Lesson 04

85
LESSON Compensation Strategies
4
COMPENSATION STRATEGIES
CONTENTS
4.0 Aims and Objectives
4.1 Introduction
4.2 Compensation or Wages
4.2.1 Traditional Theory of Wage Determination
4.2.2 Theory of Negotiated Wages
4.3 Principles of Compensation/Wage Fixation/Determination
4.4 Types of Wages
4.4.1 Minimum Rate of Wages
4.4.2 Need-Based Minimum Wage
4.4.3 Living Wage
4.4.4 Fair Wage
4.4.5 Wage Boards
4.4.6 Wage Policy
4.5 Objectives of Compensation or Wages
4.6 Principles of Wage or Compensation Formulation
4.6.1 Wage Determination through Job Evaluation
4.6.2 Wage Determination through Wage Boards Intervention
4.6.3 Wage Determination through Time Study
4.7 Job Employee Benefits Required by Laws
4.7.1 Statutory Employee Benefits in India
4.7.2 Discretionary Major Employee Benefits
4.8 Employee Services
4.8.1 Dearness Allowance (DA)
4.8.2 Overtime Wages
4.8.3 Incentive Schemes
4.8.4 Fringe Benefits
4.9 Health Care
4.9.1 Problems Galore
4.9.2 Right Approach
4.9.3 Health Plans
4.10 Performance Related Compensation Design
4.10.1 Compensation Management Issues in Performance Management Systems
Contd…
86 4.11 Compensation Design through Skill Based Programmes
Performance Management:
Systems and Strategies 4.11.1 Major Obstacles to Introduce Skill Based Pay
4.11.2 Application of Skill Based Pay
4.12 Performance Guide Charts
4.13 Designing Executive Compensation
4.13.1 Calibration of Executive Compensation to Performance
4.13.2 Performance Measurement in Executive Incentive Programmes
4.13.3 Concepts and Issues
4.13.4 Components of Executive Compensation
4.13.5 Different Theories of Executive Compensation
4.13.6 Some other Theories of Executive Compensation
4.14 International Compensation
4.14.1 Fundamentals of International Compensation
4.14.2 International Compensation Design
4.15 Let us Sum up
4.16 Lesson End Activity
4.17 Keywords
4.18 Questions for Discussion
4.19 Suggested Readings
4.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to:
z Understand the issues and concerns in compensation strategies
z Know about the performance related inputs for compensation
4.1 INTRODUCTION
Performance means the degree or extent with which an employee applies his skill,
knowledge and efforts to a job, assigned to him and the result of that application.
Performance Appraisal means analysis, review or evaluation of performance or
behaviour analysis of an employee. It may be formal or informal, oral or documented,
open or confidential. However in organizations we find formal appraisal system in
documented form. It is therefore a formal process to evaluate the performance of the
employees in terms of achieving organizational objectives.
For all-important decisions concerning people, like transfer and promotion,
remuneration, reward, training and development, so also for long-term manpower
planning and organization development, performance appraisal is necessary. A well-
documented Performance Appraisal System helps in understanding the attributes and
behaviours of employees. It is also necessary for motivation, communication,
strengthening superior-subordinate relationship, target fixing (key performance
areas/Key result areas), work planning and for improving the overall performance of
the organisation.
87
4.2 COMPENSATION OR WAGES Compensation Strategies
Wages or compensation is any economic compensation paid by the employer to an

employee for the services he/she renders. Although the term wages is all
encompassing as it includes any form of financial support and benefits, in the
narrower sense wages are the price paid for the services of labour. Broadly wage
components are two – the base or basic wages and other allowances. The basic wage
is the remuneration, by way of basic salary and allowances, which is paid or payable
to an employee in terms of contract of employment for the work done. Allowances are
paid in addition to the basic wage to ensure that the value of basic wages do not fall
over a period of time. Some allowances are statutory while others are voluntary. Most
of the organizations pay allowances like holiday pay, overtime pay, bonus and social
security benefits. Theoretically these are not included in the definition of wages. In
India, however, different Acts include different items under wages, though all the Acts
include basic wage and dearness allowances. The Workmen’s Compensation Act,
1923, Section 2 (m), include in the term “wages for leave period, holiday pay,
overtime pay, bonus, attendance bonus, and good conduct bonus” form part of wages.
Under The Payment of Wages Act, 1936 section 2 (VI) “any award of settlement and
production bonus, if paid, constitutes wages.” But under the Payment of Wages Act,
1948, “retrenchment compensation, payment in lieu of notice and gratuity payable on
discharge constitute wages.”
Without going into the theoretical debate on what constitutes wages, summing up the
provisions of different Acts, we can exclude the following type of remuneration from
the purview of wages.
1. Bonus or other payments under a profit-sharing scheme, which do not form a part
of the contract of employment.
2. Value of any house accommodation, supply of light, water, medical attendance,
travelling allowance; or payment in lieu thereof or any other concession.
3. Any sum paid to defray special expenses entailed by the nature of the employment
of a workman.
4. Any contribution to pension, provident fund, or a scheme of social security and
social insurance benefits.
5. Any other amenity or service excluded from the computation of wages by a
general or special order of an appropriate governmental authority.
A wage level is an average of the rates paid for the jobs of an organization, an
establishment, a labour market, an industry, a region or a nation. A wage structure is a
hierarchy of jobs to which wage rates have been attached.
4.2.1 Traditional Theory of Wage Determination

This theory assumes that market forces, i.e., demand and supply determine the wages.
For example, we have acute shortage of critical skills. For example, computer
programmers are in short supply and they are able to command higher salary. In our
country many organizations pay very high salary to entry level IT professionals and at
times even more than senior managerial level employees. This is because of the
supply gap.
4.2.2 Theory of Negotiated Wages

Unionised employees can negotiate salary. This is done through the collective
bargaining process. Normally in any unionised organizations, unions periodically
submit their memorandum to the management, urging for wage rise, to keep pace with
market standards and organisational profitability. Then the wage is negotiated in a
collective bargaining meet represented by the unions and the management nominees.
88 However, in collective bargaining, much other employment related issues could be
Systems and Strategies negotiated. For non-unionised employees wages can be negotiated through individual
bargaining. In some cases even there may be regulatory intervention in wage
determination. Good example is wage boards. The Wage Boards are tripartite in
nature and represented by the workers, employers and the independent members.
Wage Boards finalise the wage recommendations. All wage boards, however, are not
statutory. Importance of wage board has now reduced because of the rising bargaining
power of the workers.
Check Your Progress 1
State whether the following statements are true or false:
1. Performance Appraisal means analysis, review or evaluation of
performance or behaviour analysis of an employee.
2. A well-documented Performance Appraisal System helps in
understanding the attributes and behaviours of employees.
3. Wages or compensation in any economic compensation paid by the
employer to an employee for the services he/she renders.
4. Allowances are not paid in addition to the basic wage to ensure that the
value of basic wages do not fall over a period of time. Some allowances
are statutory while others are voluntary.
4.3 PRINCIPLES OF COMPENSATION/WAGE

FIXATION/DETERMINATION
Wage determination, apart from statutory aspect, influenced by different theories.
These theories can be summed up as under:
1. Subsistence theory
2. Wages fund theory
3. The surplus value theory of wages
4. Residual claimant theory
5. Marginal productivity theory
6. The bargaining theory of wages
7. Behavioural theories
1. Subsistence Theory is the Iron Law of Wages. It was advocated by David Ricardo
(1772-1832) and in his own language the labourers should be paid “to enable
them to subsist and perpetuate the race without increase or diminution.” The
theory was based on the assumption that if the workers were paid more than
subsistence wage, their numbers would increase as they would procreate more;
and this would bring down the rate of wages. If the wages fall below the
subsistence level, the number of workers would decrease - as many would die of
hunger, malnutrition, disease, cold, etc. and many would not marry, when that
happened the wage rates would go up. In economics, the subsistence theory of
wages states that wages in the long run will tend to the minimum value needed to
keep workers alive.
2. Wages Fund Theory was developed by Adam Smith (1723-1790) with the
assumption that the wages are paid out of a predetermined fund of wealth, which
lay surplus with wealthy persons - as a result of savings. This fund could be
utilized for employing labourers for work. If the fund was large, wages would be
high; if it was small, wages would be reduced to the subsistence level. The
demand for labour and the wages that could be paid them were determined by the 89
Compensation Strategies
size of the fund.
3. The Surplus Value Theory of Wages owes its development to Karl Marx (1818-
1883). According to this theory, the labour was an article of commerce, which
could be purchased on payment of ‘subsistence price.’ The price of any product
was determined by the labour time needed for producing it. The labourer was not
paid in proportion to the time spent on work, but much less, and the surplus went
over, to be utilized for paying other expenses.
4. Residual Claimant Theory advocated by Francis A. Walker (1840-1897), assumes
that there are four factors of production/business activity, viz., land, labour,
capital and entrepreneurship. Wages represent the amount of value created in the
production, which remains after payment has been made for all these factors of
production. In other words, labour is the residual claimant.
5. Marginal Productivity Theory assumes wages are based upon an entrepreneur’s
estimate of the value that will probably be produced by the last or marginal
worker. In other words, it assumes that wages depend upon the demand for, and
supply of, labour. Consequently, workers are paid what they are economically
worth.
6. The Bargaining Theory of Wages considers wages are determined by the relative
bargaining power of workers or trade unions and of employers. When a trade
union is involved, basic wages, fringe benefits, job differentials and individual
differences tend to be determined by the relative strength of the organization and
the trade union.
7. Behavioural Theories on wages pioneered by several psychologists and
sociologist like Marsh and Simon, Robert Dubin, Eliot Jacques, etc. Based on
their various research studies, we can identify following areas of interest in
behavioural theories on wages:
(a) The Employee’s Acceptance of a Wage Level - Psychologically, people
believe in employment stability and prefer to stay on with the same
organization, pacing with their salary level. There are, however, several other
factors like; size and prestige of the company, trade unions’ power of the
organization, their level of knowledge and competencies, etc.
(b) The Internal Wage Structure - The employees value internal pay equity.
Moreover some jobs also command social status (like the job of a journalist)
Organizations design wages for different cross-sections of employees keeping
in view the ration of the maximum and minimum wage differentials, norms of
span or control and demand for the specialised skill-sets. Balancing of wages
with such internal equity also ensure increased level of motivation.
Practice Assignment
As a new start-up, a manufacturing organisation has to recruit large number of

workers, both skilled and un-skilled. This type of workers is available in huge
numbers in the local market. Your company believes there is no need to pay wages
beyond the level of minimum wages, as announced by the state government.
However, you personally feel, since the company is capable to pay more (due to
high profit margin and sound financial position), the wage should be fair one.
Develop your argument accordingly.
90
Performance Management: 4.4 TYPES OF WAGES
Systems and Strategies
4.4.1 Minimum Rate of Wages
Any minimum rate of wages fixed or revised may consist of a basic rate of wages and
a special allowance; or a basic rate of wages with or without cost of living allowance
and the cash value of concessions in respect of supplies of essential commodities at
concessional rates; or an all inclusive rate allowing for the basic rate, the cost of living
allowance and the cash value of concessions, if any.
Procedure for fixing and revising minimum wages

The appropriate Government is required to appoint an Advisory Board for advising it,
generally in the matter of fixing and revising minimum rates of wages.
The Central Government appoints a Central Advisory Board for the purpose of
advising the Central and State Governments in the matters of the fixation and revision
of minimum rates of wages as well as for co-ordinating the work of Advisory Boards.
The Central Advisory Board consists of persons to be nominated by the Central
Government representing employers and employees in the scheduled employments, in
equal number and independent persons not exceeding one third of its total number of
members. One of such independent persons is to be appointed the Chairman of the
Board by the Central Government.
Wages in kind
Minimum wages payable under this Act is to be paid in cash. However, the payment
of minimum wages can be made wholly or partly in kind, by notifying in the official
Gazette, where it is customary to pay wages either wholly or partly in kind.
Payment of minimum rate of wages

The employer is required to pay to every employee, engaged in a scheduled
employment under him, wages at a rate not less than the minimum rate of wages
notified for that class of employees without any deduction except as may be
authorised.
Fixing hours for normal working day

In regard to any scheduled employment, minimum rates of wages in respect of which
have been fixed under this Act, the appropriate Government may fix the number of
hours of work which shall constitute a normal working day, inclusive of one or more
specified intervals; provide for a day of rest in every period of seven days which shall
be allowed to all employees or to any specified class of employees and for the
payment of remuneration in respect of such days of rest; provide for payment for work
on a day of rest at a rate not less than the overtime rate.
Overtime: If any employee whose minimum rate of wages is fixed under the Act
works on any day in excess of the number of hours constituting normal working day,
the employer is required to pay him for excess hours at the overtime rate fixed under
this Act or under any law of the appropriate Government for the time being in force,
whichever is higher.
Wages for two or more classes of work: If an employee does two or more classes of
work, to each of which a different rate of wages is applicable, the employer is required
to pay to such employee in respect of the time respectively occupied in each such
class of work, wages at not less than the minimum rate in force in respect of each such
class.
Maintenance of registers and records: Every employer is required to maintain 91
registers and records giving particulars of employees, the work performed by them,
the wages paid to them, the receipts given by them and any other required particulars.
Inspections
The appropriate Government may, by notification in the Official Gazette, appoint
inspectors for the purpose of this Act and define the local limits for their functions.
Claims
The appropriate Government may, by notification in the Official Gazette, appoint
Labour Commissioner or Commissioner for Workmen’s Compensation or any officer
not below the rank of Labour Commissioner or any other officer with experience as a
judge of a civil court or as a Stipendiary Magistrate, to hear and decide for any
specified area, all claims arising out of the payment of less than the minimum rates of
wages as well as payment for days of rest or for work done.
Penalties for Offences

Any employer who contravenes any provision of this Act shall be punishable with
imprisonment for a term, which may extend to six months or with fine, which may
extend to five hundred rupees or with both.
Statistics collected under the Minimum Wages Act, 1948

All establishments covered under the Act are required to furnish to the concerned
authority (Central or State) an annual return in prescribed form as per the rules framed
under the Minimum Wages Act, 1948. The Centre / State Governments in turn send a
consolidated return to the Labour Bureau which compiles an all India report based on
the data contained in these returns. Besides, Quarterly returns sent by these agencies
to the Bureau are also made use of in compiling information at all India level.
Addition of New Employments

The State Governments and the Union Territories review the Scheduled Employments
under their jurisdiction from time to time and add new employments in respect of
which it is of the opinion that minimum rates of wages should be fixed statutorily in
addition to the existing ones.
4.4.2 Need-Based Minimum Wage

The Indian Labour Conference, at its 15th session held in July 1957, suggested that
minimum, wage fixation should be need based, and should meet the minimum needs
of an industrial worker.
For the calculation of the minimum wage, the Conference accepted the following
norms and recommended that they should guide all wage-fixing authorities, including
the Minimum Wage Committee, Wage-Boards, and adjudicators:
1. The standard working class family should be taken to consist of 3 consumption
units for the earner; the earnings of women, children and adolescents should be
disregarded;
2. The minimum food requirements should be calculated on the basis of the net
intake of 2,700 calories, as recommended by Dr. Akroyd, for an average Indian
adult of moderate activity;
3. The clothing requirements should be estimated at a per capita consumption of 18
yards per annum, which would mean, for an average worker’s family of four, a
total of 72 yards;
92 4. In respect of housing, the norms should be the minimum rent charged by the
Systems and Strategies Government in any area for houses provided under the Subsidized Housing
Scheme for low income groups; and
5. Fuel, lighting and other miscellaneous items of expenditure should constitute 20
per cent of the total minimum wage.
Subsistence wage meets only bare physical needs of worker and his/her family.
Minimum wage provides not only for bare physical needs but also for preservation of
efficiency of worker plus some measure or education, health and other things. This is
the legal minimum wage of the Minimum Wage Act.
4.4.3 Living Wage

This wage was recommended by the Committee as a fair wage and as ultimate goal in
a wage policy. It defined a Living Wage as “one which should enable the earner to
provide for himself/herself and his/her family not only the bare essentials of food,
clothing and shelter but a measure of frugal comfort, including education for his
children, protection against ill-health, requirements of essential social needs and a
measure of insurance against the more important misfortunes, including old age.” In
other words, a living wage was to provide for a standard of living that would ensure
good health for the worker, and his family as well as a measure of decency, comfort~
education for his children, and protection against misfortunes. This obviously implied
a high level of living.
Such a wage was so determined by keeping in view the national income, and the
capacity to pay of an industry. The Committee was of the opinion that although the
provision of a living wage should be the ultimate goal, the present level of national
income did not permit of the payment of a living wage on the basis of the standards
prevalent in more advanced countries. The goal of a living wage was to be achieved in
three stages. In the first stage, the wage to be paid to the entire working class was to
be established and stabilized. In the second stage, fair wages were to be established in
the community-cum-industry. In the third stage, the working class was to be paid the
living wage. The living wage may be somewhere between the lowest level of the
minimum wage and the highest limit of the living wage, depending upon the
bargaining power of labour, the capacity of the industry to pay, the level of the
national income, the general effect of the wage rise on neighbouring industries, the
productivity of labour, the place of industry in the economy of the country, and the
prevailing rates of wages in the same or similar occupations in neighbouring localities.
Thus living wage maintains worker's health and decency, a measure of comfort and
some insurance against the more important misfortunes of life. The Supreme Court
has held the following principles for wage fixation:
1. There is minimum wage, which in any event must be paid, irrespective of the
extent of profits, the financial condition of establishment or the availability of
workmen at lower wages.
2. The wages must be fair, i.e. sufficiently high to provide a standard family with
food, shelter, clothing, medical care and education of children appropriate to the
workmen.
3. A fair wage lies between minimum wage and the living wage, which is the goal.
4. Wages must be paid on an industry-wise and region basis having due regard to the
financial capacity of the unit.
The Bombay High Court in the following two cases has held that while fixing wages,
a broad and overall view of the financial position of the employer must be taken into
account:
Express Newspapers (P) Ltd. vs. Union of India, 1961 LLJ 339 (SC); AIR
1958 SC 678; (1958-59) 14 FJR 211; 1958 SCJ 1113; 1958 SCA 952.
Bombay Mothers & Children Society vs. General Labour Union (Regd.) 1991 93
Lab.IC 1653.
4.4.4 Fair Wage

According to the Committee on Fair Wages, “it is the wage which is above the
minimum wage but below the living wage.” The lower limit of the fair wage is
obviously the minimum wage; the upper limit is set by the “capacity of the industry to
pay.”
Between these two limits, the actual wages should depend on considerations of such
factors as:
1. The productivity of labour;
2. The prevailing rates of wages in the same or neighbouring localities;
3. The level of the national income and its distribution; and
4. The place of industry in the economy of the country.
Thus fair wages is an adjustable step, moves up according to the capacity of the
industry to pay, and the prevailing rates of wages in the area or industry.
4.4.5 Wage Boards

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

A wage policy guides the organisations to take decisions on wage related matters. At
the organization level, wage policies are framed, keeping in view various regulatory
requirements and the organisational own strategies. Whatever wage policies are
framed, it should consider the recommendations of the Committee on fair wages,
1948, which provides the basic approach for tribunals, Wage Boards and others to fix
wages of workers, a large part of which has been accepted by the Supreme Court in
the case of Express Newspapers (Pvt) Ltd. and others Vs. The Union of India, 1938.
Confining within the boundaries of the fair wage concept, every organisation must
strive to ensure fair growth in the remuneration to its workmen. First of all the current
purchasing power of workers should be maintained against price rise by providing for
adequate neutralization in respect of the rise in the cost of living so that there is no
erosion in their total emoluments in terms of their purchasing power.
94 Secondly, a reasonable growth in the real earnings of workers should be aimed at
Systems and Strategies improving their living standards, commensurate with their level of productivity, firms’
profitability and other factors.

Fill in the blanks:
1. Subsistence Theory is the …………..
2. ……….………. represents the amount of value created in the production,
which remains after payment has been made for all these factors of
production.
3. …………. is required the employer to pay to every employee, engaged in
a scheduled employment under him, wages at a rate not less than the
minimum rate of wages notified for that class of employees without any
deduction except as may be authorised.
4. A …………. the organisations to take decisions on wage related matters.
4.5 OBJECTIVES OF COMPENSATION OR WAGES

The objectives can be classified under four broad headings:
1. The first is equity, which may take several forms. They include income
distribution through narrowing of inequalities, increasing the wages of the lowest
paid employees, protecting real wages (purchasing power), the concept of equal
pay for work of equal value compensation management strives for internal and
external equity. Internal equity requires that, pay be related to the relative worth
of a job so that similar jobs get similar pay. Other firms in the labour market pay
external equity means paying workers what comparable workers. Even
compensation differentials based on differences in skills or contribution are all
related to the concept of equity.
2. Efficiency, which is often closely related to equity because the two concepts are
not antithetical. Efficiency objectives are reflected in attempts to link to link a part
of wages to productivity or profit, group or individual performance, acquisition
and application of skills and so on. Arrangements to achieve efficiency may be
seen also as being equitable (if they fairly reward performance) or inequitable (if
the reward is viewed as unfair).
3. Macro economic stability through high employment levels and low inflation, of
instance, an inordinately high minimum wage would have an adverse impact on
levels of employment, though at what level this consequence would occur is a
matter of debate.
Though compensation and compensation policies are only one of the factors,
which impinge on macro-economic stability, they do contribute to (or impede)
balanced and sustainable economic development.
4. Efficient allocation of labour in the labour market. This implies that employees
would move to wherever they receive a net gain, such movement may be form
one geographical location to another or form on job to another (within or outside
an enterprise). The provision or availability of financial incentives causes such
movement.
For example, workers may move form a labour surplus or low wage area to a high
wage area. They may acquire new skills to benefit form the higher wages paid for
skills. When an employer’s wages are below market rates employee turnover 95
increases. When it is above market rates the employer attracts job applicants.
When employees move from declining to grow industries, an efficient allocation
of labour due to structural changes takes place.
Other Objectives of Compensation are as follows:

1. Acquire qualified personnel – compensation needs to be high enough to attract
applicants. Pay levels must respond to the supply and demand of workers in the
labour market since employers compete for workers. Premium wages are
sometimes needed to attract applicants already working for others.
2. Retain current employees – Employees may quit when compensation levels are
not competitive, resulting in higher turnover.
3. Reward desired behaviour – pay should reinforce desired behaviours and act as an
incentive for those behaviours to occur in the future. Effective compensation plans
reward performance, loyalty, experience, responsibility, and other behaviours.
4. Control costs – a rational compensation system helps the organization obtain and
retain workers at a reasonable cost. Without effective compensation management,
workers could be over paid or under paid.
5. Comply with legal regulations – a sound wage and salary system considers the
legal challenges imposed by the government and ensures the employer’s
compliance. Facilitate understanding- the compensation management system
should be easily understood buy human resource specialists, operating managers
and employees.
6. Further administrative efficiency – wage and salary programs should be designed
to be managed efficiently, making optimal use of the HRIS, although this
objective should be a secondary consideration compared with other objectives.
4.6 PRINCIPLES OF WAGE OR COMPENSATION

FORMULATION
The main factors affecting wage or compensation levels within an organization are:
z External relativities: market rates as affected by supply and demand and general
movements in pay levels.
z Internal relativities: salary relativities between jobs within the organisation
depending on the values attached to different jobs.
z Individual worth: the value of the individual’s performance to the organisation.
4.6.1 Wage Determination through Job Evaluation

It is the process of determining the worth of one job in relation to that of another
without regard to the personalities. It analyses and assesses the content of jobs, to
place them in some standard rank order. The end-result is used as the basis for a fair
and logical remuneration system.
A properly devised job evaluation scheme provides management with definite,
systematic and reliable data for working out wage and salary scales. Thus logical
wage negotiation reduces wage grievances and dissatisfaction with wage differentials
and ensures fair treatment for each employee. It also provides a logical basis for
promotion.
96 Job Design
Systems and Strategies Every work undergoes constant modification because of the impact of mechanization
and automation. Some jobs become redundant while others are created and still others
are altered in content. This necessitates different types of education, experience and
other attributes. Also for effecting Job Design, the organisation needs to respect the
unions, who otherwise may stall the move on one ground or the other.
While designing a job, management must also be concerned with the practical
considerations of quantity and quality of available personnel (both within the
organisation and in the labour market). Personality conflict and friction, problem of
human relations, boredom, obsessive thinking, etc., also need to be taken care of.
Thus the factors, which are likely to affect Job Design, can be enumerated as follows:
1. Job Specialisation and repetitive operations;
2. Changing technology;
3. Labour-union policies;
4. Abilities of present personnel;
5. Adequate availability of potential personnel;
6. Inter-action among jobs with the system;
7. Psychological and social needs that can be met by the job.
Job Assessment
At this stage information about each job is made available to the assessors. Every job
whether manual or not, is closely observed and inspected in actual operation by the
assessors. If required, assessors question the operators and their supervisors to collect
further details about the job to clear doubts, if any. To keep pace with the changing
job content, due to technological changes, it is necessary to make periodic re-
assessment of the job keeping in view the old Job Description.
Job Analysis
This process helps to examine the facts about some specific job and determine the
essential job factors. Therefore, the exercise helps to identify the qualities, like; skill,
training experience, etc. required of the worker to perform his jobs satisfactorily. The
analysis is primarily based on Job Description Sheet. However, to supplement the
analysis further details may be obtained from personal observation and discussion.
Job Description
This process helps to give a title to a job, considering the conditions, tasks and
responsibilities involved and qualities required for a job. Even though, the terms `Job
Description’ and `Job Specification’ are used interchangeably, there is a distinction,
like; Job Description process defines the job content, i.e., the conditions, tasks and
responsibilities, while Job Specification denotes the job requirements, i.e., the
qualities that are necessary in a worker, to satisfy the demands of the job.
In the determination of wage differentials and wage structure, job evaluation as a tool
has to be thought of with adequate caution. Other techniques, discussed above also to
a great extent influences the wage determination process.
4.6.2 Wage Determination through Wage Boards Intervention

Wage Boards consist of an impartial Chairman, 2 other independent members and 2 or
3 representatives of workers and employers each. The recommendations of the Board
are first submitted to the Government for its acceptance. After acceptance, the 97
Government requests the parties to implement them.
The Board is required to take the following points in determining the wage structure:
1. Need-based minimum wage,
2. Industry’s capacity to pay,
3. Productivity of labour,
4. Prevailing rates of wages,
5. Level of national income and its distribution,
6. Place of industry in the economy of the country,
7. Need of its development,
8. Requirements of social justice,
9. Adjustment of wage differentials in such a manner as to provide incentives for
skill formation.
Collective bargaining is also another important method of wage determination and
which is very successful in industries. We have discussed this technique in details in a
separate chapter.
Practice Assignment
Explain in the context of your understanding of an organizational practice,
how job evaluation helped them in deciding the wage rates for various levels
of employees.
4.6.3 Wage Determination through Time Study

Time Study technique is also used for wage determination. We have briefly introduced
the concept here and then illustrated the method suitably designing a problem.
ILO defined Time Study “ a technique for determining as accurately as possible from
a limited number of observations the time necessary to carry out a given activity at a
defined standard of performance.” For carrying out a Time Study, equipments like;
Stopwatch, Study Board, Pencils, Slide-rule, etc. are required. The stopwatches are of
different types, like:
1. Stopwatch, which records one minute per revolution by intervals of 1/5 of a
second with a small hand recording 30 minutes;
2. Stopwatch which records one minute per revolution, calibrated in 1/100th of a
minute with a small hand recording 30 minutes;
3. Decimal-hour Stopwatch recording 1/100ths of an hour per revolution graduated
in 1/1000ths of an hour and a small hand records up to one hour in 100 divisions.
4.7 JOB EMPLOYEE BENEFITS REQUIRED BY LAWS

Employee benefits typically refers to retirement plans, health life insurance, life
insurance, disability insurance, vacation, employee stock ownership plans, etc.
Benefits are increasingly expensive for businesses to provide to employees, so the
range and options of benefits are changing rapidly to include, for example, flexible
benefit plans.
Employee benefits and (especially in British English) benefits in kind (also called
fringe benefits, perquisites, perqs or perks) are various non-wage compensations
provided to employees in addition to their normal wages or salaries. Where an
98 employee exchanges (cash) wages for some other form of benefit, this is generally
Systems and Strategies referred to as a 'salary sacrifice' arrangement. In most countries, most kinds of
employee benefits are taxable to at least some degree.
Benefits are forms of value, other than payment, that are provided to the employee in
return for their contribution to the organization, that is, for doing their job. Some
benefits, such as unemployment and worker's compensation, are federally required.
(Worker's compensation is really a worker's right, rather than a benefit.)
Prominent examples of benefits are insurance (medical, life, dental, disability,
unemployment and worker's compensation), vacation pay, holiday pay, and maternity
leave, contribution to retirement (pension pay), profit sharing, stock options, and
bonuses. (Some people would consider profit sharing, stock options and bonuses as
forms of compensation.)
You might think of benefits as being tangible or intangible. The benefits listed
previously are tangible benefits. Intangible benefits are less direct, for example,
appreciation from a boss, likelihood for promotion, nice office, etc. People sometimes
talk of fringe benefits, usually referring to tangible benefits, but sometimes meaning
both kinds of benefits.
You might also think of benefits as company-paid and employee-paid. While the
company usually pays for most types of benefits (holiday pay, vacation pay, etc.),
some benefits, such as medical insurance, are often paid, at least in part, by employees
because of the high costs of medical insurance.
Fringe benefits can include, but are not limited to: (employer-provided or employer-
paid) housing, group insurance (health, dental, life etc.), disability income protection,
retirement benefits, daycare, tuition reimbursement, sick leave, vacation (paid and
non-paid), social security, profit sharing, funding of education, and other specialized
benefits.
The purpose of the benefits is to increase the economic security of employees.
The term perqs or perks is often used colloquially to refer to those benefits of a more
discretionary nature. Often, perks are given to employees who are doing notably well
and/or have seniority. Common perks are company cars, hotel stays, free
refreshments, leisure activities on work time (golf, etc.), stationery, allowances for
lunch, and—when multiple choices exist—first choice of such things as job
assignments and vacation scheduling. They may also be given first chance at job
promotions when vacancies exist.
Compensation includes topics in regard to wage and/or salary programs and
structures, for example, salary ranges for job descriptions, merit-based programs,
bonus-based programs, commission-based programs, etc.
An employee benefit is more a holistic term, comprising of both wage and non-wage
component of total labour costs. Non-wage components are given more in the form of
benefits in kind. Employee benefits are also called fringe benefits, perquisites, or
perks. Wage component of employee benefits are paid in cash, hence it is more like a
normal wages or salaries. Where employee benefits are given in cash, we call it salary
sacrifice, as employees avail such benefits, per se in exchange of their cash salaries.
Both the wage and non-wage component of employee benefits are taxable, barring a
few strategically chosen one.
4.7.1 Statutory Employee Benefits in India

Indian Labour Laws require organizations to provide some statutory employee
benefits, both monetary and non-monetary in nature. Here we are explaining some of
the statutory employee benefits, which organizations, by and large need to provide:
1. Employee Security: Physical and job security to the employee promotes security 99
to the employees and their family members. Organizations provide job security,
confirming the employees in regular pay roll, after they complete the probationary
period. Such confirmation creates a sense of job security in the minds of the
employees. Ensuring regular payment of wages, in compliance with the relevant
Labour Laws, further strengthens this. Adopting adequate safety measures, on the
other hand, ensures physical security. It also includes accident prevention steps,
pollution free workplace, etc.
2. Retrenchment Compensation: The Industrial Disputes Act, 1947 provides for the
payment of compensation in case of lay-off and retrenchment. The non-seasonal
industrial establishments employing 50 or more workers have to give one month’s
notice or one month’s wages to all the workers who are retrenched after one
year’s continuous service. The compensation is paid at the rate of 15 days wage
for every completed year of service with a maximum of 45 days wage in a year.
Workers are eligible for compensation as stated above even in case of closing
down of undertakings.
3. Lay-off Compensation: In case of lay-off, employees are entitled to lay-off
compensation at the rate to 50% of the total of the basic wage and dearness
allowance for the period of their lay-off except for weekly holidays. Lay-off
compensation can normally be paid up to 45 days in a year.
4. Safety and Health Provisions: Employee’s safety and health should be taken care
of in order to protect the employee against accidents, unhealthy working
conditions and to protect worker’s capacity. In India, the Factories Act, 1948,
stipulated certain requirements regarding working conditions with a view to
provide safe working environment. These provisions relate to cleanliness, disposal
of waste and effluents, ventilation and temperature, dust and fume, artificial
humidification, over-crowding, lighting, drinking water, latrine, urinals, and
spittoons. Provisions relating to safety measures include fencing of machinery,
work on or near machinery in motion, employment of young persons on
dangerous machines, striking gear and devices for cutting off power, self-acting
machines, easing of new machinery, probation of employment of women and
children near cotton openers, hoists and lifts, lifting machines, chains, ropes and
lifting tackles, revolving machinery, pressure plant, floors, excessive weights,
protection of eyes, precautions against dangerous fumes, explosive or
inflammable dust, gas etc. Precautions in case of fire, power to require
specifications of defective parts of test of stability, safety of buildings and
machinery etc.
4.7.2 Discretionary Major Employee Benefits

Drawing a tentative list of employee benefits, both with the wage and non-wage
components, is difficult. However, from the industry practrices, we can categorise it
to housing, group insurance, income protection (with optimisation of fixed and the
variables), retirement benefits, tuition fees reimbursement, funding of children
education, contribution to different social security schemes, club membership,
international tours, different types of leave (other than the statutory one), like;
vacation leave, sabbatical leave, etc. Most of the employee benefits are employer
paid, while in some, like in social security schemes, employees may also be required
to partly contribute. Both the statutory and voluntary employee benefits increase the
economic security of the employees. Organizational practices on employee benefits
vary widely.
100
Performance Management: 4.8 EMPLOYEE SERVICES
These services are those, which are provided by the organisations, in addition to the
usual fringe benefits, either at no cost to the employee or at highly subsidised rate.
Such services include: eating facilities, transportation facilities, childcare facilities,
educational services, flexible working hours, etc.
A good company provides the following employee services to ensure timely and
accurate handling of employee queries:
z Database Management: Creating, managing and updating database for current
and retired employees with the relevant fields.
z Employee Expense Claims: Validating employee claims against set parameters
and limits and approving or declining a claim. This also involves collecting taxes.
z Employee Travel Support: Providing business travel support to employees.
Travel support requires answering queries related to free passes, nominee detail
modification, and calculation of fares and taxes.
z Training Support: Identifying and scheduling employees who need to undergo
training, deploying trainers and managing logistics. This also involves
maintaining training records and schedule maintenance.
z Payroll & Leave: Handling back-office administration work; e.g., health records,
leave, airline incentive commission reports, manpower reports, personal details,
and data quality and profit sharing forms.
4.8.1 Dearness Allowance (DA)

To give effect to price neutrialisation, D.A. is paid over and above the basic wages to
ensure that real income of the workers is not falling short. There are several methods
of computation of D.A., which can be enumerated as follows:
1. D.A. not linked to Consumer Price Index:

(a) Flat D.A.
(b) Graduated Scale of D.A.
2. Linked to Consumer Price Index:
(a) D.A. computed according to changes in C.P.I.
(b) D.A. linked to pay scales and to C.P.I.
Supreme Court of India has laid down certain criteria for regulating payment of D.A.
as under:
1. Capacity to Pay
2. Rates prevailing in comparable concerned in the region
Extent of neutralisation of price rise.
The views of the National Labour Commission are:
1. The basic wages in all cases should be adjusted to a common base year.
2. D.A. should be adjusted every time when there is a 5-point change in the C.P.I.
3. Neutralisation should be allowed at the rate of 95% in the non-scheduled
employment.
4. Capacity to pay is irrelevant for payment of D.A. at the minimum level.
4.8.2 Overtime Wages 101
Overtime wages is calculated on the basis of the working hours prescribed to the
several types of workmen. If 36 hours a week is prescribed as working hours, the
company should pay extra wages to workmen if they are required to work beyond 36
hours. Usually the rate of wages for period beyond 36 hours should be at the ordinary
rate, while the rate should be double if the workers are required to work more than 48
hours a week for the period beyond 48 hours. However, where wages are paid on a
piece-rate basis, the State Government in consultation with the employer concerned
and the representatives of the workers, shall fix the time-rate as nearly as possible,
considering average rate of earnings of those workers and the rates so fixed shall be
deemed to be the ordinary rate of wages of the workers and hence overtime rate
should be decided following above principles.
4.8.3 Incentive Schemes

Incentives are paid to the workmen over and above the normal wages to reward their
good performance. In places, where piece-rate system of wages are existing, payment
of incentives is relatively simple as for manufacturing additional units than the
standard one, workers can be paid extra wages, which they are supposed to get for
each additional unit. This incentive scheme is known as Straight Piece-Rate Scheme.
In time-rate system, however, such incentives are computed following Standard Hour
Systems. To illustrate, let us assume a given volume of job is given to a worker for
standard 8 hours’ work. If the worker is able to complete the job within 6 hours, then
for the hours saved, i.e., 2 hours, he should be given the incentives duly upgrading his
hourly wage rate apportioning his 8 hours rate for 6 hours. Let us assume 8 hours are
needed as standard time for completing a job and the rate per hour is Re.1/-. If the
worker finishes the work in 6 hours, he will also get Rs. 8/-, which upgrades his
hourly wage rate then from Re. 1/- to Rs. 1.33P.
Yet in another way we can look into the nature of incentive schemes from the
organisational practices.
Different type of Bonus/Incentives

Discretionary Bonus
Performance-contingent Bonus
Pre-determined allocation Bonus
Target Plan Bonus
Different Stock Incentive Options

1. ESOP at pre-determined price (Capital Gains).
2. Non-statutory ESOP at a discounted price (IT).
3. Restricted Stock at a discounted rate with minimum locks in period. Before lock
in period price would remain the same (no appreciation). (Capital Gains)
4. Phantom Stock – hypothetical stock with option to convert only after minimum
vesting period (Capital Gains).
There are also several other Incentive Schemes too, which can be briefly stated as
follows. However, these are more in the nature of incentive computation techniques
rather than stand alone incentive systems.
1. Barth System - Under this system, there is no minimum guaranteed wage. The
formula (considering hourly wage rate of Re. 1/- ) is as follows:
Wage = Std. time 8 hrs x time taken (6 hrs) x hourly rate re. 1/- = Rs. 7/- (approx.)
102 2. Bedaux System - This system is also called ‘units’ or ‘points’ System. It has a
Systems and Strategies guaranteed basic rate like the Halsey and Rowan Systems. Under this system each
minute of Standard Time is expressed in terms of units or points after a detailed
time study. The guaranteed basic wage is paid upto 60 points per hour scored by
the worker. Points earned above 60 are paid at 75 to 100 per cent of the basic
wage rate (the standard daily rate for the job which is always higher than the
minimum guaranteed wage).
3. Taylorian System - In this scheme there are two piece-rates - one lower and one
higher plus a bonus paid as a per centage of the time rate. Obviously such a
system would automatically discourage low production and would be installed
where the average performance is well below expectations.
4. Merrick Differential Piece Rate System: Under this system there are three piece
rates:
a) Upto, say, 83% of Standard output - a piece-rate + 10% of time rate as bonus.
b) Above 83% and upto 100% of standard output - same piece rate + 20% of
time rate.
c) Above 100% of Standard output - same piece rate but no bonus.
5. Gantt Task System: This has three stages of payment:
a) Below the standard performance, only the minimum guaranteed wage is to be
paid.
b) At the standard performance, this wage + 20% of the time rate will be paid as
bonus.
c) When the standard is exceeded, higher piece-rate is paid but there is no bonus.
The main objective of this scheme is to raise the performance up to the standard
level which is the task set before the workers.
6. Emerson Empiric System: Under this system, standard time is established for
each job. The efficiency of the worker is determined by dividing the time taken
into the standard time. Upto 67% efficiency the worker is paid at this time rate
and from this point to 100 per cent a bonus of 1 per cent is paid for every
additional 1 per cent output. At 100 per cent efficiency, a bonus of 20 per cent is
paid.
7. Accelerating Premium System: This provides for a guaranteed minimum wage
for output below the standard. For low and average increase in output above the
standard small increments in earnings are allowed. Increasingly large earnings are
conceded for the above average output, the increment being different for each
1% increase in output.
8. Scanlon Plan: The Scanlon Plan was designed to involve the workers in making
suggestions for reducing the cost of operation and improving the working
methods and sharing in the gains of increased productivity. The Rucker Plan is
similar to the Scanlon Plan, the only difference being that in the latter the
incentive earnings are calculated on the basis of the `value added’ by the
manufacturing process. The Kaiser Plan is also like these - a gains-sharing
scheme. While the Rucker Plan excludes all the supply and material costs, the
Kaiser Plan excludes all costs over which the workers have no control.
9 Halsey Premium Plan: It guarantees a fixed time wage to slow workers and, at
the same time, offers extra pay to efficient workers. Extra pay in the form of
bonus is given based on the amount of time saved by the worker, which is
calculated @ 33-1/2 per cent of the time saved. Thus the cost of labour is reduced
because of the per centage premium system.
10 Rowan Premium Plan: Under this plan, the time saved is expressed as a per 103
centage of the time allowed, and the hourly rate of pay is increased by that per
centage of the time allowed, and the hourly rate of pay is increased by that per
centage so that total earnings of the worker are the total number of hours
multiplied by the increased hourly wages.
4.8.4 Fringe Benefits

The fringe benefits have often been described as ‘welfare expenses’, ‘wage
supplements’, perquisites other than wages, ‘sub-wages’ and ‘social charges’. ILO has
defined fringe benefits as under:
“Wages are often augmented by special cash benefits, by the provision of medical and
other services, or by payments in kind that free part of the wage for expenditure or
other goods and services. In addition workers commonly receive such benefits as
holidays with pay, low-cost meals, low rent housing, etc. Such additions to the wage
proper are some times referred to as ‘fringe benefits.’ However, it is important to note
that ‘benefits which have no relation to employment or wages should not be regarded
as ‘fringe benefits,’ despite the fact it may constitute a significant part of workers’
total income. Fringe benefits account for the services rendered to workers and their
families by an industrial enterprises for the purpose of raising their moral, material,
social and cultural levels and to prepare them for a better life.
Thus fringe benefits can broadly be classified under six main heads as under:
(i) Extra payment for time worked (overtime, weekend holidays, shift premiums,
etc.).
(ii) Payment for time not worked (lunch period and rest time, medical care time,
sick leave, maternity leave, death in family leave, grievance handling, voting
time, paid holidays and vacations, severance pay and lay-off, etc.).
(iii) Monetary prizes for special activities and performance anniversary award,
quality bonus, waste reduction, safety awards, attendance bonus, suggestion
plans award, etc.
(iv) Bonus Payments
(v) Payment for personal security and financial protection - medical care, old-age
pension, unemployment insurance, family allowance, compensation for
disability and death, housing, room and board allowance, etc.
(vi) Payment for the welfare facilities, like: maintaining dining room, cultural and
recreational facilities, etc.
4.9 HEALTH CARE

Benefits for medical and health care include: Accident insurance, disability insurance,
health insurance, hospitalization, life insurance, medical care, sick benefits and sick
leave are classified under this benefit category.
A glance at various organisational websites and annual reports reveal that lack of a
comprehensive health plan for the employees has resulted in indirect, recurring losses
for companies.
In a Canadian government study, the Canada Life Assurance Company experimental
group realised a four per cent increase in productivity after starting an employee
fitness program. Further, 47 per cent of programme participants reported that they felt
more alert, had better rapport with their co-workers, and generally enjoyed their work
more.
104 Swedish investigators found that mental performance was significantly better in
Systems and Strategies physically fit workers than in non-fit workers. Fit workers committed 27 per cent
fewer errors on tasks involving concentration and short-term memory, as compared
with the performance of non-fit workers.
Studies by various US and UK-based medical research institutes have shown that 80-
90 per cent of people of any age, gender, physical fitness and profession who use a
computer regularly are likely to suffer from vision and health problems.
Another study conducted by Department of Human Factors Engineering, University of
Occupational and Environmental Health, Japan, showed that visual strain occurred
after 60 minutes of Video Display Terminal task.
A close look at these only supports the fact that a sizeable portion of employees suffer
from health problems that are mostly work generated and that well-planned,
comprehensive health promotion programmes can help in reducing such ailments.
This would in turn pave the way for rise in overall productivity.
However, corporates have hardly realised the existence of this silent troublemaker,
leave alone assessing the magnitude of the problem. Hence, they continue to extract
more work hours, which results in a stressed life-style for employees.
“While at first, corporations may appear to benefit from workers’ added effort during
long, stress-filled days, rising health care premiums may show otherwise. One study
based on the Multiple Risk Factor Intervention Trial, for instance, showed men who
skipped their annual vacation were more likely to die from coronary heart disease than
were couch potatoes or smokers who do get away for a little annual rest and
relaxation,” wrote Wendy D Lynch in Business Health about the American work
scenario.
The scene back home is also not good. Taking cue from the workaholic West born
companies, Indian corporate houses too can be seen flooded with over-stressed
employees trying to attain strength from their cups of coffee and puffs of cigarettes.
Many employees report for work on time and work for unlimited hours. That the
company stands to earn more if employees put in additional work- hours is only a
myth.
4.9.1 Problems Galore

Poor eyesight, spondylitis, discomfort, fatigue, tension, depression, irritability and
obesity are only a few of the problems. Lack of care can lead to long-term ailments,
wherein not only the person concerned, but also his entire family has to suffer.
Another problem that has a direct implication on the employee’s psyche is lack of a
feeling of belonging to his/her organisation. “There is much more an employee
expects from his organisation, beyond a work-salary relationship. A sense of
attachment to his company is very important,” opine employees by and large.
Agrees Prof B M Hedge, Vice-Chancellor, Manipal Academy of Higher Education,
“Japan has the lowest rate of heart attacks in the world. One of the reasons is the
absence of differences between the boss and workers. So a sense of belonging helps!”
Health education programmes improves overall productivity and quality of
employees. “Companies might do a lot for the medical care of employees, but
precious little for preventive healthcare,” says Dr Prathap Reddy, Chairman, Apollo
Hospitals Group, stressing on the importance of preventive healthcare for diseases like
cancer and heart attack.
4.9.2 Right Approach

“Most human resources managers and corporate directors intuitively understand that
neither the sleep-deprived employee nor her caffeine-powered manager who hasn’t
taken a day off in three years is working at peak capacity. But what is “peak?” 105
Lacking a definition, Americans have fallen into the “more is better” rut, with untold
implications for their health,” says Lynch.
So its high-time employers actually wake up and realise the fact that more work-hours
need not necessarily mean more output. To maintain that, they need to adopt their
employees’ well-being as a business strategy. “It is very important to allocate not only
an appropriate budget for the company’s healthcare plan. With an appropriate budget
for the company’s healthcare activities in place, it is also imperative that a
professional set-up and approach be followed for the implementation of the same. In
other words, the healthcare vision must be total —- promotive, preventive and
curative,” says Captain Dr Rakesh Dullu, deputy manager health and medical
services, Hero Honda.
“At the same time, we must not lose sight of the fact that if we are able to take care of
the families’ health too, we are actually reducing the stress of the employees and can
expect better productivity and quality from them,” he adds. But according to the
current scenario there are only countable organisations that have any health plans for
their employees’ families. Out of a plethora of services that can or should be provided,
most companies are happy providing medical reimbursement of a few hundred rupees
to their employees. Ideally, the focus should be on prevention rather than cure.
Small things like low-fat balanced meals in cafeterias and occasional serving of fresh
fruits or juices can go a long way in helping the workers maintain a healthy mind and
body. However, this is not the least a company can do. Considering the long working
hours, die hard competition and mounting pressure, experts suggest a few “must
haves” for any organisation:
4.9.3 Health Plans

Even though health insurance has not established a foothold in India, companies must
ensure that its employees get an insurance coverage. Hero Honda, for instance has an
understanding with some Gurgaon-based hospitals where, depending on the
availability of specialised doctors, employees are sent for treatment. All employees in
the company are covered under the National Insurance scheme. “We have our own
parameters for selecting a hospital and we are constantly in touch with the doctors
there,” says Dr Dullu.
4.10 PERFORMANCE RELATED COMPENSATION

4.10 DESIGN
Employees are the cores of any organization. Effective performance management
systems ensure quality of the employees. It systematically and objectively links the
ability and contributions of employees, individually and in a team, to the overall
performance of the organization. Employee compensation acts as a catalyst to the
performance management systems. Hence effective design of employee compensation
should also focus on performance management systems. Performance linked pay or
compensation thus has a strategic significance, as it optimises the cost of
compensation and at the same time rewards the good performers, who feel
increasingly motivated and make the organization as their desired place to work with.
This chapter first discusses about the basics of performance management systems,
delineating it from our traditional percepts, i.e., performance appraisal. Then it
focuses on linking performance management systems with the employee
compensation designs.
Performance appraisal systems in any organization formally analyses, reviews and
evaluates performance of an employee in achieving the organization’s mandated
objectives. Like any other function, performance appraisal is also an important human
106 resource management activity. Performance management, on the other hand, is an
Systems and Strategies integrated process. It sets objectives, appraises employees, translates objectives into
individual Key Performance Areas (KPA), helps in compensation design, and in the
process, benefits the organization to achieve its business goals and objectives. We call
it a development tool, as it facilitates performance improvement, career development
and training. Thus performance management involves thinking through various facets
of performance, identifying critical dimensions of performance, planning, reviewing
and developing and enhancing performance and related competencies. It is an ongoing
communication process that involves both the managers and the employees:
z To identify and describe essential job functions and relating them to the mission
and goals of the organization.
z To develop realistic and appropriate performance standards.
z To give and receive feedback about performance.
z To write and communicate constructive performance appraisals.
z To plan education and development opportunities to sustain improve or build on
employees’ work performance.
Performance appraisals are bundles of tools used to evaluate the effectiveness or
otherwise of a performance management system.
To sustain competitive advantage, organizations are not only required to recruit the
best fit and systematically train and develop them but also monitor the performance of
employees and focus on performance improvement through various HR interventions.
Globally it is now well established through series of empirical research that
performance management is the most important areas of an organization and perhaps
now started getting the supreme priority.
4.10.1 Compensation Management Issues in Performance Management

Systems
From compensation management point of view, performance management systems
help in achieving following critical goals:
z It helps in recognising the efforts and contributions of employees objectively and
thereby facilitates in effective job pricing, both through the cost optimisation and
befitting rewarding of talented performers.
z It facilitates in suitable compensation design, rewarding employees based on the
performance linkage.
z It supports employee motivation (which lead to increased performance), helping
employees to receive their performance feedback, understanding their strengths
and weaknesses. Employees can develop themselves through self-introspection
and thereby feel intrinsically motivated. So also performance based pay helps in
getting extrinsically motivated. Both the motivational constructs lead to improved
performance.
z It facilitates employees to develop their core faculty of goal achievement.
z It retains good performers, through competitive compensation design, offering
increased flexibility to earn more, based on performance level.
z It attracts good performers from competing organization.
Operationally for many organizations, which follow structured pay scales,
introduction of performance related pay is difficult. It is our experience that many
senior level employees, in such organizations, stagnate at the last slab of their pay
scales. As a consequence, these employees get de-motivated, decrease their
performance levels and wait for the opportune moment to job-shift. This exactly what
the Steel Authority of India (SAIL) had experienced. SAIL lost many of their senior 107
level employees, who took pre-matured retirement (under their earlier launched
voluntary retirement scheme, commonly known as golden handshake programme). It
benefited many steel plants under private ownership, as they could get instant quality
manpower for their projects. Similar fate was for the State Bank of India. All these are
squarely attributable to absence of performance linked pay or compensation systems.
Another crude operational issue is designing incentives, aligning with the
performance, without specifying any minimum performance requirement. It means
every one become eligible for the incentives, as individual contributions is not
factored in designing the compensation. While hundred percent factoring of individual
performance is not desirable (as it culminates conflicts), total ignorance of it is also
not desirable. Performance linked compensation in such cases provide for incentives
for results that exceed the stated goals, combining individual, departmental and
organizational goals.
In order to reap the strategic benefits of pay for performance, many organizations
limit the increase in the pay only to bare statutory minimum, while increases the
amount of salary for those who are good performers. In both the cases compensation
decisions are based on realistic assessment of performance. Thus in such cases,
organizations do away with the traditional cost of living and seniority percepts for
compensation design. However, such practices have both the advantages and
disadvantages. Advantages are; it rewards the merit, improves the teamwork, provides
job satisfaction, and finally achieves the desired results. Disadvantages are difficulty
to institutionalise the systems and monitor it, difficulty in identifying appropriate
performance evaluation tools, and dilution of loyalty of employees (as it ignores the
seniority factor).
4.11 COMPENSATION DESIGN THROUGH SKILL

4.11 BASED PROGRAMMES
Compensation design through skill based programmes rewards employees for
attainment of additional skills and knowledge. A skill based pay system enables
employees to enjoy addition payment of compensation for new learning, which
correspondingly enhances their level of performance. Learned skills and knowledge of
employees significantly improve their competencies. To introduce the skill based
compensation programmes, organizations at the outset break the jobs or group of jobs
into different components. Initial placement of employees is given at the base level
jobs, assuming employees can autonomously be able to develop their individual
proficiency in executing their job assignments. Organizations then encourage such
employees to acquire additional skills. Wherever required, organizations also extend
training support. These way employees can also acquire new set of competencies and
raise their base pay level. Organizations, this process can develop multi-skill, to
employees competent to execute different cross-section of jobs. Often skill-based pay
is deliberately introduced by the organization to urge employees in new skill
development. It is different from performance related pay, as enhanced compensation
become payable to employees on attaining new skill, knowledge and competencies,
recognised by the organizations. For examples, bank employees become eligible for
additional increments after completion of CAIIB examination. Similarly, college
lecturers become eligible for additional increments after getting award of Ph.D. Every
organization, likewise adopt certain predetermined standards. Some of the important
lessons on skill-based pay are unnecessary culmination of competition, more
individualised. On the contrary, it focuses on individual skill development and
benefits the organization to accomplish its goals.
108
4.11.1 Major Obstacles to Introduce Skill Based Pay
Skill based pay although provides multiple benefits, to introduce it, organizations
encounter serious problems. Some of the major obstacles to introduce the skill based
pay, can be listed as under:
z Defining of skill sets: It is difficult to document skill sets of a job. Even though
organizations can at the outset document skill sets for a well-defined job, it
become quickly obsolete. Jobs are getting restructured every now and then with
the changing technology and new product designs, rendering redundancy of
earlier documented skills. Another problem encountered by the organization is to
narrow down skill-sets, jobs being highly inter-related. We cannot identify the
job-specific competency differences.
z Pricing skill sets: This is another major obstacles in introducing skill-based pay.
Effective pricing of skill sets seemingly difficult for the organizations. Often we
benchmark with the market pricing, but many organizations may require some
unique skill-sets, for their typical nature of job. In such case price rationalisation
become difficult, as we have to depend on the subjective assessment. Some of the
skill price rationalisation criteria could be; competitive value of skill, amount and
degree of effort required acquiring the skills, amount and degree of effort required
to implement the learned skills in tasks and jobs, etc.
z Validation of skills: This is also difficult to validate some skill sets. For some
jobs, we can use job trial or performance tests to validate the skills and
competencies of employees, but for many others, we have to depend on our
hunches and subjective assessment. Hence to achieve success in implementation
of skill-based pay, it is necessary to introduce a credible skill validation process.
z Skill re-certification tests: For some skill sets, it is necessary to ensure that
concerned employees are able to sustain their skill, through a periodic skill re-
certification programme.
z Skill obsolescence: Technology changes render change of necessary skill sets.
This makes earlier learned skills obsolete, requiring organizations to renew the
existing skills through sustained training and development initiatives.
z High cost of training: To introduce skill based pay, organizations need to focus
on employees’ learning of new activities. Any training and learning initiatives
enhance downtime, apart from usual cost of training. Often the benefits accrue fail
to recoup the expenses, resulting failure of organizational initiatives. Such
possible threat outweighs the benefit of skill-based pay.
z Increased payroll costs: Often skill based pay increases the overall payroll costs.
This, however, depends on the nature of job. If the jobs are simple, employees can
quickly learn the skill-sets required to perform the job and accordingly can
maximise their earnings stepping up production, even when organizations may
require curtailing the same. This problem would be more acute for those
organizations whose production planning is market dependent. It would be
difficult for such organizations to practice lean management or lean
manufacturing.
z Regulatory bottlenecks: Skill based pay programme, among others, require
organizations to increase the variables, which put the pay at risk. Thus reduced
fixed or base pay at less than statutory minimum wages, may lead to legal
complications for average or below average performers, who fail to earn the
variables, for their inability to acquire new skill-sets.
4.11.2 Application of Skill Based Pay 109
Despite having major obstacles to introduce skill based pay, many organizations can
make best use of it for all cross-sections of employees, including managerial levels.
To successfully apply, organizations need to design it with technological
considerations, so that identified skills do not get quickly redundant. Identified skill
elements should be relevant and accepted both by the employees and the management;
it should be consistent and implemented with integrity. A participative task force
should be formed to look into various aspects, right from development to
implementation of skill-based pay. The task force considers all the issues pointed out
in the list of obstacles and then determine the relative value of skills. The task force
implements the skill based pay in a phased manner.
4.12 PERFORMANCE GUIDE CHARTS

Organizations develop performance guide charts to introduce performance linked pay
programme. Such chart is prepared after performance evaluation and it tentatively
covers degree of performance, i.e., the performance rating, recommended rate of
increase in different quarters (where organizations introduce quarterly review of
performance), etc.
Table 4.1: Performance Guide Charts
Name of the Performance Rating First Second Third Fourth
Employees Quarter Quarter Quarter Quarter
Mr. A Outstanding (1) 15% 13% 11% 9%
Mr. B Exceeds Expectations 13% 11% 9% No
(2) increase
Mr. C Meets Expectations (3) 11% 9% No No
increase increase
Mr. D Meets minimum Token raise No Increase No No
expectations (4) to boost the Increase Increase
morale
Mr. E Does not meet No increase No increase No No
expectations (5) Increase Increase
Notice employees here have been ranked with a 5-point scale. Each employee’s
present performance ranking has been mapped using this scale and the recommended
quarterly raise in the compensation has been indicated. Notice employees do not get
any raise, when they fail to meet the expectations.
4.13 DESIGNING EXECUTIVE COMPENSATION

Use of performance criteria to design executive compensation, account for measurable
performance targets, behaviour, job requirements, and experience of the executives,
job role, peer compensation, market considerations and the size of the organization.
For better clarity in understanding in table below, these are explained
Table 4.2: Measurement of Performance Criteria
Criteria Parameters
Performance Targets Key Result Areas (KRA), Key Performance Areas (KPA), Key
Sales Objectives (KSO), or even some protocol bound
performance specification.
Behaviour Performance impact
Job Requirements Quality of actions in terms of job requirements, or fulfillment
of a prescribed role
Contd…
110 Experience of the executives Experience, talent and skills
Systems and Strategies Job role Hierarchy and the role requirements
Peer Compensation Pay differences between the executives
Market Considerations Benchmarked compensation information
Size of the organization Large, medium or small.
Nature of the organization Public limited, closely held, family business
These criteria are then studied in the context of time span and the nature of
measurement. Time span may be long or short-term compensation. The nature of
measurement, on the other hand account for profitability vs. market-based measures,
qualitative vs. quantitative measures, etc. (Gomez-Mejia & Balkin, 1992).
4.13.1 Calibration of Executive Compensation to Performance

The concept of calibrating pay to performance is the 'Market value measure'. On the
'X' axis we could include shareholder value, revenue growth or other suitable metrics
of business performance. The key to the model is ensuring the measures being
selected are pertinent, so that the right set of behaviours are being encouraged. To
simply say that a particular executive is a high performer may not only be a sweeping
generalisation, it may also be in reference to measures that are not currently important
to the organization.
High Pay/ High Pay/High

Low Performance Performance
Low Pay/Low Low Pay/High

Performance Performance
Figure 4.1: Pay Calibration
4.13.2 Performance Measurement in Executive Incentive Programmes

In most of the organizations, executives are rewarded independent of company
performance. Such practices, in fact built the argument that executives get rich at the
expense of shareholders. Because of such negative perception, linking executive
compensation to organizational performance, shareholders’ value creation has become
extremely important. Effective performance measures ensure that executive
compensation is commensurate with performance. Regardless of the industry there are
certain criteria that incentive performance measures should ideally meet. They should
be:
z Aligned with shareholders’ interests
z Definable
z Measurable
z Controllable
z Easily communicated and understood
Assessing potential performance objectives against these criteria can help to ensure
the appropriateness of the measure or measures ultimately used.
As an indication of how certain measurement categories stack up, the table below 111
briefly evaluates shareholder return based measures and company-specific measures
against the criteria above. Total Shareholder Return (TSR) has become a popular
performance measurement criterion, particularly for stock options plan. Some
organizations, however, emphasise on other internal financial performance criteria
like; ROE, EPS, and EVA.
Against the above criteria, there is merit for both shareholder return based measures
and company-specific measures.
Table 4.3: Shareholder return versus company-specific measures
Criteria Shareholder return based Company-specific financial measures

measures (TSR, share price (ROE, EPS, etc.)
growth)
Aligned with Directly aligned. Indirectly aligned. Proper measures may

shareholder interest reinforce performance that drives value
creation over long term.
Definable Yes. Typically definable, assuming adequate

financial reporting standards.
Measurable Easily measured. Relative TSR Easily measured. Progress can be

presents issues related to choosing communicated quarterly. Harder to
appropriate peer groups. measure relative performance in timely
manner.
Controllable Somewhat, unless economic and/or Typically more controllable than those
market factors dominate price. subject to market volatility.
Influence may be limited to top tier
executive group.
Easily communicated If properly designed. If properly designed.

and understood
The important point from the table above is that in some cases company-specific
measures may be more appropriate than shareholder return measures, particularly in
circumstances where executives have very little influence over the market valuation of
their companies. A thorough process, as laid out in the next section, can ensure that
the most effective and appropriate measures are used.
To choose an effective method, organizations need to consider various external and
internal considerations to identify the correct performance measures over time.
Some of the external inputs for performance measures, could be:
z Market practices for short, medium and long-term incentives.
z Identify external value drivers to understand the state of the economy.
z Understand the relevance of any financial ratios, which are generally attributable
to industry situation.
Similarly, internal inputs for performance measures are:
z Understand the internal value drivers.
z Focus on key strategic objectives.
z Link the executive behaviour and its relation with the business performance.
Both the internal and external value drivers significantly influence executive incentive
payment decision in any organization.
112
4.13.3 Concepts and Issues
Organization’s extent of payment of compensation to executives plays the most
important role to motivate critical performance. Such critical performance
achievement helps the company to achieve the results. It is important to understand
that base salary is not the only component in executive’s compensation. Organizations
have to make available various short-term and long-term incentives (STIs and LTIs).
Such incentives need not always be in terms of cash, it also includes stock options,
and various other innovative deferrals like loyalty bonus with the time-cap, golden
parachute schemes, etc. Executive compensation package need to be designed in such
a way, so that it can help executives to achieve the financial goals. Although increased
executive compensation package acts as a great motivator and helps in retention,
organizations need to optimise it following various innovative approaches, else it may
adversely affect their profitability. Also organizations need to design tax efficient
executive compensation.
4.13.4 Components of Executive Compensation

Components of executive compensation can be studied in three perspectives, i.e.,
variable pay (e.g., bonuses, commissions, profit sharing, etc.), base pay (e.g., salary
and perquisites), and employment status (e.g., promotions and termination).
Distinction in these perspectives focuses on the uncertainty of present and future
wealth, and emanate from agency discussions of risk bearing. In particular, it is
recognised that employment, fixed pay, and variable pay represent different aspects of
executive wealth and carry different risks or threats to wealth. For example,
employment consequences (in particular threats of termination) represent the most
severe threat to wealth since they correspond to a complete loss of current income as
well as a threat to prospects for future income, since they lower the market value of an
executive (Agarwal & Walking, 1994; Fama, 1980). Base pay represents a more
important but less severe, threat to wealth than employment since uncertainty in base
pay generally concerns an erosion of buying power resulting from loss of market
adjustments, cost of living adjustments, merit raises, and so forth. Finally, true
variable pay represents the least threat to current wealth since this form of pay is not
counted as part of wealth until it is actually awarded (cf. Thaler, 1990). Failure to
receive a performance award does not affect one's standard of living, as would failure
to receive one's salary or even failure to receive cost of living adjustments. It must be
noted that some forms of pay generally counted as variable (e.g., some forms of
bonuses and stock options) may not be truly variable and would, therefore, not be
included in our category of variable pay. In cases where bonuses are regularly
awarded, they become more like an entitlement and, thus, more like fixed pay.
Thus effective executive compensation packages typically comprise the following
components:
z Base Salary
z Annual Incentives
z Long-Term Capital Accumulation
z Deferred Compensation Arrangements
z Supplemental Benefits and Perquisites
z Special Severance and Retirement Arrangements
z Employment and Change of Control Agreements
4.13.5 Different Theories of Executive Compensation

To sustain the competitive advantage, organizations always focus on retention of
executives, because of their inimitable skill and knowledge base. The neoclassical
economics consider profit maximization as the core objective of organization, which 113
in turn maximize the gains of the owners or shareholders. In the era of corporatisation,
executives enjoy the control to manage the organizations. Shareholders and owners
repose their confidence on executives to manage the show. Therefore, executives may
often take the undue advantage to pursue their own interest, over-riding owners’ or
shareholders’ interest. Since goals of shareholders (principal) and executives (agent)
are not congruent, executives may engage themselves in opportunistic behaviour for
maximising their personal gains at the cost of the principal. This is the classical
syndrome of agency theory. Executives can dissuade them from such pursuit, once
they get higher than market level compensation. Organizations, however, cannot
substitute their core objectives of profitability for the sake of increased level of
executive compensation. Hence they design executive compensation innovatively
primarily with three core components; cash (salary and bonus), various perquisites
and supplementary benefits, and finally various long-term incentives.
Most of the executive compensation theories center on the theories of firms. With
profit maximization as the core objective, firms need to bend upon executives, as the
power of controlling rest on them. This typical syndrome indulges executives to
expect above normal compensation. Granting cash compensation, without considering
the cost aspects adversely affect the interest of the firms. Although firms can always
benchmark their compensation package with the market rate, even after payment of
benchmarked salary rate, firms may not be able to make them good performers, and
hence require to identify other compensation option, both to derive the benefit of
performance satisfaction and increased executive retention.
Perquisites and supplementary benefits represent a very small fraction of executive
compensation, for obvious tax burden. Hence organizations need to design more tax
efficient long-term incentive package. However, worth of long-term incentive package
is difficult to determine. For example future value of stock options is uncertain. Even
using different established models, we cannot predict its value. We consider four
classes of variables like; corporate size, firm performance, industry characteristics,
and human capital attributes, as determinants of stock value.
Firms’ size is ascertained based on its sales, assets, and number of employees who are
employed. Executives’ job in large organization is more complex than in small one,
hence large firm pays higher compensation to executives. Another analogy for large
firms to pay more to executives is that in a large firm we have more hierarchical
levels, therefore organizations make pay differentials between the hierarchical levels,
resulting more pay for the executives.
Another analogy for higher level of executive compensation is sales maximisation
hypothesis. In organizations, executives by increasing the sales achieve higher results,
which make them natural claimant of higher compensation. With sales maximization,
organizations achieve growth, which reduces the power of owners, rendering them to
play the monitoring role. This makes it possible for the executives to pursue their own
interests and accumulate wealth.
Other important economic determinant of executive compensation is the performance
of firm. Executives are accountable for the firm’s performance; hence their
compensation is linked with the results of organizational performance. Although we
lack adequate empirical evidence in this respect, changes in executive compensation
can be indexed, aligning with the performance of the organization.
A simple statistical model to explain influences of organizational performance on the
growth of executive salary is:
Base salary growth = a + b1revenue growth + b2 profit growth + e

114 Here ‘a’ is the intercept term, b1and b2 are coefficients of revenue growth and profit
Systems and Strategies growth, and e is a standard error.
Type of industry is the third economic variable of executive compensation. For
example, service industry’s compensation package is higher than the manufacturing
industry. Again within the service industry, IT and ITES organizations pay higher
compensation than transport service providers. All these cannot be explained in terms
quality of manpower required. Typical occupational hazard, security and safety
involved in a job could be a factor for compensation differences. For example a
ground engineer of an Airline may get less salary than in-flight personnel.
Another important economic variable is the difference in human capital. Variation in
human capital make significant differences in performance and productivity on the
job, and may be due to education, work experience and skill differences. The
underlying analogy for increased level of executive compensation, therefore those
who have invested more in enriching their value, should get more.
Political and social factors also make differences in executive compensation. Because
of their proximity with the authority, executives themselves can manipulate and come
out with their increased compensation plan. This is what we attribute to power
politics. Likewise, social norms also can make a significant difference in executive
compensation.
4.13.6 Some other Theories of Executive Compensation

Based on the above discussions, some of the theories of executive compensation can
be narrated as under:
Agency Theory: Shareholders’ being agents of the company due to their ownership
rights, they delegate control to top executives to represent their ownership interest by
designing compensation, keeping in view the mutual interest. The theory therefore
requires designing compensation in a way that serves the best mutual interest of
shareholders and the virtual owners, i.e., the top executives of the organizations.
Tournament Theory: As per this theory, compensation is viewed as the prize in a
series of tournaments or contests among middle and top-level managers, who aspire to
become CEO. Winners of the tournament at one level enter the next tournament. In
other words, an executive’s promotion to a higher rank signifies a win, and more
lucrative compensation represents the prize.
Social Comparison Theory: This theory suggests designing of compensation by
comparing with similar individuals.
Balance Sheet Approach: This approach provides expatriates the standard of living
they normally enjoy in their own country. Indian Software companies or other
companies when depute their executives and employees abroad allow their current
salary to accumulate and provide separate salary/compensation to accommodate their
cost of living in countries where they are posted.
Headquarters based pay: Compensation to all according to the rate used at the
headquarters.
Golden handcuffs: Compensation components earned over a period of time that assist
in retaining an employee. Many organizations practice this approach to avoid attrition.
Some organizations deliberately provide a designation and salary to newly recruited or
relatively less experienced employees, disproportionate to their deserving level. Say,
an MBA with 2 years experience, given a designation of Vice President with a
compensation package much higher than the market benchmark. This dissuades the
young executives to leave the job, as they know it well, they will not get a befitting
salary and status in other organizations. In India also such practices is evident in many
new generation companies. Another example of golden handcuffs may be giving
loyalty bonus points or phantom stock for every year of completed service, with a cap 115
(qualifying services) of 5 or 10 years service. Which means to get the benefit,
employees should remain with the company.
Competency based pay: Pay related directly to the kinds and levels of competencies
required in the performance of the work/job.
Golden parachutes: Provide pay and benefits to executives after their termination
resulting from a change in ownership, or corporate takeover. This is particularly for
very senior level executives, who may dictate this condition in their terms of
employment to protect their interests in the event of take over. However, in India
some recent judgments of Supreme Court even, questioned the sanctity of such
practices, leaving it to the discretion of the acquiring organization to alter or not to
alter the service conditions of employees of the organization, which is being acquired.
A Hay Group study in 2006 shows the French executives' golden parachutes are the
highest, as they receive double of their salary and bonus in their golden parachute.
An alternative to golden parachutes is the golden handshake plan. With the provision
of gloden handshake in the terms of appointment of executives, they become eligible
for significant severance package, when they get fired, or retired or even required to
quit due to organisational restructuring.
Cafeteria plan: For executives, options for different nature of benefits, is commonly
termed as cafeteria plan. For example health insurance, group-term life insurance and
flexible spending accounts, all represent medical benefits. Executives may select
either of the alternative as compensation benefit. Cafeteria plan is also evident in
some Indian organization, which gives the employee the flexibility to choose between
the contributory provident fund and pension.
Profit sharing plan: It provides direct or indirect payments, based on organization’s
profitability, apart from regular compensation. Although employee stock options fit
here as a good example, more applicable fit is Tata Group’s EVA plan.
4.14 INTERNATIONAL COMPENSATION

For organizations, globalization has exerted two influences; market globalization and
the need for reducing the cost of production. A large number of companies now look
for global market to sell their products and services. With the availability of latest
state of the art communication technology, globalization has increased the demand
from across the borders and people are now looking for best bargain for products and
services, irrespective of the country where they are produced. To reduce the costs of
production, organizations are now taking many initiatives, including relocating their
production facilities to low labour cost countries. However, relocating the production
and facilities to low labour costs countries may not always be feasible, as it may put
the organizations in a relatively disadvantageous position for loosing the market
proximity. These require the organizations to expand their plant and offices all around
the world and man those recruiting people, both from the local markets and also
deputing their own people as expatriates. Compensation design both for the Local
Country Nationals (LCN) and for the expatriates is a biggest challenge. Expatriates
are the Third Country Nationals (TCN). Both for LCN and TCN, organizations have
to frame compensation strategically, so that the burnt of compensation cost, cannot
defeat their business goals in global markets.
Expatriates can be assigned international posting both for the short term (less than a
year) and for the longer duration. In the United States, expatriates assignments may
be for two to three years. In Japan such assignments are for longer duration, usually
five years. However, we can generalise the period of assignment from such trends.
For short-term assignments, we do not require any change in the compensation
structure. Expatriates in such cases are given their usual salaries plus some living
116 expenses to meet their additional expenses in international assignments. However, in
Systems and Strategies case of long-term assignment, organizations need to design compensation.
4.14.1 Fundamentals of International Compensation

Globalization is now a reality for all organizations. Globalization do not have just
economic ramification, it has also enhanced the level of awareness for free flow of
information across the nation, influencing the market, the people. As a natural
consequence, globalization also has bearings on compensation management.
Internationally equitable compensation, across the nations, for companies having
presence in the global market, is now common. International compensation
management is a complex area, because of cross-cultural issues, difference in
organizational practices, labour costs etc. Thus, particularly for organization, which
works in a multi-national environment, it is important to understand the international
compensation systems. Problems in international compensation become more serious
when organizations send their employees on overseas assignments and subsequent
return of such employees to their home countries.
Before we clarify issues involved in international compensation, it is important to
clarify certain terms. International compensation design for an expatriate (expat) is the
most challenging task for the organizations. An expatriate is a citizen of the country,
where his/her organization is headquartered. For example an Indian working for the
subsidiary of his/her organizations in the U.S.A. is an expatriate. This is quite evident
in IT and ITeS companies, to optimise the utilisation of expertise, or to restructure the
manpower or even to develop the employees’ capability. In technology transfer cases;
overseas assignments for training and development are more evident.
Today’s workforces are mobile. For international assignments, workforces are
classified as short-term transferees, permanent transferees, permanent transferees,
expatriates, third country nationals, glopats, etc. Compensation systems largely
depend on the nature of the assignments and the workforces. Firms send workers to
international assignment with some definite goals and objectives, hence alignment of
international compensation with defined goals and objectives is very important.
Now we will explain the terms used for the international assignment. A short-term
transferee is temporarily assignment to work abroad for a period of 2 – 12 months. An
expatriate is usually transferred to an international assignment to work for a period of
3 – 5 years. They are also known as assignees. A glopat is a worker of international
cadre, who is sent to one international assignment to another. These workers are also
known as globetrotter. Third Country Nationals (TCNs) are those workers, who are
neither from the country of the organization, where it exists, nor from the country
where they are working. Their origin is from a different country. For example,
Chinese workers working for Infosys’s software development projects in the U.S.A,
represent TCNs.
4.14.2 International Compensation Design

In a global market place, strategic flexibility is more important than the national
culture to determine compensation. Employment practices vary worldwide. Even
after globalization, such practices hardly could change. For example lifetime
employment in Japan and industry-wide bargaining in Germany are still in vogue.
These have weakened the spate of globalization, and so also the issue of uniformity in
international compensation design. What is therefore important for us is to look for
design of international compensation, which keeps expatriates ‘economically whole’.
International compensation design requires global mind-sets. With the right global
mind sets, organization, in the era of globalization and market economies, can balance
the corporate, business unit and functional priorities of a global scale. In the words of
Jack Welch, the erstwhile CEO of General Electric, ‘the aim in a global business is to
get the best ideas from everyone, everywhere.’ To successfully compete in a global 117
market, it is essential for the organizations to design their international compensation
with a global mind set, to understand the economic, social and political changes in the
countries where they operate. With a global mind-set, organization can become
flexible to design compensation for the expatriates. For example, in China local labour
costs for the State Owned Enterprises (SOEs) and for the private and foreign
organizations are different, In SOEs compensation costs are quite high. In other
organizations it is low. Most of the global organizations relocated their manufacturing
units in China to reap the advantage of low labour cost. Similarly, in Japan employee
compensation largely depends organizational size, degree of unionization, capital-
labour ratio, degree of global competition and above all the profitability. Korean
compensation considers labour market issues, customer-supplier relations, economic
situation and technology level. In Hungary and in the U.S.A. political, economic and
institutional forcers are more important in organizational compensation decisions. In
India, however, the labour laws largely regulate employee compensation issues with
little room for variation and flexibility, depending on the organizational needs.
Similarly country-wise emphasis on fixed and variable pay varies.

State whether the following statements are true or false:
1. The main functions and objectives of Performance Appraisal are to
identify and define the specific job criteria.
2. Performance appraisal is to measure and compare the performance in
terms of the defined job criteria.
3. KRAs and KPAs are designed so that it can help in measuring job
performance in quantitative or qualitative terms.
4. Performance appraisal aims to develop and justify reward system, relating
rewards to the employees’ performance.
5. The function of an HR manager is to identify the strengths and
weaknesses of employees and to decide on proper placement and
promotion.
4.15 LET US SUM UP

The purpose of performance related pay is to reward employees for factors other than
the value of the job. This chapter discussed the methods of designing performance
related pay, going beyond the traditional paradigm of compensation design, which
considers cost of living, and other statutory wage provisions. However, the chapter
also focused on the possible dangers of designing compensation, solely on
performance criteria, as often it may ignore other vital issues of people management
aspects. It may not be always possible or even desirable to introduce performance
related pay in organizations. Many organizations embrace the system for their cost
control, rather to derive the strategic benefits like employee motivation and retention.
Hence introduction of performance related pay requires the organizations to
understand the basics of performance management systems and its relations to other
facets of human resource management issues.
Rewarding employees on the basis of performance, requires correlating the position of
employees on a performance scale and effect changes in the wage structure
accordingly. Its perquisite is to introduce first a good performance evaluation system,
emphasizing more on quantification of performance achievement. The chapter
discusses about many performance evaluation tools also, but its selection highly
depends on the nature of organization and its activities. Developing a performance
118 standard for all types of job may be difficult, despite having advanced mechanisms
Systems and Strategies like balanced score card, competency-based assessment, etc. Thus, though it is
effective, it requires adequate pre-work and feasibility study before introduction.
Performance Appraisal reinforces HRM in an organization. In this era of
technological change and global competitiveness, organizations are constantly
required to renew and update skill of their people or else they are likely to encounter
the problem of manpower obsolescence, which among others, will call for frequent
downsizing or rightsizing. While Performance Appraisal updates organizations to take
a stock on their skill inventories, training helps to address the skill-gap.
Wages and Salary administration is one of the major HR functions today. While
compliance with procedures and regulations is one aspect, cost to the organisation and
employees’ motivation are other aspects between which HR managers need to trade-
off. In per centage terms, salary and wages and bonus taken together are still major
causal factors of industrial disputes in India. Hence determining wages based on
certain defined methodologies should receive priority. Linking wages to performance
is again a major issue. Suitable incentive schemes need to be identified to reward good
performers. Fringe benefits again another major instrument for employee motivation.
Organisations can be innovative in designing employee compensation considering
various aspects.
Compensation is a methodical approach to assigning a monetary value to employees
in return for work performed. Compensation may include any or all of base pay,
overtime pay, commissions, stock option plans, merit pay, profit sharing, bonuses,
housing allowance, vacations and all benefits. Compensation is a term used to
describe not only employee salaries but also all other benefits received. This is also
referred to as remuneration. Compensation is a more holistic term. Traditional wages
and salary administration has now started loosing ground, because we have to design
compensation in a way, so that in employees’ hand it becomes more a reward than
monthly salaries for the job done. Just complying with statutory norms and expecting
employees to deliver results do not hold good in today’s competitive scenario.
Organisations need to emulate best practices, continuously benchmarking their
compensation designs and understand what holds good for them. Even decision on
fixed and variable components of compensation, need to be taken, keeping pace with
numerous factors, like; nature of job, company’s business goals, product life-cycle,
performance management systems, etc. There are various short-term and long-term
incentive schemes, available for the organisations. Taking into account human
resource strategy, organisation has to choose among different alternatives, which is
qualifying the test of cost-benefit. Choosing right incentive plans is again another
important area.
4.16 LESSON END ACTIVITY

Draw a wage policy for payment of wages to industrial workers.
4.17 KEYWORDS
Performance management system refers to the combination of performance goals and
a pay for performance plan.
Minimum Wages: Wages, which are need-based and statutorily decided both by the
Central and the State Government. Payment of minimum wages is obligatory for the
organisation.
Fair Wages: It is the wage, which is above the minimum wage but below the living
wage. Thus the lower limit of the fair wage is the minimum wage and the upper limit
is set by the “capacity of the industry to pay.”
Job Evaluation: Process of measuring the relative worth of a job to decide the wage 119
rate.
Living Wages: Wage rate which not only provide the bare essentials of food, clothing
and shelter but a measure of frugal comfort, including education for his children,
protection against ill-health, requirements of essential social needs and a measure of
insurance against the more important misfortunes, including old age.
ESOP: Employee Stock Options, offered as incentives by the organisation to ensure
increased level of motivation and retention of employees.
Dearness Allowance: These allowances are paid to protect the fall of real wages of
employees, keeping pace with the price rise.
Time Study: Carried out to decide the standard time required performing a job and
then basing the wage and incentives on the same standards.
KRA: Key Result Areas to indicate the performance target of individual employees of
an organization, aligning with the business goals.
SMART: SMART goals are specific, measurable, attainable, realistic, and time bound.
Behaviourally Anchored Rating Scales: It is used to measure underlying attitude in
one or more performance attributes.
Assessment Centres: One of the modern methods of performance appraisal. This
method test candidates in a social situation by a number of assessors, using a variety
of criteria. This method is useful in measuring inter-personal skills, organizing and
planning ability, creativity, resistance to stress, work motivation, decision making
power, etc.
4.18 QUESTIONS FOR DISCUSSION

1. What are the important objectives of a Wage Policy? Distinguish between Fair
Wages and Living Wages.
2. Describe some important techniques of Wage Determination.
3. To what extent Job Evaluation technique is useful for Wage Determination? What
are the different types of Job Evaluation? Which type you consider better and
why?
4. Describe the role of Time Study in Wage Determination
5. Describe various incentive schemes, which are incentive schemes you consider
better for employee motivation.
6. What way fringe benefits help in employee motivation?
7. Traditional Performance Appraisal System emphasises on assessing the individual
performance as an isolated factor. Briefly discuss the newer techniques of
performance appraisal, mentioning how it can benefit an organization to design
suitable compensation structure.
8. Discuss the effectiveness of MBO and BARS in designing performance related
pay. Develop KRAs for a HR Manager of an organization and identify five
important performance criteria for assessing the performance and its relation to
your compensation design.
9. Explain the concept of competency. How competency development helps in
compensation design.
120 10. Write short notes on:
Systems and Strategies a) Employee Services
b) Factor Comparison Model
c) Employee Stock Option
d) Scanlon Plan
Check Your Progress: Model Answers

CYP 1
1. T, 2. T, 3. T, 4. F.
CYP 2
1. Iron Law of Wages, 2. Wages, 3. Payment of minimum rate of wages,
4. Wage policy guides
CYP 3
1. T, 2. F, 3. T, 4, T, 5. T.
4.19 SUGGESTED READINGS

Suri, Venkata Ratnam & Gupt (ed.), Performance Measurement and Management,
Excel Books, New Delhi, 2004.
R. K. Sahu, Performance Management System, Excel Books, New Delhi, 2006.
Rao and Rao (ed.), 360-Degree Feedback and Performance Management System,
Excel Books, New Delhi, 2000.
B. D. Singh, Compensation and Reward Management, Excel Books, New Delhi,
2007.

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85

LESSON Compensation Strategies

4.0 AIMS AND OBJECTIVES

Wages or compensation is any economic compensation paid by the employer to an

4.2.1 Traditional Theory of Wage Determination

4.2.2 Theory of Negotiated Wages

4.3 PRINCIPLES OF COMPENSATION/WAGE

As a new start-up, a manufacturing organisation has to recruit large number of

Procedure for fixing and revising minimum wages

Payment of minimum rate of wages

Fixing hours for normal working day

Penalties for Offences

Statistics collected under the Minimum Wages Act, 1948

Addition of New Employments

4.4.2 Need-Based Minimum Wage

4.4.3 Living Wage

4.4.4 Fair Wage

4.4.5 Wage Boards

4.4.6 Wage Policy

Check Your Progress 2

4.5 OBJECTIVES OF COMPENSATION OR WAGES

Other Objectives of Compensation are as follows:

4.6 PRINCIPLES OF WAGE OR COMPENSATION

4.6.1 Wage Determination through Job Evaluation

4.6.2 Wage Determination through Wage Boards Intervention

4.6.3 Wage Determination through Time Study

4.7 JOB EMPLOYEE BENEFITS REQUIRED BY LAWS

4.7.1 Statutory Employee Benefits in India

4.7.2 Discretionary Major Employee Benefits

4.8.1 Dearness Allowance (DA)

1. D.A. not linked to Consumer Price Index:

4.8.3 Incentive Schemes

Different type of Bonus/Incentives

Different Stock Incentive Options

4.8.4 Fringe Benefits

4.9 HEALTH CARE

4.9.1 Problems Galore

4.9.2 Right Approach

4.9.3 Health Plans

4.10 PERFORMANCE RELATED COMPENSATION

4.10.1 Compensation Management Issues in Performance Management

4.11 COMPENSATION DESIGN THROUGH SKILL

4.12 PERFORMANCE GUIDE CHARTS

4.13 DESIGNING EXECUTIVE COMPENSATION

4.13.1 Calibration of Executive Compensation to Performance

High Pay/ High Pay/High

Low Pay/Low Low Pay/High

Figure 4.1: Pay Calibration

4.13.2 Performance Measurement in Executive Incentive Programmes

Criteria Shareholder return based Company-specific financial measures

Aligned with Directly aligned. Indirectly aligned. Proper measures may

Definable Yes. Typically definable, assuming adequate

Measurable Easily measured. Relative TSR Easily measured. Progress can be

Easily communicated If properly designed. If properly designed.

4.13.4 Components of Executive Compensation

4.13.5 Different Theories of Executive Compensation

Base salary growth = a + b1revenue growth + b2 profit growth + e

4.13.6 Some other Theories of Executive Compensation

4.14 INTERNATIONAL COMPENSATION

4.14.1 Fundamentals of International Compensation

4.14.2 International Compensation Design

Check Your Progress 3

4.15 LET US SUM UP