

1. Explain the components and objectives of compensation management
2. Discuss the importance of work analysis and work evaluation in
compensation management
3. What are the components of cost to company? Explain the same with an
example, not given in the unit
4. Discuss various pension plans
5. Critically evaluate executive compensation

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 Unit 12: Performance Management and Compensation

12.16 Suggested Readings/Reference Material

1. John Shields, Jim Rooney, Michelle Brown, Sarah Kaine; Managing
Employee Performance and Reward: Systems, Practices and Prospects, 3rd
Edition, Cambridge University Press, 2020
2. Susan L. Verhulst, David A. DeCenzo, Rama Shankar Yadav; Human
Resource Management, 13th Edition, Wiley, 2021
3. Durai Pillai, Total Reward Strategy: Retain Your Best Talent, 1st Edition,
Notion Press, 2020
4. Stephen J Perkins, Sarah Jones, Reward Management: Alternatives,
Consequences and Contexts, 4th Edition, Kogan Page, 2020
5. Kevin R. Murphy, Jeanette N. Cleveland, Madision E. Hanscom,
Performance Appraisal and Management, Sage Publications, 2020

12.16 Answers to Check Your Progress Questions

1. (c) Challenging work
Some of the relational returns of work are challenging work,
employment security, learning opportunity, recognition and status.
2. (d) Perquisites (Perks)
Perks include company car, residential accommodation, paid holiday
trips, stock options, club membership and the like.
3. (a) Job description
It tells what is to be done, how it is to be done and why. It is an organized
statement of the duties and responsibilities of a specific job.
4. (c) Gross Salary
Amount of salary paid after adding all benefits and allowances before
deducting tax.
5. (a) Market Lead
where employees are compensated higher than market rate.
6. (b) 10%
Females earning between 2.5-5 lakhs are taxed at the rate of 10%.
7. (e) ERISA
Federal law sets minimum standards for pension plans in the private
industry through ERISA
8. (c) ESOP
An employee stock ownership plan (ESOP) is a contributory retirement
plan, where employees participate in corporate ownership

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9. (d) Length of service

Income last drawn and length of service are important factors for
calculating pension.
10. (e) IRA
Individuals who do not participate in any retirement plans are eligible
for IRA.

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 Unit 13
Job Evaluation and Pay Structure
Structure
13.1 Introduction
13.2 Objectives
13.3 Concept and Definition of Job Evaluation
13.4 The Need for Job Evaluation
13.5 Methods of Job Evaluation
13.6 Importance and Objectives of Pay
13.7 Pay Structure
13.8 Broad Banding
13.9 Summary
13.10 Glossary
13.11 Self-Assessment Test
13.12 Suggested Readings/Reference Material
13.13 Answers to Check Your Progress Questions

“It is difficult to get a man to understand something when his salary depends
upon his not understanding it”
- Upton Sinclair

13.1 Introduction
As has been popularized by Upton Sinclair, deciding the worth of the job relative
to other jobs in the organization would help formulating appropriate pay structure
in the organization and elevate the motivation and morale of the employees. In
the previous unit, we have examined compensation management as an important
component of performance management.
Job evaluation is the formal process of deciding the relative worth of the job.
Subsequently, the pay structure gives the framework for implementing the pay
policies through the organization.
This unit will focus on the concept of job evaluation followed by discussion on
the various methods of job evaluation. The unit closes with a comprehensive look
at the concept of pay and its related components, such as pay structure and broad
branding.
Block 4: Compensation and Reward Management

13.2 Objectives
After studying this unit, you should be able to:
 State and explain the concept of job evaluation
 Examine the need for job evaluation
 Enumerate the objectives of job evaluation
 Explain the methods of job evaluation
 Justify the importance of pay
 Describe the concept of broad banding

13.3 Concept and Definition of Job Evaluation

Job analysis describes the duties of a job, authority relationships, skills required,
conditions of work, and additional relevant information. Job evaluation, on the
other hand, uses the information derived through job analysis to evaluate each job
– each component is valued and the relative job worth ascertained
Job evaluation is a process of determining the relative worth of the various jobs
within the organization, so that differential wages may be paid to jobs of different
worth.
Process of job evaluation is explained below:
 It rates jobs in order to determine their position in the job hierarchy. This
evaluation may be achieved through a formal assignment of points to
different jobs or through evaluating skills, experience, and responsibility of
the person concerned.
 During the process of job evaluation, various positions are analyzed and
described. These are then grouped in order to determine their relative value
through a comparison of the duties of different positions in terms of their
different responsibilities and other requirements. In other words, it can be
said that job evaluation involves the quantitative measurement of the relative
job worth for the purpose of establishing consistent wage rate differentials
through objective means.
It should be emphasized that job evaluation does not consider the performance of
an individual on the job. It does not look at how well the individual performs the
job. This also means that job evaluation is 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.
Example
Virgin Media Inc is a UK-based company that provides broadband internet
services to fixed/mobile telephone and television for consumers and businesses
as well.
Contd….

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 Unit 13: Job Evaluation and Pay Structure

Virgin Media was successful in expanding to different markets as its works

adapt to changes quickly keeping organization ahead of their competitors. For
designing competitive pay structures, Virgin Media continuously assesses the
skills of its workforce. It measures the number of workers who underwent
training, lists their qualifications, skills, competencies and experiences for
future plans with respect to recruitment, training to name a few.
Source: ICFAI Research Center

Activity 13.1
Job Analysis
You have been appointed as recruitment specialist in Synchrony Financial, a
financial software and business analytics company. You were asked to analyse
the job of a Data Scientist for the organization. Please describe it.
Answer:

Check Your Progress - 1

1. Job evaluation achieves a number of objectives. Which of these would be
true?
i. Ranking of jobs in the hierarchy.
ii. Determining the worth of various jobs in the organization.
iii. Grouping of jobs.
iv. Determining and comparing the demands which the normal performance
of a job makes on normal workers.
a. i
b. iii
c. iv
d. i, ii, iii, and iv
e. ii
2. Which of the following is the best way to define a job?
a. Performing an activity.
b. Getting paid for performing an activity.
c. Similar activities that are related to each other
d. Evaluating the job
e. Performing the job

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13.4 The Need for Job Evaluation

There are several reasons for the growing interest in job evaluation in recent times
and these are discussed here:
 Job evaluation is a valuable technique to evolve a more rational and
consistent wage and salary structure.
 Job evaluation brings about harmonious relations between labour and
management through elimination of wage inequalities.
 Given the mechanization and automation in industry, it has become
unrealistic to pay workers primarily on the basis of their output. Job
evaluation is of use in fixing realistic wages.
 Job differentials should not to be based on skill differences alone: various
factors such as risks and working conditions should also determine the worth
of jobs.
 Job evaluation keeps down the cost of recruitment and selection of workers.
Selection can be made objective by matching the qualifications of the
candidate with job requirements.
 The process of determining the wage differentials for different jobs becomes
standardized through job evaluation.
 An increasingly dynamic economy requires continuous job evaluation.

Example
Gravity Payments, a credit card payment processing company located in
Seattle, US believes that income of a person directly influences his emotional
health, and generally employees who earn less would be happy if a little extra
money was given and improves the motivation and morale of the employees.
It pays competitive salaries to its customer service representative, salesmen
and clerks despite the fact that it put a toll on the company’s profits.
Source: ICFAI Research Center

Check Your Progress - 2

3. Job evaluation is done to set wages and salary on the basis of the relative
work or jobs in the organization. In this context, what do you think job
evaluation facilitates?
a. Working conditions of employees
b. Standardizing the work capacities of employees
c. Standardizing effort
d. Standardizing the development of employees
e. Standardizing the performance of an individual

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13.5 Methods of Job Evaluation

Whenever possible, pooled or combined evaluation is the best way of setting the
rates of wages within a firm. A decision must be made concerning what groups
of jobs are to be covered by a single evaluation system.

Essentials of job evaluation are:

 A clear and accurate job description and specification must be available to

provide data concerning the factors to be measured.
 It must be noted that during evaluation, it is the job that has to be rated and
not the employee.
 In deciding how much money a particular job is worth, there is always a
temptation to be influenced in one’s judgment by the qualifications and
caliber of the individual who is present while doing the job.

Example

At McDonald’s, the job responsibilities of crew members include attending to

individual needs and delivering services fast and compassionately. Crew
members are given training on cleanliness and hygiene requirements to
maintain high standards in the restaurant. Before direct entry into service
section, they are also trained on how to use utensils and cleaning products
(chemical) and taking correct and necessary precautions while using
equipment.

Source: ICFAI Research Center

The job evaluation method can be classified into two main types depending on
the comparison method used:
 Non-analytical method in which whole jobs are examined and compared
without being analyzed into their constituent parts or elements.
 Analytical method in which jobs are analyzed by reference to one or more
criteria, factors, or elements.
In both these means of comparison, there are two bases on which comparisons
are made:
 Job-job where judgments are based on a direct comparison between one job
and another, and
 Job-scale where the judgments are made by comparing each job with a set
scale.

Job evaluation methods are classified as non-quantitative methods and

quantitative methods. Let us discuss the same in detail.

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13.5.1 Non-quantitative Methods

The non-quantitative methods of job evaluation along with their relative merits
and demerits are discussed below:

Ranking or Job Comparison

This is perhaps the simplest method of job evaluation.

Process of ranking or job comparison is as given below:

 Here, the total or whole job is ranked against other jobs on the basis of
difficulty level.
 No measurable points or score values are assigned.
 It is simply arranging the job in a hierarchy. Since the job as a whole is taken
into consideration, no attempts are made to break each job into its composite
segments.
 First, ranking is done by functional areas, and then they are combined for
developing an organization level system.
This method is useful in small organizations with a relatively flat structure.
The most obvious limitation of the ordering method is the sheer inability to
manage it as there are a large number of jobs in an organization. It is virtually
impossible to do the ranking correctly. Other drawbacks are the subjectivity of
the method – there are no definite or consistent standards by which to justify the
ranking and employees have no knowledge of the distance between the ranks.

Internal Benchmarking
Internal benchmarking is done intuitively, in order to decide on the value of jobs.
The method is used more in smaller organizations that have few formal personnel
policies. Usually in this method, a job which is believed to be properly graded
and paid is taken as a benchmark and all other jobs which are to be reviewed are
compared with it. The comparison is made on a whole job basis without analyzing
the job factor by factor. This is referred to as job slotting. This method can lead
to equal pay problems.
Advantages of internal benchmarking system are:

 It is realistic in nature.
 Is simple to implement
 It recognizes that this is a natural way of valuing jobs.
 It can produce reasonable results as long as it is based on the comparison of
accurate job or role descriptions and is done by people who are familiar with
the work involved and its relative complexities.

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Disadvantages of internal benchmarking system:

 It relies on judgments which may be entirely subjective, may confirm implicit

prejudices, and could be hard to justify if tested analytically.
 It is dependent on the identification of suitable benchmarks that are properly
graded and paid, and such comparisons may only perpetuate existing
inequities and discrimination.
 It would not be acceptable in cases of equal value.

Job Classification Method

This method consists of first identifying classes, categories, or grades.

Following explains the process of job classification:

 Once the classes or grades are identified, their level of difficulty is identified
by defining their specifications and then the individual jobs are classified in
those categories/grades.
 The individual jobs may come from various functional areas with common
responsibilities and work.
 The classification is sometimes also created by identifying such common
denominator-skills, knowledge, and responsibilities, the desired goal being
the creation of a number of distinct classes or grades of jobs.
 Once the classification has been established, the categories are ranked in an
overall order of importance according to the criteria chosen, and each job is
placed in its appropriate classification.
 Compensation levels for each grade/category are allocated and employees
working in various departments and sections may end up with the same
compensation level as long as they belong to same grade/category.
Though the classification method has proven successful and viable in classifying
millions of kinds and levels of jobs in the civil service, it suffers from
disadvantages of writing classification, description, judging which job goes
where and dealing with jobs that appear to fall into more than one classification.

13.5.2 Quantitative Methods

The quantitative methods are discussed below:

Point Rating Method

Administration of point rating method is elaborated below:

 This method of job evaluation consists of first developing key compensable
factors based on which each job must be evaluated.

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Block 4: Compensation and Reward Management

 The collection of these key factors is called a manual or yardstick. These

manuals can be developed on the basis of the organization’s own experience
or on those developed through industry-wide effort by various organizations.
 Each of these key compensable factors has a scale value which defines the
degree to which the factor is present in the job.
 Each job is rated on these key factors and a value assigned.
 At the end of this exercise, the values of each factor are added to get a total
score which is then converted into a compensation level.
Factor Comparison Method
This method is complicated and expensive. It requires consultation with experts
and specialists for the comparison and appraisal of jobs to assign weights on key
factors.
Process of factor comparison is given below:
 The current rate of pay is used to derive weights for each element of
compensable factors in the key jobs.
 After all the key jobs have been analyzed, weights are assigned to the
elements by taking an average on the key jobs.
 Thus the money value of one factor in one job is compared to the money value
of the same factor in another job. This is what makes this method more
acceptable because it is based on the established compensation structure. It is
not as arbitrary as the point system
Thus, we see that methods of job evaluation are based on the judgments of those
that evaluate the jobs. This sometimes leads to disagreement about the quality and
nature of the evaluation being carried out. However, given the absence of more
scientific techniques, they are the best approaches available. In fact, with
sophisticated software, the methodology can be fine-tuned to give more objective
results.

Check Your Progress - 3

4. Of the following, which is the simplest method of job evaluation: Internal

benchmarking, job comparison, job classification, job segmentation?
a. Job classification.
b. Job comparison
c. Job segmentation
d. Internal benchmarking
e. Job evaluation

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5. Which of the following can turn into a disadvantage for the Internal
Benchmarking system?
a. The handling of cases where jobs have a different value
b. The absence of factors in grading
c. Use of suitable benchmarks that are properly graded
d. Internal benchmarking being an intuitive process
e. Objective judgements
6. Which of the following methods involves the development of key
compensable factors that are called a manual or yardstick?
a. Internal benchmarking
b. Job classification
c. Point rating
d. Factor comparison
e. Job evaluation

13.6 Importance and Objectives of Pay

Pay is among the most important yet contentious elements in the employment
relationship. Given its unique role, it has always been of substantial interest to
both the employer and the employees. The Government also monitors the pay
levels in various organizations.
The following points enumerate the importance of pay:
 Pay is important for an employer because it forms a significant part of the
costs of running the organization. This has implications for the performance
of the firm as well as its competitiveness. It also affects an organization’s
ability to recruit and retain a labor force.
 Pay is important to the employee as it represents the value of his/her
performance to the organization and is a measure of the value of his services
or performance.
 Pay is important for the government as well as it has implications for the
overall level of purchasing power and prosperity of the workforce of the
country.
Pay determination can have one or more objectives, which may often be in
conflict with each other. The objectives of pay determination can be classified
under five broad headings:
 Establishing Equity: Pay helps establish equity in the organization, which
may translate into raising the wages of the lowest paid employees and the
concept of equal pay for work of equal value.

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 Establishing Efficiency: Pay helps to establish efficiency which links a part

of the wages to productivity, profit, or group or individual performance.
Arrangements to achieve efficiency are related to equity as the firm should
reward performance.
 Existence of motivated workforce: Pay is an important hygiene factor in
Herzberg’s theory of motivation. This means that an appropriate level of pay
should exist in order to prevent dissatisfaction among the employees.
 Act as a Mechanism to Control the Growth of Pay: This will ensure that a
substantial amount of costs (ie, pay) of the organization, is kept under check.
 A Matter of Prestige: Pay is a matter of prestige for the company. A good pay
system is a hallmark of a well-functioning organization that helps it to attract
and retain talent.

Example
The onset of Covid-19 and the resultant reverse migration of unskilled and
semi-skilled labour, have increased the daily wage rates from INR 250 to INR
350-400 as of April, 2021. The minimum wage in India comes under the
purview of The Minimum Wages Act, 1948 with amendments as per Code on
Wages Act, 2019 that determines the irreducible amount that is necessary for
the bare sustenance of the worker and his family along with the preservation
of his efficiency at work. This illustrates the importance of establishing equity.
For details, check out https://www.india-briefing.com/news/guide-minimum-
wage-india-2021-19406.html/ (accessed on 25/4/2022)

13.7 Pay Structure

The pay structure provides a framework within which an organization defines the
different levels of pay for jobs or groups of jobs. The pay structure is based on
the assessment of the relative internal valuation and external valuation of the job.
13.7.1 Objectives of the Pay Structure
The pay structure has the following objectives:
i. It should establish an appropriate framework for the implementation of fair,
equitable, and consistent reward policies.
ii. The pay structure should facilitate determination of the appropriate levels of
pay for both jobs and people.
iii. The pay structure should act as a basis for monitoring and controlling the
implementation of pay practices.
iv. Last, it should enable organizations to communicate to the employees the pay
opportunities that are available.

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13.7.2 Characteristics of the Pay Structure

The characteristic features of pay structure are enumerated below:
i. The pay structures contain pay ranges for jobs which are grouped into various
grades, individual jobs, or job families.
ii. Pay structures point to the existing rates of pay for different jobs.
iii. They enable pay progression which is in accordance with the performance
and competence of the employee.
13.7.3 Types of Pay Structures
There are various types of pay structures. Each structure has a different way of
operating. The main types are:
a) Graded Structures
These are conventional pay structures. These consist of a sequence of job
grades in which jobs of broadly equivalent value are placed. The same has
been explained below:
 Each grade has a pay range.
 The maximum range is between 20 percent and 50 percent above the
minimum pay.
 The pay range gives the scope for pay progression. Typical pay structures
consist of between 6 and 15 grades
 The grades are defined through job evaluation which is in terms of points.
The jobs can also be put into grades through the differentials between the
pay ranges.
b) Broad Banded Pay Structures:
The broad banded pay structure has a range of pay which is higher than in a
conventional graded structure. The same has been explained below:
 The band width is quite large and sometimes exceeds 100 percent.
 Band boundaries are defined by job evaluation. A combination of both
job evaluation and market rate analysis can be done.
 The bands are given by their generic roles and not hierarchy.
 A broad banded structure gives room for horizontal room in the band, on
the basis of activities, contribution, and competence.
 In this structure, pay progression and career development do not always
come from being promoted to higher grade.

Example
Toyota had a unique system of job classification where hierarchy of pay
grades or salary ranges were compressed into small number of wide bands.
Each band thus consisted of a wide range of jobs and salary levels.
Contd….

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Block 4: Compensation and Reward Management

There were only 3 plant job classifications such as Division I – all

production members, Division II – all general maintenance team members
and Division III – all tie and dye members. This serves as an illustration
for broad banding.
Source: ICFAI Research Center

c) Job Family Structures

A job family consists of related jobs that deal with a similar type of work.
The same has been explained below:
 They also require similar knowledge, skills, and abilities. For instance, a
‘Financial’ job family can consist of a number of related jobs such as
investment analyst and accountant.
 Each job family will have its own structure which is graded in terms of
responsibility, skill, or competence.
d) Spot Rate Structures
This is the individual job rate which allocates a specific rate for a particular
job. These rates can be set through job evaluation or through market rates.
The same has been explained below:
 There is no scope for the basic rate for the job to progress through a
defined pay range.
 Job holders can receive a bonus or other forms of incentive payment on
top of the base rate.
e) Pay Spines
These consist of incremental pay points extending from the lowest to the
highest-paid jobs in the structure. The same has been explained below:
 Each spine has a minimum and maximum, with progression based on
service.
 The increments may be standardized. For instance, there may be an
increment at a standard rate of three percent all through the spine. On the
other hand, the increments can be such that they are wider at higher
levels.
 Pay scales for different job grades can also be superimposed on the spine.
Pay spines are usually found in the public sector undertakings.
f) Pay Structure for Manual Workers
This pay structure is used for workers that perform manual tasks. For
instance, this rate would be paid for employees who do distribution and
transportation. The same has been explained below:

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 Unit 13: Job Evaluation and Pay Structure

 This pay structure can be arrived at by national, local, or plant

negotiations with the existing trade unions. In case the firm is not
unionized, the contract the individual makes determines the pay structure.
 It may include numerous spot rates, i.e., fixed base rates for each job that
has similar skill or merit
 The pay structure can also be based on the day rate or flat rate. In this
arrangement, the workers are paid a predetermined rate for the time
period worked.
g) Integrated Pay Structures
The integrated pay structure covers groups of employees that are paid under
separate arrangements. The same has been explained below:
 It may include numerous spot rates, i.e., fixed base rates for each job that
has similar skill or merit.
 Job evaluation is used to arrive at an integrated pay structure.
 Under an integrated pay structure, the old system is abolished and the one
that has consolidated pay is used.

13.8 Broad Banding

Broad banding combines salary grades into a few wide bands. Each band consists
of a wide range of jobs and salary levels. Broad banding is useful since it avoids
the difficulty of making ranges for a very large number of jobs.
Broad banding is the compression of a hierarchy of pay grades or salary ranges
into a small number of wide bands. Each of these bands therefore spans the pay
opportunities previously covered by pay ranges.
Variations in broad banding structures are:
 Some broad banding structures have zones or sub-bands within bands in order
to provide guidance on the pay range for different roles that may come within
the band.
 Pay levels in broad banding can be market driven. In other cases, there may
be scrutiny in relation to market trends. Thus, the thrust can vary from internal
equity to being externally competitive.
 The decisions on pay increases depend on internal equity considerations.
There would be comparison between the pay of people with similar roles in
job cluster or job families.
Steps to achieve a broad banded pay structure are as given below:
 At the outset, there should be an agreement among the parties concerned that
broad banding is the most appropriate pay structure for progression.

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Block 4: Compensation and Reward Management

 The number of bands desired should be estimated. This can be done by

examining the organizational structure and roles at each level. Subsequently,
the size or width of the band should be determined.
 Job evaluation should be carried out to define the band boundaries and devise
the appropriate band structures.
 An external pay survey should be done to determine the market rates of pay.
 The roles in the bands would have to be positioned on the basis of the results
of job evaluation and market rates. A decision would have to be made on the
weight to be given to internal and external relativities. Subsequently, one has
to decide the basis for progressing pay within zones and for adjusting pay
levels following a change in role.
The existing rates of pay for employees would have to be examined. It would
have to be done to identify any increases or establish cases where pay protection
may be necessary.
 There is a need to draw up procedures for managing the structure in areas of
allocation of roles to bands, use of job evaluation, conduct of pay reviews,
etc.
 The managers have to be trained on the new structure for managing pay.
 Last, the details of the new structure and how it will affect the staff need to
be communicated.
Figure 13.1 gives a typical broad banded structure showing the relation with
traditional pay grades and ranges.
Figure 13.1: Broad Banded Structure

Broad Banded Structure and the Relation with Traditional Pay Grades
and Rages

Brand B

w
a
g
Brand B
e
r
a
y
e
s
Grades and Evaluation Points

Source: Gary Dessler, Human Resource Management, Pearson, 16th Edition, 2020

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 Unit 13: Job Evaluation and Pay Structure

Activity 13.2
Broad Banding
Be Healthy is a pharmaceutical company that follows a spot rate structure for
fixing pay for its employees. But to provide a greater flexibility for the
organization in making and administering pay decisions, it has decided to adopt
broad -banding. List out the steps involved in fixing the broad-band pay
structure.
Answer:

Advantages of broad banding are:

 It provides greater flexibility for organizations to make and administer pay
decisions.
 It creates greater scope for lateral career development since broad bands
create a flatter organizational structure.
 It acts as a mechanism that can enable an organization to change from a
traditional hierarchical approach to one that is flatter and multi-skilled.
 An organization that operates with a small number of bands can address
communication issues more effectively since it places far more employees
within the same category.
 By linking Broad Banding with performance, there can be alignment of pay
progression with the corporate goals of the organization.
 With more employees falling under the same band, there is a reduction in the
status consciousness observed in a narrow banded pay structure.
 When aligned to a competence based method of reward, it can encourage
employee development and therefore, multi-skilling.
Disadvantages of broad banding are:
 Status conscious employees feel resentment at the elimination of a narrow
banded grading structure and the status it confers.
 Broad banding needs to be monitored. There is a danger of band drift since
the number of spinal column points between the lowest and the highest points
of a band are considerably greater than in a narrow banded pay structure.
 Market rates of pay will have to be continuously monitored to address
recruitment problems due to external competition. This can be a very costly
and time consuming process.

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 A broad banded pay structure may not suit the culture of every organization.
If it is imposed without the commitment of the majority of the workforce, it
can cause significant workforce problems.
 In case employees believe that the decision of their line manager on their pay
progression has been subjective, the whole process can be undermined.
 If broad banding is not introduced with a full and clear explanation of how it
will affect individual employees, it is highly likely to be rejected since it is
too difficult to understand.
 Sometimes if a broad banded structure is linked to a competency based
reward system, the scope for employees to acquire new skills may be
controlled to avoid costs increasing too rapidly.

Example
Atla Bates Summit Medical Center in the USA, follows clear and concise
broadband structure. The pay bands are based on competitive pay and relate to
the general staff, the chief executive and other senior type roles. For instance,
a resident doctor working under the Spine Specialist and Surgeon falls in the
junior salary band and upon acquiring the skill set by dint of his tenure and
experience, would achieve an upward movement in the salary band.
Source: ICFAI Research Center

Check Your Progress - 4

7. Which of the following pay structures are found in public sector units?
a. It usually comprises pay spines.
b. There is a fixed increment
c. There is fixed pay for higher level jobs in the organization.
d. Other pay scales cannot be superimposed on the pay spine.
e. Uniform pay scales for different jobs
8. Broad banding is fast gaining popularity in organizations. Which of the
following are true in the context of broad banding?
i. It combines salary ranges into wider bands.
ii. It evolved as organizations wanted to retain their hierarchies.
iii. It allows career growth but at the cost of formal promotions.
iv. It is easy to administer.
a. i and iii
b. ii
c. ii and iv
d. iii
e. ii and iii

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9. In an organization that has a few wide bands, the type of pay structure being
followed is:
a. Broad banding
b. Integrated pay structure
c. Pay spine
d. Graded structure
e. Spot rate structures
10. Broad banding, if not carried out properly, can have numerous disadvantages.
Which of the following are the disadvantages of broad banding?
i. It creates a flatter organizational structure.
ii. It cannot be linked with performance or corporate goals due to the
existence of wide salary bands.
iii. It can lead to an increase in costs due to higher pay.
iv. It causes resentment among status conscious employees.
a. i, ii, and iii
b. ii
c. iii and iv
d. iv
e. ii and iv

13.9 Summary
 Job evaluation is the evaluation or rating of jobs to determine the position of
the job in the job hierarchy.
 Job evaluation may be achieved through the assignment of points or the use
of some systematic methods for essential job requirements, such as skills,
experiences, and responsibilities.
 Job evaluation methods are classified as quantitative methods, which include
the point rating method and factor comparison method and non-quantitative
methods include ranking or job comparison, internal benchmarking, and job
grading or classification.
 Pay represents the most important element in the employment relationship.
The objectives of pay can be classified as: equity, efficiency, financial
stability and the efficient allocation of labour.
 The pay structure gives a framework within which an organization defines
the different levels of pay for jobs or groups of jobs. The pay structure is
based on the assessment of the relative internal valuation and external
valuation of the job.

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 The main types of pay structures are: graded structures, broad-banded

structures, job family structures, spot rate structures, pay spines, pay structure
for manual workers, and integrated pay structures.
 Broad banding is a concept of combining salary grades and ranges into just a
few wide levels, each of which contains a relatively wide range of jobs and
salary levels.
 Job evaluation techniques, pay structures, and broad banding are the different
means in which the values of job can be assessed.
 Job classification consists of identifying classes, categories, or grades.
Subsequently, the level of difficulty is identified by defining the
specification.

13.10 Glossary
Broad banded pay structures: This structure has the range of pay in a band,
which is significantly higher than the conventional graded structure.
Broad banding: This means combining salary grades and ranges into just few
wide level or brands each of which contains a relatively wide range of jobs and
salary levels.
Factor comparison method: This method involves a comparison of all key jobs
and appraisal of jobs. The money value of one factor in one job is compared to
the money value of the same factor in other job.
Graded pay structure: A conventional graded pay structure is that of a sequence
of jobs into which jobs of broadly equivalent value are slotted.
Integrated pay structures: Integrated pay structures cover groups of employees
who have traditionally been paid under separate arrangements.
Job analysis: Job analysis describes the duties of a job, authority relationships,
skills required, conditions of work, and additional relevant information.
Job comparison: In this method, the whole job is ranked against other jobs on
the basis of difficulty level. The jobs are arranged in a hierarchy, without any
measureable points or values being assigned.
Job evaluation: Job evaluation uses information from job analysis to evaluate
each job. It evaluates its components and ascertaining relative job worth. It
involves a formal and systematic comparison of jobs in order to determine the
worth of one job relative to another.
Job family structures: This type of structure consists of a collection of separate
pay structures for job families.
Job slotting: This is also called internal benchmarking. It is an intuitive method
where a properly graded and paid job is taken as a benchmark and all the other
jobs are compared with it. The comparison is made on the whole job without
analyzing the job factor by factor.

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Job: A job is a group of positions that are similar to the kind and level of work.
Pay spines: This is a pay structure that consists of a series of incremental pay
points extending from the lowest to the highest-paid jobs covered by the structure.
Pay structures: These indicate the rate of pay for different jobs and provide
scope for pay progression in accordance with performance, competence,
contribution, skill, or service.
Point raking method: This method involves the development of key
compensable factors for the evaluation of each job. These manuals are developed
on the basis of the organization’s own experience or on the basis of industry-wide
organization. Each of these key factors has a scale value which defines the degree
to which that factor is present. Each job is rated on these key factors and a value
is assigned. At the end of this exercise, the values of each factor are added to get
a total score that is converted to get the compensation level.
Spot rate structures: The spot rate structure allocates a specific rate for a job.

13.11 Self-Assessment- Test

1. Job evaluation is a process by which jobs in an organization are evaluated.
What are the factors that lead an organization to undertake job evaluation?
2. Explain the various benefits that an organization derives from performing job
evaluation.
3. Give an overview of quantitative and non-quantitative categories of job
evaluation.
4. Pay represents an important but contentious element in the employment
relationship. In this context, explain why pay is important to the employer,
employee, and the government.
5. What are pay structures? Explain in detail about each pay structure.

13.12 Suggested Readings/Reference Material

1. John Shields, Jim Rooney, Michelle Brown, Sarah Kaine; Managing
Employee Performance and Reward: Systems, Practices and Prospects, 3rd
Edition, Cambridge University Press, 2020
2. Susan L. Verhulst, David A. DeCenzo, Rama Shankar Yadav; Human
Resource Management, 13th Edition, Wiley, 2021
3. Durai Pillai, Total Reward Strategy: Retain Your Best Talent, 1st Edition,
Notion Press, 2020
4. Stephen J Perkins, Sarah Jones, Reward Management: Alternatives,
Consequences and Contexts, 4th Edition, Kogan Page, 2020
5. Kevin R. Murphy, Jeanette N. Cleveland, Madision E. Hanscom,
Performance Appraisal and Management, Sage Publications, 2020

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13.13 Answers to Check Your Progress Questions

1. (d) i, ii, iii, and iv

Job evaluation touches the grouping of jobs, ranking of the jobs,
determining the worth of various jobs in the organization as well as
determining the demands which the normal performance of a job makes
on a normal worker.
2. (c) Similar activities that are related to each other
A job can be considered to be a group of positions or activities that are
similar to the kind and level of work.
3. (a) Working conditions of employees
Job evaluation is done to set wages and salary on the basis of the relative
work or jobs in the organization. In this context, it facilitates
standardization of the working conditions of employees
4. (b) Job comparison
Job comparison is among the simplest methods of job evaluation. It
consists of ranking the whole job against another on the basis of
difficulty level of the job.
5. (b) The absence of factors in grading
The internal benchmarking system is dependent on the identification of
suitable benchmarks that are properly graded and paid. As a
consequence, the comparisons may only perpetuate existing inequities
and discrimination.
6. (c) Point rating
Point rating is a method of job evaluation which consists of first
developing key compensable factors based on which each job must be
evaluated. The collection of these key factors is called manual or
yardstick. These manuals can be developed on the basis of the
organization’s own experience or those developed by industry wide
organization.
7. (a) It usually comprises pay spines
Only the first statement is true, since it is the public sector units who
prefer to use the pay spines.
8. (a) i and iii
The broad banding exercise allows the combining of salary ranges into
wider bands.

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9. (a) Broad banding

The type of pay structure being followed in this case is broad banding.
This type of salary structure combines salary grades into a few wide
bands. Each band thus consists of a wide range of jobs and salary levels.
10. (c) iii and iv
In the context of broad banding, it should be noted that status conscious
employees may resent the elimination of a narrow banded grading
structure and the status it confers. Further, if a broad banded structure is
linked to a competency based reward system the scope for employees to
acquire new skills will need to be tightly controlled to avoid costs
increasing too rapidly.

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 Unit 14
Performance, Competence and Skill Based Pay
Structure
14.1 Introduction
14.2 Objectives
14.3 Performance–based Pay
14.4 Competence–related Pay
14.5 Skill-based Pay
14.6 Incentive-based Schemes
14.7 Team-based Pay
14.8 Summary
14.9 Glossary
14.10 Self-Assessment Test
14.11 Suggested Readings/Reference Material
14.12 Answers to Check Your Progress Questions

“Learn to hide your need and show your skill.”

- Jim Rohn

14.1 Introduction
As has been advocated by Jim Rohn, the key to successful work life is to become
skillful enough to be able to do rewarding things. The previous unit dealt with the
concept of job evaluation that looked at the need for such evaluation, its
objectives, and methods. This was followed by a comprehensive discussion on
the concept of pay with its related components.
However, there are other aspects of pay such as performance, competence, and
skill-based pay, which are becoming increasingly more important. The reward
systems of organizations have an impact on the organizations, which in turn, use
these systems in a way that best serves their objectives.
It should be noted that in this age of global competition, organizations use their
compensation systems to attract, motivate, and retain good talent. The traditional
concepts of the pay system such as status, seniority, and responsibility level have
given way to a performance-based culture. Organizations are witnessing a rise of
performance and skill-based pay systems.
This unit deals with an examination of the concepts of pay, performance,
competence, and skill. The unit closes with a discussion on team-based pay.
 Unit 14: Performance, Competence and Skill Based Pay

14.2 Objectives
After studying this unit, you should be able to:
 Explain the concept of performance-based pay
 Appraise competence related pay
 Describe skill-based pay
 Examine incentive-based schemes
 Analyze team-based pay

14.3 Performance-based Pay

A salary is deemed to be adequate and fair only to the extent that it matches the
individual’s ability and performance to achieve an adequate level of rewards.
Moreover, the employees would also equate this salary with their own
preconceived notion of the ‘correct’ salary.
Components of the financial reward processes are:
 The basic pay is the rate for the job as affected by the internal and external
employment markets; it is a fixed compensation paid to employees for
performing a specific job. This is typically pensionable.
 The contingent or differential pay is the pay which is influenced by the level
of performance, competence, and skills of individuals or teams. It may be
consolidated into base pay and is typically not pensionable. It is often referred
to as ‘variable pay’ since it is related to potentially variable factors and has
to be re-earned at every review of performance.
 The other factors that also influence pay are profitability of the company, job
evaluation, seniority of an employee, cost of living, the manpower
availability and the strength of the parties in negotiating.
However, in response to the newly emerging global challenge of increased
competition, organizations are beginning to increasingly emphasize performance-
based pay.
Challenges faced by the organization in terms of reward management are:
 If employees realize that their pay is not based on merit, it would lead to a
decrease in their commitment to the organization.
 This may lead to a decrease in the level of effort and productivity may be
adversely affected.
 Some employees may even go for jobs elsewhere. Hence there would be an
increase in rate of attrition.
Hence, in order to motivate people, organizations link pay with performance in
line with the organizational culture to avoid misfit.

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14.3.1 Assumptions of the Performance-based Pay System

The pay-for performance system rewards an employee’s performance on the basis
of three assumptions:
b. There is a difference in the level of contribution between the contribution made
by an employee as an individual and a team.
c. The overall performance of an organization is dependent on the performance
level of individuals and groups.
c. In order to attract, retain, and motivate high performers and to be fair to all
employees, the company must reward employees on the basis of their
performance. The good performers always expect, and indeed require, to be
paid more in order to continue with their good performance. They must be
paid more than poor performers.
14.3.2 Types of Performance-based Pay
A single pay plan would not be able to meet the expectations of the employees or
deliver what the management would want from the employees. Thus, there are
different types of pay plans for employees who work at different levels in an
organization, since a single plan will not be compatible with all levels. Thus,
many organizations, particularly large ones, have more than one performance-
based pay plan.
Performance-based pay can be categorized into the following types:
 Piecework: A price is paid for each unit of output. This is the oldest form of
performance pay.
 Payment by Results: These are bonus earnings that depend on measured
qualities or values of output for individuals or groups. These are usually based
on time and work studies. They cover a range of bonus schemes and are the
main method of performance pay for manual workers.
 Organization-wide Incentives: In organization-wide incentives employees
are encouraged to subordinate personal goals for that of the organization or
the department. The payments are usually based on sharing the overall profits
achieved through the collective efforts of all the employees or by sharing the
money which is saved through an organization-wide effort at cost cutting.
 Merit Pay: Bonus is based on a general assessment of an employee’s
contributions to performance; this is an earlier, less structured form of
 Individual Performance Related Pay (IPRP): This is based on the notion that
employees will be motivated if they believe that they will be rewarded for
improving their contribution to the success of the enterprise. The pay will be
in the nature of bonus earnings which are based on the assessment or appraisal
of an employee’s or team’s performance against previously set objectives. It
usually falls under the performance management system.

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 Profit-related Pay: This refers to a bonus or share options based on the

organization’s profits. It is widespread in the private sector, where share
options are often important for senior managers.
 Commission: This refers to percentage payments on sales or turnover, paid
on an individual or group basis; generally seen in sales, retailing to name a
few

Example
Google provides its employees with performance bonus which is based on
three variables: the employee’s job position, their performance or results
obtained and a multiplier rate that can be 15% or more of the fixed payroll.
Source: ICFAI Research Center

14.3.3. Fixed and Variable Pay

Firms are increasingly paying its employees which have elements of both base
pay and variable pay.
However, there remains a great deal of variation in the way firms look at the fixed
versus variable pay criteria. Let us understand the same in detail:
 Variable compensation can be in the form of individual bonus, team bonus,
profit sharing, and employee stock options programs.
 It should be noted that a higher proportion of variable pay would mean that
there would be more risk sharing between the employee and the firm.
 In effect, there is a trade-off between income security and potential higher
earnings.
Fixed pay has become popular in a majority of organizations since it reduces the
risk to both employer and employee. Moreover, it can be used advantageously in
smaller companies, especially with firms with products that are not well
established.
Variable pay is the payment given to individuals in the form of performance pay
or bonuses on the basis of their own performance or that of their team or
organization.
Essentials of variable pay are:
 Variable pay is used in situations where organizations have varying revenue,
shortage of funds or with a younger labor force that is willing to delay
gratification.
 It focuses on the quality and quantity of performance and rewards for
individuals or groups.
 Variable pay has to be re-earned at each performance period. It is ‘pay at risk’
which is awarded for specific achievements. The employee’s risks are not
paid for unless the same or a higher level of performance is achieved.

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 While designing the variable pay, performance measures should be focused on

the basis on which the employees and teams are receiving their reward. The
performance measures are customer satisfaction, cost savings, accuracy, and
timeliness.
 Once these measures have been established, they must be clearly and frequently
communicated to employees. Establishing benchmarks and performance
targets is a must to have an effective variable pay system.
 Variable pay focuses on the quality or quantity of performance and rewards
teams or individuals. It includes incentives, bonuses, gain sharing, and goal
plans.
 Variable pay is not consolidated into base pay, as often happens with
performance-related payment systems.
The argument against variable pay is it assumes past performance will continue
in future at the same level and should therefore be rewarded with a permanent
increase in pay.
Variable pay has always been the rule in executive pay, pay for sales
representatives and remuneration and payment – by-results schemes for manual
workers. It has been less common in performance – related pay schemes, although
organizations with such schemes are increasingly turning toward the use of
achievement or sustained high performance bonuses, often in the form of spot
payments for a particular achievement.

Check Your Progress - 1

1. Performance-based pay rests on certain fundamental assumptions. In this

context, identify which of the following are true.
i. Employees and firms differ in the capacity to do a particular task
ii. All employees have an equal capacity to work
iii. Employees differ in the types of tasks they can perform
iv. Organizations should have the capacity to attract and reward good
performers
a. i, iii
b. i, iii, and iv
c. i and iv
d. iv
e. i and ii

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2. There are various systems of performance-based pay. In this context, which

of the following statements are applicable?
i. The merit pay system gives bonus earnings that are based on a general
assessment of an employee’s contributions to performance
ii. Profit plans are based on percentage of turnover, which is paid on an
individual or group basis
iii. Individual performance related pay works on the assumption that
employees will be motivated if they believe that they will be rewarded
for improving their contribution to the success of the enterprise
iv. Commissions are paid on the basis of percentage payments on sales or
turnover, which are paid on an individual or group basis
a. i, ii
b. i, iii, and iv
c. ii and iv
d. i, ii, iii, and iv
e. i and iii
3. Of the following, which plan subordinate’s personal goals to that of the
organization or the department?
a. Payment by Results
b. Performance related pay
c. Organization-wide Incentives
d. Profit-Related Pay
e. Gain sharing
4. Which performance-based pay system works on the assumption that
employees are motivated if they believe that they will be rewarded for
improving their contribution to the success of the enterprise?
a. Merit pay
b. Individual performance related pay
c. Performance-related pay
d. Commission
e. Seniority
5. Variable pay has become an increasingly important component of modern
reward system. In this context, which of the following is not incorporated into
variable pay plans?
a. Incentives
b. Bonus
c. Goal plans
d. Gain sharing
e. Fixed pay

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14.4 Competence-related Pay

Competence is an inherent characteristic of an individual related to effective or
superior performance. Competence-related pay refers to the ability of a person to
perform a job or task competently. It looks into how people ought to behave in
order to carry out a role with competence. It also refers to areas of work in which
the person is competent or the dimensions of behavior lying behind competent
performance.
The concept of competence is made even more complex by the contention of
some people that competence embraces behavior, knowledge, and skills while
others claim that competence is about the effective use of knowledge and skills
by themselves.
Competence-related pay provides for pay progression to be linked to assessments
of the levels of performance that people have achieved. Competence-based pay
reflects an intention by the organization to reward the use or development of job-
related competencies.
The following points illustrate the differences between performance and
competence-related pay:
 Competence pay may be concerned with how work is done (behavior) while
performance pay is concerned with what work is done.
 Competence pay decisions are made by assessing behavior and the outcomes
of that behavior against competence profiles, which have usually been
prepared by a joint analysis process. Performance pay decisions are usually
made by comparing results against individual or team objectives.
 Competence-related pay is not based on the achievement of specific results
expressed in the form of targets or projects to be completed, although it can
be said that it is concerned with the attainment on a continuing basis of agreed
standards of performance.
 Competence-related pay is forward looking which means that when people
have reached a certain level of competence, they will be able to go on using
it effectively into the future; conversely, performance related pay looks
backward – this is what the employees have achieved and rewarding their
achievement.
 Competence pay helps to integrate core, generic, and individual
competencies, whereas performance pay helps to integrate corporate,
individual, or team objectives.

14.4.1 Designing Competency-based Pay

Competency-based pay focuses on paying for the person’s capability rather than
paying the person for his/her job. It is intended to motivate employee to do his
best.

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There are five steps in designing such a compensation system:

 Conduct a job analysis and establish a clear link between a job’s content, a
person’s qualifications, and optimal performance of that job.
 Based on the job analysis, identify the competencies needed to perform the
work.
 Develop assessments to measure the staff member’s performance of these
competencies.
 Value the competencies by analyzing compensation survey data.
 Establish a salary for each staff member based on the set of competencies he
or she uses on the job.

Activity 14.1
Competency-based Pay

Ankit is working as Sales Manager for a branch in an automobile company.

His pay structure included a CTC of Rs.10,00,000 per annum (Basic:
Rs.6,00,000, DA Rs.200,000, HRA:1,00,000 and other allowances
Rs.1,00,000). In addition to this, he was assured to receive 5% of his branch
sales amount as incentives, a commission of 1% on sale of each vehicle and a
gain sharing of 1% from his branch’s profit, if sales are improved by 40% over
the previous year.

From the above example, specify fixed pay and variable pay.

Answer:

14.4.2 Advantages of Competence Related Pay

Listed below are the advantages of competence based pay:

 Competence-based pay develops a broader perspective for staff. It

encourages and rewards on the basis of the skills that the staff possesses
(rather than their ‘positions’).
 It reinforces a culture of improvement.
 It facilitates self-management and enables leaner staffing. Since this model
rewards staff members for developing new skills, it prepares them to be more
productive, take on greater responsibility, and work more collaboratively
with other staff.

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 It facilitates staff retention, because staff members develop their skills

continuously, have more control over their pay, and are unlikely to find
comparable jobs elsewhere – since a majority of organizations still use the
traditional model.
 It builds acceptance for a culture of change.
 It focuses attention on the need for high levels of competence. It encourages
competence development.
The cited advantages of competence related pay, which rewards employees
based on how well they perform in the workplace, show that competence at
work is essential for better performance.
14.4.3 Disadvantages of Competence Related Pay
The disadvantages of competence related pay are listed below:
 The assessment and documentation of competence levels can be time
consuming and expensive.
 It requires a large investment in training. Since peers train each other, there
are chances that productivity will decline initially. But in the later stages,
productivity is bound to go up.
 Market comparisons can be more difficult because most of the data relate to
the traditional pay model; staff salary comparison may not actually be a
simple task.
 The process makes considerable demands on the commitment and skills of
line managers.
 Administrative involvement can increase keeping track of each person’s
competency assessments, competency mix, and pay rates though it requires
time and effort.
 It is recognized that competence related pay will require the mobilization of
extensive management resources and will take time to implement and
manage.
The disadvantages of competence related pay show that competence rather
than hierarchy of position or years of experience in a job is more important.

Example
The Volkswagen Group (UK) Ltd discontinued its performance management
system that rated most of the employees as average with very small
differentiation in pay rewards as normal distribution was followed.
Consequently, it introduced a new pay scheme where ten critical competencies
needed for every job family were described and employees were assessed
against the well-articulated three/four levels of achievements. This enabled the
company to create a completely transparent system that rewarded capabilities
of employees.
Source: ICFAI Research Center

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14.5 Skill-based Pay

Skill-based pay refers to pay increases in relation to the increase in the number of
skills acquired by an employee. It is a means of developing broader and deeper
skills among the workforce. Skill-based pay links pay to the level of skills used
on the job, and sometimes the acquisition and application of additional skills by
the person carrying out the job.
In skill-based pay, the employees are slotted into grades informally based on their
training, qualification, and experience. The three grades into which employees
are graded are unskilled, semiskilled, and skilled. The pay increases are usually
tied to these three types of skills.

 Horizontal skills which involve a broadening of skills in terms of the range

of tasks.
 Vertical skills which refer to the skills of a higher level.
 Depth skills which refer to a high level of skills in specialized areas relating
to the same job.
Skill-based pay differs in various ways from traditional pay systems. The
traditional pay system could only reflect skill differences in a structure consisting
of rates of pay for unskilled, semiskilled, and skilled workers. These differences
are:

 Skill-based pay is a person-based and not a job-based system. It rewards a

person for what he/she possesses, rather than the job’s worth. Job worth is
related to basic rate of pay given for minimum skills, but pay progression is
connected to skills acquisition.
 It rewards a broad range of skills which makes the employee multi-skilled
and therefore flexible.
 It positively encourages skill development.
 A skill-based pay system may not necessarily reflect how well the skill is
used as this falls within the performance component of pay. But performance
based criterion may be included in this.
 In such cases, the system will be performance-oriented rather than a structure.
The system needs to be supported or justified by opportunities for training
which is critical to its success. The traditional structure is not dependent on
such opportunities.

14.5.1 Purposes of Skill-based Pay

Skills serve a dual purpose: They protect against unemployment and promote
better earnings while giving the employers a chance to compete with better
quality products or achieve cost reductions.

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The rapid pace of change in the economies and the shift to a knowledge-based
economic system means that employees will have to continuously improve and
add on their skill-set. Moreover, the modern workplace is increasingly taking on
a skill-based color, where even doing a simple task requires the operation of
highly sophisticated machines. Skill-based pay serves the following purposes:
 It enables organizations to adapt to change and emphasizes on learning new
skills. The emphasis on total quality and customer service has also led to the
demand for learning new skills.
 It helps employees to be flexible and adapt to the technological changes and
competitive challenges in a world of fast changing technologies and
competitive pressure. Skilled employees will be more flexible and respond
quickly to the new demands and peak workloads.
 Skill-based pay systems promote commitment among employees and help to
enhance their skills, develop their careers within the organization, and
increase their employability.
 It enables the production of quality products, which can be done better only
through skilled workers. Multi-skilled workers ensure that the production will
not be disturbed even to meet new demands.
14.5.2 Introducing Skill-based Pay
The introduction of a skill-based pay system is a complex process. It requires
several steps to be taken and several issues to be addressed. These are given here:

 The skill requirements of the company needs to be analyzed. The availability

of resources for training should be ascertained. The jobs to be covered by the
scheme should be identified.
 The individual’s jobs have to be grouped into ‘job families’ on the basis that
in each ‘family’ the skill needs are similar. The skills within each job family
and the tasks needed to perform the job should be analyzed.
 The steps just seen will lead to an identification of the skill blocks or levels.
The skill level is the pay grade relating to the competence to use particular
skills, and the skill block is the training input which has to be completed to
the satisfaction of the certifying authority in order to gain entitlement to the
extra pay.
 Training modules have to be formulated.
 The way in which certification is obtained that the skill has been acquired
should be agreed upon.
 The base rates for ‘job families’ have to be fixed, as also the payments that
will be made in future when an employee moves upward through the skills
route.

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 The criterion for extra payments should not be acquisition of the skill but its
application.
 The period during which the skill should be applied before a new one is
acquired should normally be decided on, as the skill should benefit the
employer who should receive a return on the investment made.
14.5.3 Advantages of Skill-based Pay
The system of skill-based pay provides the following advantages:
 It contributes to job enlargement and job enrichment as it narrows down job
classifications.
 There is lot of flexibility as the performance of multiple tasks is encouraged.
It enables job rotation and the filling of temporary vacancies.
 It enhances productivity and quality through the better use of human
resources.
 It facilitates technological change. Pay increases, continuous training, and job
enrichment and job enlargement through the broadening of skills, tend to
reduce staff turnover.
 Elimination of unnecessary jobs reduces the need for supervision.
 Job satisfaction is engendered through employees having greater control over
the planning and execution of jobs.
 Broadening of skills develop a better perspective of operations as a whole.
 It acts as an incentive for self-development.
 Skill enhancement provides employment security. Promotion to higher levels
are easy because of skill upgradation, leading to employee’s career
development path.
 Competition is restricted as the reward flows from the application of a skill
and does not reduce opportunities for others since the pay increases on
account of skills which are linked to a measurable standard, subjectivity in
performance appraisals and individual-based performance-related pay is
avoided.
14.5.4 Problems with Skill-based Pay
The problems associated with the introduction of skill-based pay are enumerated
below:
 There may be substantial training costs.
 It may happen that some skills would be paid for but would be used
infrequently.
 There is a strong possibility that unusable skills may be acquired unless the
system is properly administered.

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 Identifying the type of training to be given to the employees is difficult since

employers cannot always anticipate what skills would be required in the
future.
 The administration of the skill-based system is a complex task, with regard
to skill acquisition, certification, and its payment. Hence, unless the system
is administered properly, the costs would outweigh the gains.

Example
At Wipro, the compensation of the employees is based upon the value of a
person’s earnings from technology and businesses using a different skill set.
The criteria speak about skills in analytics, open source and big data. This
serves as an illustration for skill-based pay.
Source: ICFAI Research Center

Check Your Progress - 2

6. Which of the following statements is true with regard to competence related

pay?
a. Competence related pay does not require considerable resources to
implement and manage
b. Competence related pay makes considerable demands on the abilities of
line managers
c. Competence related pay leads to a cultural change
d. Competence related pay creates change for its own sake
e. Competence related pay is negatively associated with productivity.
7. Which of the following is not an advantage of skill-based pay?
a. It contributes to job enlargement and job enrichment as it narrows down
job classifications
b. It enhances productivity and quality through the better use of human
resources
c. It facilitates technological change
d. Broadening of skills develop a better perspective of operations as a whole
e. It increases attrition rate
8. With the rapid pace of change in technology, skill-based pay is becoming
increasingly popular. What purpose does skill-based pay serve?
i. Adapting to change
ii. Being flexible

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iii. Making better quality products

iv. Enabling increased commitment of employees
a. i and ii
b. ii
c. iii and iv
d. i, ii, iii, and iv
e. i, ii and iii

14.6 Incentive-based Schemes

To bring out incentive-based schemes, organizations consider payment by results
as well as sales for incentive schemes.
14.6.1 Payment by Results
Payment by results is done when the employee is paid for the results achieved. It
is assumed that this relationship would lead the individual to continue or increase
his or her level of performance in order to receive more financial rewards, and,
by implication, to increase his/her efforts.
Payment by result schemes relate either the whole or part of an employee’s total
pay package to the output produced by the individual or group to which he or she
belongs.
These schemes can vary on several dimensions:
 The level of financial reward for each incremental level of output.
 The level of basic pay
 The inter-relationship between incremental pay and incremental output
 The threshold of output for receiving payment by results
Types of incentive or payment-by-result schemes are given below:
Individual piecework: Under individual or straight piecework, a uniform price is
paid per unit of production. Operators are therefore rewarded according to the
number of pieces they produce or process, so pay is directly proportional to
results. Most piecework schemes provide a fallback rate or minimum earning
level.
Work-measured schemes: In a work-measured scheme, the job or its component
task is timed and the incentive payment is related to performance above the
standard time.
The process of work measurement is explained below:
 Work measurement involves working out standard values or times for a
complete task, which can, however, be broken down into components to each
of which standard minute values can be allocated.

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 The difference between the actual time taken to perform the task and the
standard time allowed is the amount of incentive pay received. If a task is
done in less than the standard time, then there is a time saving, which means
that the operator’s output will increase.
Measured day work schemes: These schemes relate pay to the achievement and
sustenance of a specified level of performance. The arrangement depends on work
measurement to define the required level of performance and to monitor the actual
level.
The same is explained in the points below:
 The fundamental principle of measured day work is that there is an incentive
level of performance and that the incentive payment is guaranteed in advance,
thereby putting the employee under an obligation to perform at the effort level
required.
 In contrast, a conventional work-measured incentive scheme allows
employees discretion on their effort level but relates their pay directly to the
results they achieve.
 Between these two extremes there are a variety of alternatives, including
banded incentives, stepped schemes, and various forms of high day rate.

Example

Mediocrity has no place at Netflix. In fact, adequate performance gets a

generous severance package. If an employee does not pass the Keeper Test
which is applied as a judgement of someone’s overall expected contribution,
they are offered a generous severance package, and respectfully asked to move
on to their next opportunity.

Source: ICFAI Research Center

14.6.2 Sales Force Incentive Schemes

Sales are where the revenues are generated for an organization – hence it is
necessary that sales compensation itself be well designed. Sales personnel tend to
have different roles that vary from giving cold-calls to promoting the firm’s
products. They have to resort to various approaches from hard selling to
relationship building. The design of a sales force pay plan becomes a sensitive
issue as the motivation of the sales force generally has immediate and strong
impact on the business results.
However, developing performance standards for sales employees is a difficult
task, as their performance is often affected by external factors beyond their
control. The sales volume alone, therefore, may not be an accurate indicator of
the effort sales people have expended.

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Reasons for designing effective sales force incentive program are:

 To motivate the direct sales force of the company
 To get people to focus on the products over the competitors. To build team
spirit internally or externally
 To capitalize on the competitive nature of the sales team
 To reward the best sales teams and build a strong customer relationship

14.7 Team-based Pay

Team-based pay provides rewards to teams or groups of employees carrying out
similar and related work which is linked to the performance of the team.
Performance may be measured in terms of outputs and/or the achievement of
service delivery standards. The quality of the output and the opinion of customers
are also often taken into consideration.
Team pay is usually paid in the form of a bonus which is shared amongst team
members in proportion to their base rate of pay (much less frequently, it is shared
equally). The individual team members may be eligible for competence related
pay or skill-based pay but not for performance-related pay.
There are various advantages to team-based pay:
 It encourages effective team working and cooperative behavior.
 It clarifies team goals and priorities.
 It enhances flexible working conditions within team.
 It encourages multi-skilling.
 It provides an incentive for the team collectively to improve performance.
 It encourages less effective team members to improve and meet the standards.
There are some disadvantages to team-based pay as well:
 It only works in cohesive and mature teams.
 Individuals dislike the fact that their own efforts are not rewarded
specifically.
 Peer pressure, may compel the employees to confirm to group notions and
this can sometimes have undesirable effects.
In this section, we will discuss various team-based pay systems that are being
used in organizations:
 Profit sharing which distributes a portion of corporate profits among
designated employees.
 Gain sharing which divides a portion of cost reductions or productivity
increases between groups covered by the plan
 Employee stock ownership plan that distributes stocks and stock options to
employees based on corporate performance measures such as return on
equity.

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All the three types are designed to establish a link between the pay and
performance, but performance is measured at the group, unit, or company level.
14.7.1 Profit Sharing
Profit sharing is regarded as a stepping stone to industrial democracy. It is a plan
under which an employee receives an additional remuneration to their regular pay
a special sum in the form of cash or shares in the company related to the profit of
the business. The amount shared is determined either by an established formula,
or is at the discretion of management.
The theory behind profit sharing is that employees will fulfill their responsibilities
with renewed vigor if they find that their efforts will yield higher profits through
profit sharing.
Profit sharing serves the following objectives:
 It facilitates enhanced awareness and interest in the performance of the
organization, and possibly creating an impression of ownership of the
business.
 It encourages long-term commitment and loyalty to the company.
 Profit sharing ensures that employees benefit from company profitability and
share in the wealth they helped to create.
 It ensures that labor costs are responsive to the performance, and hence
profits, of the company.
 It helps in retaining existing employees and attracting talent.
 It promotes harmonious industrial relations.
 It facilitates employees and employers to take advantage of tax breaks.
 It follows the principle of equity to reward good performance.
Advantages of Profit Sharing
The advantages of profit sharing are enumerated below:
 Many firms use profit sharing as a tool to control employee turnover because
the idea of sharing the profits inspires the management and the workers to be
sincere, devoted, and loyal to the firm.
 It brings groups of employees to work together towards a common goal (the
success/benefit of the company).
 The costs of implementing the plan rise and fall with the company’s revenues,
which mean that profit sharing does not become a burden on the firm.
 It helps in supplementing the remuneration of workers and enables them to
lead a richer life.
 Workers become self-motivated and do not require close supervision. It
attracts talented people to join the ranks of the firm with a view to sharing the
profits.

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Profit sharing has been criticized as being remote and perceptually unrelated to
individual performance. Following are the disadvantages of profit sharing:

 The profit sharing schemes are like a fair-weather plan. Workers may not get
anything in case the business does not do well and does not generate profit.
Employees would dislike their base pay getting affected negatively by the
profit sharing provision.
 Profit sharing sometimes hurts solidarity towards the trade unions, as the
workers develop a greater sense of belonging with the enterprise.
 Fixing the share in the profit of the firm is sometimes a very difficult task as
it may happen that the management may want to give away a smaller share
than the workers are willing to accept.
 The overall focus of the firm turns out to be that of profit, which comes at the
costs of other goals such as quality of production. In case of small business
units, there is a high likelihood of a fluctuation in earnings of firms causing
drastic shifts in the earnings of employees.
 The pay for each employee moves up or down together, depending on the
overall performance of the firm, at the cost of individual difference in merit.

14.7.2 Gain Sharing

Gain sharing can be conceived as an incentive plan that engages many or all
employees in a common effort for achieving the productivity objectives of the
organization. It can also be perceived as a factory-wide bonus plan that provides
for employees to share the gains made by a company with its improved
performance. Gain-sharing plans are tailored to the company’s requirements.

Advantages of Gain Sharing

 There is a greater involvement of employees in the functioning of the

organization.
 Employees share the benefits of improved functioning. There is improvement
of various measures of company performance such as teamwork, product
quality, etc.
 It stresses greater promotion of communication about issues concerning work
and productivity.
 There is an increased attention of the employees on key issues that affect
organizational performance. Through gain sharing, the entire organization
has, increases in productivity.
 There is an enhanced commitment to organizational goals.

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Disadvantages of Gain Sharing

 Compliance with legal formalities may require the calculation of a regular
rate of pay of the employees. As a consequence, the employers may not go in
for this type of compensation.
 The gain sharing formulation would require a more team-oriented leadership
style.

14.7.3 Employee Stock Ownership Plan (ESOP)

ESOP enables employees to turn into owners of the company. The plan is based
on payment of equity.
Features of ESOP are:

 Generally, full-time employees of the company participate in the plan.

 The allocations of shares are usually made on the basis of relative pay or some
other formula.
 Over time, as the employees accumulate seniority, they have an increasing
right over shares in their account.
 Further, it should be noted that ESOPs are also used as savings plan where
the company contributes on par with the employee contribution with stock
from ESOP instead of cash.

Refer to Exhibit 14.1 that illustrates ESOP at SAP Inc.

Exhibit 14.1: Employee Stock Ownership Plan (ESOP) of SAP

SAP offers an award-winning employee share purchase plan, enabling

employees to own a part of SAP and build long term value. Employees become
shareholders, are entitled to voting right at the Annual Shareholders Meetings
and receive dividends.
SAP has a long tradition in sharing company success with its employees. In
this spirit, SAP announced to dedicate an additional budget of €400 million to
launch a new equity program “Grow SAP” from 2020–2023. Besides
acknowledging everyone’s commitment to past achievements, the focus of
Grow SAP is to unite all employees behind achieving SAP’s 2023 ambitions.
As SAP CEO Christian Klein has put it “SAP wouldn’t be the company it is
without the commitment and passion each colleague brings to work every day”.
The Executive Board is committed to the investment in its employees even
more so in the Covid-19 crisis! This program will support employees to stand
together to sustain and grow their success.
Contd….

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Grow SAP is offered on top of the already existing equity plans “Own SAP”,
an award-winning share purchase plan that enables all employees to become
shareholders at preferred conditions, and “Move SAP”, a Restricted Stock Unit
plan offered to employees who have a significant sustained impact on business
success.
Source:https://sap.com/2020/06/16/sap-launches-additional-equity-plan-to-deepen-employees-
participation-in-company-performance/ (accessed on 25/4/2022)

Activity 14.2
Upgrading skills at the former electronics marvel
Makhailovich Electronics has been making consumer electronics ever since
private capital came into Russia after the fall of the USSR. Although they have
factories all over Russia, the plant in Moscow is the crowning glory. It has the
best engineers from the former Soviet Union who made cathode ray tube based
TVs. There was a good demand for their television sets all over Russia.
However, the plant has not seen major innovations even though the
Makhailovich group as a whole has gone in for major improvements and the
launch of new LCD viewing systems. Much of these innovations have come
from other plants. Today, the Moscow-based plant stands at the bottom of the
ladder in its contribution to the profits of the Makhailovich Group. Sadly, no
one wants a cathode ray based TV anymore!
The senior management of the group has been thinking of closing down the
plant and laying off the workers. However, they realize that the fault lies with
the senior management, since no one was interested in giving proper direction
to the Moscow plant; it was conceived as a cash cow. The management also
knows that the workers at the plant are among the most qualified, honest, and
dedicated.
The senior management wants to give the Moscow plant one fair chance. It has
sent Ivan Vitaly, the new Human Resources director, in his additional role as
the chief manager of the plant.
What problems do you foresee for Ivan at this plant? How can Ivan help the
plant regain its former glory?

Answer:

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Check Your Progress - 3

9. What are the three major types of group-based incentives?

i. Profit sharing plans
ii. Employee gain sharing plans
iii. Employee stock option plans
iv. Employee pay
a. i, iii, and iv
b. i, ii, and iii
c. i and ii
d. i and iii
e. ii, iii and iv
10. Under profit sharing, a special sum is kept in the form of cash or shares in the
company related to the profit of the business. Which of the following are the
objectives of profit sharing?
i. To increase the responsiveness of the labor force to the profit and hence
performance of the company.
ii. To attract and retain employees.
iii. To reduce the role of trade unions.
iv. To increase long-term loyalty toward the company.
a. i and iv
b. iii and iv
c. ii and iii
d. i, ii, iii, and iv
e. i and ii

14.8 Summary
 A salary is deemed to be adequate and fair only to the extent that it matches
the individual’s ability and performance to achieve an adequate level of
rewards.
 Financial reward processes use base pay and variable pay, plus the provision
of employee’s benefits and pensions.
 The performance-based pay can be categorized into piecework, payment by
results, organization wide incentives, merit pay, individual performance
related pay, profit related pay, and commission.

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 Firms are increasingly going in for a system that has elements of both base
pay and variable pay. Certain companies prefer going in for fixed pay.
However, there is an increasing proportion of total compensation that goes in
the form of variable pay that fluctuates according to some pre-established
criteria.
 Competence-related pay provides for pay progression to be linked to
assessments of the levels of performance that people have achieved.
 Skill-based pay refers to a pay system in which pay increases are linked to
the number or depth of skills an employee acquires and applies.
 Team-based pay provides rewards to teams or groups of employees carrying
out similar and related work which is linked to the performance of the team.
Performance may be measured in terms of outputs and/or the achievement of
service delivery standards.
 Team pay is usually paid in the form of a bonus which is shared amongst
team members in proportion to their base rate of pay. The individual team
members may be eligible for competence related pay or skill-based pay but
not for performance related pay.

14.9 Glossary
Commission: This refers to percentage payments on sales or turnover.
Competence related pay: This pay system provides for pay progression to be
linked to assessments of the levels of performance that people have achieved.
Employees stock ownership plan: An ESOP is an employee benefit plan which
enables employees to turn into owners of stock in the company in which they
work.
Gain sharing: Gain sharing is an incentive plan that engages many or all
employees in a common effort to achieve a company’s productivity objectives,
with any resulting cost-savings gains being shared among employees and the
company.
Individual Performance Related Pay (IPRP): This is based on the notion that
employees will be motivated if they believe that they will be rewarded for
improving their contribution to the success of the enterprise.
Individual piece work: In individual or straight piecework, a uniform price is
paid per unit of production.
Measured day work schemes: Measured day work schemes provide for the pay
of employees to be fixed on the understanding that they will maintain a specified
level of performance. However, the pay does not fluctuate in the short-term with
their performance.

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Merit pay: Merit pay is usually based on the general assessment of an

employee’s contributions to performance
Payment by Results: These are bonus earnings which depend on measured
qualities or values of output for individuals or groups.
Performance-based pay: A salary can be deemed to be adequate and fair only
to the extent it matches an individual’s ability and performance with adequate
rewards.
Piecework: A price is paid for each unit of output.
Profit related pay: This is bonus or share options based on the organization’s
profit.
Profit sharing: Profit sharing holds that workers will fulfil their responsibilities
more diligently if they realize that their efforts may result in higher profits which
will be returned to the workers.
Shop-floor incentives: Shop-floor incentive schemes relate to the pay or part of
the pay received by employees to the number of items they produce or process,
the time they take to do a certain amount of work, and/or some other aspect of
their performance.
Skill based pay: Skill-based pay refers to a pay system in which pay increases
are linked to the number or depth of skills an employee acquires and applies.
Team based pay: Team-based pay provides rewards to teams or groups of
employees carrying out similar and related work which is linked to the
performance of the team.
Work-measured schemes: In a work-measured scheme, the job or its component
task is timed and the incentive payment is related to performance above the
standard time allowed for the job.

14.10 Self-Assessment Test

1. How would you differentiate between performance and competence-based
pay?
2. Skill-based pay practices are becoming increasingly common. What are the
pros and cons of a skill-based pay system for an organization?
3. Describe in detail the various types of incentive or pay or payment-by-result
schemes.
4. What is gain sharing? What are the advantages that flow from gain sharing?
5. Organizations are going to be increasingly under pressure to have good pay
packages in order to retain star employees. Do you agree or disagree with this
statement. Give reasons.

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14.11 Suggested Readings/Reference Material

1. John Shields, Jim Rooney, Michelle Brown, Sarah Kaine; Managing
Employee Performance and Reward: Systems, Practices and Prospects, 3rd
Edition, Cambridge University Press, 2020
2. Susan L. Verhulst, David A. DeCenzo, Rama Shankar Yadav; Human
Resource Management, 13th Edition, Wiley, 2021
3. Durai Pillai, Total Reward Strategy: Retain Your Best Talent, 1st Edition,
Notion Press, 2020
4. Stephen J Perkins, Sarah Jones, Reward Management: Alternatives,
Consequences and Contexts, 4th Edition, Kogan Page, 2020
5. Kevin R. Murphy, Jeanette N. Cleveland, Madision E. Hanscom,
Performance Appraisal and Management, Sage Publications, 2020

14.12 Answers to Check Your Progress Questions

1. (b) i, iii and iv
There are three crucial assumptions that are the basis of performance-
based pay. First, it is held that employees and work teams differ in how
much they contribute to the firm not only in what they do, but also in
how well they do it. Second, the overall performance of the organization
depends largely on the performance of individuals and groups. Third, in
order to attract, retain, and motivate high performers, it is essential to
reward employees on the basis of their relative performance. This
happens as the good performers would both expect and require more pay
in order to retain their good performance.
2. (b) i, iii and iv
Bonus earnings or pay levels are usually based on the general
assessment of an employee’s contributions to performance. Further,
individual performance related pay works on the assumption that
employees will be motivated if they believe that they will be rewarded
for improving their contribution to the success of the enterprise. Last, a
commission is paid on the basis of percentage payments on sales or
turnover, which are paid on an individual or group basis.
3. (c) Organization-wide incentives
Organization-wide incentives are plans that encourage employees to
subordinate personal goals for that of the organization or the department.
4. (b) Individual performance related pay
Individual performance related pay is based on the notion that
employees will be motivated if they believe that they will be rewarded
for improving their contribution to the success of the enterprise.

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The pay would be in the nature of bonus earnings which are based on
the assessment or appraisal of an employee’s or team’s performance
against previously set objectives. It usually falls under the performance
management system.
5. (d) Fixed pay
Fixed pay is not incorporated into variable pay plans, Instead incentives,
bonuses, goal plans, and gain sharing are components of the variable pay
plans.
6. (b) Competence related pay makes considerable demands on the
abilities of line managers
The competency related pay makes considerable demands on the
commitment and skills of line managers.
7. (e) It increases attrition rate
Skill-based pay helps in reducing attrition. So option ‘e’ is not an
advantage of skill-based pay.
8. (d) i, ii, iii and iv
Among other things, skill-based pay enables organizations to adapt to
change and become more flexible. It also enables organizations to have
a quest for commitment and produce better quality products.
9. (b) i, ii and iii
The three major types of group payment schemes are profit sharing, gain
sharing and Employee Stock Ownership Plans (ESOPs).
10. (d) i, ii, iii, and iv
Profit sharing enables an increase in the responsiveness of the labour
force to the profit and hence performance of the company. It enables the
organization to attract and retain employees. It reduces the role of trade
unions and also increases long-term loyalty towards the company.

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Course Structure

Block 1: Foundations of Performance Management

Unit 1 Introduction to Performance Management
Unit 2 Performance Appraisals
Unit 3 3600 Feedback

Block 2: Performance Management Framework

Unit 4 Developing the Performance Management Framework
Unit 5 Designing and Launching the Performance Management System
Unit 6 Evaluation and Maintenance of Performance Management

Block 3: Performance Measurement of Individuals, Teams and Organizations

Unit 7 Measuring Individual Performance
Unit 8 Measuring Team Performance
Unit 9 Measuring Organizational Performance

Block 4: Compensation and Reward Management

Unit 10 Rewards and Recognition
Unit 11 Reward Management
Unit 12 Performance Management and Compensation
Unit 13 Job Evaluation and Pay Structure
Unit 14 Performance Competence and Skill Based Pay

Block 5: Performance Development

Unit 15 Performance Management and Employee Development
Unit 16 Motivation and Performance Improvement
Unit 17 Emerging Trends in Performance Management