UNIT 1 introduction to compensation

Topic 1 Defined, Goals of Compensation System

Compensation includes payments like bonuses, profit sharing, overtime pay, recognition
rewards and sales commission, etc.

Compensation can also include non-monetary perks like a company-paid car, company-
paid housing and stock opportunities. Compensation is a vital part of human resource
management, which helps in encouraging the employees and improving organizational
effectiveness.

Compensation packages with good pay and advantages can help attract and retain the best
employees. A quick survey of employees about compensation is likely to expose an
expectation that wages are fair and cover basic living expenses, keep up with inflation, leave
some money for savings (perhaps for retirement) and leisure, increment over time.

A company’s compensation scheme also informs a great deal about the firm’s values and
cultures. Employees often look at what a company pays rather than what it says. In
many aspects, people behave as they are rewarded.

A compensation scheme projects what the company expects of its employees. For example,
if quality is an essential value, then it should be implemented through some element of the
total compensation system.

Goals/Objectives of Compensation Policy

 Allure suitable staff.

 Keep qualified personnel.
 Develop reward structures that are equitable with logical and fair pay relationships between
differently valued jobs.
 Manage pay structures to mirror inflationary effects.
 Assure that rewards and salary costs handle changes in market rates or organizational
change.
 Appraise performance, duty, and loyalty, and provide for progression.
 Abide with legal requirements.
 Maintain compensation levels and differentials under review and control salary or wage costs.

Clearly, managing a firm’s compensation policy is a complex task as it facilitates

systematically administered and equitable salaries, reconciles employees’ career aspirations
with respect to earnings, aligns employees’ personal objectives with those of the organization,
and keeps the firm’s costs under control.
 To summarize, compensation management is a synchronized practice that includes
balancing the work-employee relation by facilitating monetary and non-monetary benefits for
employees.

Topic 2 Foundations of compensation Management

A good compensation is a must for every business organization, as it gives an employee a

reason to stick to the company.

An organization gains from a structured compensation management in the following ways

 It tries to give proper refund to the employees for their contributions to the organization.
 It discovers a positive control on the efficiency of employees and motivates them to perform
better and achieve the specific standards.
 It creates a base for happiness and satisfaction of the workforce that limits the labor turnover
and confers a stable organization.
 It enhances the job evaluation process, which in return helps in setting up more realistic and
achievable standards.
 It is designed to abide with the various labor acts and thus does not result in conflicts between
the employee union and the management. This creates a peaceful relationship between the
employer and the employees.
 It excites an environment of morale, efficiency and cooperation among the workers and
ensures satisfaction to the workers.

In short, we can say that compensation management is required as it encourages the

employees to perform better and show their excellence as well as provides growth and
development options to the deserving employees.

Types of Compensations
We have learnt about what compensation and its importance is. However, when it comes to
an organization, be it private or public, compensations are further divided into the following −

Direct Compensation

It is naturally made up of salary payments and health benefits. The creation of salary ranges
and pay scales for different positions within an organization are the central responsibility of
compensation management staff.

Direct compensation that is in line with the industry standards facilitates employees with the
assurance that they are getting paid fairly. This helps the employer not to worry about the
costly loss of trained staff to a competitor.
 Indirect Compensation

It focuses on the personal encouragements of each individual to work. Although salary is

essential, people are most productive in jobs where they share the company’s values and
priorities.

These benefits can include things like free staff development courses, subsidized day care,
the chances for promotion or transfer within the company, public recognition, the ability to
effect change or bring some changes in the workplace, and service to others.

These are the two types of compensation that need to be managed and have its own
contribution in the development of the organization. Moving forward, we will see the different
components of compensation.

Components of Compensation
Compensation as a whole is made up of different components that work as an aid for an
employee after retirement or in case of some accident or injury. Now we shall see the key
elements or components that make compensation.

Wages and Salary

Wages mark hourly rates of pay, and salary marks the monthly rate of pay of an employee. It
is irrelevant of the number of hours put in by an employee working in the firm. These are
subject to annual increase.

Allowances

Allowances can be defined as the amount of something that is allowed, especially within a
set of rules and regulations or for a specified purpose. Various allowances are paid in addition
to basic pay.

Some of these allowances are as follows −

 Dearness Allowance− This allowance is given to protect real income of an employee against
price rise. Dearness allowance (DA) is paid as a percentage of basic pay.
 House Rent Allowance− Companies who do not provide living accommodation to their
employees pay house rent allowance (HRA) to employees. This allowance is calculated as a
percentage of salary.
 City Compensatory Allowance− This allowance is paid basically to employees in metros
and other big cities where cost of living is comparatively more. City compensatory allowance
(CCA) is normally a fixed amount per month, like 30 per cent of basic pay in case of
government employees.
 Transport Allowance/Conveyance Allowance− Some companies pay transport allowance
(TA) that accommodates travel from the employee’s house to the office. A fixed amount is
paid every month to cover a part of traveling expenses.
Incentives and Performance Based Pay

Incentive compensation is performance-related remuneration paid with a view to encourage

employees to work hard and do better.

Both individual incentives and group incentives are applicable in most cases. Bonus, gain-
sharing, commissions on sales are some examples of incentive compensation.

Fringe Benefits

Fringe benefits include employee benefits like medical care, hospitalization, accident relief,
health and group insurance, canteen, uniform, recreation and the likes.

In recent years, a great deal of attention has been directed to the development of
compensation systems that go beyond just money. We can say that all the components of
compensation management play a very important role in the life of an employee.

In particular, there has been a marked increase in the use of pay-for-performance (PrP) for
management and professional employees, especially for executive management and senior
managers. Compensation is a primary motivation for most employees.

Topic 3 Compensation Strategy Monetary & Non-Monetary

Rewards

The motivational factors that motivate a person to work and which can be used to enhance their
performance can be classified into two categories—monetary factors and non-monetary factors.

Monetary Factors:

1. Salary or wages:
This is one of the most important motivational factors in an organization. Salaries and wages
should be fixed reasonably and paid on time.
2. Bonus:
Bonus is an extra payment over and above salary, and it acts as an incentive to perform better. It
is linked to the profitability and productivity of the organization.

3. Financial incentives:
The organization provides additional incentives to their employees such as medical allowance,
travelling allowance, house rent allowance, hard duty allowance and children educational
allowance.

4. Promotion (monetary part):

Promotion is attached with increase in pay, and this motivates the employee to perform better.

5. Profit sharing:
This is an arrangement by which organizations distribute compensation based on some
established formula designed around the company’s profitability.

6. Stock option:
This is a system by which the employee receives shares on a preferential basis which results in
financial benefits to the employees.

Non-monetary Factors:

1. Status:
An employee is motivated by better status and designation. Organizations should offer job titles
that convey the importance of the position.

2. Appreciation and recognition:

Employees must be appreciated and reasonably compensated for all their achievements and
contributions.

3. Work-life balance:
Employees should be in a position to balance the two important segments of their life—work and
life. This balance makes them ensure the quality of work and life. A balanced employee is a
motivated employee.

4. Delegation:
Delegation of authority promotes dedication and commitment among employees. Employees are
satisfied that their employer has faith in them and this motivates them to perform better.

5. Working conditions:
Healthy working conditions such as proper ventilation, proper lighting and proper sanitation
improve the work performance of employees.
6. Job enrichment:
This provides employees more challenging tasks and responsibilities. The job of the employee
becomes more meaningful and satisfying.

7. Job security:
This promotes employee involvement and better performance. An employee should not be kept
on a temporary basis for a long period.

Topic 4 Intrinsic rewards, Cafeteria Compensation Style

Intrinsic rewards
Intrinsic rewards are the non-physical rewards. They cannot be seen or touched but are emotionally
connected with the employees. In other words, intrinsic rewards can be defined as the feeling of
contentment one finds in the completion of any task.

Intrinsic reward is directly related to job performance as a successful task automatically produces
it. Higher the success rate, higher will be the rate of intrinsic rewards one receives.

Different people have different perception and therefore, there are various forms of intrinsic
rewards, some of which are:

Sense of achievement

It takes lots of efforts, skills, and courage to perform any task and there is no better feeling than
the joy one feels seeing his hard work pay off.

Words of praise from the seniors

Employees become more than happy when their seniors or supervisors speak few words of
appreciation for them in front of peers or co-workers.

Recognition

Everyone wants to be renowned at the place where they work. It is rewarding for employees when
they are recognized by the co-workers and other members of the company for the work they’ve
done. If implemented properly, employee recognition can benefit both employer and employees
more than any monetary rewards.
Taking pride from the job

People try to avoid the credit when the jobs are wrongly done. But they feel proud of themselves
when the work is perfectly done. Such feeling of pride plays a vital role in motivating them to give
continuity to make even better outputs.

Work freedom or autonomy

When employees continue to make better output, supervisors may bother less to manage them.
The freedom that employees receive to make their own decision and work as per their schedule is
also a form of intrinsic reward.

Cafeteria Compensation Style

A cafeteria plan, also called a flexible benefit plan, allows employees to choose from a menu of
optional benefits the ones that best fit their individual needs. Thus, employees can customize their
benefit packages. In a cafeteria plan, benefits required by law (e.g. Social Security, unemployment
compensation, workers’s compensation) and those mandated by company policies or labor
agreements are supplemented by a list of other benefits to which employees can subscribe.
Employees’s choices of optional benefits are limited only by the total benefit dollars available and
the variety of benefits offered by the employer. Optional benefits that are often part of cafeteria
plans include dental insurance, vision care, group-term life insurance, child care, and disability
insurance. Many companies offer some form of cafeteria benefit plan to their employees, although
smaller companies are less likely to offer flexible benefits than larger companies.

TYPES OF CAFETERIA PLANS

There are several variations of cafeteria plans, including core-plus plans and modular plans. Core-
plus plans provide a set of mandatory benefits that are usually designed to meet the basic needs of
all employees. In addition to legally-required benefits, medical insurance, long-term disability
insurance, and retirement benefits are often included in the core. Optional benefits are offered to
employees who spend benefit credits to select other benefits that best fit their needs. Modular plans
usually package several different bundles of benefits that offer increasingly extensive arrays of
benefits. The basic module might include only the legally-required benefits, basic health insurance,
and life insurance. A second module might include everything in the basic module plus additional
benefits. A third module might include everything in modules one and two and even more benefits.
Employees would choose the module that best fits their needs and life situation.

Topic 5 Fringe Benefits

Fringe Benefits

Fringe benefits are a type of compensation provided to an employee outside of his normal
wage or salary. Many years ago, employers began to understand that potential employees
 give great consideration to the wage or salary offered. In an effort to tempt a qualified
individual to accept employment with the company, rather than going to a competing
company, many employers began offering non-wage compensation in addition to the actual
salary offered.

These fringe benefits, often in the form of employer-paid life and health insurance policies,
retirement benefits, and other things that might aid in the recruitment of top quality, skilled
workers. In fact, fringe benefits play a large role in keeping workers motivated to do quality
work and increase production. Some fringe benefits may be classified as taxable income by
the IRS.

Types of Fringe Benefit

Many employers offer employees an array of fringe benefits in addition to their salaries. Also
considered “job-perks,” these benefits cost employers, who pay for such perks, and are
therefore considered a portion of the employees’ salaries on their books, even if the benefits
are not in the form of money, such as bonuses. There are many types of fringe benefit, and
which types are offered often depends on the type of employer, and value of the employee’s
position.

1. Taxable Fringe Benefits

According to the IRS, any fringe benefit provided by an employer may be taxable, unless it is
specifically excluded from taxation. The IRS provides specific information regarding fringe
benefits, including which are considered taxable. Some of the fringe benefits that may be
taxable under certain situations often include payment of, or reimbursement for, things in an
excessive amount. These include:

 Excessive Moving Expenses – if an employer reimburses or pays for an employee’s moving

expenses, when the move was less than 50 miles from the employee’s current residence,
may be taxed.
 Excessive Mileage Reimbursement – employer reimbursement for business-related driving
of the employee’s private vehicle may be taxable if the total exceeds the IRS’ standard
mileage rate.
 Expense Reimbursement – expense amounts reimbursed to an employee with the
employee’s sufficient accounting, may be taxable.
 Clothing Reimbursement – employer reimbursement for clothing that is not strictly for work
on the job, but which is suitable for everyday street wear, is taxable.
 Working Condition Benefits – any equipment or supplies purchased by an employee that
is used for work purposes exclusively, it is tax free. If the item is used for any personal purpose
at all, it is taxable.
 Excessive Education Expenses – Educational assistance for education that is not job-
related, or which the amount exceeds the IRS allowable amount is taxable.
 Awards and Prizes – Employee awards and prizes that are given in cash, are taxable, unless
they are given to charity in the employee’s name. Valuable non-cash awards may also be
taxable, unless the value is minimal.
 Non-Taxable Fringe Benefits

There are many types of non-taxable fringe benefits that may be offered to employees without
increasing their tax burden. Some of the most common tax-free types of fringe benefit
provided to employees by private and public businesses include:

 Insurance Coverage- Insurance coverage is perhaps the most common fringe benefit
provided to employees, though the structure of how insurance is paid for has changed in
recent years. Insurance coverage may include employer-paid life insurance, health
insurance, and short or long-term disability insurance. When an insurance coverage fringe
benefit is offered, the employer most commonly shares the cost of premiums at a certain
percentage, thus reducing the amount for which the employee is responsible. Of course,
insurance coverage may be offered entirely at the employer’s expense. Some employers also
offer health savings accounts to their employees, often matching the employees’
contributions to the plan.
 Childcare Assistance- Childcare assistance is one fringe benefit that comes in handy for
many families, and may increase attendance at work, as well as productivity. This is because
parents have additional responsibilities in ensuring their children are well cared-for while they
are at work. Many large employers are offering on-site childcare, either free of charge, or at
a discounted price. This allows parents to concentrate on their work, knowing their children
are close by, and being cared for. Some smaller employers, while unable to maintain an on-
site daycare facility, offer a cost-share for daycare.
 Physical Fitness- Some employers make it a priority to ensure their employees have access
to gyms or fitness centers in order to promote a healthy lifestyle, which in turn increases
attendance and productivity. Some companies maintain on-site fitness centers, where
employees can work out on breaks or other off times, while others offer paid gym
memberships, or memberships at a discounted price.

 Education Assistance- Education assistance in the form of tuition reimbursement, or other

assistance in adding to an employee’s education or skill set, is one of the more popular types
of fringe benefit offered by employers. Helping an employee gain new job-related skills or
knowledge helps the company, as the employee is then able to work at a different level in his
current position, or may become able to advance into new areas of the business.

Topic 6 Pay Structure: basic Pay, DA, HRA, Gross Pay, Take
home Pay, etc

Pay Structures

The pay structure or salary structure defines the compensation given to the employees. It
shows the breakup of the salary into various components. Based on various criteria such as
the professional experience or employees, or grades or bands the employees are categorized
under, different pay structures may be defined in an organization. One pay structure may be
applicable to multiple bands or grades and one band or grade may have multiple pay
structures.
Pay structures offer a framework for wage progression and can help encourage appropriate
behaviours and performance, while pay progression describes how employees are able to
increase their pay within their salary grade or band.

Pay structures can be distinguished by two key characteristics: the number of grades, levels
or bands; and the width or span of each grade. For example:

Narrow-graded pay structures, often found in the public sector, typically comprise ten or
more grades, with jobs of broadly equivalent worth in each grade. Progression is by service
increments, although due to narrow grades employees can reach the top of the pay range
relatively quickly, potentially leading to ‘grade drift’ and jobs ranked more highly than justified

Broad-graded structures have fewer grades, perhaps six to nine, and greater scope for
progression that can counter ‘grade drift’ problems

Broad-banding involves the use of an even smaller number of pay bands (four or five).
Designed to allow for greater pay flexibility, typical broad-banding would place no limits on
pay progression within each band, although some employers have introduced a greater
degree of structure

Job families group jobs within similar functions or occupations, with separate pay structures
for different ‘families’ (e.g. sales or IT staff). With around six to eight levels, similar to broad-
grading, job family structures allows for higher rates of pay for sought-after specialist staff

Career families extend the metaphor with a common pay structure across all ‘job families’
rather than separate pay structures for each family. Career families tend to emphasise career
paths and progression rather than the greater focus on pay of job families.

Basic Pay

This is the core of salary, and many other components may be calculated based on this
amount. It usually depends on one’s grade within the company’s salary is a fixed part of one’s
compensation structure. Many allowances and deductions are described in terms of
percentage of the Basic Salary.

Basic salary is the base income of an individual. Basic salary is the amount paid to employees
before any reductions or increases due to overtime or bonus, allowances (internet usage for
those who work from home or communication allowance). Basic salary is a fixed amount paid
to employees by their employers in return for the work performed or performance of
professional duties by the former. Base salary, therefore, does not include bonuses, benefits
or any other compensation from employers. As the name suggests, basic salary is the core
of the salary of an employee. It is a fixed part of the compensation structure of an employee
and generally depends on her or her designation. If the appointment of an employee is made
on a pay scale, the basic salary may increase every year. Else, it remains fixed.
According to experts, the basic salary differs according to the type of the industry. For
instance, employees in the information technology industry prefer take-home salary (since
the staff turnover is high) while employees in the manufacturing companies get more fringe
benefits.

DA (Dearness Allowance)

The Dearness Allowance (DA) is a cost of living adjustment to allowance. It is calculated as

a percentage of (Basic pay + grade pay). Dearness allowance is updated every quarter of
calendar year to compensate for inflation in consumer price index. It may increase or
decrease depending on inflation rate. (Decrease in DA is rare).

House Rent Allowance (HRA)

House Rent Allowance (HRA) is a common component of their salary structure. Although it
is a part of your salary, HRA, unlike basic salary, is not fully taxable. Subject to certain
conditions, a part of HRA is exempted under Section 10 (13A) of the Income-tax Act, 1961.

The amount of HRA exemption is deductible from the total income before arriving at a taxable
income. This helps the employee to save tax. But do keep in mind that the HRA received from
your employer, is fully taxable i f an employee is living in his own house or if he does not pay
any rent.

Who can avail HRA?

The tax benefit is available only to a salaried individual who has the HRA component as part
of his salary structure and is staying in a rented accommodation. Self-employed professionals
cannot avail the deduction.

Gross Pay

Gross pay for an employee is the amount used to calculate that employees’ wages (for an
hourly employee) or salary (for a salaried employee. It is the total amount you as the employer
owe the employee for work during one pay period. Gross pay includes regular hourly or
salaried pay and it also includes any overtime paid to the employee during the pay period.

For both salaried and hourly employees, the calculation is based on an agreed-upon amount
of gross pay. That is, both the employee and employer have agreed that this is the pay rate.
The pay rate should be in writing and signed by both the employee an employer.

For hourly employees, that pay rate might be negotiated by a union contract. For salaried
employees, that rate might be in an employment contract or just a pay letter. In each case,
the gross pay rate should be agreed to and signed before the employee begins working.

An example of gross pay calculation for a salaried employee:

 A salaried employee has an annual salary of $47,000 a year. The salaried employees at this
company are paid on the 15th and 30th of each month (twice a month). The $47,000 is divided
by 24 to get $1958.33, which is the gross pay for each pay period.

Take-Home Pay

Take-home pay is the net amount of income received after the deduction of taxes, benefits,
and voluntary contributions from a paycheck. It is the difference between the gross income
less all deductions. Deductions include federal, state and local income tax, Social Security
and Medicare contributions, retirement account contributions, and medical, dental and other
insurance premiums. The net amount or take-home pay is what the employee receives.

UNIT 2 Compensation for employees

Topic 1 Wage Theories

The workers are paid wages or salaries for the work done by them. Thus, the return to the workers
should be according to their efforts and the pay standards prevailing in the industry.

There are several theories of wage determination propounded by different scientists and are based
on varied assumptions.

Theories of Wage Determination

(1) Subsistence Wage Theory: This theory was propounded by David Ricardo and called this
theory as an “iron law wages.” According to this theory, the labor is paid the minimum amount of
wage that is sufficient to subsist and perpetuate their race without either increase or decrease. It is
based on the assumption that the law of diminishing returns applies to the industry, and the
population tends to increase.

If the labor is paid below the subsistence level, they will die out of malnutrition, disease or hunger
and therefore, the number of workers gets reduced. On the other hand, if the wage increases above
the subsistence level, the number of workers will get attracted to procreate and thus, with the
increase in labors the wage rate comes down. Thus, there is a subsistence level, which is
maintained and is not either increased or decreased.

(2) Wage Fund Theory: This theory was developed by Adam Smith, and is based on the
assumption that the wage is paid out of the pre-determined wealth or fund, which lays surplus with
the wealthy persons, as a result of savings. The amount of wage to be paid to the worker depends
on the size of the fund. Larger the fund, more labor would be employed and given higher wages,
whereas in the case of less funds, the wage would reduce to the subsistence level.
This theory was further expounded by J.S.Mill, and according to him the wage fund is fixed, and
the wages can be determined on the basis of demand for and supply of labor. And thus, the fund
size decides the demand for the labor. To have an increased wage, the number of labor is to be
reduced, and the fund is to be enlarged.

(3) Surplus Value Theory: This theory is given by Karl Marx,and according to him, like other
articles, labor is also an article of commerce and could be purchased by paying a subsistence price.

The price of a product is determined by the amount of time; a labor devotes for its production. And
the proportion of time spent by the labor on work is much less and, therefore, paid a minimum
price and the surplus amount is utilized for the other expenses.

(4) Residual Claimant Theory: Francis. A Walker propounded this theory, and according to
him there four factors of production viz. Land, labor, capital and entrepreneurship.

The wage is the amount given in return for the amount of production and thus is paid after the
payment of all other factors. Thus, the wage is considered to be a residual claimant, and is
computed as:

Wage= Whole production- (Rent+ Interest+ Profit)

(5) Marginal Productivity Theory: This theory is given by Phillips Henry Wicksteed and John
Bates Clark, and it is based on the assumption that wage is determined on the basis of last
worker’s contribution in the production i.e. the marginal production.

This theory assumes that wage depends on demand for and supply of labor. As far as, the marginal
productivity is equal to the wages paid, a firm will continue employing more labor.

(6) Bargaining Theory: John Davidson has given this theory, and according to him, the wages
are determined on the basis of a bargaining capacity of workers or their unions and employers. If
the trade union is stronger, then the wages will be high, and if the employer is powerful, the wages
tend to be low.

(7) Behavioral Theory: Several behavioral scientists (viz.March and Simon, Robert Dubin,
Eliot Jacques,) have presented their research on the wage determination. According to them, there
are various factors such as employer’s concern for the workers, the strength of unions, size and
prestige of company, etc. that determines the amount of wage to be disbursed among the workers.

Thus, the firm can adopt either of the wage methods depending on the nature of a job and the
worker’s contribution towards the accomplishment of a work.

Topic 2 Evolution of modern day labor force

Employability is the life-long, continuous process of acquiring experience, new knowledge
(purposeful learning) and skills that contribute to improving one’s marketability
for enhancing their potential to obtain and maintain employment through various shifts in the
labor market. It is based on a set of individual characteristics.

It is also not equivalent to employment, but rather a prerequisite for (gainful) employment.
Essentially, it is a person’s relative ability to find and stay employed, as well as make successful
transitions from one job to the next — either within the same company or field, or to a new one at
the discretion of an individual and as circumstances or economic conditions may dictate.
Employability will vary with economic conditions, although there are some exceptions
in professions “insulated” from economic fluctuations, such as healthcare, education, defense, etc.

Narrowly defined, employability is a product consisting of a specific set of skills such as soft, hard,
technical, transferable etc. Additionally, employability is considered as both a product (a set of
skills that “enables”) and as a process (that “empowers” an individual to acquire and improve
marketable skills that can lead to gainful employment).

Employability applies to almost everyone who is part of the labor force, as the ability to obtain,
maintain and switch employment over time is imperative to anyone’s survival as well as success
in life, thus one has to be able to possess a set of skills that are usable in the labor market.

How Employability Affects the Economy

Each factor of production is used differently, and labor or human capital can be used either in the
process of manufacturing a product or providing a service within an economy. The distinction
between labor and capital may relate to the fact that labor usually refers to blue-collar
laborers/workers and human capital to white-collar workers. Labor or human capital is in limited
and scarce quantity. For labor/human capital to be used efficiently, it warrants the acquisition of
knowledge, skills and capabilities that employers need in our current economic times and
knowledge-driven economy.

Firms and businesses are running leaner, with fewer organizational layers and prone to rapid
restructuring, striving to adapt to their shareholders’ profit-maximizing goals (stock price
appreciation and dividend growth), meeting their constituents’ needs and the challenges of the
ever-changing business landscape. This changes and limits the need for redundant and bureaucratic
careers even in government-held jobs. An individual’s employability is of high importance, since
it not only provides gainful employment but it is also a contributing factor to the individual’s
personal well-being and growth.

From a macroeconomic perspective, a lack of or a lower employability contributes to

both frictional and structural unemployment and affects the productivity of the labor force. This
subsequently impacts a country’s standard of living measured by the GDP per capita and its
potential for economic growth measured by aggregate demand and the GDP.
 The component that has the largest impact on GDP and economic growth is consumer spending. If
consumers are not spending on purchases of goods and services, businesses do not invest in capital
and labor or try to expand to meet the consumer demand. This translates into an economic
slowdown and increasing unemployment — conditions that set the stage for the creation or
deterioration of an economic recession.

Therefore, employability is vital to any nation’s labor force and society’s well-being. Economists
and policy makers argue that upgrading one’s skills can prevent both blue- or white-collar
workers from being crowded out. Low-skill, manual labor/task (blue-collar) workers working
indoors or outdoors can also benefit from changes in the demand for skills, if they receive
additional training. This also applies to human capital or white-collar workers — who usually have
a more accomplished educational background and utilize skills for performing tasks in
professional jobs, often in an office setting — by pursuing additional higher education and
professional development such as certifications, or other credentials related to their respective
field.

Meeting the Demand of the Labor Force

One component of employability that impacts it directly is the ability of workers to meet the
demand or the needs of the labor force. It requires the continuous upgrading of skills, especially
in sectors that experience rapid technological and organizational change, to help
avoid obsolescence of their human capital or labor force.

Some of the most-highly sought after skills include:

 high IQ workers, with higher education/academic skills; broader transferable skills;

 increased self-awareness about an employee’s strengths and weaknesses;
 strong work ethic and a positive attitude;
 analytical/critical thinking and problem-solving;
 communication;
 cultural competency;
 social and digital technology skills;
 team players with self-confidence who have the ability to learn from criticism;
 and flexible, adaptable workers who can work well under pressure/stress.

One should try to acquire a specific skill set based not only on what is in demand but also with
consideration of their personality, likes and dislikes, relevancy to their field of work/profession
etc., otherwise their career could be short-lived.

The Actors of Employability

There are a number of actors concerning employability and they are divided into primary and
secondary.

Primary actors are considered the employers and the workers or employees.
Secondary actors are the educational system and its representatives (schools, colleges — both
technical/community and four year — and universities), as well as their constituents and
the legislation that will have an impact on employers, workers and educational institutions.

Are labor unions also considered an actor of employability? The answer depends on whether they
have an impact (positive or negative) on workers’ (blue-collar) employment based on union
negotiations with employers/management, as well as the type of profession that may or may not
be impacted by labor unions such as white-collar workers, management, etc.

One’s employability is also affected by the degree of employability of others, since how
employable someone is creates a pecking order on how one stands relative to others within the
hierarchy of job applicants. Therefore, a high supply of candidates with similar qualifications does
not improve one’s employability when competing for a specific type of job or position (positional
competition).

The Skills of Employability

Employability consists of numerous components or skills, such as technical, non-technical,

transferable, non-transferable, context dependent, context independent and metacognitive.

Technical, often referred to as hard skills, are the skills and knowledge necessary for effective
participation in the workforce. These skills tend to be more tangible, specific to certain types of
tasks or activities that can be defined and measured, such as being considered an expert in a field.

Examples of hard skills include (but are not limited to) proficiency using software applications
such as spreadsheets, data-entry skills, operating machinery, speaking foreign languages and the
efficient use of math.

Non-technical skills, also referred to as soft or transferable, are the skills and knowledge
necessary for effective participation in the workforce such as personality traits (optimism, common
sense, responsibility, a sense of humor, integrity, enthusiasm, attitude, ethics) and skills that can
be practices (such as empathy, teamwork, leadership, communication, good manners, negotiation,
sociability, ability to teach, attention to detail, etc).

Transferable skills are high-order skills that enable someone to select, adapt, adjust and apply
other skills to different situations, across different social contexts and across different cognitive
domains. Transferable skills can be utilized in almost any type of job or profession and do not limit
someone to a specific type of job or industry, which means that a transferable skill is one that can
be taken from one type of job and applied successfully to another job. Those skills can be improved
and enhanced and they are external to, and independent of, the education/academic process.

Examples of transferable skills would be social skills, working well in groups and with others, etc.
A transferable skill set involves skills that are very sophisticated and personal/intellectual
achievements that are more attuned to professional behavior than a list of competencies. This
specifically includes disciplinary content, disciplinary skills, workplace experience, workplace
awareness, generic skills, etc.

Non-transferable skills place limitations on their applications to specific types of jobs, industries
or sectors of the economy, thus limiting the number of jobs on which they can be applied. One
example would be certain types of computer skills pertaining to a specific (or proprietary) type of
software or program.

A set of skills engaged in everyday activities are metacognitive skills, which are associated with
intelligence and enable individuals to be successful learners. Skills that are metacognitive in nature
are transferable and refer to higher-order thinking skills that involve active control over the
cognitive processes engaged in learning, such as planning how to approach a given learning task,
monitoring comprehension, evaluating progress toward the completion of a task, taking
appropriate and effective action, explaining what they are seeking to achieve, living and working
effectively with others and continuing to learn from experiences — both as individuals and in
association with others in a diverse and changing global society.

Another set of skills that is both soft and transferable is cultural competence of the work force.
This refers to an individual’s ability to work harmoniously and productively with people from
other cultures as the labor force becomes increasingly diverse. Linguistic skills also tie well with
cultural competency skills and their development since they provide the ability to speak a foreign
language and communicate in another culture’s native tongue which helps the process of
understanding another culture’s mentality and way of thinking.

Technical progress and evolution in communication have re-emphasized and facilitated the use of
the need for social and business/career networking skills. Developing and/or belonging to a social
or business network (preferably both) can advance a person forward to help facilitate the changing
of jobs or the pursuit of a new career opportunity.

The Three Areas of the Employability Process

Is employability considered to be a process, a product or both? Employability can be thought of as

a product in a specific point in time, however over time it is a process. As a product, employability
can be perceived as a final product in a specific point in time or at certain time intervals that serve
an individual — usually every time a higher skill level is reached by accomplishing a specific
educational or professional goal resulting in the individual’s improvement of thier marketable
skills.

As a process, employability is an ongoing, life-long investment in marketable and gainful

employment, which does not stop until an individual’s retirement. One of the most important
components of the employability process involves continuous self-assessment and evaluation of
one’s skills, compared to what is in demand at any given time. From the ongoing, life-long process
perspective, employability is not a final product since the individual keeps improving her/his skills
until retirement age or an age where the individual deems further skill advancement is no longer
necessary.
 The employability process can be divided into three areas, each entailing different competencies
such as:

1. Personal management, referring to the building and maintaining a positive self-concept, interacting
positively and effectively with others, and continual growth throughout life;
2. Learning and work exploration, involving participating in life-long learning that is supportive of career
goals, locating and effectively using career information, and understanding the relationship between
work, society and the economy;
3. Career building, pertaining to security (creating and maintaining work/job), making career-enhancing
decisions, maintaining a balance between life and work roles, understanding the changing nature of life
and work roles, and also understanding, engaging and managing the career-building process.

Topic 8 Incentive Scheme- Individual, Group

Incentive Scheme
HR: Employee motivational program designed to encourage commitment to increasing
productivity or in achieving some worthwhile objective such as reducing the number of man-hours
lost due to accidents.

Marketing: Customer motivational program designed to encourage them to buy more of the firm’s
products. Also called bonus scheme or incentive program.

(I) Individual Incentive Plan

Reward systems tied to the performance of individual employees are known as individual incentive
plans. These plans depend on category of workers for which they are designed. Under this plan
mostly a certain pay rate is guaranteed and the rewards represent additional compensation.

Under individual wage incentive plans three categories of personnel’s can be included. They are
Production workers or blue dollar workers, white collar workers such as salesman, and managerial
personnel’s. All these categories of employees have different needs, they differ in qualification
and type of work, and therefore separate plans are designed for them.

Incentive Plans for Production Workers or Blue Collar Workers:

There are three categories of these plans:

(1) Incentive is proportional to extra output.

(2) Incentive is proportionately at lower rate than increase in output.

(3) Incentive is higher proportionately to rate of increase in output.

Under these plans, workers are rewarded individually when their performance exceeds pre
determined standard. Individual workers earn a bonus if they work more and produce more. These
plans are therefore known as premium plans. These plans are either time based or production
based.

A standard time is determined for doing a job. A standard time serves as the basis of giving bonus
to the workers if they meet or exceed the standard. The worker is said to be efficient if he completes
his job in less than the standard time. In order to reward him for his efficiency, he may be given
bonus under an appropriate incentive plan.

Advantages:

Incentive wage plan have following advantages:

(1) The standard output is determined on the basis of time and motion studies by the specialists
and the rates of wages are fixed for different jobs on the basis of job evaluation. This stimulates
workers to work more.

(2) Increase in output leads to lowering of per unit cost, hence a direct gain to the employer.

(3) Less supervision is required as the workers are motivated to work more. This saves supervisor’s
time for supervision. He can utilize this time for other more important work.

(4) No conflict between employees and employers as the needs of both are satisfied because
employees are rewarded for their efficient work and employers are happy with the increased
output.

Disadvantages:

The wage incentive plan suffers from some of the demerits:

(1) Even though output is increasing the quality is at the receiving end. Employees give more stress
on increase in output neglecting the quality. Employees become quantity conscious and not quality
conscious.

(2) Employees oppose the introduction of advanced and modern techniques of production because
of the fear that they may lose extra payment for extra output produced by them.

(3) There is an increase in cost of record keeper.

(4) Safety precautions are overlooked. May therefore lead to accidents.

(5) Slow workers become jealous of fast workers because comparatively their earnings will be less
than their counterparts.

(6) This system increases their earnings. They may therefore put a demand for increased minimum
wages.

(7) Management faces difficulties in determining the rate of bonus to be paid. Fewer rates may
aggrieve the workers and high rates may reduce their efficiency.

(II) Group Incentive Schemes:

It is observed that under individual incentive plans bonus is paid to the worker on the basis of
individual’s performance. This is in the case where the payment of bonus is not affected by the
performance of others. But there are certain situations where it is difficult to measure individual
contribution. Here the performance each worker is affected by others. Under such situations group
incentive bonus schemes are introduced.

Under group incentive plan, bonus is calculated on the collective production of a group of
interdependent workers and distributed among members of group on some agreed terms and
conditions. As far as possible the bonus so earned is distributed equally among the members of the
group.

The basis for distribution is on the following:

(1) Group bonus is distributed equally if all the members of the group possess similar skills.

(2) If the base wage of members is different than bonus may be distributed in proportion to the
basic rates.

(3) Bonus may be paid to the members on a specified percentage depending on the basis of skill,
experience, basic rate of pay of each individual employee.

Following are the group incentive plans:

(1) Priestman’s Plan:

Under this, the starting point is productivity of the group. Standard output is laid for the group.
Minimum wage is assured to a group. The group members are entitled for a bonus if their output
exceeds the set standard. The payment of bonus is made in proportion to the excess of actual output
over the standard output. This plan encourages the feelings of team spirit among the members of
the group. The employees behave as a group and work together to increase output. This scheme
does not consider the individual efficiency of worker. Thus the inefficient member of the group
also get bonus.
(2) Scanlon Plan:
This plan was devised by Joseph Scanlon in 1937, a trade union leader. Under this plan workers
are involved in decision making. They are encouraged to make suggestions regarding cost
reduction and increasing productivity.

They are involved in the various screening committees in the plant to find out ways and means to
judge the cost reduction suggestions. In this way employees work with their supervisors, managers
and other fellow employees on various screening committees.

If the suggestions are successfully implemented, employees get share in the savings. To facilitate
workers’ participation, there are departmental committees consisting of representative of workers
and management.

Periodical meetings of these committees are held to discuss the problems faced by the workers.
They recommend measures to increase production. It promotes healthy labour relations, minimizes
supervision, increases efficiency and sense of partnership among workers.

This plan suffers from certain drawbacks such as the inefficient worker gets rewarded because of
better performance of the group. It is also true that the suggestions of the employees are not given
due consideration by the management.

(3) Profit Sharing:

Under the scheme of profit sharing a certain percentage of profit is distributed at fixed ratio among
some categories of employees annually. According to Henry R. Seager, “profit sharing is an
agreement freely entered into by which the employees receive a share, fixed in advance, of the
profits.”

The decision of sharing of profit to the employees is informed in advance. The basis of profit
sharing is decided on the length of service or the number of working days in a year or the wages
earned by a worker during a year.

It is direct incentive to a worker. The payment of profit can be made in cash or it can be deposited
in the account of provident fund of an employee. The advantage of this scheme is that workers
develop common concern for the development and progress of the undertaking.

Profit sharing is of two types:

(a) Current Profit Sharing:

It is the one directly paid to the employee annually or six monthly.

(b) Deferred Profit Sharing:

 It is the one which is not paid directly to the employee but credited in his provident fund account
or to pension account or sometimes paid in the form of bonus shares.

Merits:

(1) Creation of industrial peace because workers are satisfied as they are getting an additional
amount besides their wages.

(3) The bonus is paid only when the amount of profit exceeds the set target. It means bonus is not
part of cost of production.

(4) Profit sharing scheme is based on the basic pay of the employees.

(5) Workers have share in profit and not losses incurred by the employer.

(6) It represents a reward for group effort and group efficiency.

(7) It brings about team spirit among the employees. They developed a sense of belonging to the
organization, reduces training time.

(8) Profit sharing results into equitable distribution of the profit.

Demerits:

(1) Employees are entitled to bonus when company earns profit. They do not get bonus when
company recur losses.

(2) It is not possible for newly established company to pay bonus.

(3) There is no distinction between efficient and inefficient employees of the company while
distribution of bonus.

(4) Bonus is paid to the employee once in a year. This does not motivate them for better
performance.

Topic 10 Co-partnership- Stock option: ESOP

Co-partnership

 A partnership or association between two equals, esp in a business enterprise.

 A form of industrial democracy in which the employees of an organization are partners in the company
and share in part of its profits.
Stock Option

Stock options are sold by one party to another, that give the option buyer the right, but not the
obligation, to buy or sell a stock at an agreed-upon price within a certain period of time. American
options, which make up most of the public exchange-traded stock options, can be exercised any
time between the date of purchase and the expiration date of the option. European options, also
known as “share options” in the United Kingdom, are less common and can only be redeemed at
the expiration date.

Employee stock ownership plan (ESOP)

An employee stock ownership plan (ESOP) is an employee-owner program that provides a

company’s workforce with an ownership interest in the company. In an ESOP, companies provide
their employees with stock ownership, often at no upfront cost to the employees. ESOP shares,
however, are part of employees’ remuneration for work performed. Shares are allocated to
employees and may be held in an ESOP trust until the employee retires or leaves the company.
The shares are then either bought back by the company for redistribution or voided.

Some corporations are majority employee-owned; the term “employee-owned corporation” often
refers to such companies. Such organizations are similar to worker cooperatives, but unlike
cooperatives, control of the company’s capital is not necessarily evenly distributed. In many cases,
voting rights are given only to certain shareholders, and more senior employees may be allocated
more shares than new hires; typically, they are tied to the compensation an employee receives from
the company. Compared with cooperatives, ESOP-centered corporations often allow for company
executives to have greater flexibility and control in governing and managing the corporation.

Most corporations, however, use stock ownership plans as a form of in-kind benefit, as a way to
prevent hostile takeovers, or to maintain a specific corporate culture. The plans generally prevent
average employees from holding too much of the company’s stock.

ESOP and Other Forms of Employee Ownership

Stock ownership plans provide packages that act as additional benefits for employees to prevent
hostility and keep a specific corporate culture that company managements want to maintain. The
plans also stop company employees from taking too much company stock.

Other versions of employee ownership include direct-purchase programs, stock options, restricted
stock, phantom stock and stock appreciation rights. Direct-purchase plans let employees purchase
shares of their respective companies with their personal after-tax money. Some countries provide
special tax-qualified plans that let employees purchase company stock at discounted prices.
Restricted stock gives the employees the right to receive shares as a gift or a purchased item after
meeting particular restrictions such as working for a specific period or hitting specific performance
targets. Stock options provide employees the opportunity to buy shares at a fixed price for a set
period. Phantom stock provides cash bonuses for good employee performance. These bonuses
equate to the value of a particular number of shares. Stock appreciation rights give employees the
right to raise the value of an assigned number of shares. Companies usually pay these shares in
cash

Topic 5 EVA Reward Management in TNC’s

EVA® (Economic Value Added) was developed by a New York Consulting firm, Stern Steward
& Co in 1982 to promote value-maximizing behaviour in corporate managers (O’Hanlon. J &
Peasnell. K, 1998). It is a single, value-based measure that was intended to evaluate
business strategies, capital projects and to maximize long-term shareholders wealth. Value
that has been created or destroyed by the firm during the period can be measured by
comparing profits with the cost of capital used to produce them. Therefore, managers can
decide to withdraw value-destructive activities and invest in projects that are critical to
shareholder’s wealth. This will lead to an increase in the market value of the company.
However, activities that do not increase shareholders value might be critical to customer’s
satisfaction or social responsibility. For example, acquiring expensive technology to ensure
that the environment is not polluted might not be of high value from a shareholder’s
perspective. Focusing solely on shareholder’s wealth might jeopardize a firm reputation and
profitability in the long run.

EVA sets managerial performance target and links it to reward systems. The single goal of
maximizing shareholder value helps to overcome the traditional measure problem, where
different measures are used for different purposes with inconsistent standards and goal.
Rewards will be given to managers who are able to turn investor’s money and capital into
profits efficiently. Researches have found that managers are more likely to respond to EVA
incentives when making financial, operational and investing decision (Biddle, Gary,
Managerial finance 1998), allowing them to be motivated to behave like owners. However
this behaviour might lead to some managers pursuing their own goal and shareholder value
at the expense of customer satisfaction.

Unlike simple traditional budgeting, EVA focuses on ends and not means as it does not state
how manager can increase company’s value as long as the shareholders wealth are
maximised. This allowed managers to have discretion and free range creativity, avoiding any
potential dysfunctional short-term behaviour. Rewards such as bonuses from the attainment
of EVA target level are usually paid fully at the end of 3 years. This is because workers’
performance is monitored and will only be rewarded when this target is maintained
consistently. Hence, leading to long-term shareholders’ wealth.

4 Ms of EVA
As a mnemonic device, Stern Stewart describes four main applications of EVA with four words
beginning with the letter M.

(1) Measurement
EVA is the most accurate measure of corporate performance over any given period. Fortune
magazine has called it “today’s hottest financial idea,” and Peter Drucker rightly observed in
the Harvard Business Review that EVA is a measure of “total factor productivity” whose
growing popularity reflects the new demands of the information age.

(2) Management System

While simply measuring EVA can give companies a better focus on how they are performing,
its true value comes in using it as the foundation for a comprehensive financial management
system that encompasses all the policies, procedures, methods and measures that guide
operations and strategy. The EVA system covers the full range of managerial decisions,
including strategic planning, allocating capital, pricing acquisitions or divestitures, setting
annual goals-even day-to-day operating decisions. In all cases, the goal of increasing EVA is
paramount.

(3) Motivation

To instill both the sense of urgency and the long-term perspective of an owner, Stern
Stewart designs cash bonus plans that cause managers to think like and act like owners
because they are paid like owners. Indeed, basing incentive compensation on
improvements in EVA is the source of the greatest power in the EVA system. Under an EVA
bonus plan, the only way managers can make more money for themselves is by creating
even greater value for shareholders. This makes it possible to have bonus plans with no
upside limits. In fact, under EVA the greater the bonus for managers, the happier
shareholders will be.

(4) Mindset

When implemented in its totality, the EVA financial management and incentive compensation
system transforms a corporate culture. By putting all financial and operating functions on the
same basis, the EVA system effectively provides a common language for employees across
all corporate functions. EVA facilitates communication and cooperation among divisions and
departments, it links strategic planning with the operating divisions, and it eliminates much of
the mistrust that typically exists between operations and finance. The EVA framework is, in
effect, a system of internal corporate governance that automatically guides all managers and
employees and propels them to work for the best interests of the owners. The EVA system
also facilitates decentralized decision making because it holds managers responsible for-and
rewards them for-delivering value.

The EVA Concept of Profitability

EVA is based on the concept that a successful firm should earn at least its cost of capital.
Firms that earn higher returns than financing costs benefit shareholders and account for
increased shareholder value. In its simplest form, EVA can be expressed as the following
equation:

EVA = Net Operating Profit After Tax (NOPAT) – Cost of Capital

Topic 6 Discrimination in Labor Market

Discrimination can manifest itself in all aspects of life. It may be evident in the type and location
of housing available to certain groups, in their access to quality education and health care or how
they are treated in the labour market. This does not mean that discrimination in the labour market
is a more relevant consideration than other forms of discrimination, nor should it imply that labour
market discrimination is independent from other forms of discrimination. Indeed, some economists
would argue that a satisfactory explanation of labour market discrimination can only be developed
when it is recognised that all forms of discrimination are related.

The fact that some people do better or worse than others in the labour market does not, in itself,
signify the presence of discrimination. It would be more surprising if such differences were not
observed. What is harder to explain, however, is why particular groups of workers are
disadvantaged in the labour market. Why do women and members of minority ethnic groups, for
example, face significantly lower wages and poorer employment opportunities as a group? In this
course we focus on the general observation that certain characteristics – gender, race, religion, age
– actually matter in the labour market when there is no apparent reason why they should.

Gender-based disadvantage

The post-war period has seen a significant increase in the participation of women in the labour
market, with women now making up around 45 per cent of the UK workforce. Although women
still undertake the major share of family responsibilities and domestic activities, an increasing
number of women are entering the labour market. This increase is evident in many countries and
has been associated with an improvement in the relative earnings of women.

The labour market is complex and the two observations that more women now participate in the
labour market and that there has been a narrowing of relative wage differentials reflect a number
of possible relationships. On the one hand, it may be the case that more women participate because
female wages have increased over time. On the other hand, the stronger commitment of women to
the labour market could, in itself, increase female wages and narrow the earnings differential. Thus,
if higher wages and higher participation are statistically associated, there are various views on
causation which the labour economist must disentangle.

Consumer discrimination

Customer discrimination is a manifestation of personal prejudice of consumers such that they

prefer to trade with individuals belonging to a certain group over others. A prevalent fact states
that customers do not like being served by minorities or women For example, a white customer
may like to be served by a white worker. This leads to two consequences

(i) There is a reduction in the demand for good that are sold by African-American workers and
(ii) If the cost of the product is P, the customer acts like he is paying P(1 + d), where Pd is the cost
of discrimination The fact that customer discrimination is still prevalent in the market leads to a
number of consequences, one, that it leads to seggregation of jobs such that minorities and women
are segregated into jobs that do not require a high level of personal contact with customers and
two, the decline in the manufacturing industry and a growth in the service sector will only aid in
increasing the effects of this discrimination with a growth of jobs requiring face-to-face contact

Statistical discrimination

Statistical discrimination is said to occur when an employer projects group characteristics upon an
individual which leads to him or her being discriminated against in the employment market. In the
process of selecting a suitable candidate for a job, the employer has access to only that information
which defines the productivity of the individual such as education, training, experience, age etc.
These although do play a role, are not perfect measurements of productivity. In such cases, the
employer supplements such information with other information that is prominent of the group he
or she belongs to, for example, one’s race and sex is easily identifiable from an interview. Thus,
the employee may attach the characteristics of his/her race or sex to quantify or guess his
productivity.

This, thus, is a form of discrimination that arises not because of a deep-rooted personal prejudice
that an employer holds against a prospective employee.

Let us consider an example to illustrate this: Women, on an average, tend to have a shorter career
life than males do and thus, even if they possess equal qualification as men, they tend to be less
valuable to the company. Now, a career minded woman with equal qualifications as a man may be
disadvantaged when applying for a job, because the employer may take into consideration the
prevalent characteristics of the average women when comparing the two applications. Hence, the
career minded woman is discriminated against.

Statistical discrimination leads to a systematic preference of a worker over other individuals with
the same characteristics, and leads to a situation where women or minorities equal to their
counterparts in qualifications are paid less. The manifestation of the stigma is not due to personal
preference but it has the same effects as if prejudice was present.

Topic 7 Duality in Labor Market

The dual labour market (also referred to as the segmented labour market) theory aims at
introducing a broader range of factors into economic research, such as institutional aspects, race
and gender. It divides the economy into two parts, called the “primary” and “secondary” sectors.
The distinction may also be drawn between formal/informal sectors or sectors with high/low value-
added.
 A broader concept is that of labor market segmentation. While the word “dual” implies a division
into two parallel markets, segmentation in its broadest sense may involve several distinct labor
markets.

In a dual labour market, a secondary sector is characterized by short-term employment

relationships, little or no prospect of internal promotion, and the determination of wages primarily
by market forces. In terms of occupations, it consists primarily of low or unskilled jobs, whether
they are blue-collar (manual labour), white-collar (e.g. filing clerks), or service industry (e.g.
waiters). These jobs are linked by the fact that they are characterized by “low skill levels, low
earnings, easy entry, job impermanence, and low returns to education or experience.”

The informal economy consists of labour that is often “pay-under-the-table“. This market tends
to attract the poor and a disproportionate number of minority group members.

The dual labour market theory generally ignores the micro-level decisions such as an individual’s
cost-benefit analysis. Instead, it focuses on immigration as a “natural consequence of economic
globalization and market penetration across national boundaries” (Massey, et al., 1993, p. 432). In
whole, it is not concerned with individual decisions to migrate but focuses on what pulls them, as
a collective group, to migrate. It argues that international migration starts from the labour demands
of modern civilization.

TOPIC 1 Methods of Managing Performance of all the Levels

of Management

Performance Appraisal For Employees at Different Levels

Therefore, the two things to be noted and evaluated for the purpose of appraisals are:

 Performance in accomplishing goals, and

 Performance as managers

(I) Performance in accomplishing goals

Managers are responsible for the performance of their teams as a whole. Performance in
accomplishing goals would mean to look at the completion or achievement of the goals set
for a team of employees which is being assigned to or working under a particular manager.
The best measuring criteria for a manager are hi goals, his plans of course of action to
achieve them and the extent of achievement of the goals.

(II) Performance as managers

 The responsibilities of managers include a series of activities which are concerned with
planning, organizing, directing, leading, motivating and controlling. Managers can be rated
on the above parameters or characteristics

Criteria for measuring performance at different levels:

The criteria for measuring performance changes as the levels of the employees and their
roles and responsibilities change.

A few examples for each level are described below:

For top level management

 Degree of organizational growth and expansion

 Extent of achievement of organizational goals
 Contribution towards the society
 Profitability and return on capital employed

For middle level managers

 Performance of the departments or teams

 Co-ordination with other departments
 Optimal use of resources
 Costs Vs. revenues for a given period of time
 The communication with superiors and subordinates

Topic 9 Guidelines of Companies Act Relating to CEO

Compensation and components

 The CEO or the managing director or the manager.

 The Company Secretary.
 The Whole-time director.
 The Chief Financial Officer
 Any other officer as may be prescribed.

In India, first time law has been prescribed in 1956 as company act for maximum
remuneration of the managerial. Sections 198, 309, 310 and 311 read with schedule XIII of
the Companies Act, 1956 regulate with the managerial remuneration in India.

Regular amendment has been made in the law regarding the company act. Recent
amendment was made for remuneration of the managerial in 2013 as Company act 2013
which replaced the earlier company act 1956.
 Executive are top level managerial, who is having keys managerial role between the company
and shareholders. A well and balance designed compensation attracts the executives to
motivate to works and creates the long term firm value. Several regulations and provisions
have been implemented in India for compensation for executives. As per the recent
regulation, company act 2013 becomes the important act for appointment and remuneration
of managerial.

Section 197 of the company act defines the total remuneration to the managerial persons,
whose total remuneration of executives is based on the net profit of a company, which
computed as per the manner adopted in the section 198.

As per company act 2013, a maximum ceiling of remuneration is exempted for Private limited
company; a private company can pay any amount to the managerial. Once upon a time as
per the leading news paper, Naveen Jindal, executive vice-chairman and managing director
of Jindal Steel & Power was highly paid CEO in India, whose estimated commission value
received from the profit was Rs 39.7 lakh apart from the perks and salary.

 Company act 2013 prescribed the maximum ceiling of remuneration which is applicable to
public company or a private company which is subsidiary of public company known as
deemed public company. Company act 2013 clearly regulated how much remuneration is
prescribed to Managerial in India.
 As per the section 197, prescribed the maximum ceiling for payment of managerial
remuneration by a public company to its director, whole time director or manager should not
exceed the 11% of the net profit of the company in that financial year computed in accordance
with section 198 except that the remuneration of the directors shall not be deducted from the
gross profits.
 The public company in the general meeting may consent the payment of remuneration
exceeding the 11% of the net profits of the company with the approval of central government
and provisions of Schedule V. The net profits for the purpose of this section should be
computed as per guidance adopted in section 198.

1. In case if there is only one managing director or whole time director, the remuneration payable
by public company shall not exceed 5% of the net profits of the company.
2. Wherein a public company is having more than one such director then total remuneration
payable by public company to them shall not exceed 10% of the net profits of the company.
3. The remuneration payable to directors who are neither managing directors nor whole-time
directors shall not exceed 1% of the net profits of the company, if there is a managing or
whole-time director or manager.
4. The remuneration payable to directors who are neither managing directors nor whole-time
directors shall not exceed 3% of the net profits of the company, if there is no managing or
whole-time director or manager.

Executive compensation or executive pay is composed of the financial compensation and

other non-financial awards received by an executive from their firm for their service to the
organization. It is typically a mixture of salary, bonuses, shares of or call options on the
company stock, benefits, and perquisites, ideally configured to take into account government
regulations, tax law, the desires of the organization and the executive, and rewards for
performance.
The three decades starting with the 1980s saw a dramatic rise in executive pay relative to
that of an average worker’s wage in the United States, and to a lesser extent in a number of
other countries. Observers differ as to whether this rise is a natural and beneficial result of
competition for scarce business talent that can add greatly to stockholder value in large
companies, or a socially harmful phenomenon brought about by social and political changes
that have given executives greater control over their own pay. Recent studies have indicated
that executive compensation should be better aligned with social goals(e.g. public health
goals). Executive pay is an important part of corporate governance, and is often determined
by a company’s board of directors.

Stock options

Executive stock option pay rose dramatically in the United States after scholarly support from
University of Chicago educated Professors Michael C. Jensen and Kevin J. Murphy. Due to
their publications in the Harvard Business Review 1990 and support from Wall Street and
institutional investors, Congress passed a law making it cost effective to pay executives in
equity.

Supporters of stock options say they align the interests of CEOs to those of shareholders,
since options are valuable only if the stock price remains above the option’s strike price. Stock
options are now counted as a corporate expense (non-cash), which impacts a company’s
income statement and makes the distribution of options more transparent to shareholders.
Critics of stock options charge that they are granted without justification as there is little
reason to align the interests of CEOs with those of shareholders.[citation needed] Empirical
evidence[citation needed] shows since the wide use of stock options, executive pay relative
to workers has dramatically risen. Moreover, executive stock options contributed to the
accounting manipulation scandals of the late 1990s and abuses such as the options
backdating of such grants. Finally, researchers have shown that relationships between
executive stock options and stock buybacks, implying that executives use corporate
resources to inflate stock prices before they exercise their options.

Stock options also incentivize executives to engage in risk-seeking behavior. This is because
the value of a call option increases with increased volatility (see options pricing). Stock
options also present a potential up-side gain (if the stock price goes up) for the executive, but
no downside risk (if the stock price goes down, the option simply isn’t exercised). Stock
options therefore can incentivize excessive risk seeking behavior that can lead to catastrophic
corporate failure.

Restricted stock

Executives are also compensated with restricted stock, which is stock given to an executive
that cannot be sold until certain conditions are met and has the same value as the market
price of the stock at the time of grant. As the size of stock option grants have been reduced,
the number of companies granting restricted stock either with stock options or instead of, has
increased. Restricted stock has its detractors, too, as it has value even when the stock price
falls. As an alternative to straight time vested restricted stock, companies have been adding
performance type features to their grants. These grants, which could be called performance
shares, do not vest or are not granted until these conditions are met. These performance
conditions could be earnings per share or internal financial targets.

UNIT 3 Job Evaluation

Topic 1 Job description and Job Specification

Job Analysis is a primary tool to collect job-related data. The process results in collecting and
recording two data sets including job description and job specification. Any job vacancy
cannot be filled until and unless HR manager has these two sets of data. It is necessary to
define them accurately in order to fit the right person at the right place and at the right time.
This helps both employer and employee understand what exactly needs to be delivered and
how.

Both job description and job specification are essential parts of job analysis information.
Writing them clearly and accurately helps organization and workers cope with many
challenges while onboard.

Though preparing job description and job specification are not legal requirements yet play a
vital role in getting the desired outcome. These data sets help in determining the necessity,
worth and scope of a specific job.

Job Description

Job description includes basic job-related data that is useful to advertise a specific job and
attract a pool of talent. It includes information such as job title, job location, reporting to and
of employees, job summary, nature and objectives of a job, tasks and duties to be performed,
working conditions, machines, tools and equipments to be used by a prospective worker and
hazards involved in it.

Purpose of Job Description

 The main purpose of job description is to collect job-related data in order to advertise for a
particular job. It helps in attracting, targeting, recruiting and selecting the right candidate for
the right job.
 It is done to determine what needs to be delivered in a particular job. It clarifies what
employees are supposed to do if selected for that particular job opening.
 It gives recruiting staff a clear view what kind of candidate is required by a particular
department or division to perform a specific task or job.
 It also clarifies who will report to whom.

Job Specification

Also known as employee specifications, a job specification is a written statement of

educational qualifications, specific qualities, level of experience, physical, emotional,
technical and communication skills required to perform a job, responsibilities involved in a job
and other unusual sensory demands. It also includes general health, mental health,
intelligence, aptitude, memory, judgment, leadership skills, emotional ability, adaptability,
flexibility, values and ethics, manners and creativity, etc.

Purpose of Job Specification

 Described on the basis of job description, job specification helps candidates analyze whether
are eligible to apply for a particular job vacancy or not.
 It helps recruiting team of an organization understand what level of qualifications, qualities
and set of characteristics should be present in a candidate to make him or her eligible for the
job opening.
 Job Specification gives detailed information about any job including job responsibilities,
desired technical and physical skills, conversational ability and much more.
 It helps in selecting the most appropriate candidate for a particular job.

Job description and job specification are two integral parts of job analysis. They define a job
fully and guide both employer and employee on how to go about the whole process of
recruitment and selection. Both data sets are extremely relevant for creating a right fit
between job and talent, evaluate performance and analyze training needs and measuring the
worth of a particular job.

Topic 4 Job Analysis

Job Analysis is a process to identify and determine in detail the particular job duties and
requirements and the relative importance of these duties for a given job. Job Analysis is a process
where judgements are made about data collected on a job.

The Job; not the person An important concept of Job Analysis is that the analysis is conducted of
the Job, not the person. While Job Analysis data may be collected from incumbents through
interviews or questionnaires, the product of the analysis is a description or specifications of the
job, not a description of the person.
 Purpose of Job Analysis

The purpose of Job Analysis is to establish and document the ‘job relatedness‘ of employment
procedures such as training, selection, compensation, and performance appraisal.

Determining Training Needs

Job Analysis can be used in training/”needs assessment” to identify or develop:

 training content
 assessment tests to measure effectiveness of training
 equipment to be used in delivering the training
 methods of training (i.e., small group, computer-based, video, classroom…)

Compensation
Job Analysis can be used in compensation to identify or determine:

 skill levels
 compensable job factors
 work environment (e.g., hazards; attention; physical effort)
 responsibilities (e.g., fiscal; supervisory)
 required level of education (indirectly related to salary level)

Selection Procedures
Job Analysis can be used in selection procedures to identify or develop:

 job duties that should be included in advertisements of vacant positions;

 appropriate salary level for the position to help determine what salary should be offered to a candidate;
 minimum requirements (education and/or experience) for screening applicants;
 interview questions;
 selection tests/instruments (e.g., written tests; oral tests; job simulations);
 applicant appraisal/evaluation forms;
 orientation materials for applicants/new hires

Performance Review
Job Analysis can be used in performance review to identify or develop:

 goals and objectives

 performance standards
 evaluation criteria
 length of probationary periods
 duties to be evaluated

Methods of Job Analysis

Several methods exist that may be used individually or in combination. These include:
 review of job classification systems
 incumbent interviews
 supervisor interviews
 expert panels
 structured questionnaires
 task inventories
 check lists
 open-ended questionnaires
 observation
 incumbent work logs

A typical method of Job Analysis would be to give the incumbent a simple questionnaire to identify
job duties, responsibilities, equipment used, work relationships, and work environment. The
completed questionnaire would then be used to assist the Job Analyst who would then conduct an
interview of the incumbent(s). A draft of the identified job duties, responsibilities, equipment,
relationships, and work environment would be reviewed with the supervisor for accuracy. The Job
Analyst would then prepare a job description and/or job specifications.

The method that you may use in Job Analysis will depend on practical concerns such as type of
job, number of jobs, number of incumbents, and location of jobs.

What Aspects of a Job Are Analyzed?

Job Analysis should collect information on the following areas:

 Duties and Tasks The basic unit of a job is the performance of specific tasks and duties. Information to be
collected about these items may include: frequency, duration, effort, skill, complexity, equipment,
standards, etc.
 Environment This may have a significant impact on the physical requirements to be able to perform a job.
The work environment may include unpleasant conditions such as offensive odors and temperature
extremes. There may also be definite risks to the incumbent such as noxious fumes, radioactive
substances, hostile and aggressive people, and dangerous explosives.
 Tools and Equipment Some duties and tasks are performed using specific equipment and tools. Equipment
may include protective clothing. These items need to be specified in a Job Analysis.
 Relationships Supervision given and received. Relationships with internal or external people.
 Requirements The knowledges, skills, and abilities (KSA’s) required to perform the job. While an
incumbent may have higher KSA’s than those required for the job, a Job Analysis typically only states the
minimum requirements to perform the job.

Topic 3 Job Evaluation Method

Methods of Job Evaluation

There are many methods by which job evaluation is done.

1. Ranking / Grading Method: Under ranking method, jobs are organized in descending order of importance
with the help of job description and job specification. The ranking of job is done by a committee of experts
called raters. The ranking is done at departmental level, for every department the job is ranked in order
of importance. The main benefits of this method are that it is simple, easily understood by all concerned
and easy to operate, inexpensive and can be used conveniently in small establishments. The limitations
include the degree of differences in the jobs. Sometimes it is based on the rater’s general knowledge of
the jobs. It is inappropriate for big company with a complex organisational structure.
2. Factor Comparison / Weight-in-Money Method: In this type of procedure, the jobs are ranked in the
following way: Common key elements of different jobs are selected. These selected key elements are
weighted and ranked. A monetary value is assigned to each element of all jobs. Then these monetary
values of individual jobs are weighted. Then total value of each job is available. The major benefits if this
methods are that it is more accurate and systematic as compared to simple ranking method. Different
jobs also can be rated on the basis of common factors. The drawbacks of this method comprise that it is
complicated, not easily explainable and expensive. Application of weight age and monetary values may
involve bias of rankers. It is difficult to install hence not used extensively.
3. Point Rating Method: In this method, each job is appraised separately, considering each of the job factors
such as skill, effort, responsibility and working conditions and combining them into a single point score
for each job. Main advantages are that it is analytical in its approach, it gives a quantitative value for each
job. Basis and guidelines of valuation are standardized and codified in a user manual. Disadvantages
include, manual used for rating the jobs needs periodical revision and update. It is difficult for application
and unintelligible for workers.

Procedure of job evaluation:

Though the common objective of job evaluation is to establish the relative worth of jobs in a job
hierarchy, there is no common procedure of job evaluation followed by all organizations. As such,
the procedure of job evaluation varies from organization to organization. For example, a job e
valuation procedure may consist of the eight stages as delineated.

1. Preliminary Stage:

This is the stage setting for job evaluation programme. In this stage, the required information’s
obtained about present arrangements, decisions are made on the need for a new programme or
revision of an existing one and a clear cut choice is made of the type of programme is to be used
by the organization.
2. Planning Stage:

In this stage, the evaluation programme is drawn up and the job holders to be affected are informed.
Due arrangements are made for setting up joint working parties and the sample of jobs to be
evaluated is selected.

3. Analysis Stage:

This is the stage when required information about the sample of jobs is collected. This information
serves as a basis for the internal and external evaluation of jobs.

4. Internal Evaluation Stage:

Next to analysis stage is internal evaluation stage. In the internal evaluation stage, the sample of
bench-mark jobs are ranked by means of the chosen evaluation scheme as drawn up at the planning
stage. Jobs are then graded on the basis of data pending the collection of market rate data. Relative
worth of jobs is ascertained by comparing grades between the jobs.

5. External Evaluation Stage:

In this stage, information is collected on market rates at that time.

6. Design Stage:

Having ascertained grades for jobs, salary structure is designed in this stage.
7. Grading Stage:

This is the stage in which different jobs are slotted into the salary structure as designed in the
preceding stage 6.

8. Developing and Maintaining Stage:

This is the final stage in a job evaluation programme. In this stage, procedures for maintaining the
salary structure are developed with a view to accommodate inflationary pressures in the salary
levels, grading new jobs into the structure and regarding the existing jobs in the light of changes
in their responsibilities and market rates.

In India, the Indian Institute of Personnel Management, Kolkata has suggested the following
five steps to be taken to develop a job evaluation programme:

1. Analyze and Prepare Job Description

2. Select and Prepare a Job Evaluation Programme/Plan
3. Classify Jobs
4. Install the Programme
5. Maintain the Programme

These steps are self-explanatory. Hence are not discussed in detail.

Advantages of job evaluation:

According to an ILO publication job evaluation offers the following advantages:

1. Job evaluation being a logical process and objective technique helps in developing an equitable and
consistent wage and salary structure based on the relative worth of jobs in an organization.
2. By eliminating wage differentials within the organization, job evaluation helps in minimizing conflict
between labour unions and management and, in turn, helps in promoting harmonious relations between
them.
3. Job evaluation simplifies wage administration by establishing uniformity in wage rates.
4. It provides a logical basis for wage negotiations and collective bargaining.
5. In the case of new jobs, job evaluation facilitates spotting them into the existing wage and salary structure.
6. In the modem times of mechanization, performance depends much on the machines than on the worker
himself/herself. In such cases, job evaluation provides the realistic basis for determination of wages.
7. The information generated by job evaluation may also be used for improvement of selection, transfer and
promotion procedures on the basis of comparative job requirements.
8. Job evaluation rates the job, not the workers. Organizations have large number of jobs with
specializations. It is job evaluation here again which helps in rating all these jobs and determining the
wages and salary and also removing ambiguity in them.
 Drawbacks of job evaluation:

In spite of many advantages, job evaluation suffers from the following

drawbacks/limitations:

1. Job evaluation is susceptible because of human error and subjective judgment. While there is no standard
list of factors to be considered for job evaluation, there are some factors that cannot be measured
accurately.
2. There is a variation between wages fixed through job evaluation and market forces. Say Kerr and Fisher,
the jobs which tend to rate high as compared with the market are those of junior, nurse and typist, while
craft rates are relatively low. Weaker groups are better served by an evaluation plan than by the market,
the former places the emphasis not on force but on equity”.
3. When job evaluation is applied for the first time in an organisation, it creates doubts in the minds of
workers whose jobs are evaluated and trade unions that it may do away with collective bargaining for
fixing wage rates.
4. Job evaluation methods being lacking in scientific basis are often looked upon as suspicious about the
efficacy of methods of job evaluation.
5. Job evaluation is a time-consuming process requiring specialized technical personnel to undertake it and,
thus, is likely to be costly also.
6. Job evaluation is not found suitable for establishing the relative worth of the managerial jobs which are
skill-oriented. But, these skills cannot be measured in quantitative terms.
7. Given the changes in job contents and work conditions, frequent evaluation of jobs is essential. This is not
always so easy and simple.
8. Job evaluation leads to frequent and substantial changes in wage and salary structures. This, in turn,
creates financial burden on organization.

Topic 4 Internal and External Equity in Reward Management

The internal and external analysis allows an organization to evaluate the compensation plan based
on the fairness of employee compensation. The impact of the internal and external forces is
important when dealing with pay structure. Equity pay is ensuring that all parties involved are
receiving the same benefits based on the internal and external factors.

Internal Influences
Internal influences involve employees doing the same job, a difference in job responsibilities, or
even a specific department but for the same company. The structured pay scale could reflect the
highest pay grade at the top and the lowest pay grade at the bottom based on job responsibility.
The pay scale allows the employee to view the benefits he or she will receive in relation to the
responsibility given. Fair pay and work conditions are an important factor to employees and
influence the morale and employee response. According to Martocchio (2008), “Job evaluation is
key for casting internally consistent compensation systems as strategic tools. Compensation
professionals use job evaluation to establish pay differentials among employees within the
company”. The evaluation outlines differences and similarities in job responsibilities, this can be
described in the experience level, performance, and knowledge. Internal equity ensures that
fairness is throughout the organization based on similar responsibilities.

External Influences
Understanding the external influences is just as important as the internal factors. An evaluation of
external factors allows the organization to remain competitive in the market. Organizations are
competing to attain the best employees to help their company grow. In turn pay is taken into
consideration to compete with other similar organizations. The external wage comparisons can be
the same union, geographical area, job similarity, certifications, or the size of the company. Human
Resource Managers is responsible to assess the outside competition properly in regard to the above
mentioned to maintain a competitive advantage with similar companies. An employee looking to
join the organization can easily find the mean or medium pay based on the geographical area and
job description. An evaluation of the marketing prices can also be used to retain the employees
already on staff. Competitive business will seek out employees from other company, so it is
important to ensure that the organization does not allow the competition to steal their employees.
This is referred to as poaching or raiding.

Advantages and Disadvantages

The advantages of internal and external factors are an important tool used to define and implement
a solid base pay, cash compensation, or benefits. Internal equity allows the organization to warrant
an equal pay among the employees based on the pay scale or performance. The disadvantage of
internal equity is the perception of the employees. An employee can perceive that he or she is
doing the same job as another employee and should receive the same pay. Perception of employees
may differ from the perception of the employers. The employee may feel that his or her individual
performance is the same or above in comparison to the employees who are performing. It creates
tension and lowers morale within the workplace. External equity advantages allow the organization
to remain competitive for sought out profession or geographical area.

The disadvantages of external equities are the cost to remain in a competitive market. There seems
to be no set preference in which factors is more important whether it is internal or external equity.
It is still undecided on which is the most important between internal and external equity and there
is no right or wrong answer (Kent Romanoffken, 1986, p. 8, Balancing external and internal
equity). Finding a balance and ensuring that the internal and external equities in the organization
is important. A fair and honest compensation policy that is communicated to the employees which
define the value and worth of an employee is best. The external and internal compensation plan
should meet the organizational goals will create the culture it seeks.

Topic 7 Regulatory Compliance including Wage and Pay

commission
 Pay Commission is set up by Government of India, and gives its recommendations regarding
changes in salary structure of its employees. Since India’s Independence, seven pay commissions
have been set up on a regular basis to review and make recommendations on the work and pay
structure of all civil and military divisions of the Government of India. Headquartered in Delhi,
the Commission is given 18 months from date of its constitution to make its recommendations.

Objective of pay/Wage Board in The Private/Government etc. Organization

(i) To establish a fair and equitable compensation offering similar pay for similar work.

(ii) To attract competent and qualified personnel.

(iii) To retain the present employees by keeping wage levels in nine with competitive units.

(iv) To keep labour and administrative costs in line with the ability of the organisation to pay.

(v) To improve motivation and morale of employees and to improve union management relations.

(vi) To project a good image of the company and to comply with legal needs relating to wages and
salaries.

(vii) To establish job sequences and lines of promotion wherever applicable.

(viii) To minimise chances of favouritism while assigning the wage rates.

The following principles should be observed in the wage and salary administration:

1. Wage policy should be developed keeping in view the interests of all concerned parties viz. employer,
employees, the consumers and the society.
2. Wage and salary plans should be sufficiently flexible or responsive to changes in internal and external
conditions of the organisation.
3. Efforts should be made to ensure that differences in pay for jobs are based on variations in job
requirements such as skill, responsibility, efforts and mental and physical requirements.
4. Wage and salary administration plans must always be consistent with overall organisational plans and
programmes.
5. Wage and salary administration plans must be in conformity with the social and economic objectives of
the country like attainment of equality in income distribution and controlling inflation etc.
6. These plans and programmes should be responsive to the changing local and national conditions.
7. Wage and salary plans should expedite and simplify administrative process.
8. Workers should be associated, as far as possible, in formulation and implementation of wage policy.
9. An adequate database and a proper organisational set up should be developed for compensation
determination and administration.
10. The general level of wages and salaries should be reasonably in line with that prevailing in the labour
market.
11. There should be a clearly established procedure for hearing and adjusting wage complaints. This may be
integrated with the regular grievance procedure, if it exists.
12. The workers should receive a guaranteed minimum wage to protect them against conditions beyond their
control.
13. Prompt and correct payments to the employees should be ensured and arrears of payment should not
accumulate.
14. The wage and salary payments must fulfill a wide variety of human needs including the need for self
actualisation.
15. Wage policy and programme should be reviewed and revised periodically in conformity with changing
needs. For revision of wages, a wage committee should always be preferred to the individual judgement,
in order to prevent bias of a manager.

Topic 6 Knowledge based Compensation

A system of payment where employees are compensated based on their individual skill level and
education attainment. Under this system, employees are rewarded for reaching certain goals in
education, training and skill development. Knowledge-based pay systems provide incentive for
employees to improve their skill set and education.

The concept of knowledge-based pay focuses on an individual employee’s ability to improve their
education to increase salary or other compensation. As the employee increases their scope of
knowledge earned, the employee can generally take on more complicated and lucrative projects
on behalf of the company.

In some businesses, the organizational structure encourages educational development. In doing so,
employees are rewarded upon obtaining certain educational goals. This may or may not be formal
accredited education, but may include in-house education or training and skill development from
third parties.

Generally, the parties agree on this type of pay structure at the time of hiring, although companies
can incorporate this type of system at any time, upon the agreement of any union or contracts.

Once in place, a knowledge-based pay system can empower individuals to improve their abilities
on the job. Often the individual receives a specific amount of pay increase when he or she achieves
the next level of education. The system may be one-tiered or involve various steps that must be
achieved.

Knowledge-based pay systems can encourage employees to become life-long learners, which can
help a company maintain its edge in the industry. This can lead to greater innovation, longer
retention of skilled employees, and higher revenues as a result of high-quality workmanship.
 TOPIC 1 Compensation – Definition, function, significance

Compensation

According to the viewpoint of the economist, labour only sells its services to the entrepreneur
for productive purposes; does not sell itself.

As such, any payment made to this factor of production (i.e. labour) is only in the nature of
compensation for its services.

Moreover, the services provided by labour are invaluable, in the sense that without such
services, the productive machinery is like a body without any soul. Therefore, labour could
not be paid exactly for its services; any payment to it is only a mere compensation of the
value provided by it to the production mechanism.

Payment or compensation to labour for its services is popularly known as personnel

remuneration. This payment is variously called either wages or salaries. Though in reality,
the concept of wages and salaries are not much different so far as their determination and
significance are concerned; yet it would be an interesting academic exercise to differentiate
the two.

Wages are usually associated with a payment made to workmen who are actually engaged
in physical production of goods and services; and payment of wages being made on both
bases-time rate and piece rate systems.

Salaries, on the other hand, represent a payment made to office employees, managerial
personnel and technical personnel like engineers, cost accountants, etc.; and salaries usually
being paid only on a time-basis i.e. according to time-rate system of payment.

The term compensation is used to indicate the employee’s gross earnings in the form of
financial rewards and benefits.

Compensation can also be defined as follows:

1. A system of rewards that can motivate the employees to perform.

2. A tool that is used to foster values and culture.
3. An instrument that enables an organization to achieve its objectives.

The management should ensure that compensation structure is designed after taking into
account certain factors such as qualification, experience, attitude and prevailing rates in the
markets. Compensation means the reward that is received by an employee for the work
performed in an organization. It is an important function of human resource management.
Employees may receive financial and non-financial compensations for the work performed by
them.
 Financial compensation includes salary, bonus, and all the benefits and incentives, whereas
non-financial compensation includes awards, rewards, citation, praise, recognition, which can
motivate the employees towards highest productivity.

Compensation System:

Compensation is a tool used by management for safeguarding the existence of the company.
Compensation can be of two types—direct and indirect.

(i) Direct Compensation:

1. Basic pay, dearness allowance, cash allowance

2. Incentive pay, bonus, commission, profit sharing, stock option.

(ii) Indirect Compensation

1. Legal requirement

 Provident fund
 Gravidity
 Pension
 Insurance
 Medical leave
 Accident benefits
 Maturity leave

2. Optional sick leave

3. Casual leave
4. Travelling allowance
5. Telephone bills
6. Canteen allowance
7. Club membership

The main characteristics of the compensation system are as follows:

1. A hierarchy of pay levels

2. A hierarchy of jobs
3. A set of rules and procedures
4. Qualities required for movement from one level to other

An organization’s compensation system usually consists of three separate components. Each

element of the compensation package has a link with an individual need hierarchy. All
allowance are linked to basic pay. In order to motivate the employees when they achieve
objectives, rewards and incentives are incorporated along with basic pay. To retain the
employees and to get long-term commitments, stock option plan, annual increments and
promotion are provided.
 Objectives of Compensation:

1. The compensation should be paid to each employee on the basis of their abilities and training.
2. Compensation should be in the form of package.
3. It should motivate the employees towards increasing productivity.
4. It should be capable of taking care of employees for safety and security needs also.
5. It should be flexible and clear.
6. It should not be excessive.
7. Compensation should be decided by the management as per the norms fixed by the
legislations in consultation with the union.

Significance of Employee Compensation (Or Personnel Remuneration):

The issue of personnel remuneration, whether in the form of wages or salaries, is highly
significant from the viewpoint of industrial relations, social peace and economic implications.
In fact, it is the centre from which the circle of industrial relations is drawn; it being the crux of
industrial conflicts.

Following are some of the points which highlight the significance of personnel remuneration:

(i) Wages/ salaries constitute the primary source of income to employees. Their adequacy or
otherwise would very much determine their standard of living.

(ii) Adequate remuneration is a source of motivation to employees. It makes them committed

and loyal to the organization; and paves way for excellent industrial relations.

(iii) Through making adequate and timely payment of employee remuneration, an employer
can attract and retain good personnel to and in the organization. This helps to ensure a
stability of labour force – bringing several valuable advantages in the its wake for the
organization.

(iv) Specially, in labour-intensive industries, wages constitute a substantial part of the cost of
production. As such wage payments affects the cost and price-structures of an industrial
enterprise. Prices of goods and services, in turn, have social implications; as these directly
affect the purchasing power of money held by the society.

Topic 8 Competency based Compensation

In the 1990s, a new idea gained acceptance in a number of organizations that more closely
aligned human resource practices with organizational strategies, missions and cultures. A
number of organizations switched from a traditional job-based structure to a competency-
based structure that emphasized the development and attainment of behaviors, knowledge
and skills compatible with and aligned to the organization’s mission and business strategies.
The focus of competencies is centered on characteristics of the employee, including
behaviors, skills and knowledge that can be demonstrated and positively affect the
organization. Competencies emphasize the attributes and activities that are required for an
organization to be successful. Therefore, human resource practices using Competency
Models tap into the employee capabilities that are aligned to the organization mission and
business need.

Competency Models when implemented in totality can impact all of the agency’s human
resource practices including recruitment, selection, compensation decisions, performance
planning, performance evaluation and career development.

Like other alternative pay and job evaluation systems, a Competency-based System is fairly
labor intensive and requires the agency’s commitment to designate the necessary staff
resources during the development stages. Agencies will also want to consider the financial
and human resources required to administer such a system. Additionally, Competency-based
Systems should not be perceived as a “one size fits all” approach. It is important that an
agency identify the specific work unit(s) where competencies may be identified that directly
and positively impact the success of employees and the agency.

What are Competencies?

Competencies are identified behaviors, knowledge, and skills that directly and positively
impact the success of employees and the organization. Competencies can be objectively
measured, enhanced and improved through coaching and learning opportunities. There are
two types of competencies, Behavioral and Technical. Depending on the purpose of the
Competency Model, one or a combination of these competency types may be used.

Behavioral Competencies are a set of behaviors, described in observable and measurable

terms that make employees particularly effective in their work when applied in appropriate
situations. Behavioral Competency Models may be designed to describe common or “core”
behaviors that are applicable to employees throughout an agency, or may be more narrowly
defined to reflect behaviors unique to an Occupational Family or Career Group.

Technical Competencies are underlying knowledge and skills, described in observable and
measurable terms that are necessary in order for employees to perform a particular type or
level of work activity. Technical Competencies typically reflect a career-long experience in an
agency.

What is a Competency Model?

A Competency Model is a listing of Competencies that apply to a particular type of work.

Competency Models can include Behavioral Competencies only, Technical Competencies
only, or both. An example of a Competency Model for Human Resource Professional follows:

Behavioral Competencies
 Agency (implies company) Mission Focus
 Customer Focus
 Teamwork
 Consultation
 Achievement Orientation

Technical Competencies

 Compensation Expertise
 Recruitment/Selection Expertise
 Employee Relations Expertise
 Employee Benefits Expertise
 Training and Development Expertise

In Competency based compensation management system, employee compensation is based

on an evaluation of the following pay factors:

 Agency business need;

 Duties and responsibilities;
 Performance;
 Work experience and education;
 Knowledge, skills, abilities and competencies;
 Training, certification and license;
 Internal salary alignment;
 Market availability;
 Salary reference data;
 Total compensation;
 Budget implications;
 Long term impact; and
 Current salary

UNIT 4 Modern Techniques of Compensation

Topic 1 Incentive schemes/Payment-By-Results (PBR)

‘Payment by Results’ or ‘PBR’ is a payment or remuneration method used to reward workers or

employees in proportion with the amount of work done or deliverables achieved. In this method,
a staff member or worker or even an external service provider, such as an agent or advertising
agency or a consultant, is remunerated on the basis of achievement of objectives.

For a factory worker, it may be defined as wages based on the amount of factory units produced;
for a service agent, the number of customers serviced satisfactorily. Similarly, a sales person may
be compensated by sales commission on the basis of number of units sold. The underlying principle
behind ‘variable pay’ in most organizations is mostly based on rewarding employees according
to the amount of work done by them in terms of predefined deliverables.
 The same evaluation, and hence, remuneration system may be used for compensating external
service providers/ agencies/ consultants also, by linking their ‘pay’ with the requisite levels of
desired ‘performance’. This kind of remuneration compensation method has increasingly gained
popularity in social, health and public sectors, and attracted both positive and negative publicity.

Payment by Results (PbR) is a type of public policy instrument whereby payments are contingent
on the independent verification of results. It is being actively promoted by a number of
governments for more effective implementation of domestic policy.

There is also increasing interest in the field of international development, where PBR is often
referred to either as ‘results-based aid’ (where the funding relationship is between a donor and a
recipient country) or ‘results-based financing‘ (where the funding relationship is between a
developing country government or a development agency, and public or private sector providers).
There are also a number of other terms in use which can often lead to confusion and a lack of
clarity.

PbR instruments have three key features:

 Payments for pre-agreed results

 Recipient discretion over how the results are achieved
 Independent verification as the trigger for disbursement

Topic 2 Performance linked Compensation

Performance-based compensation is an incentive-based form of compensation that can be

paid to portfolio managers. Regulated mutual funds with performance-based compensation
may add approximately 0.20% to their management fees for performance-based incentives.
Within the investment industry, hedge fund managers are most well known for receiving high
levels of performance-based compensation.

Performance-based compensation is an incentive-driven compensation schedule for paying

portfolio managers. It can be used in traditional investment management. In the hedge fund
industry it is generally standard for funds to charge performance-based fees.

Investment Company Compensation

The Mutual Funds in India are governed by the Securities Exchange Board of India (Mutual
Fund) Regulations 1996 with the exception of Unit Trust of India (UTI) as it was created by
the UTI Act passed by the Parliament of India. All mutual funds must be registered with SEBI.
governs the mutual fund industry and sets certain requirements that have helped to shape
the compensation standards for portfolio managers. Investment companies must have a
board of directors that approves the compensation schedule of managers. Companies must
also file a registration statement including a prospectus and statement of additional
information, clearly and transparently outlining all the information on the fund including
compensation.

Standards and documentation for publicly traded funds are generally expected to be
consistent across the industry for easy comparison by investors. This consistency has also
generally led to standardized fees charged by mutual fund managers as part of the fund’s
total annual operating expenses.

Mutual fund portfolio management fees can range from 0.50% to 2.50% with active fund
managers requiring a higher compensation. Portfolio management fees typically comprise
the majority of a mutual fund’s total annual operating expenses. Across the industry mutual
fund managers can also receive performance-based fees. These fees are detailed in their
registration statement documentation and approved by the board of directors.

Almost mutual fund company offering performance-based compensation for many of its
funds. Approximately two-thirds of the funds managed to active equity investment objectives
include performance-based compensation. The compensation is much lower than hedge
funds with the mutual fund’s potentially allowing for an extra 0.20% added to the management
fee when a fund meets certain performance criteria. Inversely, fees can also be substracted
when fund performance is below expectations.

Hedge Fund Manager Compensation

Across the investment industry, hedge fund managers are more broadly known for their
performance-based fees. Hedge funds are much less regulated than traditional mutual
funds and therefore have greater latitude for fee schedule structuring. Hedge fund managers
will typically charge a “two and twenty” fee schedule requiring higher management fees than
mutual funds from their investors.

The two and twenty hedge fund fee structure indicates a flat 2% fee as well as a 20%
performance fee. The 2% fee is based on the fund’s assets under management. The 20%
fee is a performance-based compensation that is typically triggered when performance
outperforms a benchmark by a specified amount. The 20% fee is paid to the hedge fund
manager from the fund’s profits.

Topic 3 Tax implication of Employee Compensation Package to

the Employer

In today’s changing times, when employees are critical to the growth of an organization, a large
number of companies offer stock options to different levels of employees — be it to retain key
employees or to attract new talent.

There are different models of employee stock option plans available: Employee Stock Option Plan
(ESOP), Employee Share Purchase Plan (ESPP) and Stock Appreciation Rights Plan (SAR).
While ESPP and SAR models are prevalent in the global market, the ESOP model is prevalent in
India due to certain legal regulatory framework.

The first event of taxability is triggered on the date of allotment/transfer of the shares. The benefit
arising to an employee, being the difference between the Fair Market Value (FMV) on the date on
which the option is exercised less the amount actually paid or recovered from the employee, would
be subject to tax as part of the salary income.

Accordingly, an employer is required to compute the benefit under the stock options, include the
same as part of the salary income and, accordingly, withhold the tax on the same from the
employee.

The manner of determining the value of perquisite differs for shares, which are listed on a
recognised stock exchange in India vis-à-vis shares not listed on a recognised stock exchange in
India (overseas equity shares). In case the shares of a company are listed on a recognised stock
exchange in India, the fair market value (FMV) is to be determined as the average of the opening
price and the closing price of the share on that date.

In case the shares are not listed, the FMV shall be such value as determined by a merchant banker
(registered with the Securities and Exchange Board of India) on the specified date. The term
‘specified date’ means

(i) the date of exercising of the option

(ii) any date earlier than the date of exercising of the option, not being a date that is more than 180
days earlier than the date of exercise.

The next event of taxability under the stock options would arise in the event of sale/transfer of
shares. The difference between the sales consideration and the fair market value on the date of
exercise would be treated as capital gains and subject to capital gains tax. The capital gains could
be long term or short term, depending upon the period of holding of such shares/securities.

There is no clarity on the taxability of benefit arising under Esops in case of globally mobile
employees. Also, the rules do not comment on taxability of individuals whose residential status is
non-resident/not ordinarily resident in India and who have worked overseas during the period of
the Esop.

An analogy on these open issues can only be drawn from clarifications provided by the Central
Board of Direct Taxes from time to time.

Topic 4 Tax Efficient Compensation Package

It is generally observed that in the first quarter of a new financial year (FY) many employers
decide the salary of their employees for the upcoming financial year basis the performance
appraisal of the last year. In many cases, employees are given the flexibility to structure
different components of their salary within the broad contours of the company’s compensation
policy. The employees are allowed to structure the salary as per their financial goals, personal
requirements and requirement for retirement corpus.

Such structuring of the salary has a consequent bearing on the taxable salary income and
net take-home pay of the employees. Hence, it is important that the employees are aware
about the provisions of the Income-Tax Act, 1961 (the Act), read with Income-Tax Rules,
1962 (the Rules), for some commonly-used components:

House Rent Allowance (HRA): Employees staying in a rented accommodation can claim
exemption from HRA in their salary structure based on their rental payments. “The tax exempt
amount is least of (a) Actual HRA received or (b) 50 per cent of basic salary (40 per cent in
case the employee is in a non-metro city) or (c) Rent paid – 10 per cent of basic salary. The
exemption is subject to the verification of the prescribed supporting documents (such as the
lease deed, rent receipts, etc.) to be furnished by an employee,” says Parizad Sirwalla,
Partner and Head, Global Mobility Services, Tax, KPMG in India.

Leave Travel Allowance (LTA): Exemption can be claimed against LTA for the amount
spent by the employee on personal travel within India for himself/herself and specified family
members. “The exemption is subject to prescribed limits depending upon the mode of
transport (air, train or road) and can only be claimed twice in a block of four calendar years
(current block is from 2014 to 2017). Like HRA, the employees are required to furnish
prescribed documents in support of the cost of travel,” informs Sirwalla,.

Medical reimbursement: An employee can claim a tax-free reimbursement up to Rs 15,000

per annum by furnishing proofs of the medical expenditure incurred by himself/herself and
specified family members.

Conveyance Allowance: Conveyance allowance of Rs 1,600 per month can be claimed as

exempt without furnishing any supporting proofs.

Food Coupons: Meal vouchers provided by the employer which are not transferable and
usable only at eating joints up to Rs 50 per meal are not taxable in employees’ hands.

National Pension System (NPS): Employer’s contribution to NPS is exempt up to 10 per

cent of the basic salary without any upper limit. Employee’s own contribution of up to Rs
50,000 is eligible for deduction against taxable income over and above the limit of Rs 1,50,000
under section 80C of the Income-Tax Act.

Other Tax-Efficient Reimbursements: Telephone reimbursement towards mobile and

landline telephone connections can be structured as a component in the salary structure.
Usually this is based on the actual bill amount and is required to be within a reasonable limit
prescribed by the employer. There could be various other components (e.g. car, professional
pursuits, etc.) which can be structured in the compensation structure.
 Topic 5 VRS: Approaches to deal with the workforce
Redundancy

Voluntary Retirement Scheme (VRS) is the most common method which is used by organizations
to reduce excess manpower. It helps the employer not only to compete and survive in this current
business scenario but also improve his/her performance. This scheme also becomes the prominent
means of downsizing of employees. VRS is also known by the names such as Voluntary Separation
Scheme, Golden Handshake and Early Separation Scheme.

Though the criteria of eligibility of VRS may differ from organization to organization it is given
only to those employees who have either served 10 years of working or attained 40 years of age.
Thus, the employees who opt for this scheme are permitted to get 45 days of benefits for each
completed year of working or monthly benefits during retirement time which is multiplied with
service months that are left before the date of working whichever is less.

Effects of VRS:

1. It results in reduction in the strength of employees.

2. The vacancy as a result of VRS is not to be filled.
3. The retiring employees are not to be employed by the same management.

Compensation for VRS:

1. Not exceeding to three months’ salary for each completed year of service
2. Salary last drawn at the time of retirement*remaining months of service before retirement on
superannuation.

Merits:

1. Companies go for VRS to cut costs. Tenured workers are likely to draw higher salary than young workers
for the same position.
2. VRS is a lesser painful alternative to mass firings. It avoids involuntary layoffs.
3. Companies can work efficiently as technology replaces excess labour.
4. Avoids labour unrest.
5. Production cost reduces with a reduction in labour cost.

Demerits:

1. VRS creates fear and uncertainty among employees

2. Sometimes the VRS benefits weigh more than possible gains
3. Trade unions against VRS may cause disturbance in normal operations
 When an employer decides to offer VRS, he has to issues a circular communicating the same which
mentions:

1. Reasons for downsizing

2. Eligibility criteria to apply for voluntary retirement
3. Benefits offered in turn
4. Employer’s right to accept or reject any application for VRS
5. Dates open to receive application for VRS
6. Income tax incidence on VRS benefits in excess of Rs. 5 Lakhs

Topic 6 International Compensation

Designing and developing a better compensation package for HR professionals for

the international assignments requires knowledge of taxation, employment laws, and foreign
currency fluctuation by the HR professionals. Moreover, the socio-economic conditions of the
country have to be taken into consideration while developing a compensation package. It is easy
to develop the compensation package for the parent country national but difficult to manage the
host and third country nationals. When a firm develops international compensation policies, it tries
to fulfills some broad objectives:

1. The compensation policy should be in line with the structure, business needs and overall strategy of the
organization.
2. The policy should aim at attracting and retaining the best talent.
3. It should enhance employee satisfaction.
4. It should be clear in terms of understanding of the employees and also convenient to administer.

The employee also has a number of objectives that he wishes to achieve from the compensation
policy of the firm

 He expects proper compensation against his competency and performance level.

 He expects substantial financial gain for his own comfort and for his family also.
 He expects his present and future needs to be taken care of including children’s education, medical
protection and housing facilities.
 The policy should be progressive in nature.

Major Components in an International Compensation Package

International Compensation is an internal rate of return (monetary or non monetary rewards /

package) including base salary, benefits, perquisites and long term & short term incentives that
valued by employee’s in accordance with their relative contributions to performance towards
achieving the desired goal of an organization.
 International Compensation

The following are the major components of an international compensation package.

1. Base Salary

This term has a slightly different meaning in an international context than in a domestic one. In
the latter case, it denotes the amount of cash compensation that serves as a benchmark for other
compensation elements like bonus, social benefits. For the expatriate, it denotes the main
component of a package of allowances directly related to the base salary and the basis for in-
service benefits and pension contributions. Base salary actually forms the foundation block of the
international compensation.

2. Foreign Service Inducement Premium

This is a component of the total compensation package given to employees to encourage them to
take up foreign assignments. This is with the aim to compensate them for the possible hardships
they may face while being overseas. In this context, the definition of hardship, the eligibility
criteria for premium and the amount and timing of this payment are to be carefully considered.
Such payments are normally made in the form of a percentage of the salary and they vary
depending upon the tenure and content of the assignment. In addition, sometimes other
differentials may be considered. For instance: if a host country’s work week is longer that of the
home country, a differential payment may be made in lieu of overtime.

3. Allowances
 One of the most common kinds of allowance internationally is the Cost of Living Allowance
(COLA). It typically involves a payment to compensate for the differences in the cost of living
between the two countries resulting in an eventual difference in the expenditure made. A typical
example is to compensate for the inflation differential. COLA also includes payments for housing
and other utilities, and also personal income tax. Other major allowances that are often made are:

 Home leave allowance

 Education allowance
 Relocation allowance
 Spouse assistance (compensates for the loss of income due to spouse losing their job)

Thus, multinationals normally pay these allowances to encourage employees to take up

international assignments to make sure that they are comfortable in the host country in comparison
to the parent country.

4. Benefits

The aspect of benefits is often very complicated to deal with. For instance, pension plans normally
differ from country to country due to difference in national practices. Thus all these and other
benefits (medical coverage, social security) are difficult to imitate across countries.

Thus, firms need to address a number of issues when considering what benefits to give and how
to give them. However, the crucial issue that remains to be dealt with is whether the expatriates
should be covered under the home country benefit programmes or the ones of the host country. As
a matter of fact, most US officials are covered by their home country benefit programmes. Other
kinds of benefits that are offered are:

 Vacation and special leaves

 Rest and rehabilitation leaves
 Emergency provisions like death or illness in the family

These benefits, however, depend on the host country regulations.

5. Incentives

In recent years some MNC have been designing special incentives programmes for keeping
expatriate motivated. In the process a growing number of firms have dropped the ongoing premium
for overseas assignment and replaced it with on time lump-sum premium. The lump-sum payment
has at least three advantages. First expatriates realize that they are paid this only once and that too
when they accept an overseas assignment. So the payment tends to retain its motivational value.
Second, costs to the company are less because there is only one payment and no future financial
commitment. This is so because incentive is separate payment, distinguishable for a regular pay
and it is more readily for saving or spending.

6. Taxes
 The final component of the expatriate’s compensation relates to taxes. MNCs generally select one
of the following approaches to handle international taxation.

1. Tax equalization: Firm withhold an amount equal to the home country tax obligation of the expatriate
and pay all taxes in the host country.
2. Tax Protection: The employee pays up to the amount of taxes he or she would pay on remuneration in
the home country. In such a situation, The employee is entitled to any windfall received if total taxes are
less in the foreign country then in the home country.

7. Long Term Benefits or Stock Benefits

The most common long term benefits offered to employees of MNCs are Employee Stock Option
Schemes (ESOS). Traditionally ESOS were used as means to reward top management or key
people of the MNCs. Some of the commonly used stock option schemes are:

 Employee Stock Option Plan (ESOP)- a certain nos. of shares are reserved for purchase and issuance to
key employees. Such shares serve as incentive for employees to build long term value for the company.
 Restricted Stock Unit (RSU) – This is a plan established by a company, wherein units of stocks are provided
with restrictions on when they can be exercised. It is usually issued as partial compensation for employees.
The restrictions generally lifts in 3-5 years when the stock vests.
 Employee Stock Purchase Plan (ESPP) – This is a plan wherein the company sells shares to its employees
usually, at a discount. Importantly, the company deducts the purchase price of these shares every month
from the employee’s salary.

Topic 7 Expatriate’s Compensation Package

Major objectives on which most of the expatriate compensation plans are designed are mentioned
below:

The whole area of international compensation presents some tricky problems. On the one hand,
there is logic in maintaining uniformity in company wide pay scales and policies so that the
employees in the same cadre are paid within the same narrow range.

This reduces the risk of perceived inequalities and dramatically simplifies the job of keeping track
of disparate country-by-country wage rates. But not adopting pay scales according to local markets
can produce more problems than it solves.

It can be extremely expensive to live in some countries. Therefore determining equitable wage
rates in many countries is not a simple matter of equality in pay. Most expatriate compensation
plans are designed to achieve (4) four major objectives:

1. Attract employees who are qualified and interested in international assignments. Thus the compensation
policy works to attract and retain staff in the areas where the multinational has the greatest needs and
opportunities.
2. Facilitate the movement of expatriates from one subsidiary to another, from home to subsidiaries, and
from subsidiaries back home. To achieve this policy must be competitive and recognise factors such as
incentives for Foreign Service, tax equalisation, and reimbursement for reasonable costs.
3. Provide a consistent and reasonable relationship between the pay levels of employees at headquarters,
domestic affiliates, and foreign subsidiaries and
4. The policy must be made cost-effective by reducing unnecessary expenses. It must give due consideration
to equity and ease of administration.

Besides the above major objectives, the international employee will also have a number of
objectives that need to be achieved from the firm’s compensation policy:

1. The employee will expect that the policy offers financial protection in terms of benefits, social security,
and living costs in the foreign location.
2. The employee will expect that a foreign assignment will offer opportunities for financial advancement
through income and/or savings.
3. The employees will expect that issues such as housing, education of children and recreation will be
addressed in the policy.

Determining equitable wage rates in many countries is no simple matter. One of the greatest
difficulties in managing total compensation on a multinational level is establishing a consistent
compensation measure between countries that builds credibility both at home and abroad. There
are four basic approaches to compensation:

1. HQ-based model: Expatriates are paid according to the headquarters compensation structure.
2. Modified home-country model: Expatriates are paid according to their home- country salary structures,
and their living standard is protected so as to be comparable to the home country or some other chosen
standard.
3. Better of home or host model: Expatriates receive the higher of the home-country system or the host-
country system.
4. Host-country/local-market package: Expatriates are paid according to the host- country compensation
structure.