and a host of other variables influence the participation rate and
UNIT 2 COMPENSATION AT supply of labor.
MACRO LEVEL
COMPENSATION AT MACRO LEVEL is related with
organizational compensation policy. It is related with such
compensation plan and policies which will enable the
organization to direct and increase employee motivation towards
the achievement of organizational goal and objective. Contrary to
this, compensation at Micro level is related with the individual
compensation. It includes discussions of compensation programs
for specific individual as well as group of employees and how
their compensation opportunities differ from the great majority of
workforce i.e senior executive receiving more than other
executive in the organization.
LABOR MARKET
The labor market is defined as the informal mechanism where the
demand and supply of labor interact. A labor market could be a
community, a city, a region, a country or a larger area.
Supply of labor:
The supply of labor includes all those who are either working or
looking for work, that is all those who are participating in the
labor force.
Demand of labor:
Demand for labor is determined by the demand for employers'
products (sometimes called consumer demand), export demand,
and government policies among other factors, all of which are
strongly inter-related. For example, an increase in the demand for
construction workers because of a major construction project will
result in an increase in demand for workers in other sectors, such
as those that supply building materials, transportation and
hospitality and retail.
The labor market can experience both "shortages" and
"surpluses". Typically this occurs because of skill mismatches,
immobility of the labor force and incomplete information about
both workers and employers.
Labor Market Information:
Labor Market Information (LMI) is material and data about the
supply and demand for labor within a certain labor market. LMI
covers economic, social, demographic and labor force data. It
describes the characteristics of the supply of labor: the people
who are workers or potential workers in the market. It also
provides information on demand: job opportunities in the market
and the needs of employers. Future needs of existing employers
and of new employers who will enter the market are also
considered within LMI. Often, a wide range of information must
be collected and analysed to describe important features of the
labor market. LMI often gives historical, current and forecast
information. Different users have different information needs.
Factors influencing the labor market:
The labor market participation rate and the supply of labor are
influenced by demographics such as the number of working-age
people. The conditions of the economy in general and in the
labor market, the likelihood of finding work, education levels
Labor markets fluctuate in terms of the number of employees and
employee hours needed. These swings in labor demand affect
employer compensation decisions and compensation differentials
among companies. High-pay employers are less affected by these
swings because their compensation is high enough above the area
level so that they are little affected by short-run changes. They
try to limit compensation level changes to once a year and tend to
set prices by a percentage markup over average unit costs of
production.
Low-pay organizations adjust to changes in labor demand by
deciding how far they can lag behind high-paying organizations.
During an economic upswing, high-pay employers will be
increasing wages, salaries, benefits, and employment. Low-pay
employers, to hold down turnover and to increase employment,
will have to raise compensation more than high-paying firms.
The compensation gap between high-paying and low-paying
firms thereby narrows during an upswing.
WAGE POLICY IN INDIA
Wage policy before Independence, was arbitrary, conventional,
customer-based following the traditional agrarian-cum-feudal
systems without having any bearing on industrial society and
factory system. The British rule in this respect in India followed
the familiar pattern of business and commercial policy of the
East India Company.
After 1918, especially under political leadership of Mahatma
Gandhi and left wing communist ideological projection, a
number of ad hoc enquiry committees, without statutory
sanction, sought to settle wage disputes.
The Indian Trade Disputes Act, 1929 might be considered an
important landmark which ushered in a new era of state
intervention in Indian Industrial Relations system affecting wage
questions within capitalistic method of production.
The Report of Royal Commission on Labour in 1931 was the
first systematic enquiry which, among other issues, focused
the following aspects of wages governing a suitable wage
policy:
(a) Wage levels in different industries
(b) Minimum wages
(c) Standardisation of wages
(d) Inter-sectoral wages and incentives
(e) Payment of wages
(f) Unfair deductions.
During the Second World War, war conditions resulting in high
prices and diversion of consumer goods to military needs
necessitated the system of payment of dearness allowance and
bonus, which constituted subsequently important elements in
wage policy.
The Rage Committee (Labour Investigation Committee) in
1946 later reviewed the wage questions and emphasized the
following with regard to a wage policy:
(a) Wage differential of agricultural and industrial labour
(b) Statutory minimum wages in sweated industries
(c) Fair wage agreements
Compiled by Chinmoy Kumar from online resources.
(d) Living wage.
Wage Policy since Independence:
The first plan (1951 to 1956) suggested that pre-war levels of
real wages should be restored as an initial march towards “living
wage” by use of enhanced productivity. It further suggested
various measures for making wage adjustments like reduction of
disparities in income, reduction of gap between the current and
living wages, maintenance and standardisation of wage
differentials to provide incentives.
The second plan (1956 to 1961) stressed improvement in wages
through increased productivity stemming from efficiency on the
part of the workers, improved layout of plants and improvement
in management practices.
The third plan (1961 to 1966) reinforced the wage policy of the
preceding two plans with respect to minimum wage fixation,
reduction of disparities and wage differentials and stressed the
role of productivity in raising the living standard of the workers.
The fourth plan (1969 to 1974) did not provide a fresh direction
or any shift of the Government’s wage policy.
The fifth plan (1974 to 1979) recommended that the reward
structure of the industrial employees in terms of wage and non-
wage benefits must be related to performance records in
industrial enterprises. It was necessary to build over a period of
time a national wage structure to narrow down disparities within
the organised sector itself, including both public and private
sectors.
The sixth plan (1980 to 1985) pointed out that there were clear
variations with respect to wages between the organised,
unorganised, and urban and rural sectors. The differences and
inequalities have resulted in social tensions and industrial unrest.
Essay # 3. Wage Policy under Sixth Plan:
The following were the basic principles of wage policy during
the Sixth Plan:
(i) The real wages of workers in the lower income brackets
should not be allowed to fall. For other workers excepting
supervisory and managerial personnel, graded compensation for
significant increases in the cost of living should be granted.
(ii) Real wages should also change in some relation to the change
in real productivity of workers.
(iii) Money wages in an industry should be related to the change
in cost of living and change in real average productivity per
worker in the industry.
(iv) Coverage of minimum wages should be further extended
provided enforcement or extension does not cause shrinkage of
employment opportunities and harassment in very large number
of un-organised informal units.
(v) The possibility of enforcement of minimum wages in
informal sectors should be considered when such units are better
organised as economically viable units.
(vi) Minimum wages should be extended taking into
consideration the capacity of pay and also minimum wages
should be frequently revised to allow for change in the cost of
living.
(vii) Notwithstanding the need for inter-state differences in
minimum wages on account of wage levels, prices and
productivity, excessive differences should be reduced to leave
the way for standardisation of wages.
(viii) A long term wage policy should be adopted ensuring
similar wage for similar work. But historical interest anomalies
in the prevailing wage structure in different industries should be
removed thereby paving the way for wage negotiations and
collective agreements.
(ix) Undue wage differentials should be removed gradually over
time through training and continuous upgradation of skills at
various levels.
(x) Effective measures should be taken to limit property incomes
and to guarantee employment to the poor at a minimum
subsistence level for the purpose of coordinating wage policy and
income policy.
Objectives of a Growth-Oriented Wage Policy:
No Specific Wage Policy in Later Plans:
The subsequent Five Year Plans did not lay down any specific
wage policy. In the context of the performance of India’s Five
Year Plans and the need for economic growth under planned
economy, the following may be discussed as objectives of a
growth-oriented wage policy.
Objectives: Management Viewpoints:
(i) Industrial wages should have relationship with agricultural
wages and average per capita national income.
(ii) Beyond basic minimum wage, there should be a linkage
between productivity and industrial wage.
(iii) Subsistence minimum wage being statutorily compulsory,
minimum wage must have some relationship with capacity to pay
as defined by the Committee on Fair Wage.
(iv) Price rise neutralisation policy and present arrangement by
dearness allowance linked with consumer price index having
adverse effects on industry’s needs for capital formation should
be reviewed.
(v) A flexible wage policy consistent with industry’s need to
raise resources out of its own surplus to meet some cost of
expansion programme should be adopted.
Objectives: Union Viewpoints:
(i) Wage policy consistent with continuous improvement of real
wages and standard of living of workers as well as productivity
should be incorporated in national wage policy.
(ii) Fair wages should be the main objective which must be
ensured to labour for capital formation and development of
industry.
(iii) Despite so many Five Year Plans, supply and price position
of consumer goods have not. Improved and this has corroded real
earnings of workers. Demand for capital formation of industry
should be as important as demand for labour’s consumer goods
which should be the important objective of wage policy.
(iv) Ever-increasing income disparities necessitate reform of
established social and economic relationship, and to achieve this
progressive wage policy should incorporate changing moods of
established social order.
(v) Wage policy should aim at achieving national unity planning
and administrative reform ensuring gains of labour legislation.
Objective: Government Viewpoints:
(i) While recognising the need for a change in wage policy, the
Central and State Governments emphasised the need for looking
after the interest of consumers as well.
(ii) The main objective should be the better implementation of
the existing wage policy instead of initiating a new one.
(iii) The government also accepted union viewpoints of wage
policy regarding the removal of income disparities and fair
distribution of wealth, but emphasized the greater importance of
higher employment and standard of living.
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(iv) The Planning Commission felt the limitation of resources as • Industrial relations and enforcement of labour laws in
the most serious inhibiting factor for achieving the above the central sphere;
objective, and as such resource mobilisation should be given the • Adjudication of industrial disputes through Central
top priority in any future growth-oriented wage policy. Government Industrial Tribunals-cum-Labour Courts
and National Industrial Tribunals;
National Commission’s approach to wage policy assessment • Workers' education;
centered on principal indicators viz: • Labour and employment statistics;
(i) Industrial harmony • Emigration of labour for employment abroad;
(ii) Workers’ level of living • Employment services and vocational training;
(iii) Labour productivity
• Administration of central labour and employment
(iv) Wage-price relation
services; and
(v) Share of wages in the value added by manufacture.
• International cooperation in labour and employment
matters.
LEGAL FRAMEWORK
India has a number of labour laws that govern almost all the
aspects of employment such as payment of wages, minimum
"Labour" is a subject in the "Concurrent List" under the
wages, payment of bonus, payment of gratuity, contributions to
Constitution of India where both the Central and State
provident fund and pension fund, working conditions, accident
Governments are competent to enact legislations subject,
compensations, etc. The Government has enacted certain central
however, to reservation of certain matters for the Central
legislations, viz, the Employees Provident Fund and
Government. The constitutional status of labour jurisdiction has
Miscellaneous Provisions Act, Employees State Insurance Act,
been explained in the following table:
Payment of Wages Act, Minimum Wages Act, Equal
Union List Concurrent List Remuneration Act, Maternity Benefits Act, etc.
(Central Government) (Central as well as State In addition, at the State level, the State Governments usually
Government) have a separate Labour Ministry, which seeks to ensure
compliance with State labour laws (viz, State Shops and
Entry No. 55 Entry No. 22 Establishments Act, Labour Welfare Fund Act, etc) through its
Regulation of labour Trade unions, industrial and labour Labour Department, which is generally operational at the district
and safety in mines and disputes level.
oil fields The various labour legislations enacted by the Central
Government can be classified into the following different broad
Entry No. 61 Entry No. 23 categories:
Industrial disputes Social security and insurance, A. Laws relating to Industrial Relations-
concerning Union employment and unemployment 1. Industrial Disputes Act, 1947
employees 2. Trade Unions Act, 1926
B. Laws relating to Wages
Entry No. 65 Entry No. 24
1. Minimum Wages Act, 1948
Union agencies and Welfare of labour including
2. Payment of Wages Act, 1936
institutions for "... conditions of work, provident funds,
3. Payment of Bonus Act, 1965
vocational ... training employers' invalidity and old-age
C. Laws relating to Social Security
..." pension and maternity benefits
1. Employees' Provident Funds and
The Ministry of Labour and Employment seeks to protect and Miscellaneous Provisions Act, 1952
safeguard the interests of workers in general and those who 2. Employees' State Insurance Act, 1948
constitute the poor, deprived and disadvantaged sections of the 3. Labour Welfare Fund Act (of respective States)
society, in particular, with due regard to creating a healthy work 4. Payment of Gratuity Act, 1972
environment for higher production and productivity, and 5. Employee's Compensation Act, 1923
developing and coordinating vocational skill training and D. Laws relating to Working Hours, Conditions of
employment services. Government's attention is also focused on Services and Employment
promotion of welfare activities and providing social security to 1. Factories Act, 1948
the labour force both in the organised and unorganised sectors, in 2. Industrial Employment (Standing Orders) Act,
tandem with the process of liberalisation. These objectives are 1946
sought to be achieved through enactment and implementation of 3. Shops and Commercial Establishments Act (of
various labour laws, which regulate the terms and conditions of respective States)
service and employment of workers. 4. Contract Labour (Regulation and Abolition)
The following are the thrust areas of the Government concerning Act, 1970
labour laws: 5. Inter-State Migrant Workmen (Regulation of
• Labour policy and legislation; Employment and Conditions of Service) Act,
• Safety, health and welfare of labour; 1979
• Social security of labour; 6. Weekly Holiday Act, 1942
• Policy relating to special target groups such as women 7. National and Festival Holidays Act (of
and child labour; respective States) 1963
8. The Plantation Labour Act, 1951
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 9. The Mines Act, 1952
10. The Dock Workers (Safety, Health & Welfare)
Act, 1986
E. Laws relating to Equality and Empowerment of
Women
1. Equal Remuneration Act, 1976
2. Maternity Benefits Act, 1961
F. Prohibitive Labour Laws
1. Bonded Labour System (Abolition), Act, 1976
2. Child Labour (Prohibition & Regulation) Act,
1986
3. The Beedi and Cigar Workers (Conditions of
Employment) Act, 1966
4. The Sexual Harassment at the Workplace
(Prevention, Prohibition and Redressal) Act,
2013
G. Laws relating to Employment and Training
1. Apprentices Act, 1961
2. Employment Exchanges (Compulsory
Notification of Vacancies) Act, 1959
DETERMINANTS OF THE WAGE STRUCTURE
Before discussing the wage determination process in detail let us
first discuss the determinants of wage structure.
1. Economic Determinants
In the labor market there commonly exists, known as
Occupational Wage Differentials. The reason for its existence is
that in different occupations require different qualifications;
different wages of skill and carry different degrees of
responsibility, wages are usually fixed on the basis of the
differences in occupations and various degrees of skills.
Adam Smith explains occupational wage differentials in terms
of:
1. Hardship,
2. Difficulty of learning the job,
3. Stability of employment,
4. Responsibility of the job, and
5. Chance for success or failure in the work. This is a theory of
wage structure. But his standards of worth are equally useful in
explaining the complexity of wage structure decisions. The
market value of an item is the price it brings in a market where
demand and supply are equal. Use value is the value an
individual buyer or seller anticipates through use of the item. Use
value obviously varies among individuals and over time.
2. Job worth
These two concepts of worth and the concept of internal labor
markets combine to explain important differences among
employers in wage structure decisions. Organizations with
relatively open internal labor Markets (organizations in which
most jobs are filled from outside) make much use of market
value. They also make much use of wage and salary surveys in
wage structure decisions. Conversely, organizations with
relatively closed internal labor markets (most jobs are filled from
inside) emphasize use value. Their analysis of job worth relies
more heavily on perceptions of organization members of the
relative value of jobs.
3. Training
Some other wage structure determinants derived from economic
analysis may be noted. Training requirements of jobs in terms of
length, difficulty, and whether the training is provided by society,
employers, or individuals constitute a primary factor in human-
capital analysis and thus job worth. The interaction of ability
requirements with training requirements can yield different job
values depending on the scarcity of the ability required and the
number of people who try to make it in the occupation and fail.
4. Employee Tastes
Employee tastes and preferences are another economic factor.
People differ in the occupations they like and dislike. In like
manner, occupations have non-monetary advantages and
disadvantages of many kinds.
What is the Wage Determination Process?
Determination of an equitable wage and salary structure is one of
the most important phases of employer-employee relations.
For good industrial relations, each employee should
1. Receive sufficient wages and salaries to sustain himself and
his dependents.
2. Feel satisfied with a relationship between his wages and wages
of other people performing the same type of work in some other
organization. The primary objective of wage and salary
administration program is that each employee should be
equitably compensated for the services rendered by him to the
enterprise on the basis of:
The nature of the job.
The present worth of that type of job.
The effectiveness with which the individual performs the job.
Usually, the steps involved in determining wage rates are:
· performing job analysis,
· wage surveys,
· analysis of relevant organizational problems in forming
wage structure,
· framing rules of wage administration,
· explaining these to employees,
· assigning grades and
Compiled by Chinmoy Kumar from online resources.
· price to each job and paying the guaranteed wage.
Wage Surveys
Once the relative worth of jobs has been determined by job
evaluation, the actual amounts to be paid must be determined.
This is done by making wage or salary surveys in the area
concerned.
Such surveys seek to answer questions like:
What are other firms paying?
What are they doing by way of social insurance?
What is the level of pay offered by other firms for similar
occupations?
By gathering information about ‘benchmark jobs’, which are
usually known as good indicators. There are various ways to
make such a survey. Most firms either use the results of
“packaged surveys” available from the research bodies,
employer’s associations, etc., or they participate in wage surveys
and receive copies of results, or else they conduct their own.
These surveys may be carried out by Mailed questionnaire,
telephone, or personal interviews with other managers and
personnel Agencies.
A wage survey to be useful, must satisfy these points
a. Frequency
Affected by rapidity of changes, current and contemplated. Once
per year is common.
b.Scope (number of firms)
Influenced by the geographic area from which people are drawn,
the number of units competing for this labor, accuracy
requirements, and willingness of organizations to share
information.
c. Accuracy
The diversity in job titles and specific job duties is staggering.
The greater the accuracy and detail needed, the greater the
requirements for careful description and specification and
surveyor’s reliance on person-to-person ‘interviewing rather than
mailed questionnaires. Such wage surveys provide many kinds of
useful information about differences in wage levels for particular
kinds of occupations. This can have a great influence on an
organization’s compensation policy.
Setting wage rates is a key process in any compensation
management system. Organizations need to understand how
much they will need to pay their employees, as this expense is
typically the largest portion of business expenses. How then is
wage determined?
The Market Theory of Wage Determination assumes that wages
are determined by supply and demand. All other considerations
such as skill level of labor or location of open jobs are secondary
to the basic equation of available labor versus demand for that
labor in the market. Market Theory argues that wages will
eventually be agreed upon by employers and employees based on
all of the above factors. In addition, any change in labor or
demand will affect wages proportionately, i.e. scarcity of labor
will increase wages and vice versa.
However, this theory ignores the fact that in real market
conditions there may be a gross imbalance of bargaining power
between employers and employees leading to wage rates that do
not meet even subsistence standards for workers. This is where
wage policy becomes important.
In the Indian context, the Minimum Wages Act, 1948 was passed
to lay down norms and procedures for fixing wages by
government. A tripartite committee on fair wages was setup in
1949 to determine principles for promotion of wages, and wage
Policy was introduced in the First Five Year Plan to ensure full
employment & optimum allocation of resources.
In India, wages and salaries are determined through several
different procedures
• Collective Bargaining: The negotiation between
organized workers and their employer or employers to
determine wages, hours, rules, and working conditions
constitutes Collective Bargaining. Trade Unions
influence the general level and structure of wages under
collective bargaining. Workers have the right and
capacity to strike, thus promoting democracy. Several
laws influence Collective Bargaining efforts. Some of
these are the Factories Act, 1948, Industrial Disputes
Act, 1947 etc.
• Industrial Wage Boards: Industrial Wage Boards
consist of an equal representation of employers and
employees as well as an independent Chairman. India
has a statutory wage board and a Tripartite wage board.
Wage Boards were set up so that industrial disputes
could be referred to them without the need to move a
Court of Law. The decisions of a Wage Board are
binding on the parties.
• Pay Commissions: The Pay Commission is an
administrative system / mechanism that the government
of India set up in 1956 to determine the salaries of
government employees. It was proposed that in no
circumstance could the wage of any worker be less than
the Living Wage. Since then, there have been 6 Pay
Commissions.
• Adjudication: Courts and Tribunals intend to deal with
settlement of industrial disputes concerning wages and
salaries.
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 UNIT-3 COMPENSATION AT MICRO
LEVEL
There are many different compensation theories, each with its
own benefits and detriments. Below we’ll discuss some of the
most common theories and the circumstances under which they
are most effective.
Rewards and financial compensation will encourage good
behavior while punishment will discourage bad behavior.
The pay-per-performance—a.k.a. stick and carrot approach—
theory of salary is an economic standard when it comes to
compensation strategies. The reason this has become such a
popular method of pay structuring is because of the concept that
“In a perfect world of perfect information and low transaction
costs, the parties will bargain to a wealth-maximizing result.”
Or basically that people will perform actions based on their
calculation of highest financial reward.
While this pay structure largely includes the base pay +
commission pay structure, the theory also encompasses yearly or
quarterly bonuses, raises as incentives, and other financial or
extrinsic rewards to be used as motivation.
Combining monetary and nonmonetary rewards can create
overall job satisfaction and thereby yield positive business
results.
If you are part of an HR team or if you have a Human Resources
team who helps organize your compensation structure, then
you’re probably familiar with Total Rewards. The idea is that if
employees are overall satisfied with their job and compensation,
that they will perform at optimal levels.
Consider the following:
Rules for a successful compensation strategy
1 – Track, Measure, and Analyze
When you’re developing, launching, and maintaining a
compensation strategy, it’s important to have the tools in place to
make sure the plan is fiscally supported and that the strategy is
fulfilling your strategic goals.
2 – Budget and forecast
Make sure your plan can be supported financially in the short-
and long-term.
3 – Set clear goals
Know what you’re trying to accomplish with your compensation
strategy—improved performance KPIs, lower compensation
costs, higher employee satisfaction scores, lower turnover, lower
employee acquisition costs, etc.
4 – Track key metrics
Having goals isn’t enough. Track your company’s progress
scrupulously to ensure your compensation plan is achieving what
you’d like it to achieve.
5 – Empower yourself (and others) with information
Just as goals are useless without tracking, so too is tracking
useless without using it to empower yourself and your team
members with information. Don’t keep your metrics secret.
Involve your teams in developing goals and keep them regularly
apprised on the progress of these goals.
6 – Review cost-effectiveness
Compensation plans should not be set and forgotten. It’s wise to
regularly review the pieces of your compensation plan to make
sure it’s in line with your budgeting and forecasting, as well as to
ensure the benefits of the plan is in line with actual cost.
7 – Analyze overall plan effectiveness
Quantify and review your goals, metrics, tracking, and team
member collaboration and regularly review the plan
effectiveness. There’s no way a team of any size can perfectly
predict the effectiveness of a plan before it’s ever put to the test
with your team members, so understand that you can—and
should—fine-tune your plan based on its performance.
CONCEPT OF INTERNAL EQUITY & EXTERNAL
PARITY
Internal equity refers to the comparison of pay between people
in the same company. External equity refers to the comparison of
pay between an employee and those outside of the company.
Most companies start with external data. External equity is
generally referring to comparisons against qualified survey data.
This is data that is collected as scientifically as possible from the
Compiled by Chinmoy Kumar from online resources.
source (the company). Sometimes external equity is a
comparison to employee or recruiter-provided data.
Often external data is too thin, too volatile or too suspect to be
used as a reference. In this case Internal equity takes precedence.
Internal equity is also used to ensure that discrimination is not
taking place. You can compare you staff internally, based on age,
experience, tenure, gender, color, whatever to ensure that
intentional or accidental bias is not taking place.
JOB EVALUATION
Job evaluation is the process of analyzing and assessing various
jobs systematically to ascertain their relative worth in an
organization.
Job evaluation is an assessment of the relative worth of various
jobs on the basis of a consistent set of job and personal factors,
such as qualifications and skills required.
The objective of job evaluation is to determine which jobs
should get more pay than others. Several methods such as job
ranking, job grading, and factor comparison are employed in job
evaluation. Research indicates, however, that each method is
nearly as accurate and reliable as the other in ranking and pricing
different jobs. Job evaluation forms the basis for wage and salary
negotiations.
--------businessdictionary.com
Background of Job Evaluation
Job evaluation developed out of civil service classification
practices and some early employer job and pay classification
systems. Whether formal job evaluation began with the United
States Civil Service Commission in 1871 or with Frederick W.
Taylor in 1881, it is now over 120 years old and still of great
value. The first point system was developed in the 1920s.
Employer associations have contributed greatly to the adoption
of certain plans. The spread of unionism has influenced the
installation of job evaluation in that employers gave more
attention to rationalized wage structures as unionism advanced.
During World War II, the National War Labor Board encouraged
the expansion of job evaluation as a method of reducing wage
inequities.
As organizations became larger and larger and more
bureaucratized the need for a rational system of paying
employees became evident. Wage structures became more
complex and needed some way to bring order to the chaos
perpetuated by supervisors setting pay rates for their employees
on their own. Job evaluation became a major part of the answer.
The techniques and processes of job evaluation were developed
and perfected during this time period of the late 1950s.
With the advent of the Civil Rights movement, job evaluation
literally got written into the law. The Equal Pay Act of 1963
required jobs to be compared on the basis of skill, effort, and
responsibility to determine if they were or were not equal. A
1979 study of job evaluation, as a potential source of and/or a
potential solution to sex discrimination in pay, was made by the
National Research Council under a contract from the Equal
Employment Opportunity Commission. The study suggested that
jobs held predominantly by women and minorities could be
undervalued. Such discrimination resulted from the use of
different plans for different employee groups, from the
compensable factors employed, from the weights assigned to
factors, and from the stereotypes associated with jobs. Although
the preliminary report failed to take a position on job evaluation,
the final report concluded that job evaluation holds some
potential for solving problems of discrimination.
Definitions of Job Evaluation
Below are given some important definitions of job analysis:
Job Evaluation involves determination of relative worth of each
job for the purpose of establishing wage and salary differentials.
Relative worth is determined mainly on the basis of Job
Description and Job Specification only. Job Evaluation helps to
determine wages and salary grades for all jobs. Employees need
to be compensated depending on the grades of jobs they perform.
Remuneration must be based on the relative worth of each job.
Ignoring this basic principle results in inequitable compensation
and attendant ill effects on employees’ morale. A perception of
inequity is a sure way of De-motivating an employee.
• In the words of Edwin B. Flippo. "Job evaluation is a
systematic and orderly process of determining the worth
of a job in relation to other jobs."
• According to Kimball and Kimball Jr., "Job
evaluation represents an effort to determine the relative
value of every job in a plant and to determine what the
fair basic wage for such a job should be."
• According to Bethel, Atwater and Smith et at, "Job
evaluation as a personal term has both a specific and
genetic meaning specifically, it means job rating or the
grading of occupations in terms of duties ; generally it
means the entire field of wages and salary
administration along modern lines"
• According to International Labour
Organisation, "Job evaluation may be defined as an
attempt to determine and compare the demands which
the normal performance of particular job makes on
normal workers without taking account of the individual
abilities or performance of the workers concerned."
• In the words of Dale Yoder, "Job evaluation is a
practice which seeks to provide a degree of objectivity
in measuring the comparative value of jobs within an
organisation and among similar organisations."
• According to Bureau of Labour Statistics, "Job
evaluation is the evaluation or rating of job to
determine their position in job hierarchy. The
evaluation may be achievement through asssignment of
points or the use of some other systematic rating method
for essential job requirements such as skill, experience
and responsibility."
Jobs are evaluated on the basis of content and placed in order of
importance. This establishes Job Hierarchies, which becomes the
basis for satisfactory wage differentials among various jobs. Jobs
are ranked (not jobholders)
Facts [+]
A commonly used job evaluation method is the paired
comparison evaluation system. The paired comparison system
compares each job within a company with every other job within
the company. A job's resulting score is determined from the
comparisons. The jobs are then ranked by score.
Compiled by Chinmoy Kumar from online resources.
THE JOB EVALUATION PROCESS
Job analysis describes a job. Job evaluation develops a plan for
comparing jobs in terms of those things the organization
considers important determinants of job worth. This process
involves a number of steps that will be briefly stated here and
then discussed more fully.
1. Job Analysis. The first step is a study of the jobs in the
organization. Through job analysis, information on job
content is obtained, together with an appreciation of
worker requirements for successful performance of the
job. This information is recorded in the precise,
consistent language of a job description. This was the
topic of chapter 10.
2. Compensable Factors. The next step is deciding what
the organization "is paying for" -- that is, what factor or
factors place one job at a higher level in the job
hierarchy than another. These compensable factors are
the yardsticks used to determine the relative position of
jobs. In a sense, choosing compensable factors is the
heart of job evaluation. Not only do these factors place
jobs in the organization's job hierarchy, but they also
serve to inform job incumbents which contributions are
rewarded.
3. Developing the Method. The third step in job
evaluation is to select a method of appraising the
organization's jobs according to the factor(s) chosen.
The method should permit consistent placement of the
organization's jobs containing more of the factors higher
in the job hierarchy, than those jobs lower in the
hierarchy.
4. Job Structure. The fourth step is comparing jobs to
develop a job structure. This involves choosing and
assigning decision makers, reaching and recording
decisions, and setting up the job hierarchy.
5. Wage Structure. The final step is pricing the job
structure to arrive at a wage structure.
Features of Job Evaluation
The primary objective of job evaluation is to find out the value of
work, but this is a value which varies from time to time and from
place to place under the influence of certain economic pressure,
not least of which is the worth of money itself. The main features
of job evaluations are:
• To supply bases for wage negotiation founded on facts
rather than on vague intermediate ideas.
• It attempts to assess jobs, not people.
• Job evaluation is the output provided by job analysis.
• Job evaluation does not design wage structure, it helps
in rationalising the system by reducing number of
separate and different rates.
• Job evaluation is not made by individuals rather it is
done by group of experts.
• Job evaluation determines the value of job. Further the
value of each of the aspects such as skill and
responsibility levels are also related and studied in
connection with the job.
• Job evaluation helps the management to maintain high
levels of employee productivity and employee
satisfaction.
The objectives of job evaluation
• To establish an orderly, rational, systematic structure of
jobs based on their worth to the organization.
• To justify an existing pay rate structure or to develop
one that provides for internal equity.
• To assist in setting pay rates that are comparable to
those of in similar jobs in other organizations to
compete in market place for best talent.
• To provide a rational basis for negotiating pay rates
when bargaining collectively with a recognized union.
• To ensure the fair and equitable compensation of
employees in relation to their duties.
• To ensure equity in pay for jobs of similar skill, effort,
responsibility and working conditions by using a system
that consistently and accurately assesses differences in
relative value among jobs and
• To establish a framework of procedures to determine the
grade levels and the consequent salary range for new
jobs or jobs which have evolved and changed.
• To identify a ladder of progression for future movement
to all employees interested in improving their
compensation.
• To comply with equal pay legislation and regulations
determining pay differences according to job content.
• To develop a base for merit or pay-for-performance.
Advantages of Job evaluation
Job evaluation is a process of determining the relative worth of a
job. It is a process which is helpful even for framing
compensation plans by the personnel manager. Job evaluation as
a process is advantageous to a company in many ways:
1. Reduction in inequalities in salary structure - It is
found that people and their motivation is dependent
upon how well they are being paid. Therefore the main
objective of job evaluation is to have external and
internal consistency in salary structure so that
inequalities in salaries are reduced.
2. Specialization - Because of division of labour and
thereby specialization, a large number of enterprises
have got hundred jobs and many employees to perform
them. Therefore, an attempt should be made to define a
job and thereby fix salaries for it. This is possible only
through job evaluation.
3. Helps in selection of employees - The job evaluation
information can be helpful at the time of selection of
candidates. The factors that are determined for job
evaluation can be taken into account while selecting the
employees.
4. Harmonious relationship between employees and
manager - Through job evaluation, harmonious and
congenial relations can be maintained between
employees and management, so that all kinds of salaries
controversies can be minimized.
5. Standardization - The process of determining the
salary differentials for different jobs become
standardized through job evaluation. This helps in
bringing uniformity into salary structure.
6. Relevance of new jobs - Through job evaluation, one
can understand the relative value of new jobs in a
concern.
Limitations:
Compiled by Chinmoy Kumar from online resources.
 1. Though there are many ways of applying job evaluation
in a flexible manner, rapid changes in technology and in
the supply of and demand for particular skills, create
problems of adjustment that may need further study.
2. When job evaluation results in substantial changes in
the existing wage structure, the possibility of
implementing these changes in a relatively short period
may be restricted by the financial limits within which
the firm has to operate.
3. When there are a large proportion of incentive workers,
it may be difficult to maintain a reasonable and
acceptable structure of relative earnings.
4. The process of job rating is, to some extent, inexact
because some of the factors and degrees can be
measured with accuracy.
5. Job evaluation takes a long time to complete, requires Factor comparison
specialized technical personnel and is quite expensive.
JOB EVALUATION METHODS

After job analysis preparations of job descriptions comes the

essential stage of job evaluation, namely, the systematic
comparison of jobs in order to establish a job hierarchy. The
techniques which have been commonly used tend to fall into one
of the two main categories:
Non-analytical or Non-quantitative or summary methods
Analytical or quantitative methods.
Point rating

Job Ranking

Job Classification
Compiled by Chinmoy Kumar from online resources.
Unit-4 Performance Linked Compensation
PERFORMACE LINKED COMPENSATION
A performance-linked incentive (PLI) is a form of payment
from an employer to an employee, which is directly related to the
performance output of an employee and which may be specified
in an employment contract. PLI may either be open-ended (does
not have a fixed ceiling) or close-ended (has an upper ceiling
which is normally stipulated in the employment contract).
Open-ended incentives are normally applicable to revenue-
generating activities (e.g., sales), while close-ended incentives
are associated with support functions (e.g., operations, human
resources, administration, etc.)
PLI vs Salary
Salary is paid for the efforts that one puts in and PLI is paid for
the results. Salary is paid in short, definitive cycles (e.g., weekly,
monthly, fortnightly etc.) while PLI is paid in a longer cycle of
monthly, quarterly or half-yearly, yearly.
PLI vs Bonus
Bonus is paid for the performance of the organization while PLI
is paid for the individual's performance. Bonus is normally paid
yearly or half-yearly. This is normally paid as a percentage of
one's salary, or as a fixed amount, of the employee's individual
performance.
PLI vs Retention Bonus
Some organizations give a retention bonus which is payable for
the period that an employee stays back in the organization. This
is paid for the value added by the employee by virtue of mere
presence and not necessary for the efforts or work output.
Normally retention bonus is paid yearly or half-yearly which will
incentivise the employee to stay back in the organization for the
payment.
PLI vs Appraisal
Appraisals, normally conducted half-yearly or annually, are used
to decide on the salary increments and promotions of the
employee. These, being permanent increases, take both the
performance and potential of the employee into account.
Method of calculating PLI
Also, in calculating PLI, only the performance and not the
potential of the employee should be considered. Potential of the
employee is normally subjective and can be contested. PLI
should be based on metrics which are absolutely objective and
clearly perceived as fair by both employee and employer.
PRE-REQUISITES OF EFFECTIVE INCENTIVE SCHEME
Characteristics of good Incentive Schemes
A good incentive plan shall fulfill the following requirements:
Trust and confidence – The success of any incentive plan
depends on the existence of an atmosphere of trust and
confidence between the workers and the management. In the
absence of such an atmosphere, the workers may resist any such
proposal by the management.
Consensus required – The management should not take a
unilateral decision while evolving an incentive scheme.
Consensus between the workers and the management is
necessary for the success of the plan.
Assured minimum wage – Payment to any worker should not be
totally related to his performance. Every worker should be
assured of a minimum wave notwithstanding performance. Only
then the workers would have a sense of security.
No scope for bias or favoritism – The standards set under the
incentive plan should be based on objective analysis. It should
not expect too much out of the employee nor should it give scope
for bias or favoritism.
Simple to operate – The incentive plan should not involve
tedious calculations. It should be so simple that the worker will
be in a position to work out his total earnings himself.
Beneficial to both the workers and the management – The
incentive plan should be beneficial to both the workers and the
management. From the management’s point of view, it should be
cost effective. From the workers’ point of view, it should offer
return, at a rate higher than the normal rate of wages, for the
extra efforts made by them.
Sound system of evaluation – A perfect system of evaluating the
employees performance should be created in the organisation.
The results of evaluation should be made known to the
employees at the earliest.
Redressing grievances – Grievances and complaints are bound to
arise whenever any incentive plan is in vogue in the organisation.
Proper machinery should be installed for the quick handling of
all such complaints.
Review – The progress of the incentive scheme should be
periodically reviewed. Only then it would be possible to notice
and remove defects, if any, in the plan.
TYPES OF INCENTIVES – INDIVIDUAL / GROUP
Compiled by Chinmoy Kumar from online resources.
Types of Incentive Plans | Wages | Human Resource Where
Management W=Total Wages
The various incentive plans can be classified into two groups: 1. S=Standard time
Individual Incentive Plans 2. Group Incentive Plans. T=Time taken to complete the job
%=Percentage of wages of time saved to be given as incentive
R=Rate;
For example, if rate hour is Rs.3 standard time for completion of
job is 10 hours.
A worker completes the job in 8 hours, his total wages will
be:
W= 8x 3+ (10-8)3×1/2
= Rs.27
In the above example, worker is given an incentive of 50% (1/2)
of time saved.
Advantages:
a. It is simple.
b. Each worker is guaranteed a minimum wage.
c. This is beneficial to efficient worker.
d. Causes no harm to new worker, trainee, or slow worker.
e. Management shares benefits of over-achievement by workers.
Disadvantages:
a. Workers get only a percentage of return on their over-
Type # 1. Individual Incentive Plans: achievement.
Under individual incentive plan, individual employee is paid b. The quality of production may suffer as workers may do work
incentive on the basis of individual performance or output. The in hurry,
employers are liable to pay incentives to those employees who c. There may be difficulties in setting standard time for different
are producing more than the standard output. Individual incentive jobs.
plans can be either time based or production based.
In case of time based incentive plans, a standard time is II. Rowan Plan:
determined for doing a job and this standard time served as a This plan is quite similar to Halsey plan. It differs only in terms
basis for giving incentive. A worker is considered as efficient, if of calculation of incentive for time saved. The worker gets the
he completes his job in less than standard time. The worker is guaranteed minimum wages. The incentive for completing the
awarded for his efficiency by giving incentive under some job in time lesser than standard time is paid on the basis of a
incentive plans. ratio, which is time saved over standard time per unit standard
Some of the time based incentive plans are: time.
I. Halsey Incentive Plan. Incentive is calculated as:
II. Rowan Incentive Plan. Incentive or Bonus=S-1/SX T x R
III. Emerson Efficiency Plan. Total wages=T x R+ incentive
IV. Bedeaux Incentive Plan. =T x R(S-T)/S x T x R
Where, W=Total wages
In case of production based incentive plans, a standard of output S=Standard time
is determined and wages are paid on the basis of number of units T=Time taken to complete the job
produced. R=Rate;
For example, if rate per hour is Rs.3and standard time for
Some of the production based incentive plans are: completion of job is 10 hours.
I. Taylor’s differential piece rate system. A worker completes the job in 8 hours, his total wages will
II. Merrick’s multiple piece rate plan. be:
III. Gantt’s task and bonus wage plan. W=8×3+ (10-8)/10x 8x 3=Rs.28.4
Advantages:
Time-Based Plans: a. This system checks over-speeding and overstrain by worker.
All the above mentioned time based incentive plans are b. Each worker is guaranteed a minimum wage.
explained below: c. Efficiency is rewarded.
I. Halsey Incentive Plan: Disadvantages:
: a. The workers find it difficult to understand.
In this method a standard time is fixed for the completion of the b. Discourages workers to over-achieve.
job. A minimum base-wage is guaranteed to every worker. If a c. Workers may not like sharing of profit for over-achievement.
worker completes his job in just the standard time, he will not be
given any incentive. If a worker performs his job in less than
standard time, he is given incentive. The incentive will be equal
to 50% of the time saved by the worker. III. Emerson’s Efficiency Plan:
W=TR+(S-T)R%
Compiled by Chinmoy Kumar from online resources.
In this plan, a minimum wage is guaranteed to every worker on
time basis and incentive is given on the basis of efficiency.
Efficiency is determined by the ratio of time taken to standard
time. Payment of bonus/incentive is related to efficiency of the
workers. Incentive will be given to those workers who attains
more than 2/3rd i.e. 66.67% of efficiency. No incentive will be
given at 66.67% efficiency. At 100% efficiency incentive is 20%
of the hourly rate. For efficiency exceeding 100%, 1%
incentive/bonus is paid for every 1% increase in efficiency.
For example, if standard time for a job is 6 hours and hourly rate
is Rs.3. If a worker completes a job in 6 hours, the efficiency of
worker is 100%. His wages will be 6 x 3 + bonus @20% i.e.
Rs.18 + 20% of 18 = Rs.21.6
Advantages:
a. Minimum wages are guaranteed.
b. It is simple to understand.
Disadvantages:
i. Incentive after attaining standard is very low.
IV. Bedeaux Point Plan:
Bedeaux system also called units or point system also guarantees
a minimum base wage. Under this plan, the standard time and
time taken for each job is reduced to minutes. Each minute is
referred to, as ‘B’ i.e. one hour is the same as 60B’s. The
workers who complete the job within standard time are paid at a
normal time rate.
Those who complete the job in less time are paid bonus. The
bonus paid to the worker is 75% of the wages for time saved. The
time saved is divided between workers and management.
The formula for calculating wages is:
W=TR+75% (S-T)R
where, w= Total wages
S=Standard time
T=Time taken to complete the job
R=Rate;
For example, if standard time for a job is 6 hours i.e 360 B’s and
wage rate is Rs.3 per hour. If a worker completes his job in 5
hours i.e 300 B’s, he saves 60B’s.
His total wages will be:
W=5×3+75 %(6-5)x3
=15+75%of 3=Rs.17.25
Advantages:
a. Minimum wages are guaranteed.
b. Management also shares some percentage of bonus.
Disadvantages:
a. Incentive after attaining standard is very low.
b. Workers do not like their bonus to be shared by management.
Output-Based Plans:
I. Taylor’s Differential Piece Rate System:
This system was introduced by Taylor, the father of scientific
management. The main characteristics of this system are that two
rates of wage one lower and one higher are fixed. A lower rate
for those workers who are not able to attain the standard output
within the standard time; and a higher rate for those who are in a
position to produce the standard output within or less than the
standard time.
For example, if standard production in 8 hours is fixed at 10
units. The lower piece rate is Rs.3 and higher piece rate is Rs.3.5.
If a worker produces 9 units, his wages = 9 x 3 = Rs.27. In case a
worker produces 10 units, his wages = 10 x 3.5 = Rs.35.
Advantages:
a. Provides incentives to efficient worker.
b. Inefficient worker is penalized.
c. This system is simple and easy to implement.
Disadvantages:
a. Minimum wage is not assured,
b. There are chances that quality of work may suffer,
c. This system is not liked by below average workers, as they do
not get any incentive.
II. Merrick’s Multiple Piece Rate Plan:
To overcome the limitations of Taylor’s differential piece rate
system, Merrick suggested a modified plan in which, three-piece
rates are applied for workers with different levels of
performance.
These are:
a. Workers producing less than 83% of the standard output are
paid at basic rate.
b. Workers producing between 83% and 100% of standard output
will be paid 110% of basic piece rate.
c. Those producing more than 100% of the standard output will
be paid 120% of basic piece rate.
Advantages:
a. Efficient workers are rewarded handsomely.
b. Minimum wages are guaranteed.
Disadvantages:
a. There is wide gap in slabs of differential wage rate.
b. Over emphasis on high production rate.
III. Gantt’s Task and Bonus Plan:
This plan is based on careful study of a job. The main feature of
this plan is that it combines time rate, piece rate and bonus. A
standard time is fixed for doing a particular job. Worker’s actual
performance is compared with the standard time and his
efficiency is determined.
If a worker does not complete the job within standard time i.e. he
takes more time than the standard time (efficiency below 100%),
he will not receive any bonus but he is given wages for the time
taken by him.
If a worker completes the job within standard time (100%
efficiency), he is given wages for the standard time and bonus of
20% of wages earned.
If the worker completes the job in less than the standard time (i.e.
efficiency more than 100%), wages are paid according to piece
rate.
Advantages:
a. Minimum wages are guaranteed.
b. It is simple to understand.
c. Efficient workers can earn more money.
Disadvantage:
a. Emphasis on over speed or high production rate.
Type # 2. Group Incentive Plans:
A group incentive plan scheme is designed to promote effective
teamwork, as the bonus is dependent on the performance and
output of the team as a whole. Under group incentive plan, each
employee is paid incentive on the basis of collective performance
of his group to which he belongs. Within the group, each
employee gets an equal share of the incentive.
Compiled by Chinmoy Kumar from online resources.
Some of the group incentive plans are:
I. Priestman’s Plan.
II. Scanlon’s Plan.
I. Priestman’s Plan:
In this plan workers are not considered individually but
collectively. This system considers the productivity of all
workers as a whole. Bonus is paid in proportion in excess of
standard output per week. If in a year, the output increases either
above the standard output or the output of the previous year, the
wages are increased in the same ratio.
For example, if in 2009 the output per worker per unit time is 10
units and in year 2010 the output per worker per unit time comes
out to be 12 units, the wages in 2010 will be 20% more than in
2009. The drawback of this system is that individual efficiency is
not considered.
II. Scanlon’s Plan:
A Scanlon plan is a type of gain sharing plan that pays a bonus to
employees when they improve their performance or productivity
by a certain amount as measured against a previously established
standard. A typical Scanlon plan includes an employee
suggestion program, a committee system, and a formula-based
bonus system. A Scanlon plan focuses attention on the variables
over which the organization and its employees have some
control.

Compiled by Chinmoy Kumar from online resources.