HUMAN RESOURCE MANAGEMENT

UNIT-4th : PERFORMANCE APPRAISAL & COMPENSATION

PART- A: PERFORMANCE APPRAISAL

Introduction & Meaning Of Performance Appraisal:

Performance appraisals are usually designed by human resources (HR)

departments as a way for employees to develop in their careers. They provide
individuals with feedback on their job performance, ensuring that employees are
managing and meeting the goals expected of them and giving them guidance on
how to reach those goals if they fall short.

The term “performance appraisal” refers to the regular review of an employee’s

job performance and overall contribution to a company. Also known as an annual
review, employee appraisal, performance review, or evaluation, a performance
appraisal evaluates an employee’s skills, achievements, and growth, or lack
thereof.

Features Of Performance Appraisal:

Some key features of performance appraisals include:

i. Retrospective: They assess accomplishments, skills, and performance for

a previous period.
ii. Systematic: They follow a consistent structure, metrics, forms, and
procedures.
iii. Formal: They maintain documentation for performance data and future
reference.
iv. Individual: They focus on each employee’s competencies, achievements,
behaviours, and development areas.
v. Quantitative: They rely heavily on scores, ratings, and performance
metrics.

Nature Of Performance Appraisal:

i. Subjectivity and Objectivity: While aspects of employee performance,

such as productivity and meeting targets, can be objectively measured,
Mr. Nithin Menezes, Lecturer 1
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 other factors, such as interpersonal skills and teamwork, may involve
subjective assessment by managers.
ii. Two-Way Communication: Performance appraisal is not only about
evaluating employees’ performance but also about facilitating a two-way
communication process between managers and employees.
iii. Continuous Process: While performance appraisal often occurs on a
scheduled basis, such as annually or semi-annually, it is part of a
continuous process of performance management.
iv. Developmental and Evaluative: Performance appraisal serves both
developmental and evaluative purposes. On one hand, it aims to identify
areas for improvement, provide support and guidance for employee
development, and align individual performance with organizational goals.
v. Multifaceted Evaluation: Performance appraisal evaluates various aspects
of employee performance, including quantitative measures such as
productivity, quality of work, and meeting targets, as well as qualitative
factors such as communication skills, teamwork, and leadership abilities.

Purpose Of Performance Appraisal:

The following are the main purposes of performance appraisal.

I. Appraisal Procedure: It provides a common and unified measure of

performance appraisal, so that all employee are evaluated in the same
manner. It gives an in discriminatory rating of all the employees.
II. Decision Making: Performance appraisal of the employees is extremely
use fooling the decision making process of the organization. In selection,
training. Promotion pay in crement and in transfer, performance appraisal
is very useful tool.
III. Work Performance Records: Performance appraisal gives us a complete
information in the form of records regarding very employee.
IV. Employees Development: Performance appraisal guides the employees in
removing their effects and improving their working. The weaknesses of the
employee recorded in the performance appraisal provide the basis for an
individual development programme.
V. Enables Supervisors to be More Alert and Competent: Performance
appraisal enables supervisor to be more alert and competent and to improve
the quality of supervision by giving him a complete record of employee’s.
Mr. Nithin Menezes, Lecturer 2
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
Objectives of Performance Appraisal:

I. Performance Improvement: One of the primary objectives of performance

appraisal is to identify strengths and weaknesses in employee performance.
By providing constructive feedback and setting clear objectives,
organizations aim to improve individual and overall team performance.
II. Feedback and Communication: Performance appraisal provides a formal
structure for managers and employees to engage in meaningful discussions
about performance. It facilitates open communication channels where
employees receive feedback on their work, accomplishments, and areas
needing improvement.
III. Recognition and Rewards: Effective performance appraisal processes help
organizations identify high-performing employees who contribute
significantly to business objectives. By evaluating performance fairly and
objectively, managers can make informed decisions regarding rewards
such as salary increases, bonuses, promotions, or other forms of
recognition.
IV. Career Development and Planning: Performance appraisal serves as a
platform for discussing career aspirations, skill development opportunities,
and future career paths. Through performance discussions, employees and
managers can identify developmental needs, training requirements, and
professional growth opportunities.
V. Decision Making and Human Resource Planning: Performance appraisal
outcomes inform various human resource decisions and strategic planning
processes within organizations. Objective performance data helps
managers assess workforce capabilities, identify training needs, allocate
resources effectively, and make informed decisions related to promotions,
transfers, job rotations, and workforce planning.

Importance of Performance Appraisal:

I. Boosts Employee Engagement and Motivation: Regular feedback and

recognition through performance appraisals can make employees feel
valued and appreciated. Understanding their strengths and how their work
contributes to the bigger picture can increase their motivation and
engagement.
Mr. Nithin Menezes, Lecturer 3
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 II. Provides a Clear Path for Development: Performance appraisals help
employees identify areas for improvement and set specific goals for
growth. This clear roadmap empowers them to take ownership of their
development and acquire new skills that benefit both themselves and the
organization.
III. Improves Communication and Collaboration: The appraisal process fosters
open communication between managers and employees. Discussing goals,
challenges, and feedback creates a space for honest conversations. This
improved communication strengthens working relationships and
collaboration within teams.
IV. Strengthens Alignment with Organizational Goals: Performance appraisals
ensure individual employee goals are aligned with departmental and
overall organizational objectives. By understanding how their work
contributes to the bigger picture, employees become more focused and
work towards shared goals.
V. Informs Strategic Workforce Decisions: Performance appraisals provide
valuable data on employee strengths, weaknesses, and potential. This data
can be used to make informed decisions about promotions, training
investments, and even future staffing needs. It helps organizations build a
strong and well-equipped workforce for long-term success.

Techniques or Methods Of Performance Appraisal:

1) Traditional Methods:
i. Ranking Method: It is the oldest and simplest formal systematic method of
performance appraisal in which employee is compared with all others for
the purpose of placing order of worth. The employees are ranked from the
highest to the lowest or from the best to the worst.
ii. Paired Comparison Method: In this method, each employee is compared
with every other employee, one at a time. The number of times the
employee is compared as better with others determines his or her final
ranking.
iii. Grading Method: In this method, certain categories of worth are
established in advance and carefully defined. There can be three categories

Mr. Nithin Menezes, Lecturer 4

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 established for employees: outstanding, satisfactory and unsatisfactory.
There can be more than three grades.
iv. Forced Distribution Method: This method was evolved to eliminate the
central tendency of rating most of the employees at a higher end or the
lower end of the scale. Employees are placed between two extremes of
‘good’ and ‘bad’ job performances. The method assumes that employees’
performance level confirms to a normal statistical distribution – 10, 20, 40,
20 and 10%.
v. Forced Choice Methods: The forced-choice method is developed by J. P.
Guilford. It contains a series of groups of statements, and rater rates how
effectively a statement describes each individual being evaluated.
Common method of forced-choice method contains two statements, both
positive and negative.
vi. Check-List Method: The basic purpose of utilizing check-list method is to
ease the evaluation burden upon the rater. In this method, a series of
statements, i.e., questions with their answers in ‘yes’ or ‘no’ are prepared
by the HR department. The check-list is, then, presented to the rater to tick
appropriate answers relevant to the ratee.
vii. Critical Incidents Method: This method has gained a lot of interest these
days. In this method, the rater focuses his or her attention on those key or
critical behaviours that make the difference between performing a job in a
noteworthy manner (effectively or ineffectively). There are three steps
involved in appraising employees using this method.
viii. Graphic Rating Scale Method: The graphic rating scale is one of the most
popular and simplest techniques for appraising performance. It is also
known as linear rating scale. In this method, the printed appraisal form is
used to appraise each employee.
ix. Essay Method: Essay method is the simplest one among various appraisal
methods available. In this method, the rater writes a narrative description
on an employee’s strengths, weaknesses, past performance, potential and
suggestions for improvement.
x. Field Review Method: This is an appraisal by someone outside the rater’s
own department usually someone from the corporate office or the HR
department. The outsider reviews employee’s records and holds interviews
with the appraise and his or her superior.

Mr. Nithin Menezes, Lecturer 5

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
xi. Confidential Report: It is the traditional way of appraising employees
mainly in the Government Departments. Evaluation is made by the
immediate boss or supervisor for giving effect to promotion and transfer.
Usually a structured format is devised to collect information on employee’s
strength, weakness, intelligence, attitude, character, attendance, discipline
etc.

2) Modern Methods:
i. Assessment centres: An assessment centre typically involves the use of
methods like social/informal events, tests and exercises, assignments being
given to a group of employees to assess their competencies to take higher
responsibilities in the future.
ii. Behaviourally anchored rating scales (BARS): Behaviourally Anchored
Rating Scales (BARS) is a relatively new technique which combines the
graphic rating scale and critical incidents method. It consists of
predetermined critical areas of job performance or sets of behavioural
statements describing important job performance qualities as good or bad
(for example: the qualities like inter-personal relationships, adaptability
and reliability, job knowledge etc.).
iii. Human resource accounting method: Human resources are valuable assets
for every organization. Human resource accounting method tries to find the
relative worth of these assets in the terms of money. In this method the
performance appraisal of the employees is judged in terms of cost and
contribution of the employees. The cost of employees include all the
expenses incurred on them like their compensation, recruitment and
selection costs, induction and training costs etc.
iv. 360 degree performance appraisal: 360 degree feedback, also known as
“multi-rater feedback”, is the most comprehensive appraisal where the
feedback about the employees’ performance comes from all the sources
that come in contact with the employee on his job. 360 degree appraisal
has four integral components:
• Self appraisal
• Superior’s appraisal
• Subordinate’s appraisal
• Peer appraisal.

Mr. Nithin Menezes, Lecturer 6

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 v. Management By Objectives (MBO): The concept of ‘Management by
Objectives’ (MBO) was first given by Peter Drucker in 1954. It can be
defined as a process whereby the employees and the superiors come
together to identify common goals, the employees set their goals to be
achieved, the standards to be taken as the criteria for measurement of their
performance and contribution and deciding the course of action to be
followed.
a) Process Of MBO:
• Setting Organisational Goals
• Setting Departmental Goals
• Define Expected Results
• Performance Reviews
• Provide Feedback.
b) Advantages Of MBO:
• Properly planned approach
• Ensures sound decision making
• Increases employee motivation
• Optimization of resources
• Teamwork and collaboration.
c) Disadvantages Of MBO:
• Cost and time consuming
• May create frustration
• Low employee morale
• Unfair competition.

Steps in Appraising Performance:

The performance appraisal process typically involves the following steps:

➢ Establish standards: Set performance standards for the employee

➢ Communicate standards: Share the performance standards with the
employee
➢ Measure performance: Evaluate the employee’s actual performance
➢ Compare performance: Compare the employee’s actual performance to the
standards
Mr. Nithin Menezes, Lecturer 7
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 ➢ Discuss results: Discuss the results with the employee and provide
feedback
➢ Create a plan: Decide on a follow-up plan

Other aspects of the performance appraisal process include:

❖ Setting goals: Employees and managers work together to set goals for the
employee
❖ Regular feedback: Employees and managers regularly discuss the
employee’s progress towards their goals
❖ One-on-one interviews: Managers schedule one-on-one interviews with
employees to discuss the review

Performance appraisals are a structured method of assessing an employee’s job

performance. They help to evaluate an employee’s strengths, areas for
improvement, and their value to the organization.

Advantages of Performance Appraisal:

i. A systematic appraisal system helps the managers to properly identify the

performance of employees in a systematic manner and their areas of talent
and areas where they are lacking.
ii. It helps the management to place the right employees for the perfect jobs
depending on their skills in particular areas.
iii. It helps employees identify the areas in which they need to improve.
iv. Potential employees are often given promotions on the basis of or the
results of performance appraisals.
v. An appraisal is also useful in determining the effectiveness and results of
training programmes.
vi. It creates healthy competition among employees as they will try to improve
their performance and score better than their colleagues.
vii. Managers use appraisal programmes to identify the grievances of
employees and act upon them.
viii. Keeping extensive records of performance appraisal will give managers a
very good idea of which employees have the highest growth rate and are
which ones have a declining rate of performance.

Disadvantages of Performance Appraisal:

Mr. Nithin Menezes, Lecturer 8

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 i. If the factors being used in the performance appraisal are incorrect or not
relevant, the appraisal will fail to provide any useful or effective data.
ii. Sometimes, equal weightage is not given to important factors when
performing an appraisal.
iii. Some objective factors are very vague and difficult to gauge like attitude
and initiative.
iv. Managers are sometimes not qualified enough to correctly assess the
employees and their abilities.

Potential Appraisal:

Introduction & Meaning Of Potential Appraisal:

The potential appraisal is made up of two words viz. Potential and appraisal.
Potential means the abilities of an employee which are required for meeting the
challenges of future assignments while appraisal means the evaluation of that
abilities in present status of an employee.

Thus, potential appraisal is the process of evaluation of the abilities of an

employees that uses by employee in the future assignments. It is different from
performance appraisal and needs to be carried out at regular intervals

The potential appraisal refers to the appraisal involving identification of the

hidden talents and skills of a person. The person might or might not be aware of
them.

Potential appraisal is a future oriented appraisal whose main objective is to

identify and evaluate the potential of the employees to assume higher positions
and responsibilities in the organizational hierarchy. Many organizations consider
and use potential appraisal as a part of the performance appraisal processes.

Objectives Of potential appraisal:

❖ Identify the abilities of an employee in order to evaluate whether that

employee is suitable for future assignments or otherwise, and

Mr. Nithin Menezes, Lecturer 9

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 ❖ Occupy higher positions in the organizational hierarchy and undertake
higher responsibilities because past performance may not be a good
indicator for future and higher role.
❖ Inform employees about their future roles
❖ Make suitable corrections in training efforts from time to time:
❖ Inform employees about they must do something for their career prospects;
❖ Help organization for suitable succession plan;
❖ Improve quality and quantity of performance of an employee, and
❖ Give proper feedback to the employees for their potential.

Features Of Potential Appraisal:

❖ Helps assess the employees capacities, which pave way for them to give
their best performance
❖ Helps assess an organization’s ability to develop future managers
❖ Helps assess the employees’ analytical power, which indicates the ability
to analyse problems and examine them critically
❖ Helps build creative imagination, which is the ability of presenting an
existing thing in an unconventional and new manner
❖ Helps analyse the sense of reality, which refers to an employee’s way of
interpreting a situation
❖ Helps develop leadership skills, which refer to the abilities to direct,
control, and harmonize with people.

Steps of Potential Appraisal System:

1. Role Description: A good potential appraisal system would be based on

clarity of voles and functions associated with the different roles in
organisation. This requires extensive job descriptions to be made available
for each job. These job description should spell out the various functions
involved in performing the job.
2. Qualities Required: Besides job descriptions, it is necessary to have a
detailed list of qualities required to perform each of these functions. These
qualities may be broadly divided into four categories:
• Technical knowledge and skills.
• Managerial capabilities and qualities.
• Behavioural capabilities.

Mr. Nithin Menezes, Lecturer 10

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 • Conceptual capabilities.
3. Indicators of Qualities: A good potential appraisal system besides listing
down the functions and qualities would also have various mechanism for
judging these qualities in a given individual. Some of the mechanisms for
judging these qualities are:
• Rating by others.
• Psychological tests.
• Simulation games and exercises.
• Performance appraisal records.
4. Organising the System: Once the functions, the qualities required
performing these functions, indicators of these qualities, and mechanisms
for generating these indicators ate clear, the organisation is in a sound
position to establish and operate the potential appraisal system. Such
establishment requires clarity in organisational policies and
systematisation of its efforts.
5. Feedback: If the organisation believes in the development of human
resources it should attempt to generate a climate of openness. Such a
climate is required for helping the employees to understand their strengths
and weaknesses and to create opportunities for development.

A good potential appraisal system should provide an opportunity for every

employee to know the results of assessment. He should be helped to understand
the qualities actually required for performing the role for which he thinks he has
the potential, the mechanisms used by the organisation to appraise his potential,
and the results of such an appraisal.

Employee Counseling:

Introduction:

In the present highly complex environment, HR counselling has become very

important responsibility of HR managers as counselling plays vital role in
different aspects of managing human resources like career planning and
development, performance management, stress management, and other areas
which may affect employees emotionally. Counseling has very wide application
both within and without organizational context.
Mr. Nithin Menezes, Lecturer 11
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
Meaning Of Employee Counseling:

Employee counseling is a method of understanding and helping individuals who

have technical, personal and emotional adjustment problems interfering with their
work performance.

Employee counseling is a process that helps employees resolve personal,

professional, or psychological issues. It can help to improve employee
performance, and can also be used as evidence for termination if the employee
doesn’t improve.

Objectives Of Employee Counseling:

➢ Provide an opportunity for the employee to discuss his frustration, tension,

conflicts, concerns and problems.
➢ Understand his behaviour and reasons for such behaviour.
➢ Help the employee to realise his potential.
➢ Help him to understand his strengths and areas for development.
➢ Understanding the work environment.
➢ Improve his personal and interpersonal effectiveness.

Reasons For Employee Counseling:

i. Managing Stress and Anxiety: Workplace stress and anxiety are common
issues faced by employees due to tight deadlines, heavy workloads, and
high expectations.
ii. Improving Job Performance: Employees sometimes face difficulties in
meeting their performance expectations due to personal or work-related
challenges. Counseling can identify the underlying causes of
underperformance and provide guidance.
iii. Conflict Resolution: Conflicts between co-workers with supervisors lead
to a toxic work environment, affecting morale and productivity Counseling
provides a neutral platform for resolving conflicts healthy and constructive
way.
iv. Career Development and Guidance: Employees may sometimes feel stuck
in their roles or uncertain about their career path Counseling offers career
development guidance by helping employees assess their strengths,
interests, and opportunities for growth.

Mr. Nithin Menezes, Lecturer 12

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 v. Coping with Personal Issues: Personal issues, such family problems,
financial stress, or health concerns, can significantly impact an employee’s
performance and well-being. Employee counseling provides emotional
support and a safe space to discuss these issues.
vi. Work-Life Balance: Balancing work responsibilities with personal life can
be challenging, leading to burnout. Counseling helps employees
understand the importance of work-life balance and provides practical
solutions for achieving it.
vii. Dealing with Organizational Change: Organizational changes such as
mergers, restructuring, or downsizing can cause uncertainty and anxiety
among employees. This reduces resistance to change and helps maintain
productivity during periods of upheaval.
viii. Mental Health Support: Mental health issues such depression, anxiety, or
burnout can affect an employee’s performance and well-being. Counseling
provides a confidential outlet for employees to discuss their mental health
concerns and receive professional support.

Types Of Employee Counseling:

i. Directive Counseling: It is full counseling. It is the process of listening to

an employee’s problem, deciding with the employee what should be done
and telling and motivating the employee to do it. This type of counseling
mostly does the function of advice, reassurance and communication. It
may also perform other functions of counseling.
ii. Non-directive Counseling: In non-directive counseling, the employee is
permitted to have maximum freedom in determining the course of the
interview. It is the process of skilfully listening and encouraging a
counselee to explain troublesome problems, understand them and
determine appropriate solutions.
iii. Participative Counseling: Both directive and non-directive methods suffer
from limitations. While the former is often not accepted by independent
employees, the latter needs professionals to operate and hence is costly.
Hence, the counseling used in most situations is in between these two. This
middle path is known as participative counseling.

Methods Of Employee Counseling:

Mr. Nithin Menezes, Lecturer 13

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
Methods and techniques of counseling change from person to person and from
situation to situation. Normally employee counseling involves the following
methods:

i. Desensitization: According to Desensitization, once an animal has been

shocked in a particular situation, it will continue to avoid it indefinitely.
This is quite true in respect of human beings also. Once an individual is
shocked in a particular situation, he gives himself no chance for the
situation to recur.
ii. Catharsis: Discharge of emotional tensions can be called catharsis.
Emotional tensions can be discharged by talking them out or by relieving
of the painful experience which engendered them. It is an important
technique as a means of reducing the tensions associated with anxiety, fear,
hostility, or guilt.
iii. Insight: With the help of insight one may find that he has devalued himself
unnecessarily, or his aspirations were unrealistic, or that his childish
interpretation of an event was inaccurate. Then he can overcome his
weakness.
iv. Developing the new patterns: Developing new patterns becomes very often
necessary when other methods to deal with weak spots remain ineffective.
In order to develop new, more satisfying emotional reactions, the
individual needs to expose himself to situations where he can experience
positive feelings.

Job Changes:

Meaning:

Job Changes is a revision to an employee’s existing job description. Movement

of Personnel within/outside of an Organization.

Mobility of employees from one job to another through transfer, promotion and
demotion is internal mobility and some employees leave the organization due to
resignation, retirement and termination is called external mobility. Taking internal
and external together makes job change.

Purpose Of Job Change:

Mr. Nithin Menezes, Lecturer 14
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 • To maximize employee efficiency.
• To improve organizational effectiveness.
• To ensure discipline.
• To cope with changes in operations.

Uses Of Job Changes:

• To Meet Organizational Needs.

• To Satisfy Employee Needs.
• To Better Utilize Employee.
• To Make the Employee More Versatile.
• To Adjust the Workforce.
• To Provide Relief.
• To Punish Employee.

Transfers And Promotion:

Introduction:

In Human Resource Management (HRM), transfer and promotion are crucial

aspects of career management that help organizations effectively utilize their
human resources. Both processes involve the movement of employees within the
organization, but they differ in terms of scope, purpose, and implications for the
employee.

Transfer:

A transfer refers to the assignment of an employee to a different job or location

within the same organization, typically at the same level and with the same pay.
Transfers are often done to meet organizational needs, improve employee skills,
or address personal circumstances.

Types of Transfer:

i. Lateral Transfer: Involves moving an employee to a similar position in a

different department or location without a change in job level or pay.

Mr. Nithin Menezes, Lecturer 15

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 ii. Vertical Transfer (Promotion or Demotion): A transfer that involves
moving an employee to a position with greater responsibility and higher
pay (promotion) or to a position with lesser responsibilities and pay
(demotion).
iii. Geographical Transfer: Involves transferring an employee to a different
location or office of the organization. This could be within the same city,
country, or even internationally.
iv. Cultural Transfer: Employees may be transferred to work in different
cultural settings, either within their home country or internationally, to
enhance cross-cultural skills.

Reasons for Employee Transfer:

i. Organizational Needs: Companies may transfer employees to meet

changing business requirements or fill gaps in staffing.
ii. Employee Development: Transfers help employees gain a broader
perspective of the company by providing them with opportunities to work
in different departments or locations.
iii. Employee Motivation and Satisfaction: Employees who feel stagnant in
their current roles may be transferred to reinvigorate their career.
iv. Personal Reasons: Transfers can accommodate personal circumstances
such as family relocation or health-related issues.
v. Internal Conflict or Poor Performance: Employees who face interpersonal
issues or are underperforming in one area might be transferred to a new
department to improve performance.

Promotion:

A promotion refers to the advancement of an employee to a higher position within

the organization, typically accompanied by an increase in responsibilities,
compensation, and status. Promotions are considered a positive recognition of an
employee’s hard work, capabilities, and potential.

Types of Promotion:

i. Vertical Promotion: Employees are promoted to a higher position within

the hierarchy, gaining more responsibility and a higher salary.

Mr. Nithin Menezes, Lecturer 16

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 ii. Horizontal Promotion: Involves an employee moving to a position with
similar responsibilities but in a different department, often to provide
growth opportunities without a direct change in salary.
iii. In-Grade Promotion: An increase in salary or benefits for an employee
without a change in job position or level.
iv. Merit-Based Promotion: Promotions based on an employee’s individual
performance, achievements, and contributions.
v. Seniority-Based Promotion: Promotions based primarily on the length of
time an employee has been with the organization.

Promotion Process:

i. Criteria Definition: Establish clear criteria for promotion, such as

performance appraisals, qualifications, experience, and potential.
ii. Performance Evaluation: Evaluate employee performance regularly to
identify individuals who demonstrate potential for higher responsibilities.
iii. Announcement: Promote the employee formally through internal
communication or a public announcement.
iv. Transition: Provide necessary training, orientation, or mentoring to help
the employee transition into the new role.
v. Feedback and Follow-up: Continuous monitoring of the employee’s
performance and feedback to ensure success in the new position.

Reasons for Promotion:

i. Employee Performance: Employees who consistently meet or exceed

expectations in their roles are often promoted as a recognition of their
performance.
ii. Organizational Growth: As organizations expand, higher positions may be
created, and employees are promoted to fill these roles.
iii. Employee Motivation and Retention: Promotions serve as an incentive to
motivate employees, increase job satisfaction, and reduce turnover.
iv. Reward for Experience: Employees who demonstrate experience and
accumulated knowledge may be promoted as recognition of their value to
the organization.

Difference Between Transfer and Promotion:

Mr. Nithin Menezes, Lecturer 17

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 Aspect Transfer Promotion

Definition Movement within the Advancement to a higher

same organization but position with increased
without an increase in responsibilities and
status or salary. benefits.

Objective Address organizational Reward performance

needs or employee and experience, and
development. motivate employees.

Impact on Salary Typically no change, Significant salary

though some transfers increase usually
may involve lateral accompanies a
salary adjustments. promotion.

Employee Motivation Provides variety, new Boosts morale,

challenges, or addresses recognition, and career
personal needs. growth.

Frequency Can happen more Less frequent, typically

frequently, especially for occurring as employees
skill development or show readiness.
addressing staffing
needs.

Risks for Employees Discomfort adjusting to Increased stress, possible

new roles, relocation. failure in new
responsibilities.

Downsizing:

Downsizing is when a company terminates a number of employees at the same

time. It refers to the process of reducing the size of an organizations’ workforce,
often as a result of organizational restructuring cost-cutting, or other strategic

Mr. Nithin Menezes, Lecturer 18

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
decisions. Downsizing can take many forms, Including layoffs, early retirements,
voluntary exit packages, or a freeze on hiring.

Reasons for Downsizing:

i. Cost Reduction: Often, organizations downsizing to reduce operating

expenses, especially during financial crises or when profit margins decline.
ii. Organizational Restructuring: Changes in business strategy or mergers and
acquisitions can lead to redundancies and the need for downsizing.
iii. Technological Advancements: Automation and technological changes con
tender some job role unnecessary.
iv. Globalization and Outsourcing: Companies may outsource work to other
countries with lower labour costs, leading to job cute in the domestic
workforce
v. Performance improvement: Downsizing can be part of an effort to make
the company learner and more efficient, aiming for better performance.
vi. Mergers and Acquisitions: When two companies merge, there may be
overlapping roles that lead to job cuts.

Advantages Of Downsizing:

The corporate restructuring benefits organization in the following ways:

i. Reduces Cost: It is the fastest way to minimize cost. This is because, a

significant amount of personnel moves out of the organization.
ii. Streamlining Hierarchy: Restructuring helps in redefining the operations
and streamlining the hierarchy.
iii. Avoid Duplications: Through this process, companies identity and exclude
similar posts.
iv. Eliminate Competition: It helps cut competition by optimizing
performance.
v. Sail through Economic Crisis: It plays a crucial role in sailing through the
economic crisis and remaining solvent.

Consequences Of Downsizing:

Along with many advantages to the organization, downsizing impacts employees.

Adversely. Here are some of the consequences following its implementation:

Mr. Nithin Menezes, Lecturer 19

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 • It leaves the downsized employee unemployed.
• The remaining employees suffer job insecurity
• It may greatly impact the organization’s skill base.
• It leaves a negative imprint on the customer’s mind.
• The existing employees may get overburdened by the work.

Types of Downsizing Methods:

Downsizing can be implemented in several ways, depending on the company’s

needs and goals

i. Involuntary Layoffs: Employees are terminated, typically based on

performance, seniority, or other criteria
ii. Voluntary Separation Programs (VSP): Employees are offered financial
incentives (e.g. severance packages, early retirement offers) to leave the
company voluntarily.
iii. Early Retirement Packages: Employees approaching retirement age may
be encouraged to retire earlier than planned, often with financial incentives
iv. Attrition: Instead of laying off employees, the company chooses not to
replace those who leave voluntarily, such as through retirement or
resignation
v. Outsourcing/Offshoring: The company transfers tasks or departments to
external vendors or other countries to reduce labour costs
vi. Reduced Work Hours: Instead of laying off employees, organizations may
reduce working hours to manage costs, though this is less common than
full layoffs.

The three downsizing strategies are-

❖ Workforce Reduction: This simply means eliminating those employees

from the organization whose positions are not significant and without them,
the organization may run unaffectedly
❖ Work redesign: This involves eliminating unnecessary work which does
contribute much to achieving the needs of the organization and well the
customers.
❖ Systematic approach: This approach simply involves changing the cultural
atmosphere of the company by looking upon the long-term effects of the
organization as positive for gaining strength for the company.
Mr. Nithin Menezes, Lecturer 20
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
VRS Voluntary Retirement Scheme:

Meaning:

A Voluntary Retirement Scheme or VRS is a scheme that is offered by many

companies to give employees the freedom to take voluntary retirement before
they reach the age of retirement.

Benefits availed by the employee after Voluntary Retirement:

➢ The benefits availed by the employee after Voluntary retirement are as

follows:
➢ The employee gets to enjoy retirement benefits at an early age.
➢ The employee receives provident funds and gratuity dues.
➢ The employee gets counselling and tax consultation from the company to
get a smooth retirement.
➢ The employee can also get tax-free compensation.
➢ The employee can receive 45 days’ payment for each completed year of
service.

Benefit for the company utilising VRS:

➢ The benefits that the company gets after utilising VRS scheme are as
follows:
➢ It helps the company in cost-cutting and reducing the workforce.
➢ The money that has been saved in the process can be used to improve the
productivity of the company.
➢ The company is saved from the opposition of trade unions.
➢ The company can let go of the employees in a healthy way without
damaging their relationships.

Eligibility criteria for a Voluntary Retirement Scheme (VRS):

To avail Voluntary Retirement Scheme (VRS) the employee needs to fit the
eligibility criteria. The eligibility criteria for Voluntary Retirement Scheme or
VRS are as follows:

Mr. Nithin Menezes, Lecturer 21

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 ❖ The employee should have been working with the company for more than
10 years.
❖ The employee should be 40 years of age or above.
❖ All employees of the company can avail of the Voluntary Retirement
Scheme or VRS except for the directors.

PART- B: COMPENSATION

Introduction & Meaning Of Compensation:

Compensation is the reward that the employees receive in return for the work
performed and services rendered by them to the organization. Compensation
includes monetary payments like bonuses, profit sharing, overtime pay,
recognition rewards and sales commission, etc., as well as non-monetary perks
like a company-paid car, company-paid housing and stock opportunities and so
on.

Compensation is a vital part of human resource management decision making as

it helps in encouraging the employees and improves the organizational
effectiveness.

Definition: “Employee compensation refers to all forms of pay going to

employees and arising from their employment”. - Gary Dessler

Compensation = Wage or Salary + Employee benefits + Non-recurring

financial rewards + Non-pecuniary rewards.

Objectives Of Compensation:

1) Primary Objectives:
a. Equity: The first category is equity, and may take several forms. Equity
includes income distribution through narrowing down of inequalities,
increasing the wages of the lowest paid employees, protecting real wages,
and the concept of equal pay for work of equal value.
b. Efficiency: Efficiency is often closely related to equity. These two concepts
are not adverse. The objectives of effi-ciency are evidenced in attempts to
Mr. Nithin Menezes, Lecturer 22
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 link a part of wages to productivity or profit, group or individual
performance, acquisition and application of skills, and so on.
c. Macro-Economic Stability: Companies try to achieve macro-economic
stability through high employment levels. Low inflation helps to achieve
macro-economic stability.
d. Efficient Allocation of Labour: Employees consider the net gain. Efficient
allocation of labour refers to the concept of labour/employee moving out
of a situation to another for a net gain.
2) Secondary Objectives:
a. Acquiring competent personnel – Good compensation helps an
organization attract competent applicants.
b. Complying with regulations – A sound wage and salary system considers
the legal challenges imposed by the government and ensures the employers
compliance.
c. Controlling costs – A rational compensa-tion system helps the organization
obtain and retain workers at a reasonable cost.
d. Enhancing administrative efficiency – Any organization desires and
attempts to optimally use the human resource information systems (HRIS).
e. Facilitating understanding – The compensation management system
should have a high level of clarity.
f. Retaining employees – Attrition may increase when compensation levels
do not fulfil employees’ expectations.
g. Rewarding desired behaviour – Companies expect certain types of
behaviour from the employees.

Purpose Of Compensation:

An organisation has to design its compensation system to attain the following

purpose:

i. Attracting the Talent: It is widely accepted that human resources of an

organisation give it an edge over its competitors. By offering a well-
designed pay package, an organisation can get best talent available in the
job market.
ii. Retaining the Talent: Because of liberalisation, globalisation and
privatisation, the workforce has become highly mobile.

Mr. Nithin Menezes, Lecturer 23

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
iii. Motivating the Employees: The talented employees may not be motivated
to use their talent unless they feel that they will be rewarded duly for their
contribution towards the organisational objectives.

Types Of Compensation:

Based on the definition discussed above, compensation can be broadly classified

under two heads:

1) Direct Compensation
2) Indirect Compensation

1) Monetary / Direct Compensation

Direct/Monetary Compensation refers to a form of financial reward given
to employees for their services at a regular time interval. It is further
divided into the following types:
i. Basic Wages/ Salary:
Wage refers to the hourly rate of pay, and salary refers to the monthly rate
of pay, irrespective of the number of hours invested by the employee.
ii. Allowances:
iii. Allowances are additional financial components of the compensation; they
are fixed and help employees meet their daily needs above their base salary.
The most common types are:
Mr. Nithin Menezes, Lecturer 24
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 a. House Rent Allowance: Organizations usually compensate for employees’
housing facilities, differing based on the metro and non-metro cities.
b. Dearness Allowance: This helps employees face the onslaught of inflation
of prices of goods and services.
c. Leave Travel Allowance: Employees are given allowances to take vacation
time alone or with family and friends.
d. City Compensation Allowance: It is compensation paid to employees to
cover the additional cost of living in cities and varies according to location.
e. Special Allowance: They give employees an additional sense of social
security and motivation to work. Examples of this allowance include
overtime, mobile, travel allowances etc.
iv. Bonuses and Incentives:
Incentives are paid to employees beyond their base salary and depend on
their productivity, sales, profit, or cost-reduction efforts.
A bonus is a pre-defined amount paid to employees during festive seasons
or company profit.
v. Commissions:
Employees receive them during a particular time, which varies according
to the sales revenue or company profits. They are mostly paid to sales
employees on the achievement of their targets on a monthly or a periodic
basis.
vi. Stock Options:
In this, employees can purchase the company’s shares at a fixed price lower
than the market price, and only employees who worked for a certain period
(generally three to five years) are eligible for this type of compensation.
vii. Benefits:
Employee benefits include health insurance, medical coverage, retirement
benefits, legal insurance, etc. A Glassdoor survey reveals that 48% of
employees consider a good benefits package over a salary while accepting
a job offer.

2) Non-monetary / Indirect Compensation:

Non-monetary compensation plays a vital role in the lives of today’s
workforce. They are crucial to the long-term survival of employees in the

Mr. Nithin Menezes, Lecturer 25

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 organization while impacting the reputation and profitability of the
company. They are of the following types:
i. Reward and Recognition:
Recognizing the employees often boosts their motivation and enhances
their productivity. They can be recognized for their efforts, performance,
attitude, team spirit, problem-solving ability, etc., with a reward to increase
their overall performance.
ii. Promotion:
Promotions promote a positive attitude among employees by providing
opportunities for personal growth, increased responsibilities, and increased
social status.
iii. Work-life balance initiatives:
A flexible work schedule increases the mental, physical, emotional, and
social wellness of employees. Introducing work-life balance initiatives like
remote work, hybrid work, reduced office hours, etc., helps employees
fulfil their commitments to their family and friends.
iv. Career Development Opportunities:
Employees place continuous growth opportunities and learning new skills
above other needs. A proper career progression plan provides employees
with social security and helps them develop skills to assist in their future
roles.

Importance Of Compensation:

❖ Retention: In the raging talent war, organizations find it challenging to

retain their current workforce. 70% of employees quit their jobs owing to
lesser pay packages, significantly impacting the firm’s attrition rates.
❖ Job Satisfaction: To increase the levels of job satisfaction, it’s crucial for
organizations to focus on non-monetary initiatives like team building and
work environment initiatives.
❖ Productivity : Employee productivity is directly proportional to
compensation, as a slight change in wages directly impacts their
productivity.
❖ Motivation: It also promotes desirable organizational behaviour where
employees are motivated to do their best.

Compensation Policy:
Mr. Nithin Menezes, Lecturer 26
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
A compensation policy, also known as a salary policy, is a set of guidelines and
principles that outline how a company compensates its employees:

A compensation policy establishes a fair and consistent system for rewarding

employees for their work and contributions to the organization. It also helps to
attract, motivate, and retain talent.

Elements Of Compensation Policy:

A compensation policy typically includes details on:

❖ Basic pay
❖ Statutory requirements
❖ Benefits, such as insurance and paid time off
❖ Commissions
❖ Bonuses
❖ Overtime
❖ Severance
❖ Equity-based rewards.

Job Evaluation:

Job evaluation is a systematic process used by organizations to assess the relative

worth of jobs within the company. The goal is to determine a fair and equitable
pay structure by comparing various job roles based on their duties,
responsibilities, and required skills.

Objectives of Job Evaluation:

➢ Fair Pay Structure: Ensures that employees are paid fairly based on the
value of their roles and contributions.
➢ Internal Equity: Helps to maintain a sense of fairness and equality within
the organization.
➢ External Competitiveness: Allows organizations to benchmark salaries
against similar roles in the market to remain competitive.
➢ Clarifies Job Roles: Helps define job responsibilities, leading to clearer
roles and expectations.

Mr. Nithin Menezes, Lecturer 27

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 ➢ Improves Job Satisfaction: Employees feel valued when their jobs are
appropriately evaluated and rewarded.

Methods of Job Evaluation:

Job evaluation methods can be broadly classified into qualitative and quantitative
methods.

i. Ranking Method: Jobs are ranked from highest to lowest based on overall
worth to the organization. Simple and inexpensive but subjective, as it
relies on the evaluator’s judgment.
ii. Classification Method: Jobs are classified into predefined grades or classes
based on a set of criteria (e.g., responsibilities, skills, qualifications). Each
class has a set pay range.
iii. Point Method: Each job is evaluated based on key factors (e.g., skill,
responsibility, effort, working conditions) and assigned points. Jobs are
then rated according to the total points they accumulate.
iv. Factor Comparison Method: A sophisticated method where jobs are
compared based on factors such as skill, effort, responsibility, and working
conditions. Each factor is assigned a monetary value, and jobs are rated
against these factors.

Factors Considered in Job Evaluation:

➢ Skill: The level of education, training, and experience required for the job.
➢ Effort: The mental or physical effort required to perform the job.
➢ Responsibility: The amount of responsibility the job entails, including
decision-making and accountability.
➢ Working Conditions: The environment in which the job is performed (e.g.,
physical conditions, hazards, stress levels).

Steps in Job Evaluation Process:

1. Job Analysis: Collect detailed information about job roles, responsibilities,

qualifications, and requirements. Job descriptions and specifications are
created during this step.
2. Determine Evaluation Method: Choose a suitable evaluation method
(ranking, classification, point method, or factor comparison).
3. Evaluate Jobs: Use the chosen method to assess jobs systematically.
Mr. Nithin Menezes, Lecturer 28
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 4. Review & Compare Jobs: Analyse the results, ensure consistency, and
make adjustments as needed.
5. Establish a Pay Structure: Based on the evaluations, create a fair
compensation structure for the organization.
6. Communicate with Employees: Share results of the job evaluation process
with employees, ensuring transparency and understanding.

Advantages of Job Evaluation:

❖ Fairness: Ensures a fair distribution of wages based on job content and

requirements.
❖ Transparency: Clear guidelines on how jobs are evaluated and rewarded.
❖ Legal Compliance: Helps prevent discrimination in pay and ensures
compliance with labour laws.
❖ Employee Motivation: Can increase job satisfaction and morale when
employees feel their roles are fairly evaluated and compensated.

Methods of Wage Payment and Incentive Plans:

Wage Payment and incentive plans play a crucial role in motivating employees,
ensuring productivity, and aligning the interests of the workforce with
organizational goals. Understanding these methods is essential for organizations
aiming to implement efficient payroll systems.

A. Methods of Wage Payment:

Wages can be classified into two primary methods: Time-Based Wage Systems.
And Piece-Based Wage Systems.

I. Time-Based Wage System

In a time-based wage system, employees are paid based on the time they spend at
work, regardless of the quantity or quality of output. The wage rate is usually
fixed per hour, day, week, or month. This method is suitable where quality of
work is crucial, or output is hard to measure.

Types of Time-Based Wage Systems:

Mr. Nithin Menezes, Lecturer 29

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 ➢ Hourly Rate System: Employees are paid based on the number of hours
worked. It is ideal for jobs. Where the time spent is critical, like
administrative roles.
➢ Daily Rate System: Payment is made based on daily attendance. Common
in industries where attendance is crucial, such as construction,
➢ Weekly/Monthly Rate System: Employees receive a fixed payment at the
end of the week or month, regardless of attendance or hours worked. It is
prevalent in salaried positions, especially in management.

Advantages:

❖ Emphasis on quality over quantity.

❖ Simple and easy to administer.
❖ Suitable for jobs where supervision is essential.

Disadvantages:

❖ Can lead to inefficiency, as there is no direct link between effort and

reward.
❖ Higher supervision costs.
❖ Employees may be less motivated to enhance productivity,

II. Piece-Based Wage System

In this system, wages are paid based on the amount of work completed or units.
Produced. The more units an employee produces, the more they earn. It is most
suitable for manufacturing or production environments.

Types of Piece-Based Wage Systems:

➢ Straight Piece Rate: Employees are paid a fixed amount for each unit
produced. For example, if the rate is $5 per unit, producing 100 units earns
$500.
➢ Differential Piece Rate: Different rates are applied depending on output
levels. For example, up to 50 units may be paid at $4 per unit, while beyond
50 units, the rate increases to $6.

Advantages:
Mr. Nithin Menezes, Lecturer 30
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 ❖ Encourages higher productivity as earnings are directly linked to output
❖ Low supervision costs as employees are self-motivated.
❖ Suitable for repetitive tasks where output is easily measurable

Disadvantages:

❖ May compromise quality for quantity.

❖ Employees could feel pressure, leading to stress and job dissatisfaction,
❖ Unsuitable for jobs requiring complex skills or craftsmanship.

B. Incentive Plans:
Incentive plans are additional payment systems designed to motivate
employees to exceed basic performance requirements. They reward
employees for meeting or surpassing set targets. Incentive plans can be
individual or group-based.

1) Individual Incentive Plane:

Individual incentive plans reward employees based their personal performance.

These plans are suitable when individual output is measurable, and performance
can be directly attributed to a single worker.

Types of Individual Incentive Plans:

➢ Halsey Plan: Under this plan, a standard time is set for a task. Employees
who complete the task in less time are paid a bonus, usually a percentage
of the time saved. For example, if the standard time is 10 hours and the
worker completes it in 8 hours, they save 2 hours and receive a bonus for
those saved hours.
➢ Rowan Plan: Similar to the Halsey Plan, but the bonus is calculated as a
proportion of the time saved to the standard time. If the worker saves 2
hours out of a standard 10 hours, they get a bonus proportionate to the time
saved.
➢ Taylor’s Differential Piece Rate Plan: This plan applies a lower rate for
output below the standard and a higher rate for output above the standard.
This method rewards high-performing workers while discouraging low
productivity.

Mr. Nithin Menezes, Lecturer 31

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 ➢ Gantt Task and Bonus Plan: Employees receive a guaranteed minimum
wage irrespective of output. If they exceed the standard output, they receive
a bonus on top of their wage. It combines the stability of time-based
payment with the incentive for higher productivity.

Advantages of individual Incentive Plans:

❖ Direct link between effort and reward.

❖ Encourages self-motivation and personal accountability
❖ Suitable for jobs with easily measurable outputs.

Disadvantages of Individual Incentive Plans:

❖ Can foster unhealthy competition among workers.

❖ May ignore teamwork and collaboration.
❖ Workers may focus on quantity over quality

2) Group Incentive Plans:

Group incentive plans reward teams or groups of employees for their collective
performance. They are effective when tasks require collaboration, and individual
contributions are difficult to measure.

Types of Group Incentive Plans:

➢ Profit-Sharing Plans: Employees receive share of the company’s profits,

usually based on predetermined formula. This aligns employees’ interests
with the company’s financial success.
➢ Gainsharing Plans: Unlike profit-sharing, gainsharing focuses on sharing
gains derived from increased efficiency, cost reduction, or productivity
improvements. Employees receive bonuses based on their team’s
contribution to these gains.
➢ Scanlon Plan: A type of gainsharing plan where employees receive bonuses
based on cost savings in labour and materials. The savings and employees.
Shared between the company.
➢ Rucker Plan: Similar to the Scanlon Plan but emphasizes improving the
ratio of labour costs to the value of production. Employees receive bonuses
if labour costs are kept below a certain percentage of production value.

Mr. Nithin Menezes, Lecturer 32

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
Advantages of Group Incentive Plans:

❖ Encourages teamwork and collaboration.

❖ Suitable for jobs requiring interdependence and cooperation.
❖ Reduces unhealthy competition among employees.

Disadvantages of Group Incentive Plans:

❖ High-performing employees may feel unfairly rewarded if others

underperform.
❖ Difficult to measure individual contributions in a group setting.
❖ Success depends team effective communication and cooperation within the
team.

3) Mixed or Balanced Incentive Plans:

Some organizations use a combination of time-based and piece-based systems, or

mix individual and group incentives, to balance quality, productivity, and
collaboration.

Examples:

➢ Standard Hour Plan: Employees receive a fixed hourly rate, but they can
earn bonuses if they exceed production targets within a set time.
➢ Commission-Based Plans: Common in sales roles, where employees
receive a basic salary plus commission based on sales volume. This
combines income stability with performance incentives.
➢ Bonuses and Merit Pay: Annual bonuses based on company performance
or merit-based increases in pay encourage both long-term commitment and
short-term achievements.

Fringe Benefits:

Introduction & Meaning Of Fringe Benefits:

Fringe benefits refer to the additional perks or non-wage compensations provided

to employees, beyond their regular salary or wages. These benefits are offered by
employers to attract, retain, and motivate employees. They play an essential role
Mr. Nithin Menezes, Lecturer 33
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
in employee satisfaction and well-being, contributing to the overall compensation
package. These benefits can be either mandatory or voluntary, depending on the
legal requirements and the company’s policies.

Fringe benefits are non-wage compensations provided to employees in addition

to their regular salary or wages. These benefits are often part of the overall
compensation package designed to enhance employees’ quality of life and job
satisfaction.

Importance of Fringe Benefits:

➢ Attraction and Retention: Competitive fringe benefits can help companies

attract skilled employees and retain top talent.
➢ Job Satisfaction: Employees feel valued and cared for when provided with
benefits that enhance their overall well-being.
➢ Increased Productivity: By providing employees with benefits that improve
their work-life balance, employers can increase employee motivation and
productivity.
➢ Tax Benefits: Some fringe benefits are tax-deductible for employers,
making them a cost-effective form of compensation.

Types of Fringe Benefits:

1) Mandatory Fringe Benefits:

These are benefits that employers are legally required to provide to employees.

❖ Social Security: Contributions to government-mandated programs such as

old-age pensions, disability benefits, and survivor benefits.
❖ Health Insurance: Required in many countries for certain businesses,
particularly for larger organizations.
❖ Workers’ Compensation: Insurance to cover employees injured at work,
providing medical care, and income replacement.
❖ Unemployment Insurance: Benefits for employees who lose their job
through no fault of their own.
❖ Paid Leave: Sick leave, vacation leave, and maternity leave.

2) Voluntary Fringe Benefits:

Mr. Nithin Menezes, Lecturer 34

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
These are benefits that employers provide voluntarily, though they are not
mandated by law. These can vary widely depending on the employer’s offerings.

❖ Health and Wellness Programs: Gym memberships, wellness workshops,

mental health support, or nutrition programs.
❖ Retirement Plans: Pension plans, contributions, or other retirement savings
options.
❖ Bonuses and Profit Sharing: Performance-based bonuses, stock options, or
profit-sharing programs.
❖ Employee Discounts: Discounts on company products or services or
partner company discounts.
❖ Flexible Working Hours: Allowing employees to work flexible hours or
work from home.
❖ Childcare Assistance: On-site childcare facilities or childcare subsidies.
❖ Educational Assistance: Tuition reimbursement programs for further
education or professional certifications.
❖ Company Vehicles or Transportation Allowances: Providing cars or public
transportation allowances.
❖ Life Insurance: Providing life insurance coverage for employees.
❖ Paid Time Off (PTO): Additional paid days off for personal matters.

Benefits of Offering Fringe Benefits:

➢ Employee Well-being
➢ Work-life Balance
➢ Reduced Turnover
➢ Competitive Advantage
➢ Improved Employee Morale.

Challenges in Managing Fringe Benefits:

➢ High Cost
➢ High Expectations of employees
➢ Equable distribution risk
➢ Legal Compliance
➢ Administrative Complexity.

Mr. Nithin Menezes, Lecturer 35

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
Performance Linked Compensation:

Meaning:

Performance-linked Compensation is compensation strategy where employees

earnings are directly tied to their individual or team performance. This approach
includes elements such as performance bonuses, commissions, or incentive pay
that are awarded based on achieving specific performance. Targets, goals, or
metrics. By aligning compensation with performance outcomes, organizations
aim to motivate employees to excel and achieve higher productivity.

Importance Of Performance linked Compensation:

i. Motivates High Performance: Performance-linked compensation directly

incentivizes employees to achieve higher performance levels.
ii. Aligns Goals with Organizational Objectives: This compensation strategy
aligns employees personal goals with the organizations objectives. When
employees understand that their performance.
iii. Enhances Employee Engagement: By rewarding high performance,
organizations can boost employee engagement. And commitment.
Employees who see a clear connection between their efforts.
iv. Encourages Accountability: Performance-linked compensation fosters a
sense of accountability among employees.
v. Attracts and Retains Talent: Offering performance-linked compensation
can make an organization more attractive to top talent.
vi. Promotes a Results-Oriented Culture: This compensation strategy supports
the development of a results-oriented culture within the organization.
vii. Facilitates Fair Compensation: Performance-linked compensation ensures
that employees are rewarded based on their actual contributions and
results.
viii. Supports Objective Performance Evaluation: Performance-linked
compensation often involves the use of measurable performance metrics
and evaluations.

Components of Performance linked Compensation:

i. Basic Salary: The fixed amount of compensation paid to employees on a

regular basis, such as monthly or annually.

Mr. Nithin Menezes, Lecturer 36

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 ii. Performance Bonuses: Monetary rewards given for achieving or exceeding
specific performance targets or goals.
iii. Commissions: A form of variable pay typically used in sales roles, where
employees earn a percentage of the sales they generate.
iv. Incentive Pay: Additional compensation offered for meeting or exceeding
predefined performance criteria.
v. Profit Sharing: A system where employees receive a share of the
company’s profits based on their performance or contribution.
vi. Stock Options or Equity: Provides employees with the opportunity to
purchase company stock at a set price.
vii. Sales Incentives: Rewards specifically designed for sales employees, such
as sales contests, performance awards, or additional bonuses based on
meeting sales targets or generating new business.

viii. Merit Increases: Employees who demonstrate exceptional performance

may receive higher raises compared to those with average or below-
average performance.
ix. Recognition Awards: Non-monetary rewards such as certificates, plaques,
or public recognition for outstanding performance.
x. Gainsharing: A program where employees share in the financial gains
resulting from improved productivity or cost savings.
xi. Achievement-Based Bonuses: Bonuses awarded for achieving specific
milestones, such as completing major projects or reaching significant
career development goals.
xii. Annual Incentive Plans: Financial rewards based on annual performance
reviews or company performance metrics.

Emerging Trends In Performance Appraisal And Compensation:

Emerging trends in performance appraisal and compensation are driven by the

evolving nature of work, technology, and employee expectations. Companies are
increasingly focusing on creating more dynamic, fair, and transparent systems.
Here are some key trends in both areas:

Mr. Nithin Menezes, Lecturer 37

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 1) Continuous Feedback Systems: Traditional annual performance reviews
are becoming less common as companies shift toward continuous
feedback.
➢ Pulse Surveys: Frequent mini-surveys to assess employee sentiment and
performance.
➢ 360-Degree Feedback: Gathering input from peers, subordinates, and
supervisors to create a holistic view of performance.

2) Data-Driven Performance Management: With advances in technology,

organizations are using data analytics to drive performance appraisals.
➢ AI and Machine Learning: AI is used to predict employee outcomes,
identify trends, and suggest areas of improvement.
➢ Real-time Analytics: Automated tools that analyse and provide actionable
insights on employee performance.

3) Focus on Employee Development: Rather than solely evaluating past

performance, companies are increasingly tying performance appraisals to
future growth and development.
➢ Personalized Development Plans: Tailored career development initiatives
that align with both individual aspirations and organizational goals.
➢ Skill-based Feedback: Emphasis on evaluating competencies like
communication, leadership, or problem-solving rather than just outcomes.

4) Holistic and Wellbeing-Oriented Appraisals: Organizations are beginning

to look at the whole person in their performance evaluations.
➢ Mental Health Support: Incorporating mental wellness into performance
evaluations, focusing on stress management and burnout prevention.
➢ Work-life Balance: Acknowledging the importance of flexible work
environments and acknowledging employees’ personal lives in appraisals.

5) Compensation Linked to Skills and Contribution: The future of

compensation is increasingly moving away from traditional models (e.g.,
seniority-based pay scales) and focusing on skills, competencies, and
contributions to company goals.
➢ Skill-Based Pay: Compensation tied to acquiring new skills, certifications,
or competencies, rather than just tenure.
Mr. Nithin Menezes, Lecturer 38
Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 ➢ Variable Pay Structures: Bonuses or performance-related pay that
incentivizes specific achievements or company-wide objectives.

6) Pay Transparency and Equity: Transparency in compensation is becoming

a priority for many organizations.
➢ Salary Transparency: Publicly sharing salary ranges for different roles to
foster trust and reduce wage disparities.
➢ Pay Equity: Ensuring that compensation is equitable across gender, race,
and other demographic factors, especially in the face of growing attention
to diversity, equity, and inclusion (DEI).

7) Remote and Hybrid Work Compensation Models: With the rise of remote
and hybrid work environments, companies are adapting their compensation
structures.
➢ Geographic Pay Adjustments: Adjusting salaries based on the employee’s
location (e.g., remote workers in higher-cost cities may receive higher
pay).
➢ Flexible Benefits: Offering remote work stipends, home office allowances,
and wellness programs.

8) Non-Monetary Rewards and Recognition: In addition to traditional

compensation, companies are increasingly focusing on non-monetary
recognition as a way to motivate and engage employees.
➢ Recognition Programs: Peer-to-peer recognition, manager-led shout-outs,
and achievement awards.
➢ Workplace Flexibility: Allowing more flexible working hours or time off
as a reward for good performance.

9) Gamification of Performance and Rewards: Gamification is being used to

make performance management more engaging.
➢ Leader boards and Badges: Tracking performance metrics and rewarding
achievements with points or digital badges.
➢ Gamified Learning and Development: Using game-based techniques in
employee training to enhance engagement and skills acquisition.

Mr. Nithin Menezes, Lecturer 39

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.
 10) AI and Automation in Compensation Management: Automation
tools help with tasks such as compensation benchmarking, pay adjustment
recommendations, and real-time tracking of payroll expenses, ensuring that
compensation is competitive and in line with market trends.
➢ Automated Salary Reviews: Tools that analyse compensation data and
automatically suggest adjustments based on market data.
➢ Compensation Forecasting: Using AI to predict compensation trends and
future payroll costs, helping organizations plan for the future.

Mr. Nithin Menezes, Lecturer 40

Dept. Of Commerce,
St. Joseph’s First Grade College,
Chikkamagaluru.