Performance and Compensation

Management
Unit 7
 Performance Management
Concept
 Performance is defined as the record of outcomes produced on
specified job activities during a specified time period.
 Performance management is a strategic approach which aligns
personal objectives with organizational objectives.
 Performance management is an assessment of employee,
process, equipment or other factors to measure the progress
toward predetermined goals.
“Performance management is the continuous process of
identifying, measuring, and developing the performance of
individuals and teams and aligning their performance with the
organization goals”. – Dessler and Varkkey
 Issues in Performance Management
The following challenges are taken as the issues in performance
management.
1. Lack of specific goal
2. Lack of clear strategy
3. Wrong design
4. Absence of integration
5. Lack of trust
6. Inconsistency in feedback
7. Leadership commitment
8. Incompetency
9. Inappropriate rewards
10. Ineffective of evaluation
 Criteria of Performance Management (Selection of
Performance Evaluation Criteria)
1. Relevance
2. Unbiased
3. Reliability
4. Validity
5. Practical
6. Sensitivity
7. Corrective
8. Feedback
1. Relevance
 The performance criteria should be relevant to the
organizational objectives.
2. Unbiased
 Bias is the tendency to allow individual differences such as
age, race, and sex to affect the appraisal ratings employees
receive.
 The evaluation criteria must be free from bias.
3. Reliability
 It should give same result all the time.
 The performance criteria should be reliable.
4. Validity
 Validity refers to accuracy. It refers to relationship of
evaluation criteria with actual performance.
5. Practical
 The evaluation criteria must be simple to understand and to
implement in practice.
 It should be acceptable to both the managers and employees.
6. Sensitivity
 The evaluation criteria must be sensitive.
 Evaluation criteria should distinguish effective performance
from non- effective performance.
7. Corrective
 Evaluation criteria should help correct and improve employee
performance.
 It helps to improve future performance of the organization.
8. Feedback
 The evaluation criteria should get actual result of their
performance.
 The result of evaluation should be discussed with the employee.
 Performance Evaluation Approaches
Job standard- oriented
methods
1. Essay method
2. Checklist method
3. Forced choice method
4. Critical incident method
5. Graphic Rating scales
method (rating scales
method)
6. Behaviorally anchored
rating scale (BARS)
Comparison- oriented Objective oriented
methods method
1. Individual ranking Management- by –
method objective method
2. Group order ranking
method
3. Paired comparison
method
4. 360 degree feedback
 A. Job Standard- Oriented Methods
1. Essay method
2. Checklist method
3. Forced choice method
4. Critical incident method
5. Graphic Rating scales method (rating scales method)
6. Behaviorally anchored rating scale (BARS)
1. Essay method
 The essay method is based on the qualitative information and
is written down in an unstructured way.
 In this method, the rater writes a brief describing the
employee’s performance.
 The rater must describe the employee’s strengths and
weaknesses, job performance during the appraisal period,
technical effectiveness, leadership ability, promotional
potential, training and developmental needs, and suggestions
for improvement.
 A major limitation of this method is that the quality of ratings
depend on the writing skills of the manager rather than the
performance of an employee.
2. Checklist method
 The checklist is a list of descriptive statements of employee
behavior and characteristics.
 In this method, a checklist of employee is prepared in two
columns namely a ‘yes’ column and a ‘No’ column.
 The rater (immediate superior) does tick the ‘Yes’ column if the
answer to the statement is positive and in column ‘No’ if the
answer is negative.
 After ticking off against each item, the rater only does the
reporting to HR department, while actual evaluation is done by
the HR department.
The checklist can be simple or weighted.
i. Simple checklist
 In simple checklist, the rater (immediate superior) does tick the
‘Yes’ column if the answer to the statement is positive and in
column ‘No’ if the answer is negative.
ii. Weighted checklist
 When points are allotted to the checklist, the technique
becomes a weighted checklist. The weighted are assigned by
HR department.
 Checklist
Questions Yes No
1. Is the employee really interested in the job? - -
2. Does he possess adequate knowledge about - -
job?
3. Is his attendances satisfactory ? - -
4. Does he maintain his equipment in good - -
condition? - -
5. Does he co-operate with co-workers? - -
6. Does he keep his temper? - -
- -
7. Does he obey orders?
8. Does he observe safety precautions? - -
9. Does he avoid responsibility? - -
10.Does he complete what he commences?
3. Critical incident method
 In this method, the rater prepares a list of statement on the
basis of the effective and ineffective behavior of an employee
in critical situations.
 The rater periodically records the critical incidents and
maintains it.
 At the end of the rating period, these critical incidents are used
to evaluate the overall employee performance.
 These critical incident represent the outstanding (excellent) or
poor behavior of employees on the job.
4. Graphic Rating Scale Method
 Under this method, the appraiser (evaluator) provides the
scales by measuring the employee’s performance and
personality traits along different scale.
 It is subjective evaluation of the employee’s performance ,
such as quality of work, quantity of work, job knowledge, co-
operation, loyalty, dependability, attendance, honesty,
attitudes, punctuality and initiative.
 The appraiser would go through the set of factors rating them,
For example, on a scale 1 to 5 numbers where the highest number
(5)would denote the best rating, where as the lowest number
(1) would denote the poor rating.
 Each scale ranges from excellent to poor. Under this method, a
printed form is used to evaluate the performance of an
employee.
 Employee’s name: Department:
Rater’s name: Date:
Job title

items Excellent Good Acceptable Fair Poor

(5) (4) (3) (2) (1)
1. Quantity of work
2. Quantity of work
3. Attendance
4. Dependability
5. Initiative
6. Attitude
7. Honesty
8. Co-operation
9. Appearance
10. Job knowledge

Total scores
5. Forced distribution method (forced choice method)
 Under this method, the appraiser (rater) has the forced choice
of selecting a certain percentage of employees in various
performance categories.
 The rater is forced to appraise an employee according to pre-
determined distribution scale.
 In this method, the appraiser has no choice on the percentage
of group to be rated in different categories.
 Force Distribution Method

Performance rating scale Percentage Name of Forced

of employee employee distribution
 Excellent(best 10% A, B,C 2
performance)
Good (high average 20% “ 4
performance)
Acceptable (average 40% “ 8
performance)
 Fair (below average 20% “ 4
performance)
Poor (low performance) 10% “ 2

Total 100% 20
6. Behaviorally anchored rating scale (BARS)
 This method is performance appraisal method that combines
elements of the graphical rating scales and critical incident
methods; various performance levels are shows along a scale
with each described in term of an employee’s specific job
behavior.
 BARS represent a range of descriptive statements of behavior
varying from the least to the most effective.
 BARS are scales used to rate performance.
 It is process of evaluating an employee’s performance of a job
in terms of its requirements.
B. Comparison- oriented methods (relative standard method)
 Under this method, evaluating an employee’s performance by
comparing the employee with other employees.
1. Individual ranking method
2. Group order ranking method
3. Paired comparison method
4. 360 degree feedback
1. Individual Ranking Method
 Under this method, the evaluator lists the employees in rank
order from the highest to the lowest on the basis of overall
performance.
 Only one employee can be the “best” or the “worst”.

2. Group order ranking method

Under this method, employees are serially classified into
different groups.
Group order ranking requires the evaluator to place employee
into a particular classification, such as “top twenty percent”,
“second twenty percent”, “bottom twenty percent”.
3. Paired Comparison Method
 By this technique, the evaluator compares each employee with
every other employee in pairs on a one- on- one basis in terms of
overall performance.
 Employees are paired and each employee is rated (evaluated) as
either the stronger or the weaker individual.
 Under this method, better performer in each pair is determined
and a score is obtained for each employee by counting the number
of pairs.
The number of pair is determined by the formula

Where, ‘n’ denotes number of employees.

 The results of these pair comparisons are tabulated and a rank is
assigned to each individual.
4. 360 Degree Feedback (360 Degree Assessment Process )
 360 degree feedback , also known as multi-rater feedback, is
employee development feedback that comes from colleagues,
peers and managers in the organization, as well as self-
assessment, and sometimes sources such as clients, volunteers
or other stakeholders.
 Senior managers are responsible for assessing the performance
of other employees but often do not receive adequate feedback
themselves.
 360 degree feedback allows the individual to understand how
his or her effectiveness as an employee, manager, or coworker
is viewed by others.
 Boss

360 degree Subordinate

Peers s
feedback

Self
 C. Objective -oriented method
1. Management- By Objectives Method (MBO)
 Under this method, performance appraisal is based on how
well the time-bound objectives have been accomplished.
 The objectives are jointly set by the manager and the
subordinate.
 MBO converts organizational objectives into individual
objectives.
Steps of MBO
1. Collaborative goal setting
2. Action planning
3. Performance review
4. Performance evaluation
 Problems of performance evaluation
Performance evaluation can suffer from the following problems.
1. Rater bias
 Bias is the tendency to allow individual differences such as
age, race, and sex to affect the appraisal ratings employees
receive.
2. Stereotyping
 The term stereotype refers to the tendency to perceive
another person as belonging to a single class or category.
3. The halo effect
 Under the halo effect the person is perceived on the basis of
one trait.
4. Leniency tendencies (strictness)
 This is the problem that occurs when a supervisor has a
tendency to rate all subordinates either high or low.
5. Similarity error
 The evaluators give higher scores to employees that are more
like themselves and lower scores to those who are different.
6. The regency effect
 Regency effect is concerned with making impression to
perceiver through new information and technology.
 Evaluator may only focus to the recent performance just
before the evaluation period.
7. Contrast error
 Evaluator often compare employees to contrast from other.
8. Attribution error
 The error happens when an evaluator makes judgment only
on the basis of certain behaviors or outcomes of employees.
 Compensation Management
Concept
 Compensation is a systematic approach to providing monetary
value to employees in exchange in return of their services.
 Compensation is a major component of reward which is
basically given to the employees in return of their services.
 Compensation management is concerned with designing and
implementing total compensation package.
 Compensation package consists of pay plus varieties of
benefits and services.
“Compensation management is essentially about designing,
implementing and maintaining pay systems which help to
improve organizational performance.” - Michael Armstrong
 Considerations for Determining Compensation

1. External factors 2. Internal factors

i. Legal considerations i. Objectives of compensation

ii. Labor market rates ii. Compensation policies
iii. Equity considerations iii. Job evaluation
iv. Cost of living iv. Employee productivity
v. Union pressures
1. External factor influencing compensation
i. Legal considerations
 Government has its own rules and regulations to guide the
firm level compensation policy.
 They emphasize on minimum wage rate, overtime rate,
working and payment of bonus so an organization has to
design its pay system as per the government rules and
regulations.
ii. Labor market rate
 The compensation should match market rates. This is
specifically important to structure a competitive pay system in
order to provide pay at market rate.
 Some organizations undertake market research to find their
financial and non- financial compensation.
iii. Equity considerations
 Equity considerations hold the philosophy that the
compensation system should be fair and equitable. It means,
the pay rate should be similar for the same type of work within
the organization.
 Similarly, it should be fair relative to what other people get for
the similar job in another organization.
iv. Cost of living
 Another factor influencing the compensation is cost of living.
The payment should be adequate to maintain the cost of living
of the employee.
 Hence, the employer should manage compensation to the cost
living of each employee.
v. Union pressures
 Union pressures influence compensation plan. Labor union are
pressure groups that work in the interest of workers.
 Such unions pressurize the management for the formulation of
equitable compensation plan.
2. Internal factors influencing compensation
i. Objectives of compensation
Objectives of compensation are set by organization. They are:
 To establish fair and equitable pay system
 To attract and retain competent employee
 To improve labor relations through collective bargaining on
compensation issues with unions
 To comply with legal framework related to compensation
Thus, these objectives of compensation influence compensation
plan.
ii. Compensation policies
 Compensation policy provides general guidelines for making
compensation decisions. Organization can follow pay leaders or
pay follower policies of compensation.
 Compensation can be fixed to the cost of living. Thus, these
policies of an organization influence compensation plan.
iii. Job evaluation
 Job evaluation is a process of determining the (worth) value of job
so that a payment system can be specified.
 Job description and job specification affect pay level and structure.
It helps to establish satisfactory pay differential among job.
iv. Employee productivity
 This is the new concept of linking pay with employee
performance. If the workers are highly productive, they get high
compensation. Employee abilities and motivation affect
productivity.
The Legal Environment and Pay System Governance in Nepal
1. The legal environment
Currently, there is Labor Act, 2074 BS enacted in Nepal in order to
manage the labor related issues in Nepal. Besides this, some
other Acts like Bonus Act, Public Service Regulations,
Company Act, and Constitution of Nepal.
a. Labor laws
There is provision of remuneration and welfare, no discrimination
in compensation, right and duties of the minimum
remuneration fixation committee, welfare trust and its use,
social security, etc as in the dominating labor laws.
 No discrimination in remuneration: There should be fair and
equal treatment in remuneration, and no gender discrimination
labor.
 Minimum wages : Minimum salary determination committee
is the government provision composed by employers,
representatives of labor and personalities nominated by
government. It determines the minimum wages for industrial
employees. Minimum wages are revised in each two years.
 Pay for overtime work: Employee need to work 8 hours each
day of 6 of days a week. This means that employees need to be
paid if employees work for more than 48 hours a week.
Overtime is not paid to the employees of managerial
employees.
 Provident fund: there is provision of provident fund for
retirement benefits. Organization contributes 10% of the salary
and the employee contributions 10%. Total of 20% is
deposited at the name of concern employee at provident fund
which mobilizes in risk free investment sector. Employee can
utilize provident fund during the service time as well in the
form of loan.
 Other benefits: there are other provisions too regarding the
benefits as Dashain allowances, gratuity, paid sick leave, etc.
such provisions are different according to the organization.
b. Bonus Act:
According to this act, employees in both public and private sector
must share the profit of company in the form of bonus. 10% of
net profit should be distributed for employees.
2. Pay System Governance (Institutional Framework for Pay)
Governance has a institutional framework for formulation and
implementation of policy, regulations and directives to make
the pay systematic. These provision are as follows:
 Department of labor: Department of labor is an action under
the Ministry of labor. Department of labor is to implement the
labor related acts, regulations and pay policy of government of
Nepal.
 Wage Board: the responsibility of wage board is to fix the
minimum salary to the employees. The board revises the
minimum salary to the employees of industrial sectors,
construction sectors, agriculture sector, tea industry etc.
 Pay commission: Government can form a pay commission to
conduct pay survey and provide the suggestion to the
government.
 Tribunals: They are formed by the government as per labor
Act and other Acts. Their duty is to provide verdict (award) in
case of pay disputes.
 Labor court: one of the major working areas of labor court is
to settle disputes regarding pay or compensation.
Thank You