NOTES ON COMPENSATION MANAGEMENT

Importance of Pay
Pay represents by far the most important and contentious element in the
employment relationship, and is of equal interest to the employer,
employee and government -
 to the employer because it represents a significant part of his costs, is
increasingly important to his employees' performance and to
competitiveness, and affects his ability to recruit and retain a labour
force of quality;

 to the employee because it is fundamental to his standard of living and

is a measure of the value of his services or performance;

 to the government because it affects aspects of macro-economic

stability such as employment, inflation, purchasing power and
socio-economic development in general.
While the basic wage or pay is the main component of compensation,
fringe benefits and cash and non-cash benefits influence the level of wages
or pay because the employer is concerned more about labour costs than
wage rates per se. The tendency now is towards an increasing mix of fringe
benefits, which therefore have an important impact on pay levels. In
industrialized countries, and sometimes in countries with high personal
tax rates, the non-pay element of executive compensation has
substantially increased in recent years.
Objectives of Pay
Pay determination may have one or more objectives, which may often be in
conflict with each other. The objectives can be classified under four broad
headings.
The first is equity, which may take several forms. They include income
distribution through narrowing of inequalities, increasing the wages of the
lowest paid employees, protecting real wages (purchasing power), the
concept of equal pay for work of equal value. Even pay differentials based
on differences in skills or contribution are all related to the concept of
equity.

A second objective is efficiency, which is often closely related to equity

because the two concepts are not antithetic. Efficiency objectives are
reflected in attempts to link a part of wages to productivity or profit, group
or individual performance, acquisition and application of skills and so on.
Arrangements to achieve efficiency may be seen also as being equitable (if
they fairly reward performance) or inequitable (if the reward is viewed as
unfair).

A third objective is macro-economic stability through high employment

levels and low inflation, for instance. An inordinately high minimum wage
1
would have an adverse impact on levels of employment, though at what
level this consequence would occur is a matter of much debate. Though
pay and pay policies are only one of the factors which impinge on
macro-economic stability, they do contribute to (or impede) balanced and
sustainable economic development.

A fourth objective is the efficient allocation of labour in the labour market.

This implies that employees would move to wherever they receive a net
gain; such movement may be from one geographical location to another, or
from one job to another (within or outside an enterprise). Such movement
is caused by the provision or availability of financial incentives. For
example, workers may move from a labour surplus or low wage area to a
high wage area. They may acquire new skills to benefit from the higher
wages paid for skills. When an employer's wages are below market rates
employee turnover increases. When it is above market rates the employer
attracts job applicants. When employees move from declining to growing
industries, an efficient allocation of labour due to structural changes takes
place.

The need for a Compensation Strategy-

For any / all of the following reasons:

1 To attract and retain the best in the industry

2 To have compensation strategy aligned to each business to better
serve independent business needs
3 Should attract lateral hires
4 Need for greater flexibility in taking compensation decisions
5 Need to align employee career movement
6 Adding value through personnel costs

GOALS OF A COMPENSATION STRATEGY

1 Capable applicants are attracted towards the Organization and it
helps acquire qualified competent personnel
2 To retain current employees so that they do not quit
If compensation levels are not competitive, it will result in
higher turnover
3 Motivate employees to perform better
4 Encourage value – added performance
Reward the desired behaviour
5 Control costs
Through a rational compensation system, employees can be
obtained and retained at a reasonable cost
6 Promoting continuous development through competence – related
and skill – based pay schemes, effective performance management
7 Promoting teamwork through team pay
8 Promoting flexibility by replacing hierarchical and rigid pay
structures
9 Providing value for money by evaluating the costs as well as benefits
of reward management practices
10 Facilitating easy understanding by all, including employees,
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 operating managers and HR personnel
11 Providing value for money by evaluating the costs as well as benefits
of reward management practices
12 Easy administration

CHARACTERSTICS OF A SOUND COMPENSATION STRATEGY

1 Be congruent with and support corporate values, beliefs, philosophy

and culture
2 Emanate from business strategy and business plans (medium and
long – term)
3 Fit the desired management style
4 Provide the competitive edge required; be based on an industry
benchmarking study
5 Be based on an Organization‘s ability to pay
6 Be adaptable to changing business conditions
7 Ensures Equity – both internally and externally
8 Complies with the legal regulations as imposed by the government
9 Is effectively communicated
10 Careful selection of performance measures, determination of
performance awards and distribution mechanisms
11 Union participation and involvement in designing the policy to
facilitate comprehension and acceptance
12 Provisions for modifications and periodically reviewed

A COMPENSATION STRUCTURE COMMUNICATES

1 Organization Philosophy / Culture

2 Career Progression
3 Benefits to Employees
4 Individual v/s Team Focus
5 Performance Recognition giving the message to align Total
COMPENSATION with Business Situation, Needs & Goals
6 Generate Flexibility / Variability of Costs
7 Focus on Effectiveness of Total Compensation Policy

FACTORS INFLUENCING COMPENSATION POLICY

Philosophy Organization Mission, Vision, Goals & Values –

Inclination towards People Development, Attraction &
Retention of Talent

Parity Inter / Intra Level Relativity, Compa Ratio

Positioning Assess Competitiveness – Current & Targeted Percentile

Positioning

Paying Ability Budget Considerations

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FACTORS AFFECTING COMPENSATION POLICY

EXTERNAL FACTORS
1. Parity: External equity (prevalent pay structures in industry /
geographic location)
2. Demand and supply: of labour and market condition
3. Geographic location: cost of living and inflation

ORGANIZATION - RELATED
1. Philosophy: mission, vision, goals & values – inclination towards
people development, attraction & retention of talent, goodwill &
organization culture
2. Parity: internal equity (relevant differentiating factors performance,
seniority, skills, responsibilities, interpersonal abilities, individual
vs. Team vs. Organization roles)
3. Paying ability: budget considerations / financial implications /
limits of ability to pay; business performance
4. Legalities: compliance of statutory and government requirements
5. Trade unions: influence in collective bargaining
6. Fringe benefits: statutory (overtime payment, canteen subsidy,
employee provident fund, gratuity) & non-statutory (conveyance
allowance, LTA, loans, insurance)

INDIVIDUAL RELATED
1. Job – related: job requirements and internal consistency
2. Competition: availability of special competent personnel
3. Flexibility: due to varied levels of competencies and skills of
managers
4. Responsibilities: individual productivity and performance /
contribution to output
5. Individual assessment: qualifications and relevant experience

WHAT IS A COMPENSATION SYSTEM

Allocation, conversion, and transfer of a portion of the income of an

organization to its employees for their monetary & in-kind claims on goods
& services

A Monetary claims are wages or salaries paid to an employee in the form

of money / or a form that is easily and quickly transferable to money at
the discretion of the employee
1. Wages & salaries in the form of money could be 2 types:
present payments (earned & acquired at present time) &
deferred payments (earned but not acquired until some future
time)
2. Coins / paper money / cheques, credit cards
3. Stock option plans / pension plans / post retirement income
adjustments
B In-kind claims are claims on goods & services made available & paid
for either totally or in some percentage by the employer
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 in lieu of money provide an equivalent value for what has been
offered & received
little or no immediate monetary gain
organizations purchase the usually desired goods & services
to take advantage of –
1. Economies of scale available through group purchasing
2. The benefits available through tax laws & regulations
3. Government laws requiring certain services

NON-COMPENSATION SYSTEM

Situation – related rewards, related to the physical & psychological well –

being of each employee, these rewards satisfy the emotional & intellectual
demands
- Impact on the intellectual, emotional & physical well-being of the
employee

8 DIMENSIONS OF COMPENSATION SYSTEM

- PAY FOR WORK & PERFORMANCE
- money provided in short – term (weekly / monthly / annual
bonuses & awards)
- permits employees to pay for goods & services desired
- depends on: job requirements; outputs that meet or exceed
quantity, quality & timeliness standards; innovations leading to
improved productivity; dependability; loyalty
- includes: base pay, premiums & differentials, short – term bonuses,
merit pay, travel expenses, clothing reimbursement etc
- PAY FOR TIME NOT WORKED
- days off with pay for holidays, longer paid vacations, election
official, witness in court, paternity leave, maternity leave, time off
to vote, personal leave, relocation payments, lunch & rest periods
etc
- although they increase labour costs, but they enhance quality – of
– work – life opportunities for most employees
- LOSS-OF-JOB INCOME CONTINUATION
- job security is a prime consideration
- loss of job could be due to any of the following:
* accident
* sickness
* personal performance
* interpersonal dynamics problems
* firm‘s decline / end
- unemployment insurance, supplemental unemployment benefits
(subs), severance pay, job contract etc help unemployed workers
subsist until new employment opportunities arise
- DISABILITY INCOME CONTINUATION
- health or accident disability can lead to non – performance of
normal assignments
- family expenses persist
- social security, workers‘ compensation, sick leave, travel accident
insurance, accidental death and dismemberment, short &
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 long-term disability plans are provided
- DEFERRED INCOME
- providing income after retirement
- includes social security, pension plans, profit sharing (long term),
stock option plans
- funds invested in these draw tax-free interest thus employees can
defer tax obligations
- SPOUSE (FAMILY) INCOME CONTINUATION
- Providing dependents with income when an employee dies or is
unable to work due to total and permanent disability
- life insurance plans, social security, pension plans, workers‘
compensation
- HEALTH, ACCIDENT AND LIABILITY PROTECTION
- Income continuation & payment for the expenses incurred for
overcoming the illness / disability
- wide variety of insurance plans available
- medical, hospital, surgical insurance (for self & dependents)
- major medical, dental & vision care. hearing aid, post-retirement
medical plans, prescription drugs, visiting nurse
- liability – related insurance: group legal, group automobile, group
umbrella liability, employee liability
- INCOME EQUIVALENT PAYMENTS
- Perks or perquisites
- tax free: charitable contributions, giving of gift, employee
assistance programs, counseling, child adoption, child / elderly
care, subsidized food service, discounts on merchandise, fitness
programs, parking, commuting assistance (transportation to &
from work), fly first class, professional memberships, professional
journals, special relocation & moving allowances, pay for spouse
on business trips, home entertainment allowance, domestic staff
allowance, mobile phone, use of assistant for personal services
- Tax favoured: medical expense reimbursement, chauffeur – driven
car, company plane / yacht, company provided facilities, personal
use of credit cards, vacation accommodation, special loan
arrangements, club membership, concierge services

DIMENSIONS OF NON-COMPENSATION SYSTEM

 Enhance dignity and satisfaction from work performed
- Least expensive & most powerful rewards
- Employee recognition leads to self - worth & pride
- Employees should feel that they are needed & their efforts are being
appreciated
 Enhance physiological health, intellectual growth, and emotional
maturity
- Provide a safe working environment: provision of safe equipment,
risk free environment, minimization of noxious fumes, avoidance of
extreme heat, cold & humidity conditions, elimination of contact
with radiation & other disease–related materials, reduced noise
levels, clean workstation,
- stress & technological advancements – affect emotional well-being

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 of the individual: providing a stable & secure lifestyle, training &
development opportunities to overcome health-related problems
 Promote constructive social relationships with coworkers
- an inexpensive & valuable reward is a work environment where
trust, fellowship & loyalty emanate from the top levels of
management, percolating to the grassroots
- comradeship of workplace associates
- opportunity to develop productivity – promoting social relationships
- moving towards team – based operations
 Design jobs that require attention and effort
- restructuring job tasks to make it challenging
- sense of accomplishment from work
- job rotation to increase flexibility
- turning supervisors to mentors
- making jobs more interesting & less repetitive
Organizations increase quality & productivity; reduce employee turnover,
absenteeism, tardiness, waste of physical resources, theft & malicious
damage
 Allocate sufficient resources to perform work assignments
- all necessary human, technical and physical resources should be
made available to support & aid the employee in accomplishing
the assignment
- the organization must enable employees to gain the required skills
& knowledge necessary to perform the assignment
- organization should do everything possible to assist the employee
in completing the assigned work successfully
 Grant sufficient control over job to meet personal demands
 employee participation in decision-making process
 casual dress day
 scheduling work activities
 flexible work schedules: compressed workweeks, flextime programs,
work from home choice
 job sharing (2 part-time employees share 1 full-time job)
 Offer supportive leadership & management
 employee faith & trust in management
 skill & interest in coaching & counseling of employees
 praise for a job well done
 constructive feedback leading to improvement in job performance
 sufficiently flexible leadership with policies, rules, regulations so that
an employee can meet job responsibilities without infringing on
rights & opportunities of other employees

TRADITIONAL COMPONENTS OF A COMPENSATION PROGRAM

Fixed cash compensation
- largest component of the total compensation & rewards package
- monetary remuneration based on ‗time worked‘ & not on output /
performance
- base wages & salaries – depends on the internal value (determined
by job evaluation) & external value (through market pay surveys)
of employee
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 - after-tax paycheck
- determines lifestyle of the employees
- leisure activities restricted / defined by the paycheck
- most critical part of the four components
Wage & salary add-ons
- monetary remuneration
- paid over & above the salary
- includes payments for working overtime, shift differentials,
premium pay for working on holidays / weekends
- least critical of the four components
Incentive payments
- pay- for - output system
- performance pay – linked to both the company & the individual
- difficult to measure in the service industry which employs 70%
of the workforce of the total employed people
- in several professions, it is difficult to measure output & pay
incentives
Employee benefits & services
- hidden payroll or fringe benefits
- indirect financial & non-financial payments
- supplementary compensation totally dependent on organizational
philosophy
- includes benefits provided by an employer to his employees & his
family (in some cases)
- benefits for employment security; health protection; old age &
retirement; personnel identification, participation & stimulation
- two types: mandatory employee benefits: voluntary benefits

MANDATORY EMPLOYEE BENEFITS

Employer is compelled to provide for certain benefits by the
operation of the law
Paid holidays – factories act, 1948 a weekly paid holiday
Paid vacations – one day for every 20 days worked
Retrenchment compensation – industrial disputes act, 1947 (one
month notice or one month‘s pay) – paid @ 15 days wage for every
completed year of service with a maximum of 45 days wage in a year
Lay-off compensation - industrial disputes act, 1947 (@ 50% of
the total of the basic wage & da for the period of their lay-off) – paid
upto 45 days in a year
Workmen‘s compensation – workmen‘s compensation act, 1923 –
payment to meet the contingency of invalidity & death of a worker
due to employment injury or occupational disease
Health benefits – employee state insurance act, 1948 – sickness
benefit, maternity benefit, disablement benefit, dependent‘s benefit,
medical benefit
Canteen facility – factories act, 1948 – canteen in factories
employing more than 250 workers
Provident fund – contributions by employer & employee are 8.5% of
basic salary – benefit payable on retirement, voluntary separation or
death
Employee pension scheme – introduced in 1995 –employer
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 contribution is directed to pension + 1.66% of employee wages
contributed by central govt.
Entitled to pension @ 1 / 70th of salary for each year of service
Gratuity – after 5 years of continuous service – 15 days‘ salary per
year of service upto a ceiling of INR 3,50,000/-
Companies with more than 10 employees
Given in case of separation, superannuation, death or
disablement
No contribution of employees towards this benefit
PSU scheme – public sector scheme
Various pension schemes with accrual rates varying from 1/100
to 1/60
Both employer & employee contribute
Membership is mandatory for all those in PSUs
Leave encashment scheme – claim encashment of unutilized leave at
the termination of service
Not-taxable in the hands of the retired employee
Payable to dependents in case of death of employee
VOLUNTARY EMPLOYEE BENEFITS
Its is entirely the choice of the employer to provide these benefits to
the employees
Shift premium – for IInd & IIIrd shifts for the odd hours
Company housing accommodation – some companies even pay for
the utility bills (electricity / water & society charges)
Subsidized food & transport
Group mediclaim / personal accident insurance – adequate
coverage for the hospitalization expenses incurred due to illness,
disease or injury sustained in accident / pregnancy (for female) for
employee & immediate family dependents
Educational facilities – sponsor higher education of employees &
family members
For certifications / trainings / memberships etc
co-operative credit societies – for fostering self-help than going to
money lenders
Legal aid – provide legal assistance & aid through company lawyers
or others as & when required
Recreational facilities – gyms, clubs, internet café, one film per week
shows etc
Regular meetings & gatherings – of employees with their families to
express talent, creativity & relieve of work stress
Loans – at subsidized rates of interests for housing deposits, vehicle
purchase, marriage, illness or death of a close family member
Personal health care – extensive health check-up periodically
cellular phones / laptop – on basis of business requirement
Corporate credit card – to take care of official expenses arising out of
business trips
Gifts – on various occasions like birthday, anniversary, festivals – to
strengthen bond between employer & employee

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TOTAL COMPENSATION

COMPENSATION STRUCTURE – VARIOUS PERSPECTIVES

SALARY TRENDS
AVERAGE SALARY INCREASE IN TOTAL COST TO COMPANY (TCC) FOR
THE YEAR 2006 ACROSS ASIA PACIFIC –

14.0%

8.0% 8.0%
7.0%
6.5%
5.5%
4.5% 4.5%
4.0%
3.5% 3.0%

Australia Malaysia China Philippines Hong Kong Singapore India Taiwan Japan Thailand Korea

10
 1 Average salary hike in 2006 for India at 14%, making it the highest
in Asia Pacific
2 Employees in management staff cadre received average salary hike
of 16% in 2006

PERFORMANCE LINKED AWARDS

VARIABLE PAY TREND

1 Employee expectations are on the rise

2 Senior/ Top Management received the highest percentage of variable
pay in their compensation in the range of 17% to 30%
3 Variable Pay increasing in year 2006 -
Banking Sector from 13% to 24%
IT from 13% to 18%
Manufacturing from 10% to 16%
FMCG from 14% to 18%

PERCEIVED BENEFITS
1 International Educational Advancement Program & Tuition
Reimbursement
2 Signing Bonus
3 Investment company makes on Employee & Training imparted
(National/ International)
4 OPPORTUNITIES OF LEARNING – Early responsibility in career,
freedom at work and innovate
5 JOB PROFILE – Work Content, Challenging Assignments
6 CAREER PROSPECTS & GROWTH OPPORTUNITIES – ―Growing our
own timber‖
7 FUTURE PLANS OF COMPANY – Growing organization
8 TREATMENT OF PEOPLE – Strong values of trust, caring, fairness
and respect within organization, healthy relationship at work.

NEW COMPENSATION APPROACHES

Changing environmental pressures

Three changes having impact on organization structure & management
systems:
 Product markets have become global
 increased competition in domestic & foreign markets
 Rapidly changing technology
 greater need to employ technically & professionally skilled
workers
 keep their knowledge – base & competencies current
 Fast – changing demographic composition of Workforce
* higher age group of employees, more women employees,
rising level of formal education

11
Organization’s response
 Major changes in organization structure & management systems
 new model: flat, flexible, team-based, participative, diverse,
quality- focused, dynamic, globally-oriented
 changes in the job from being specialized & stable
multidimensional
 horizontal growth of employees
 new approaches to compensation & rewards

FOUR NEW APPROACFHES TO COMPENSATION

SKILL-BASED PAY
 Employees are paid according to their number of skills
- skills are grouped in ‗skill-blocks‘ – as an employee acquires each
block, his pay goes up
- skill block includes different types of skills:
**breadth skills which focus on all related jobs in an
integrated production process
**depth skills which aim to increase specialization in a
particular area
**vertical skills which are generally possessed by managers &
professionals
 Advantages to organizations
 a workforce is created that can perform multiple tasks
 organization gets flexibility to rotate employees & take care of
organization menaces like absenteeism, overtime, turnover,
work-flow interruptions due to production bottlenecks and
variations in product demand
 better problem solving capability
 improved productivity & quality of services/ products
 stronger employee commitment
 employees become familiar with the operations & tend to
recognize the value their own contributions

 Advantages to the employees

 acquire more self-control over their own earnings
 develop greater capacity for self-management
 experience more varied and enriched task assignments
 these contribute to job satisfaction to a great extent

BROADBANDING
 Delayering of pay structure
- a typical pay structure consists of grades & ranges
- a grade is a grouping of jobs falling within a certain range of
evaluation points
- attached to grades are pay ranges – minimum to maximum spread
* successively higher grades will have higher minimum &
higher maximum pay rates
- pay structure typically consists of a tall hierarchy of narrowly
defined grades, each with a relatively limited pay range
* such structures create in employees a strong motivation to
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 strive towards upward mobility as a means to obtain higher
compensation rewards
 Broadbanding is defined as
- Consolidation of existing pay grades into a small number of wide
bands
- results in broad minimum-maximum pay spread for each band
- compared to conventional pay structures, broadband structures
have fewer bands & broader pay ranges
- best – suited to the needs of flexible, flatter & performance-oriented
organizations of today
- Allow flexibility in moving employees between jobs within a band
without formal job titles & pay grade changes
- Flat structures place increased emphasis on lateral career moves &
skill development that can be rewarded through broadbanding
- Greater scope for pay growth through within- band-pay increases
than through promotions to a higher band

Example1 of how broad banding works

 Band I - Executives, entry-level staff
 Band II - Sr. Executives, supervisors, coordinators
 Band III - Assistant managers
 Band IV - Managers, business managers
 Band V - General managers, national managers
 Band VI – CTO, CFO, CMO
 Band VII - President & CEO

Example2 of how broad banding works

 In a HR consultancy firm there are 3 bands across the organization
with a wide pay range in the same band:
- Entry level: requires good quantitative skills, knowledge of basic
MSOffice, ability to analyze & ability to learn fast
- Proficiency level: skills in project management, problem-solving,
resource management, thorough subject knowledge
- Mastery level: a leadership position requiring visionary skills &
ability to give direction to the organization
To move up the ladder, the employee needs to add value that would clearly
separate his accountability & key performance indicator
*here advancement means adding newer competencies
VARIABLE PAY
 Defined as
- financially measurable reward paid to an individual based on his
overall performance
- a powerful tool that enhances employee productivity &
performance

TEAM REWARDS
- These are awarded to teams or groups based on their collective
performance in achieving the assigned targets
- periodically targets are monitored to encourage improved productivity &
reward
- provide each member an opportunity to receive a bonus on the output of
13
the team a whole
- most appropriate when jobs are inter-related
- generally payouts are determined by team rankings (based on criteria like
ratings by internal & external customers, achievement of quarterly team
objectives & the management input recognizing special circumstances)
- within same team also, all members do not receive same payout – it is
subject to peer evaluation
- major problem in this is designing a model team-based pay system

Steps for setting up team rewards

- Appraising teams
- to evaluate the performance of team against kras / preset targets
- communicate the results to ensure transparency
- measure the performance of the team (actuals vs. Targets) every
month
- rewarding teams
- Make the minimum level of performance the benchmark of team
reward
- make team performance mandatory for individual rewards
- distribute the team reward in proportion to the basic pay of the
grade to which each team member belongs
- build a geometric rate of progression of the award for each
successive target
- link the individual award to the basic pay of the grade to which the
individual belongs

VARIABLE PERFORMANCE LINKED PAY (VPLP)

 The corporate buzzword today
 Becoming a more common method for rewarding employees while
linking their performance more closely to the employer‘s financial
success
 Some companies are allowing all levels of employees to participate in
these programs
 Variable pay is an innovative way to bring wages and salaries in line
with companies‘ market performance
 A simple concept that‘s based on rewarding employees for increased
sales or efficiency
 rewarding employees who increase productivity or efficiency
provides incentive for other employees who want to share in
the bounty
 rather than rewarding every employee with a pay raise or
bonus, variable pay rewards the individual worker, or a team
of workers, for extraordinary efforts
 Indian companies increasingly adopting VPLP
 more than 85% organizations having VPLP

Objectives / Benefits of VPLP

A powerful tool to enhance employee productivity & thus impact
bottomline
 align rewards to business goals
 build a high-performing organizational culture
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  links overall compensation strategy with the organization‘s
business strategy
 helps differentiate between a mediocre & a star employee
 a very effective motivational technique
 helps team members understand their job expectations better
 a valuable retention tool
 helps upgrade skills of team members by inducing a competitive
environment

Types of Plans
 Individual – Based Pay
 Individual-based plans are the most widely used
 Of the individual-based plans commonly used, merit pay is by far
the most popular
- its use is almost universal
- merit pay consists of an increase in base pay, normally given once
a year
- supervisors‘ ratings of employee performance are typically used to
determine the amount of merit pay granted
- once a merit pay increase is given to an employee, it remains a
part of that employee‘s base salary for the rest of his or her
tenure with the firm

 Team – based pay

 Normally reward all team members equally based on group
outcomes
 these outcomes may be measured objectively or subjectively
 the criteria for defining a desirable outcome may be broad or
narrow
 as is less commonly done in individual-based programs,
payments to team members may be made in the form of a cash
bonus or in the form of non-cash awards such as trips, time
off, or luxury items

 Plant – wide / company – based pay

 Plant-wide or company-wide pay-for-performance plans reward all
workers in a plant or business unit on the basis of the performance
of the entire plant or business unit
 profit and stock prices are generally not meaningful performance
measures for a plant or unit because they are the result of the entire
corporation‘s performance
 most corporations have multiple plants or units, a factor that
makes it difficult to attribute financial gains or losses to any single
segment of the business
- therefore, the performance indicator most frequently used to distribute
rewards at the plant level is plant or business unit efficiency, which is
normally measured in terms of labor or material cost savings compared to
an earlier period or another plant or business unit
 They are the broadest type of variable-pay incentive programs
 Reward employees on the basis of the entire corporation‘s
performance
15
  the most widely used program of this kind is profit sharing. Profit
sharing is a company-wide pay-for-performance plan that uses a
formula to allocate a portion of declared profits to employees
 typically, profit distributions under a profit-sharing plan are used to
fund employee retirement plans

Features of VPLP

 Can be in cash or kind

 generally offered in terms of extra perks as soft housing loans,
company cars, junkets abroad, mediclaim policies
 If overall company performance is poor, SBU / team
performance does not warrant VPLP
 Largely, it does not exceed 30% of an executive‘ s annual pay

Minuses of VPLP
 Recalculations in the case to reward nonexempt (hourly) employees
 VPLP requires employers to include certain types of variable
compensation, such as bonuses, in employees‘ regular hourly
wage rates
 as a result, companies that pay variable compensation to
nonexempt employees must often recalculate employees‘
regular hourly pay rates by factoring in the variable pay
 the recalculation then affects the overtime pay calculations
 employers who are designing variable compensation
programs that include nonexempt employees must be sure to
review their programs.
 failure to do so could cost significantly more in penalties and
payment of back wages

Unspoken assumptions
Several underlying assumptions are behind the variable-pay concept,
which derive from the very nature of the society that we live in and are not
necessarily accurate:
- money motivates people to work harder
- increased motivation will increase performance
- fair measurement of work performance is possible

Money as a motivator
• there is no doubt that money can be a powerful motivator
• however, it isn‘t always

Performance measurement
 motivation is clearly linked to performance
 however, in many cases motivation is not the problem
- the performance problem may be due to lack of skills, poor
organization, bad strategy etc
- measuring performance is difficult and the most significant
practical problem in VPLP
- even harder to manage is the problem of perception: even where
there are real, perhaps obvious, performance differences, the
16
 employee who doesn‘t perform well is more likely to attribute
his or her low output to favoritism rather than performance

Implementation
• Failure of this motivational technique due to
• inadequate planning
• poor implementation
• poor communication of details of the scheme across the
organization
• undefined evaluation method
• individual objectives are not quantified for variable pay
calculation
Effective implementation by
-well – defined individuals & group targets
-effective communication of the scheme to the employees
-commitment from the top
-effective performance-evaluation mechanism
* simple, measurable performance criteria that is understood
by all
-timely payouts
Employers need to do a better job of mapping individual employee
performance and linking it with compensation

Conclusion
To create and implement an efficient variable-pay plan, an employer must
make a commitment to define employee expectations in behavioral and
measurable terms
- This means making goals achievable, profitable, and practical for
both the company and its workers
- the key to the success of variable compensation is to have
something you can measure and understand—something that is
linked to creating economic value for the company
- instead of continually ratcheting up base pay, manufacturing and
service companies are adopting and expanding the use of incentive
compensation programs, at all levels, to reward outstanding
achievement without increasing fixed costs

EVA (Economic Value Added)

It is a performance metric that calculates the creation of shareholder
value
Eva is the calculation of what profits remain after the costs of a
company's capital - both debt and equity – are deducted from
operating profit
True profit should account for the cost of capital
Steps to calculate EVA:
 Calculate net operating profit after tax (NOPAT)
 Calculate total invested capital (TC)
 Determine a cost of capital (WACC)
 Calculate EVA = NOPAT – WACC% * (TC)
It is a financial performance method to calculate the true economic
profit of a company
17
 Used for: setting organizational goals, performance management,
determining bonuses, communication with shareholders &
investors, motivation of managers, capital budgeting, corporate
valuation, analyzing equity securities (the non-debt securities of a
corporation representing an ownership interest)
Links employee performance with profits
It is the net operating profit minus an appropriate charge for the
opportunity cost of all capital invested in an enterprise
An estimate of true economic profit
Amount by which earnings exceed or fall short of the required
minimum rate of return that shareholders could get by investing in
other securities of comparable risk
Calculated by combining 3 factors: net operating profit after taxes,
capital & cost of capital
Continuous improvement in EVA brings continuous increase in
shareholder‘s wealth since a sustained increase in EVA brings
increase in market value of the company
Incorporates 2 principles of finance into management decision –
making
Primary objective of any company is to maximize the wealth of
its shareholders
The value of a company depends on the extent to which
investors expect future profits to exceed or fall short of the
cost of capital
NIIT, TCS & Godrej have implemented EVA in India
Across the world, Seimens, Sony, Whirlpool, Johnson & Johnson,
Cadbury, Bausch & Lomb have implemented EVA
New concept for productivity enhancement, investor‘s confidence &
employee motivation
Steps for implementing EVA-
Measuring of EVA – concept defined & explaining throughout the
company
Managing through training programmes – oriented to educate the
managers how they would earn in direct proportion to the wealth
that the company would make
Motivation of employee benefits / rewards through performance
linked remuneration scheme
Preparing mindset of employees in the long-run, to understand the
impact of EVA on their personal remuneration

INCENTIVE PLANS:
Five Types:
Merit Pay
Gainsharing
ProfitSharing
Stock Options
ESOPs

Merit Pay: An incentive plan implemented on an institutional wide basis

to give all employees an equal opportunity for consideration, regardless of
funding source. The merit increase program is implemented when funds
18
are designated for that purpose by the institution's administration,
dependent upon the availability of funds and other constraints. .
Advantages
 Allows the employer to differentiate pay given to high performers.
 Allows a differentiation between individual and company
performance.
 Allows the employer to satisfactorily reward an employee for
accomplishing a task that might not be repeated (such as
implementation of new systems).
Gainsharing: A technique that compensates workers based on
improvements in the company's productivity.
How does Gainsharing work?

A Company shares productivity gains with the workforce. Workers

voluntarily participate in management to accept responsibility for major
reforms. This type of pay is based on factors directly under a worker‘s
control (i.e., productivity or costs). Gains are measured and distributions
are made frequently through a predetermined formula. Because this pay is
only implemented when gains are achieved, gainsharing plans do not
adversely affect company costs.

What are the 'Gains' that are measured?

 Increases in production with equal or less effort.

 Equal levels of production with less effort.

What are examples of Gainsharing formulas?

 Calculate gain in hours: The actual hours worked minus the

expected hours (for the given level of output) equals the gain in
hours.
Advantages Disadvantages
 Helps companies achieve  Adherence to the FLSA
sustained increases in requires employers to
productivity. recalculate each worker's
 Employees become more "regular rate" of pay. To
involved the productivity gains overcome this limitation,
made by the employer. employers may restrict this
 Employees can share in the type of compensation to
benefits of employee exempt employees.
sponsored improvements.  The formulas and program
 Enhances commitment to may be difficult to
organizational goals. understand.
 Leads to improvements in  Requires a shift to a more
other measures of company team oriented management
performance, including: style.
teamwork, product quality,
lower rates of absenteeism,
defects, and "downtime."

19
When does Gainsharing work best?
Works best when company performance levels can be easily quantified.
Employee involvement significantly enhances the effectiveness of incentive
pay. When used simultaneously, productivity gains from combining these
techniques can exceed gains achieved separately.

What is the best way to implement Gainsharing?

Meet with executives to develop a clear understanding of Gainsharing.
Develop various formulas and models to be used in predicting future gains
and the costs associated with sharing those gains. Prepare rules,
presentation materials, and dissemination of policy. Retrain supervisors
and administrators. Teams of employees are selected by peers to develop
cost-saving measures. Through their personal knowledge about their jobs,
employees are able to reduce waste and increase efficiency.

Profit Sharing: An incentive based compensation program to award

employees a percentage of the company's profits.
How does Profit sharing work? The company contributes a portion of its
pre-tax profits to a pool that will be distributed among eligible employees.
The amount distributed to each employee may be weighted by the
employee's base salary so that employees with higher base salaries receive
a slightly higher amount of the shared pool of profits. Generally this is
done on an annual basis.
Advantages Disadvantages
 Brings groups of employees to  The pay for each employee
work together toward a moves up or down together (no
common goal (the individual differences for merit
success/benefit of the or performance).
company).  Focuses only on the goal of
 Helps employees focus on profitability (which may be at
profitability. the expense of quality).
 The costs of implementing the  For smaller companies, these
plan rise and fall with the plans may result in drastic
company's revenues. swings in earnings for
 Enhances commitment to employees which the
organizational goals. employees may find difficult to
manage their personal
finances.
 Adherence to the FLSA
requires employers to
recalculate each worker's
"regular rate" of pay. To
overcome this limitation,
employers may restrict this
type of compensation to
exempt employees.

20
When does Profit sharing work best? When company earnings are
relatively stable (or steadily increasing).

What is the best way to implement Profit sharing? Meet with executives
to develop a clear understanding of profit sharing. Develop various
formulas and models to be used in predicting future gains and the costs
associated with sharing those gains. Prepare rules.

Stock Options: The ‗right‘ to purchase stock at a given price at some time
in the future. Stock Options come in two types:
1. Incentive stock options (ISOs) in which the employee is able to defer
taxation until the shares bought with the option are sold. The company
does not receive a tax deduction for this type of option.

2. Nonqualified stock options (NSOs) in which the employee must pay

infome tax on the 'spread' between the value of the stock and the
amount paid for the option. The company may receive a tax deduction
on the 'spread'.

How do Stock options work? An option is created that specifies that the
owner of the option may 'exercise' the 'right' to purchase a company‘s stock
at a certain price (the 'grant' price) by a certain (expiration) date in the
future. Usually the price of the option (the 'grant' price) is set to the market
price of the stock at the time the option was sold. If the underlying stock
increases in value, the option becomes more valuable. If the underlying
stock decreases below the 'grant' price or stays the same in value as the
'grant' price, then the option becomes worthless.

They provide employees the right, but not the obligation, to purchase
shares of their employer's stock at a certain price for a certain period of
time. Options are usually granted at the current market price of the stock
and last for up to 10 years. To encourage employees to stick around and
help the company grow, options typically carry a four to five year vesting
period, but each company sets its own parameters.
Advantages Disadvantages
o Allows a company to o In a down market,
share ownership with because they quickly
the employees. become valueless
o Used to align the o Dilution of ownership
interests of the o Overstatement of
employees with those operating income
of the company.
Nonqualified Stock Options

Grants the option to buy stock at a fixed price for a fixed exercise period;
gains from grant to exercise taxed at income-tax rates
Advantages Disadvantages
o Aligns executive and o Dilutes EPS
shareholder interests. o Executive investment

21
 o Company receives tax is required
deduction. o May incent short-term
o No charge to earnings. stock-price
manipulation
Restricted Stock

Outright grant of shares to executives with restrictions to sale, transfer, or

pledging; shares forfeited if executive terminates employment; value of
shares as restrictions lapse taxed as ordinary income
Advantages Disadvantages
o Aligns executive and o Immediate dilution of
shareholder interests. EPS for total shares
o No executive granted.
investment required. o Fair-market value
o If stock appreciates charged to earnings
after grant, company's over restriction period.
tax deduction exceeds
fixed charge to
earnings.
Performance shares/units

Grants contingent shares of stock or a fixed cash value at beginning of

performance period; executive earns a portion of grant as performance
goals are hit
Advantages Disadvantages
o Aligns executives and o Charge to earnings,
shareholders if stock marked to market.
is used. o Difficulty in setting
o Performance oriented. performance targets.
o No executive
investment required.
o Company receives tax
deduction at payout.

When do Stock options work best?

-Appropriate for small companies where future growth is expected. -For
publicly owned companies who want to offer some degree of company
ownership to employees.

What are important considerations when implementing Stock

Options?
-How much stock a company be willing to sell.
-Who will receive the options.
-How many options are available to be sold in the future.
-Is this a permanent part of the benefit plan or just an incentive.

22
ESOPs
Employee Stock Ownership Plan (ESOP): An ESOP is a defined
contribution employee benefit plan that allows employees to become
owners of stock in the company they work for. It is an equity based
deferred compensation plan. Several features make ESOPs unique as
compared to other employee benefit plans. First, only an ESOP is required
by law to invest primarily in the securities of the sponsoring employer.
Second, an ESOP is unique among qualified employee benefit plans in its
ability to borrow money. As a result, "leveraged ESOPs" may be used as a
technique of corporate finance.
ESOPs
An opportunity to buy stock at a set price some time in future for a
stated period
Stock option is the right or privilege to buy stock under an offer valid
for a stated period
A form of variable pay compensation package

Objectives of ESOPs
Instrument for attracting critical skills / highly valued or
scarce skills
Inculcates employee feeling of ownership and commitment
Creates additional wealth for employees
Supplement retirement / social security benefits
For employee retention particularly for groups apprehended of high
turnover
Helps introduce a performance management system without
incurring full cash out flow / lessening possible individual
differences in the immediate cash bonus
Enforces corporate governance

Infosys, Wipro, Maruti Udyog Limited, GE, Godrej, P & G, Zee Network,
Castrol etc have introduced ESOPs

Features of ESOPs
It is a qualified, defined contribution employee benefit plan that
invests primarily in the stock of the employer
A company has to create a trust fund for employees and funds it by
contributions of stock, cash or buy stock or cash to pay back the
ESOP‘s loan and to buy back stock in order to set-up a ESOP system
Shares held by ESOP trust are distributed to the employees through
an employee option scheme
Return on an ESOP portfolio is linked to company performance since
investment is through employer‘s securities
All employees except part-time directors are eligible to ESOPs of the
company
The terms, price & offer of ESOPs is done by compensation
committee of the board of directors
Options granted to employee are not transferable to any other
person
ESOP trust provides a warehouse for sponsoring company‘s shares
which can be sold or transferred to employees in future
23
 Reservation up to 5% can be made by the issuer of the company for
employees of his company or promoters of the company

3 stages:
Grant of option (enable employee to purchase a certain number of
shares of the company stock at a determined price, usually within a
specified period of time)
Vesting (employee gets right to apply for the shares)
Exercise of option (on payment of exercise price, employee is
conferred the shares of the company)
There is a minimum period of one year between grant of options and
vesting of options & company shall have the freedom to specify lock
in period
Typically, lock-in period of 3-5 years with the provision that if
employee separates from the service of the company (except in the
case of death / medical incapacity), the shares would be forfeited &
reverted to the trust
Shares are not physically transferred to employees at this stage
Once the shares are transferred in favour of the employee, only then
the latter may decide to sell them in the market (this sale will attract
capital gains tax)
During the lock-in period, the shares registered in the name of the
employee would be kept in the custody of the trust

Types of ESOPs
One-off, uniform
An offer plan where the company may decide to include
non-performers, trainees, short-service staff, temps
A one-time allotment for an equal number of shares, options
or warrants to all at the market value
SEBI guidelines allow allotment of options below the market
price for shares, subject to the differential being accounted in
the books of the company
One-off, differential / discretionary
Also a one-off scheme where company may differentiate
allotments by grades, seniority or market value of special
skills
Factors like achievements, potential, loyalty, hard work &
contribution to corporate performance if considered, then the
discretionary element will go up considerably
Ongoing schemes
Use a combination of uniform, differential & discretionary
allotments dynamically.
May be warrants, shares or options that can be issued as
―sign-on‖ bonus on confirmation / promotion /
superannuating / recognition of outstanding contribution
Given to some or all individuals
Have a vesting schedule
Are structured to enable flexibility
Proxy: stock appreciation rights / phantom shares
Notional units apportioned to employees
24
 Are productivity / contribution – linked incentive programmes
rather than stock option plans
An employee is allotted notional units / shares of the
company based on certain criteria at a set price
Employee is required to exercise his option within a given
period (say 2 years) – when the share price is high & will be
eligible to draw the differential or the whole in cash on
deduction of tax
Provision is made to enable employees to decline the shares &
opt for the cash differential between the cost of exercise & the
market price
It would have the effect of a stock appreciation right /
phantom share
Some definitions
Phantom stock – a bonus that rewards employees based on the
value of the company‘s stock & the dividend performance of the
stock
Discount stock option – stock option with an exercise price which is
less than the fair market value on the sale of the grant
Indexed stock option – the exercise price is equal to the fair market
value at grant, but the price adjusts upward or downward depending
on an index (in relation to the market / industry / peer group
performance / any other measure)
Performance accelerated stock option – has a fair market value
exercise price & a service – based vesting schedule (longer than
traditional options which are generally for 10 years), but which
becomes exercisable at an earlier date in case specified performance
goals are achieved
Performance contingent stock – has a fair market value price, which
becomes exercisable only when performance goals are achieved. It
lapses in case the set goals are not achieved
Purchased stock option – down payment required to be made (% of
the market price) before the option may be exercised
Reload/restoration stock option – stock option automatically
granted upon the exercise of a previously granted stock option to the
extent that the optionee uses shares rather than cash to pay the
purchase price of the original option (the exercise price of the reload
option is the fair market value on the date of the grant & reload
option expires on the same date as the original option
Variable - priced stock option – with an exercise price that fluctuates
upward or downward in relation to stock price performance (yo-yo
stock option or indexed stock option)
Premium stock option – exercise price greater than the fair market value
on the date of the grant

How does ESOP work?

The ESOP operates through a trust, setup by the company that accepts tax
deductible contributions from the company to purchase company stock.

25
 The contributions made by the company are distributed to individual
employee accounts within the trust.

 The amount of stock each individual receives may vary according to

pre-established formulas based on salary, service, or position.

 The employees may ‗cash out‘ after vesting in the program or when they
leave the company. The amount they may cash out may depend on the
vesting requirements.

 When an ESOP employee who has at least ten years of participation in

the ESOP reaches age 55, he or she must be given the option of
diversifying his/her ESOP account up to 25% of the value. This option
continues until age sixty, at which time the employee has a one-time
option to diversify up to 50% of his/her account. This requirement is
applicable to ESOP shares allocated to employee's accounts after
December 31, 1986.

 Employees receive the vested portion of their accounts at either

termination, disability, death, or retirement. These distributions may
be made in a lump sum or in installments over a period of years. If
employees become disabled or die, they or their beneficiaries receive the
vested portion of their ESOP accounts right away.
Advantages Disadvantages
 Capital Appreciation.  Dilution. If the ESOP is used
Companies sell some or all of to finance the company‘s
their equity to employees and growth, the cash flow benefits
by doing so convert corporate must be weighed against the
and personal taxes into rate of dilution.
tax-free capital appreciation.  Fiduciary Liability. The plan
This allows the owner to sell committee members who
100% of his or her company, administer the plan are
get money out tax-free and deemed to be fiduciaries, and
still maintain control of the can be held liable if they
company. knowingly participate in
 Incentive Based Retirement. improper transactions.
Provides a cost-effective plan  Liquidity. If the value of the
to motivate employees. After stock appreciates
all, who works harder, owners substantially, the ESOP
or employees? and/or the company may not
 Tax Advantages. Enables tax have sufficient funds to
advantaged purchasing of repurchase stock, upon
stock of a retiring company employees‘ retirement.
owner. With this purpose, a  Stock Performance. If the
company owner may sell their value of the company does not
shares to the ESOP and incur increase, the employees may
no taxable gain on the sale. A feel that the ESOP is less
company owner can sell all or attractive than a profit sharing
some of the company to the plan. In an extreme case, if the
employees cost free. Owners company fails, the employees
who sell 30% or more of their will lose their benefits to the
26
 company to an ESOP are extent that the ESOP is not
allowed to "roll-over" the diversified in other
proceeds into other securities investments
and defer taxation on the gain.
 Company reduces it's tax
liability. A company can
reduce its corporate income
taxes and increase its cash
flow and net worth by simply
issuing treasury stock or
newly issued stock to its
ESOP.

What is the best way to implement ESOP?

1. Determine how you want to use the ESOP. Will it be used as an
employee benefit plan? Or, as an incentive program?

2. Conduct a feasibility study to determine the value of the company‘s

stock and impact of the contributions that must be made to the
trust.

3. An ESOP requires different accounting procedures and a different

method of allocating stocks and other investments among the
employees than other types of plans. For this reason the plan should
be designed by an ESOP specialist in order to avoid IRS difficulties.

What are the alternatives to ESOP?

1. Employee stock options.

Profit Sharing. An ESOP differs from a profit sharing plan in that an
ESOP is required to invest primarily in employer securities, while a
profit sharing plan is usually prohibited from investing primarily in
employer securities.

LAWS & REGULATIONS RELATED TO COMPENSATION

PAYMENT OF WAGES ACT, 1936

An Act to regulate the payment of wages to certain classes of employed
persons

MINIMUM WAGES ACT, 1948

An Act to provide for fixing minimum rates of wages in certain
employments

EQUAL REMUNERATION ACT, 1976

An Act to provide for the payment of equal remuneration to men and
women workers and for the prevention of discrimination, on the ground of
sex, against women in the matter of employment and for matters
connected therewith or incidental thereto.

27
PAYMENT OF BONUS ACT, 1965
Act to provide for the payment of bonus to persons employed in certain
establishments on the basis of profits or on the basis of production or
productivity and for matters connected therewith.

EMPLOYEES' STATE INSURANCE ACT, 1948

An Act to provide for certain benefits to employees in case of sickness,
maternity and employment injury and to make provision for certain other
matters in relation thereto

EMPLOYEES' PROVIDENT FUNDS AND MISC. PROVISIONS ACT, 1952

An Act to provide for the institution of provident funds 2*[3*[, family
pension fund and deposit-linked insurance fund]] for employees in
factories and other establishments

THE PAYMENT OF GRATUITY ACT, 1972

An Act to provide for a Scheme for the payment of gratuity to employees
engaged in factories, mines, oilfields, plantations, ports, railway
companies, shops or other establishments and for matters connected
therewith or incidental thereto

THE WORKMEN'S COMPENSATION ACT, 1923

An Act to provide for the payment by certain classes of employers to their
workmen of compensation for injury by accident

PROBLEMS & ISSUES

Whether extrinsic rewards such as performance-related pay actually
motivate employees to better performance is a matter of controversy. It has
been claimed that monetary rewards usually have a limited time-span in
regard to their motivating effect. Therefore extrinsic rewards such as
performance pay, even if they can exert a continuing impact on
performance, should
 be consistent with overall management objectives, so that
performance pay may not be consistent with, for example, a purely
cost reduction strategy &

 only be used to reinforce a motivational system in which intrinsic

(non monetary) rewards exist, such as reorganization of work
processes, training, employee involvement/consultation in
decision-making, two-way communication, opportunities to
contribute ideas, career development plans and goal setting.
Some of the reasons for the failure of performance-related pay and some of
the problems and issues facing employers flow from a variety of
circumstances such as the following:
i. Inadequate criteria to measure performance, or criteria which are
not easily understood, communicated and accepted. Performance
pay should therefore be negotiated.

28
 ii. Inappropriate performance appraisal systems in that the objectives
of the appraisal system (e.g. where it is intended to identify training
needs or suitability for promotion) do not match the objectives of the
reward system.

iii. The absence of regular feedback on performance.

iv. The reward system is not designed to meet the objectives sought to
be achieved. There could be a variety of objectives e.g. to satisfy
distributive justice, attract and retain capable staff, match
particular levels of pay in the labour market, change organizational
culture (e.g. towards greater customer satisfaction) or to reinforce it.

v. The absence of a right mix of extrinsic and intrinsic rewards.

vi. The lack of an appropriate quantum of pay which should be subject

to performance criteria. This occurs when the amount which
depends on performance is too small, or it is too large and therefore
the amount placed at risk (when performance is poor) is not
acceptable to employees.

vii. The absence of periodic evaluation of the scheme.

viii. Non-recognition of the fact that performance, especially profit, is

sometimes (even often) dependent on factors outside the control of
employees e.g. management decisions, exchange rates, recessions.
There are many arguments in favour of performance-related pay which are
theoretically attractive. However, it is not easy to find evidence which
unequivocally supports or disproves these views, because of the scarcity of
empirical evidence or because the introduction of the scheme has been
faulty. Governments can sometimes facilitate the introduction of
performance-based pay. In Britain for instance, the Finance Act of 1987
introduced tax relief for approved schemes to encourage their adoption
and proliferation.
Two benefits at the macro level have been claimed for performance pay.
The first relates to employment. If increases in basic pay are transferred to
a profit-related scheme (e.g. 10% of basic pay), the employer may be more
inclined to hire new employees as his wage cost is less than otherwise. If
the percentage of profit to be shared remains fixed, additions to the
workforce do not cost the employer more in terms of the profit-related pay.
On the other hand, new recruitment would reduce the quantum existing
employees will receive unless profits increase, and consequently
dissatisfaction among employees could set in.

The second argument is that if basic pay is reduced as a percentage of total

earnings, increased earnings will not result in inflationary tendencies as
such increases are the result of increased profits/productivity.

The benefits to management and employees are:

 where performance/profits increase, higher pay is an incentive to

employees

29
  where profits reduce, the reduction in the performance-related pay
can cushion employees against redundancies

 employee identification with the success of the business is enhanced

 variations in pay lead to employees becoming more familiar with the

fortunes (or misfortunes) of the business. This would depend on the
information-sharing practices of the management.
Several criticisms of a general nature (apart from those directed at
particular types of schemes) have been made against performance-related
pay. Among them are the following:
i. where the performance earnings fall employees are less inclined to
accept reductions in their guaranteed pay

ii. positive employment effects could be negated due to opposition from

employees to recruitment as it would dilute their earnings

iii. since performance/profits depend on a variety of factors beyond the

control of employees, it is not possible to link pay to the performance
of employees. If it is linked to the overall performance of the
enterprise, then management decisions should logically be subject
to scrutiny by employees.

iv. it is difficult to determine whether the amounts paid out under

schemes are more than matched by performance gains.
Even though the evidence is not always clear whether profit-sharing, for
instance, raises productivity levels, the positive link between
profit-sharing and productivity is clearer in enterprises with employee
participation arrangements. Where the extra payments replace a fixed
wage component and is not an additional component of pay, there is a
greater likelihood that the extra pay is matched by performance increases.
In the case of group incentives payments are never proportionate to
individual performance, as poor performers ("free riders") benefit from the
efforts of others.

WAGE THEORIES & LABOUR MARKET

ECONOMIC THEORIES
CLASSICAL SOCIAL WAGE THEORIES
A. Subsistence Theory
Propounded by David Ricardo, 1817
Also known as the "Iron Law of Wages―
Was an alleged law of economics that asserted that real wages in the
long run would tend to the value needed to keep the workers'
population constant
Ricardo drew a distinction between a natural price and a market price.
For Ricardo, the natural price of labor was the cost of maintaining the
laborer. However, Ricardo believed that the market price of labour or
the actual wages paid could exceed subsistence level indefinitely due
to countervailing economic tendencies
Ricardo believed that the market price of labor could long exceed the
subsistence or natural wage
30
 He also claimed that the natural wage was not what was needed to
physically sustain the laborer, but depended on "habits and customs
The labourers are paid to enable them to subsist & perpetuate the race
without increase or diminution
The theory maintains that wages cluster around the bare subsistence
level of workers. A wage rate much above the subsistence level causes
an increase in the number of workers; competition will then lead to a
depression of wages back towards the cost of subsistence. Wages that
are below subsistence reduce the size of the working population; in
that case competition will raise wages, but only up to the subsistence
level again.
* Subsistence means minimum resources required for existence
* Diminution means change toward something smaller or lower
B. Wage Fund Theory
1 Developed by Adam Smith (18Century)
2 The wage-fund theory is that wages are advanced out of a fixed fund
of capital, from which an excess withdrawal, either through
legislation or through union pressure, will ultimately reduce the
amount available for other workers.
3 Any increase in wages would also have to be taken out of profits, and
their reduction would cause a decline in savings, which provide the
capital from which the wage fund is derived.
4 Basic assumption – wages are paid out of a pre-determined fund of
wealth which lay surplus with wealthy persons – as a result of
savings. This fund could be utilized for employing labourers for
work.
If the fund was large, the wages would be high; if it was small,
the wages would be reduced to the subsistence level
The demand for labour & the wages that could be paid them
were determined by the size of the fund
C Residual Claimant Theory
- Propounded by Francis Walker in 19th Century
- There are 4 factors of any business activity:
Land, Labour, Capital, Entrepreneurship
Wages represent the amount of value created in the
production which remains after payment has been made for
all these factors of production, thus implying that
The labour is the residual claimant
- After all the factors of production have received their compensation
for their contribution to the process, only then the labourers‘ wages
come to the fore
Theory does not explain how trade unions are able to increase
the wages
No role of labourers in productivity
D Marxian Theory
- In the surplus-value theory as propounded by Karl Marx, the value
produced by the worker in excess of what is paid in wages is called surplus
value
- The surplus value, exacted from the worker, constitutes the capitalist's
profit
- According to this theory, labour was an article of commerce – could be
31
purchased on payment of subsistence price
The price of any product was determined by the labour time
needed for producing it
The labourer was not paid in proportion to the time spent on
work, but much less
The surplus went over, to be utilized for paying other
expenses
 JUSTIFICATION THEORIES
A. Marginal Productivity Theory
- Developed by Philips Wicksteed & John Bates
The wages are based upon an entrepreneur‘s estimate of the value that will
probably be produced by the last of marginal worker
It assumes that the wages depend on the demand for, and supply of
labour
Workers are paid what they are economically worth
The employer has a larger share in profit as has not to pay for the
non-marginal workers
As long as each additional worker contributes more to the total value
than the cost in wages, it pays the employer to continue hiring
When this process becomes non-viable & uneconomic, the employer
may resort to superior technology
- This theory maintains that employers will only pay a wage that is,
at most, equal to the amount of extra value added to the total
product by one additional worker
B. Bargaining Theory
- Propounded by John Davidson
- Wages are determined by the relative bargaining power of the
workers / trade unions & of employers
- When a trade union is involved, basic wages, fringe benefits, job
differentials, and individual differences tend to be determined by the
relative strength of the organization & the trade union
- The bargaining theory modifies the marginal-productivity theory by:
Taking into consideration other factors (e.g., laws and social
and political changes) that might affect the determination of
wage levels
Acknowledging that certain basic assumptions (equal
bargaining power of employer and employee, free competition
between the two, and mobility of labor) that characterize the
marginal-productivity theory do not hold in our present
economic system
C. Supply & Demand Theory
- Inter-relation between wages & employment
- Unemployment were to disappear if workers were to accept a
voluntary cut in wages – have wage flexibility for promoting
employment at a time of depression.
- These wage cuts would bring down costs and thereby fall in price
- This lowering in prices would cause additional demand which will
increase production
- This will increase employment of workers
D. Competitive Theory
- Employers compete amongst themselves by offering a higher pay
32
 / wage to attract employees while employees compete with
another for jobs by offering their services for a lower wage
- Competition then, is essentially a disequilibrium process by
which excess demand and excess supply cause changes in wages
 Behavioral Theories
A. Employee’s acceptance Level
- This theory takes into consideration, the factors which may induce an
employee to stay on with the company –
Size & reputation of the company
Power of the union
Wages and benefits that the employee receives in proportion
to the contribution made by him / her
B. Internal Wage Structure
- Wage Structure affected by –
Social norms / traditions / customs prevalent in the
organization
Psychological pressures on the management
Prestige attached to certain jobs in terms of social status
The need to maintain internal consistency in wages at all
levels
The ratio of maximum & minimum wage differentials
Norms of span of control
Demand for specialized labour
C. Wage & Motivators
- Purchasing power provided by monitory income helps workers to take
care of their basic needs:
Food / Clothing / Shelter / Transportation / Insurance /
Pension Plans / Education / Other physical maintenance &
security factors
- Monitory income includes:
Wages / Merit increases / performance – based bonuses

EVOLUTION OF MODERN-DAY WORKFORCE

Advent of the Labour Force
During the period of foreign rule, Britishers introduced industrialization
and thereby heralded the advent of labour sector in this country. With the
emergence of native industrialists the labour sector expanded. The pace of
industrialization and the expansion of labour sector were accelerated by
the first and second world wars.
 In the early years the workers organized to obtain wages to meet limited
needs for livelihood and convenience to work decently. Labour struggle
became a part of national movement. The concepts of freedom,
democracy, secularism and socialism, were indoctrinated in the labour
movement, thanks to agitations for rights of workers.
 The trade union leaders of yesteryears played a glorious role in this
respect. We are still striving to ensure social security measures
envisaged in the directive principles of the Indian Constitution such as
right to work, living wages, security in work place etc.
 Today the economy of the nation itself is facing grave crisis due to the
impact of globalization, and the labour sector is in the dark shadows of

33
 economic and social problems. The threats faced by the economy of the
nation, industry, agriculture and thereby the labour sector are due to
the impact of the global pressures and hence beyond our control. Yet we
are compelled to defend ourselves to protect our economic and social
security
 Consequent on the grave crisis in the Indian economy, significant
reforms based on liberalization, globalization was enforced from 1991.
It was these economic reforms that dictated the industrial policy from
then on. Only after a couple of years of reforms that negative effects on
other sectors of polity came to be felt, the most affected being the
Labour
Need of the Hour
 Ensuring equity as well as accelerating the rate of growth of economy in
the labour market is the need of the hour –
It is necessary to ensure significant improvements in the quality of
labour, productivity, skill development and working conditions, and to
provide welfare and social security measures particularly, to those in
the unorganized sector
It is also necessary to ensure that all adult persons looking for work are
employed at levels of productivity and income, which are necessary to
afford them a decent life. A significant proportion of workers presently
earn below the subsistence wages
Another unfortunate facet of labour markets is the persistence of child
labour which must be eradicated in the shortest possible time
Background
 Modern day professions as we know them had their origin in the
post-industrial age after World War II when most Western nations saw
a long spell of growth
 This era also saw the emergence of modern day consumerism. To cater
to the emerging needs of the market, huge corporations built gigantic
factories to manufacture products and serve the needs of consumers
 They also started employing thousands of people to
manufacture, service and market the products
 Sometime during this period (in 1956), William H Whyte wrote his
much acclaimed book titled the Organization Man—a term which
caught the fancy of an entire generation of working professionals. For
Whyte Organization Men are People who only work for the Organization.
They are the ones of our middleclass who have left home, spiritually as
well as physically, to take the vows of organization life, and it is they
who are the mind and soul of our great self-perpetuating institutions
 For nearly half century after the book appeared, Organization Man
typified the working class. In most parts of the world, huge
corporations—private, public and government-owned—employed
hundreds of thousands of Organization Men
 In the US, Fortune 500 companies created millions of jobs. Similarly,
UK, Europe, the Eastern bloc, and India saw the emergence of huge
government owned corporations and Public Sector Undertakings (PSUs)
that employed millions
 In many parts of the world, government service was the career choice
for a generation of the best and the brightest. In India, joining the
34
 Indian Administrative Service (IAS) or Police Service (IPS) was the
dream
 In the US, President Kennedy‘s "send a man to the moon" project
captured the imagination of a whole generation of youngsters who
either wanted to become rocket scientists or astronauts for NASA
 A whole generation of the best and brightest from top universities
competed to give their life and souls, and dedicate their professional
lives to mammoth corporations by joining the burgeoning ranks of
Organization Men. In return, they were assured of a steady paycheck,
raises, promotions and a golden watch at retirement, with a guaranteed
pension to boot
 Educated professionals were not the only ones welcomed by these
organizations
There was a need for everyone—from the mailroom clerk and janitor to
shop floor workers, supervisors and managers; and everyone else in
between
One common aspect binding all employees was their unrelenting loyalty
to the organization. There was very little individualism and
entrepreneurship shown (or expected) by employees, and most of the
decision-making took place in ivory towers at head offices
The organizations asked for, and got the unwavering following of its
organization men; in return, it guaranteed employment, almost taking
on a patriarchal role for families of organization men
Transition
 There is little debate over the fact that we are experiencing a major
shift in the job market worldwide
 Changes in the marketplace are leading to a fundamental shift in
careers and professions across the board
 Perhaps the most important shift in the paradigm is the move from
Organization Man to Free Agents or Gold Collar Workers
Individuals will not remain loyal to one single organization,
just as most organizations have given up on guaranteeing
lifetime employment
New entrants to the job-market, and even those who have
been working in the corporate world for a while are starting to
realize that we cannot hope to become, or remain,
Organization Men
The New Generation
 This workforce contains the now generation, me generation, new breed,
and new X generation
 These generations have been variously described as having lower
overall job satisfaction, less desire to lead (move up the organizational
hierarchy) and to defer to authority; believe that they are entitled to a
good job; have a strong a desire to control their own destiny; have a low
absenteeism threshold
 They have also been described as having a lower respect for authority,
and a greater desire for self-expression, personal growth, and
self-fulfillment
 This group also tends to be more educated than their predecessors, in
most cases, they are more educated than their supervisors

35
 Impatience and self-confidence define today's educated young worker
 In older times, people used to do anything to get a job - Today everyone
thinks they're entitled to a job
In the old days, such attitudes were unimaginable; they would
have been self-defeating
Companies are no longer in the driver's seat - Employees are
in control now
Labor Market Discrimination

What is Discrimination?
 The valuation in the market place of personal characteristics of the
worker that are unrelated to worker productivity.
o These personal characteristics may be sex, race, age, national origin,
religion, education or sexual preference
 Labor market discrimination may take the form of different wage rates
for equally productive workers with different personal characteristics
 Labor market discrimination may also take the form of exclusion from
jobs on the grounds of social class, union membership, or political
beliefs
Labor Market Discrimination
 Discrimination is a cause of labour market failure and a source of
inequity in the distribution of income and wealth and it is usually
subject to government intervention e.g. through regulation and
legislation
 Discriminatory treatment of minority groups leads to lower wages and
reduced employment opportunities, including less training and fewer
promotions. The result is that groups subject to discrimination earn
less than they would and suffer a fall in relative living standards
Why does discrimination occur in the labour market?
 The 'Taste' Model - Discrimination arises here because employers and
workers have distaste for working with people from different ethnic
backgrounds or final customers dislike buying goods from salespeople
from different races i.e. people prefer to associate with others from their
own group. They are willing to pay a price to avoid contact with other
groups. With reference to race, this is equivalent to racial prejudice
 Employer ignorance – Discrimination also arises because employers are
unable to directly observe the productive ability of individuals and
therefore easily observable characteristics such as gender or race may
be used as proxies – the employer through ignorance or prejudice
assumes that certain groups of workers are less productive than others
and is therefore less willing to employ them, or pay them a wage or
salary that fairly reflects their productivity, experience and applicability
for a particular job
 Occupational crowding effects – Females and minorities may be
crowded into lower paying occupations. There is little doubt that a
permanent gap exists between average pay rates for females and males
in the labour markets of UK, US, Africa, Europe & Asia

Quality in Labour Market

Towards Productive Employment

36
 Country like India has tremendous labor cost advantage as far as daily
or monthly wage rates are concerned. But there are limitations due to
poor quality of training and skills, non-professional approach, low
productivity and too many labor laws.
 The labor market is deregulated & there is increased mobility of labor in
global markets
 Many other low cost countries like china, Mexico, Turkey, SAARC
region neighbors, some north African and Latin American countries are
moving fast on learning curve and will offer tough competition to Indian
exporters in low cost labor advantage
 The real labor cost will rise in countries like India erasing much of low
cost advantage of labor
 Labour market demands are changing with greater emphasis on the
quality of jobs
 Labour market reforms are necessary to cope with the accelerating
economic and social restructuring associated with globalization,
technological processes and the development of an inclusive knowledge
and information society and economy
 In an era of globalization where capital, technology, high skills and high
productivity play a major role in labour markets
 In India, like in many other developing countries, the growth of labour
force is accelerating and will remain high for quite sometime
 It needs rapid economic growth with effective and efficient utilization of
labour by upgrading its skills to ensure development and employment
generation.
 Intervention is required in labour markets to promote employment and
its quality.
 Quality in work — including training, career prospects and work
organization — makes a valuable contribution towards increasing
employment and productivity
 Improvements in the quality of work may increase the efficiency of
production processes by allowing employers to exploit fully the
potential of new technologies
 They are further likely to increase employees‘ motivation and job
satisfaction
 Upgrading the quality of labour force by pursuing suitable education
and skill development policies
 Low quality of jobs and low productivity is directly attributable to low
level of skills. The latter poses a serious challenge to integration of the
labour force in world economy
 There is overwhelming evidence that whereas educated and skilled
workers are generally able to derive some benefits of new opportunities
as a result of globalization, it is the uneducated and unskilled workers
on whom the burden of re-structuring falls
 Designing appropriate training systems is, therefore, an important
means to deal with labour market instabilities like under-employment,
skill mismatch and redundancy
 Higher productivity of labour would, apart from dignity of labour,
improve the living standards of workers and also help the industry in
facing international competition
 An increase in overall productivity and skill up-gradation will lead to
37
 progressive absorption of large number of workers from informal or
unorganized sector in the formal or organized sector and ensure rapid
economic growth
 Quality of labour force alone determines their employability abroad or
in institutions of foreign origin including multinational organization
 Manpower development to provide rising labour force with skills and
training according to the emerging demand pattern is essential to
eliminate the mismatch between the supply of and demand for labour

Reward Management in TNCs (Transnational Corporations)

Transnational Corporations
Transnational Corporation means a for-profit enterprise marked by two
basic characteristics:
– It engages in enough business activities -- including sales, distribution,
extraction, manufacturing, and research and development -- outside
the country of origin so that it is dependent financially on operations in
two or more countries
– Its management decisions are made based on regional or global
alternatives
– In an era of declining constraints on their mobility and the attraction of
cheaper wages in less-industrialized nations eager to draw foreign
investment, TNCs are eliminating jobs in their home countries and
shifting production abroad
– In less-industrialized regions, the lure for TNCs of fewer costs and
regulations offers little promise to workers of decent working conditions,
sufficient pay, or job security.
– Tax breaks and subsidies governments use as incentives are no
guarantee that the TNCs will not move on after the benefits have
expired, and as cost advantages now found in Singapore appear in, say,
Bangladesh, the countries currently experiencing an influx of
investment may eventually find themselves in the same position as that
of the US and other industrialized nations today.
– TNCs are corporations that operate in more than one country. Usually,
headquarters are in one or more nations and production or services are
in another have become some of the most powerful economic and
political entities in the world today.
– Such companies have a geocentric orientation and attempt to be
responsive to both national markets, while simultaneously seeking
global coordination
– The number of transnational corporations in the world has jumped
from 7,000 in 1970 to 40,000 in 1995

What is the difference between Multi National Corporation and Trans

National Corporation?
– MNCs operate in several different countries while transnational implies
"just across the border" as in the US and Canada. Obviously, both
operate internationally
– A MNC has a centralized headquarters & is a corporation with extensive
ties in international operations in more than one foreign country.
Examples are Coke, Pepsi, General Electric, Exxon, Wal-Mart,
Mitsubishi, Diamler Chrysler
38
– A transnational company has no "head office" and moves whatever base
of operations it has fluidly between its national offices. It is a MNC that
operates worldwide without being identified with a national home base
i.e. it is said to operate on a borderless basis. Examples are Daewoo,
Saint Gobain, Daimler-Benz, Sony, Samsung Group, Shell Oil etc

Reward Management
- The type and amount of compensation necessary to attract technically
and culturally qualified international managers and technical
professionals to the three nationals or country categories involved
international human resource management activities from which
employees are selected whether the people are:
– PCNs (parent country nationals)
– TCNs (third country nationals) or
– HCNs (host country nationals)
- HR managers focus on their strategic objectives to develop a
comprehensive compensation plan, in terms of considering base pay,
short and long-term incentives, benefits and growth opportunities
- The objective of this kind of strategy is to ensure that both TNC/MNCs‘
long and short-term objectives coexist in the compensation system
without overlap, which would duplicate a single pay plan for the same
objectives.
- The purpose of the planning is also designed to ensure that the
compensation system attracts and retains the desired employees and
that it motivates them to do those things that support the business
plan
- The type and amount of compensation necessary to attract technically
and culturally qualified international managers and technical
professionals to the three nationals or country categories involved
international human resource management activities from which
employees are selected whether the people are:
– PCNs (parent country nationals)
– TCNs (third country nationals) or
– HCNs (host country nationals)
- HR managers focus on their strategic objectives to develop a
comprehensive compensation plan, in terms of considering base pay,
short and long-term incentives, benefits and growth opportunities
- The objective of this kind of strategy is to ensure that both TNC/MNCs‘
long and short-term objectives coexist in the compensation system
without overlap, which would duplicate a single pay plan for the same
objectives.
- The purpose of the planning is also designed to ensure that the
compensation system attracts and retains the desired employees and
that it motivates them to do those things that support the business
plan
Global Staffers
An expatriate is an employee working in a country other than their country
of origin. An expatriate may also be referred to as a PCN or parent-country
national
- PCNs (Parent Country Nationals)
– Those personnel who are of the same nationality as the contracting
39
 government or personnel from headquarters
– They come from the home country of the operation.
– The policy of using PCNs is usually employed when one or more of the
following situations exists: (1) the host country cannot readily supply
desired managerial personnel, (2) efficient communication with
headquarters is required, and (3) the company adopts a centralized
approach to globalization
- TCNs (Third Country Nationals)
– Those personnel of a separate nationality to both the contracting
government and the area of operations i.e. whose nation of residence is
neither the host country nor the home country
– Such an employee normally is recruited from outside the host country
and
– relocated from the point of recruitment to the host country
- HCNs (Host Country Nationals)
– These are Indigs (Indigenous Personnel) / Nationals / Locals – those
personnel who are indigenous to the area of operations
– Whose basic residence or home is the host nation
– Local colleagues of the expatriate, they are valuable socializing agents,
sources of social support, assistance, and friendship to expatriates.
Expatriates are more likely to adjust when HCNs engage in this
behavior

Reward Management
 The vehicle for ―going global‖ is often an international strategic alliance
creating a world of ―stateless corporations‖ - a collaboration between
two or more TNC/MNCs that allows them to jointly pursue a common
goal
 TNC/MNCs are staffed either by recruiting expatriates from the regular
organizations or by creating an international cadre of managers,
professionals, and workers of very diverse cultural backgrounds
 Companies like Gillette, Sony are already doing their own international
cadre of managers now
– Recruiting people directly to an international career will assure a
supply of employees who expect and want to go overseas
– Consistency within the growth of international business operations will
require effective international human resource management (IHRM) -
• Involves moving people around the world
• Helps HR Managers to formulate and implement policies and activities
in the home-office headquarters
• HR Manager‘s responsibilities include selecting, training, and
transferring PCN abroad, and formulating policies for the firm as a
whole and for its foreign operations
– In staffing international operations, HR managers face a confusing
array of choices in recruiting and selecting from one of three types of
employees of an international firm. The three nationals or country
categories involved in international HRM activities are:
• The host-country where the subsidiary may be located
• The home country where the firm is headquartered
• Other countries that may be the source of labor or finance
– For example, P&G employs Eritrean citizens (HCNs) in its Eritrean
40
 operations, often sends U.S. citizens (PCNs) to the Gulf countries on
assignment, and may send some of its Italian employees on assignment
to its Mexican operations (as TCNs)
– These three types of employee groups have very different cultural
backgrounds. Therefore, TNC/MNCs‘ HR managers must coordinate
policies and procedures to manage from the firm‘s home country as well
as in subsidiaries around the world in shaping international
compensation and reward systems.
– These policies and practices must effectively balance the needs and
desires of HCNs, PCNs and TCNs as well - Failure to recognize
differences in managing human resources in international environment
frequently results in major difficulties in international operations

Managing of a global workforce can be an important factor in the success

or failure of an TNC/MNC:
TNC/MNC‘s HR managers must staff their international business
operations with personnel who are technically competent, culturally
proficient, and cost-effective. In almost all cases, it is generally argued that
it is cheaper to employ HCNs than to send expatriates (PCNs or TCNs).
TNC/MNCs may find expatriates too expensive to employ in large numbers
The International Compensation Challenge
– Compensation is one of the most complex areas of international human
resource management
– Pay systems must conform to local laws and customs for employee
compensation while also fitting into global MNC policies
– Managers face diverse political systems, laws & regulations, confront
different economic climates, economic development, tax policies,
diverse culture, customs, the role of labor unions, standard of living
• For example, union influences may play an important role in
determining wage policies in some countries such as Australia
where the Australian Government and unions negotiate pay rates for
workers that apply nationwide.
• In Hong Kong, by contrast, labor unions are extremely weak, and
wage rates are determined by the free market
– All these different factors between international communities affect
international compensation systems. Therefore, finding the right
method for TNC/MNCs to determine a compensation package in an
international market is simply becoming a nightmare
– It is also important for MNCs to consider carefully the motivational use
of incentives and rewards among the employees drawn from three
national or country categories
– The traditional function of pay to attract, retain and motivate
employees has not changed - The emphasis has shifted from the
attraction and retention functions to the motivation function.
– TNC/MNCs must ensure that those skilled employees are compensated
for achieving goals that make the international business operations
succeed
– As different countries have different norms for employee compensation,
HR managers should consider carefully the motivational use of
incentives and rewards among international community:
• For Americans money is likely to be the driving force even though no
41
 financial incentives such as prestige, independence, and influence
may be motivators
• Other cultures are more likely to emphasize respect, family, job
security, a satisfying personal life, social acceptance, advancement,
or power
– Since there are many alternatives to money, the rule is to match the
reward with the values of the culture
– There are wide variations both between countries and among
organizations within countries concerning how to compensate workers
– The principal problem is salary levels for the same job and the jobs are
different between countries in which an TNC/MNC operates
– Compensation policies can create conflict if local nationals compare
their pay packages to the expatriate‘s and conclude that they are being
treated unfairly
• Can create resentment and envy on the part of HCN managers and
lower their morale and productivity

Unique Compensation Issues in International Scenario

– Incentives provided to stimulate movement or expatriation to
a foreign location / host country
– Allowances for repatriation to home country
– Additional tax burdens placed on employees working in a
foreign location
– Labour regulations in home and host country
– Cost-of-living allowances in the host country
– Home country and host country currency fluctuation
– Formal and informal compensation practices unique to the
host country
– Determining home country for setting base pay of TCNs

Compensation Strategy for Global Staffers

– A successful compensation strategy involves keeping expatriates
motivated while meeting TNC/MNC goals and budgets. TNC/MNCs‘ HR
managers must build an expatriate pay package by:
• Meeting corporate goals at home and abroad
• Keeping expatriates motivated
• Complying with company budgets
– This strategic perspective on the linkage between IHRM and strategy is
so critical for a TNC/MNCs‘ success. A TNC/MNC that can develop a
highly trained, flexible, and motivated international workforce is at an
advantage relative to its competitors, especially if that workforce can be
used strategically to support corporate goals. It is essential that there is
synergy among business objectives, staffing, and compensation. A
sound expatriate strategy is a key to international business success
and should be a major interest of senior management

Management challenges concerning International Benefits &

Compensation

 HR managers focus on their strategic objectives to develop a

comprehensive compensation plan, in terms of considering base pay,
42
 short and long-term incentives, benefits and growth opportunities
 The objective of this kind of strategy is to ensure that both TNC/MNCs‘
long and short-term objectives coexist in the compensation system
without overlap, which would duplicate a single pay plan for the same
objectives.
 The purpose of the planning is also designed to ensure that the
compensation system attracts and retains the desired employees and
that it motivates them to do those things that support the business
plan
 The compensation costs of a family with children are shifted to
hardship allowance for schooling, childcare, increased residence cost
and all fringe benefits associated with supporting a family life cycle

Designing the Compensation Program

 Balance business objectives with the compensation programs such as

base salary, taxes, allowances, cost-of-living allowances (COLAs),
housing and reimbursable expenses.
 The levels of salary and types of fringe benefits paid to the three primary
labor pools of international managers are well documented. What has
not received adequate attention is the difference among PCNs, HCNs,
and TCNs.
– For example, executives, middle managers and supervisors who are
expatriate managers in international assignments, receive a variety of
―package‖ of benefits
– In addition to salary, taxes and benefits, international managers also
receive different allowances as part of their overall compensation to
accept an overseas position
– The most noticeable differences among the three labor pools of
international managers are
• Overseas premiums –
• The foreign service premium is based on the expatriate‘s level in the
company, the family size, and the location
• Another type of premium is the hardship allowance and home leaves.
The U.S. Department of State established a hardship list in 1996 to
help organizations providing expatriate managers hardship allowances
as a percentage of their base salary
• Housing allowances –
• Entails substantial additional costs
• TNC/MNCs differ in policies regarding employee contributions to
housing
• Cost-of-living allowances –
• Provided to help PCN or TCN enjoy a standard of living abroad that is
comparable to what they would enjoy in the home country
• Tax equalization –
• PCNs pay no more income tax and no less than if he or she stayed
home
• Repatriation allowances –
• Paid on return of employee to his/her country of origin to live there
permanently
• Performance-based bonuses
43
Additional Payments and services

– Lifestyle enhancement services

• Provision for employee & family to learn the local language
• Education & training of employee & family on local culture, customs
and social expectations
• Counseling services for employee & family
• Assistance in finding a home at the foreign work site / school & suitable
education programmes for children & dependents
• Company car, driver, domestic staff, child care
• Use of Fitness facilities / subsidized health care services
• Assistance in finding suitable & acceptable employment for spouse
• Assistance in joining local civic, social, professional organizations
– Allowances & Premiums
• Foreign service premium & tax equalization allowance
• Temporary living allowance
• Hardship premium
• Currency protection
• Mobility premium
• Home-leave allowance
• Stopover allowance
• Completion of assignment bonus
• Assignment extension bonus
• Emergency loan
• Extended work-week payment

The Expatriate Compensation Balance Sheet: Summary

– Expatriate (PCN or TCN) compensation programs are an important
issue in managing reward systems. Compensation plans for expatriate
managers must be:

Conclusion
Competitive, cost effective, motivating, fair and easy to understand,
consistent with international financial management, easy to administer,
and simple to communicate

CEO Compensation - Compensation of Chief Executives & other

employees

Some quotes
 ―CEOs should be compensated 15 times more than the lowest-paid
salary of an employee in a company. I am against mandating a ratio,
but it can be anything from 15 to 25 times the lowest salary.‖
-Infosys' Narayana Murthy at CII's leadership conference on the
issue of high CEO compensation.
 "The excessive flab on CEO emoluments should be cut.―
- Anu Aga, Chairman, Thermax.
 "CEOs 25 years ago never got a million dollars; their compensation was
based on common sense. Back then, CEOs were seen as diligent
managers who had skill motivating people and just got promoted up
44
 through the ranks."
- Robert Stobaugh, Professor Emeritus, Harvard Business School.

Current Compensation Packages

SALARIES AT THE TOP
Annual Salary Co's Co's
pay* hike sales profit
(Rs crore) (%) growth Growth
(%) (%)
CMD, Bharti
Sunil Bharti Mittal Airtel 12.68 78.34 58.47 100.45
Pawan Kant MD, Hero
Munjal Honda 15.22 15.74 13.61 -11.68
Rajiv Bajaj MD, Bajaj Auto 2.08 362.2 24.16 10.13
EVP and MD,
Naveen Jindal Jindal Steel 13.54 248 36 23
B Muthuraman MD, Tata Steel 2.2 13.4 15.36 20.41
MD and CEO,
K V Kamath ICICI Bank 2.48 35.51 60.73 22.45
MD, HDFC
Aditya Puri Bank 1.28 -1.5 53.93 31.08
CMD, Cadila
Pankaj R Patel Healthcare 9.93 32.4 13.47 24.14
Malvinder Mohan
Singh CEO, Ranbaxy 2.62 -2.23 15.13 70.11
Azim Premji CMD, Wipro 2.53 -1.93 33.49 40.66
ED, Patni
Gajendra Patni Computer 2 26.58 13.96 5.84
Notes: The payments are according to the 2005-06 annual report; The
sales and profit growth figures are for 2006-07

Compensation Comparison
 USA is a market leader in top managerial compensation
 CEO and top managerial salaries in India have climbed but are puny in
comparison to the global standards
 Both globally and nationally, CEO pay has increased way ahead of sales
and other employee wages
 Both globally and nationally, Corporate performance not kept pace with
CEO pay increase

Historical Perspective: in India

 In 1980s, restrictions on managerial compensation resulted in
complete erosion of earnings at senior and middle levels (Companies
Act 1956)
– Resulted in Chief Executives looking for better options abroad
 In 1988 restrictions on directors‘ salaries were raised to INR
15,000/-pm under Section 269, Companies Act, 1956, Schedule XIII
 In 1993, revision of Schedule XIII by the Government. Director‘s Salary
limit raised to INR 50,000/- pm plus commission equal to annual

45
 salary
– Perks could be drawn equal to annual salary or INR 4,50,000/- pa
whichever was less
– Overall limit of INR 10,50,000/- pm including perquisites was kept
 1990s was a tumultuous period for Executive compensation
– Salaries were low, stable and predictable
– Legal ceilings existed on remuneration (salary and commissions) of
directors
– Ceilings designed keeping in mind government officials - Bureaucratic
structure- relationship with performance of business was non-existent
 Post liberalization and globalization, the trend reversed
 Mega bucks for the chief executives from 1991 onwards
– Inflation
– Demand for competent, talented grew but supply did not match
– MNCs recruited high quality manpower or their global operations at
comparatively lower rates
– Indian family owned companies had to match the remuneration offered
by MNCs
– Complex compensation structure (allowances, benefits included)
against high tax structure
– Wide differences industry – wise in salary levels due to demand and
supply trends, profitability, growth rate etc
 1980s was boom period for advertising
 Early 1990s – for financial services
 Late 1990s – petrochemical, IT, power, insurance
 2000 – IT and telecom, biotechnology
 Revision of salaries for government officials in 1996 & PSU employees
in 1997 had a spiraling effect
 The % increase in chief executive salaries was not the same as those of
the junior level employees

Present Compensation trends

 IT is highest pay master – strategy for employee retention especially of
employees with skill sets not easily available
 Annual increments not related to tenure but only to performance
 Compensation structure still not appreciated in terms of employee
satisfaction and real cost
 Salary increases reduced from 2000 in all sectors
 Entry-level MBAs & engineers packages has come down
 Highest compensation sectors are:
– FMCG
– IT
– Telecom
– Engineering
– Durables
Components CEO Compensation
 Base Salary
 Short-term performance bonuses
 Variety of Equity (stock ownership) related components
 Severance packages (golden parachutes)
 Retirement plans
46
  Wide variety of benefits and perquisites
 Benefits and perquisites include:
• Company-provided car - Medical expense reimbursement
• Parking - College tuition reimbursement for
children
• Chauffeured limousine
• Kidnap and ransom protection
• Counseling service (financial & legal services)
• Attending professional conferences & meetings
• Spouse travel
• Use of company plane and yacht
• Home entertainment allowance
• Special living accommodations
• Club membership
• Special dining rooms
• Season tickets to entertainment events
• Special relocation allowance
• Use of company credit card
• No – and low-interest rate loans
Features of Executive Compensation
 Performance criteria must have approval of shareholders, directors
outside the compensation committee, be formula driven
 Should not be compared to wage & salary schemes of the other
employees
 Chief Executives are not as organized as Unionized staff
 A level of secrecy needs to be maintained
 Remuneration depends on competence, experience, length of service,
loyalty to founders, excelling areas like M&A specialist, turnaround
specialist etc
 Not based on individual performance but rather on organizational
performance
 Subject to statutory ceilings especially in the public sector – Ceilings do
not apply private sector
 Supposed to be guided by job evaluations, JDs, salary grades with
ranges of pay in each grade & salary survey – but exorbitant in reality
Problems of Executive Compensation
 Enormous differences between the pay, income and wealth of the
front-line and the top executives – opposed heavily this disparity
 Increases in compensation received by Chief Executives are far out of
line with those provided to the rest of the workforce
– While CEO received almost 36% raise, workers received only 3.9% raise
in some cases
 This exorbitant CEO compensation is a direct cause of the rise in union
membership
– Leads to demoralizing other employees
– Unfair to shareholders
– Can even lead to distorted behavior
CEO Compensation
- The high compensation to CEOs had been a debatable issue over the
years among corporates as well as the investors all over the world.
Market analysts and stakeholders had criticized companies for paying
47
 exorbitant compensations to CEOs and argued that this would widen
the gap between the top level and other levels of management.
- By early 2001, paying high compensation to CEOs became a very
controversial issue due to the global economic slump and poor
performance of corporates. The issue was strongly debated not only in
the US, but also in countries including UK, South Korea and India.
- The shareholders were not happy with the fact that CEOs' salaries
continued to rise in spite of the poor performance of the stocks. They
argued that, though the compensation of the CEO was linked to the
company's performance, there were instances where, in spite of the
poor performance of the company, the CEO concerned got a decent hike
in compensation package.

Guidelines for CEO Compensation

Corporate Governance
A corporate governance aspect to CEO-pay
- Revolves around the decision process involved in fixing a CEO's
compensation; In some, corporate HQ lays down the broad
guidelines while the actual compensation is a function of local
market conditions
- In the Indian context it is the board of directors that decides the
compensation of CEOs
- Since most CEOs also chair the board, this means they write their
own pay-cheques. However, some companies (especially the
progressive ones) have compensation committees in place

Corporate Governance: What the ideal situation should be

- At a theoretical level, compensation committees are a must in
companies that weave performance-based and stock-based variables
into the overall salary.
- With an increasing number of companies moving to such compensation
structures, committees, logic dictates, should become the norm.
- More important, regulations may soon insist on external representation
on these committees.
Company’s Act 1956
- In India the Companies Act is the legislation that primarily shapes the
remuneration of top managerial personnel.
- Until 1993, the Act provided for an upper limit in the amount of
compensation to be paid.
- It had been pointed out that the "regulation of director's remuneration
becomes necessary for several reasons, prominent among them being
the prevention of diversion of corporate funds for personal use and the
impact which an unduly high executive reward has upon the rest of
society."
- However, over the years, with the shift in India's economic policy
towards a market-oriented capitalistic economy, this particular
legislation has been amended to increase the maximum pay package
limits that are payable to the managerial personnel. While other
reforms have taken their time to be incorporated in to the Act, the
maximum pay ceiling for CEOs has been increased systematically and
more frequently.
48
- One of the main reasons put forward for this regular increase has been
the need to attract and retain talent at the senior level.
- Additionally, it has been argued that the risk and responsibility at the
senior level needs to be compensated by a sufficient increase in the pay
packet. Needless to mention the risk and responsibilities at the CEO's
level pertain to the uncertainty associated in fulfilling organizational
objectives. This automatically indicates a strong relationship between
the CEO's compensation and organizational performance.
- Logically the CEO's job should be at stake if the organizational
objectives are not fulfilled.
- Indian law does not require that the compensation committee have a
charter. The scope of the Company‘s remuneration committee includes
determination of the Board‘s compensation and the Company‘s policy
on specific remuneration packages for executive directors including
pension rights and any other compensation payments
Managerial remuneration & Companies Act 1956
- The Companies Act, 1956, contemplates five categories of managerial
personnel:
- a) An ordinary director, who is the director simplicities; b) a part-time
paid director, being a director in the part-time employment of the company;
- a whole-time director, being a director in the whole-time employment of
the company; d) a managing director, being a director entrusted with
substantial powers of management; and e) the manager, having the
management of the whole, or substantially the whole, of the affairs of the
company.
- The remuneration payable to a director may take any one or more of the
following forms: Sitting fee for each meeting of the Board, or a committee
thereof, attended by him; monthly, quarterly or annual payments made to
him; or a commission payable to him at specified percentages of the net
profits of the company computed in the manner referred to in Section
198(1).
- Thus, the Companies Act enlarges the ordinary meaning to the word
`remuneration' to payment in money or otherwise for services rendered.
- A CEO may be paid remuneration by way of a monthly payment and/or at
a specified percentage of the company's net profits.
- While, some companies prefer not to pay any commission and in lieu
thereof absorb the element of commission into the monthly salary so as to
ensure a steady income for the CEO irrespective of fluctuations in the net
profits of the company from year to year, others go to the extent of linking
the CEO's pay with the share price of the firm by issuing employee stock
options to him/her.
- Consider the remuneration paid to Corporate CEOs (that is, Managing
Directors or Chairman in some organizations). Section 198 of the
Companies Act, 1956, limits the overall maximum managerial
remuneration payable by a public company to persons entrusted with
managerial functions to 11 per cent of the company's net profits
(percentage of the net profits as contemplated by Section 198 (1) is to be
computed in the manner laid down in Sections 349, 350 and 351 in the
Companies Act).
- This percentage is exclusive of fees payable to directors for attending
meetings of the Board or committees thereof. The Section is concerned
49
especially with managerial remuneration payable to managing directors.
On the other hand, Section 309 is concerned with total remuneration
payable to directors; whatever is the nature of such remuneration,
managerial or otherwise.
- Obliging to the frequent demands/representations of the different
industry chambers and with the shifting economic policy, the Companies
Act was amended from time to time. For example, from a salary limit of Rs
90,000 pa in 1969-74, in 1994, the upper limit for salary was eliminated
(the only limiting factor being Section 198).
- The Guidelines should have logically helped corporations in substantially
raising their managerial remuneration packages.
- It should have also helped remove the stigma attached in paying large
remuneration.
- However, despite these positive incentives regarding pay packages, one
could question its impact on corporate performance - Did such
phenomenal increases in the limits of managerial remuneration help raise
the performance of organizations?
- Were the increases in these limits made to cope up with the pressures of
competition and globalization, or was there something more to it?
Recommendations
- Companies should have completely independent compensation
committees that decide CEO pay
- In the absence of such committees, there should at least be a special
sub-committee that decides CEO pay
- Whichever form the committee takes, CEO pay should always be
aligned with the performance of the company's stock
- The usage of more sophisticated measures of financial performance,
like Total Shareholder Returns (TSR) or Economic Value Added (EVA)
- To use a balanced measurement matrix that includes non-financial
parameters like customer satisfaction and employee engagement
- Some companies could even split the variable pay component into two
parts –
• One of these is related to a company's performance in the short-term
(typically sales and profits)
• Another to its performance in the long-term (Market Value Added or
Market Capitalization). The short-term bonus is typically capped as
a percentage of the CEO's salary, while the long-term reward takes
the form of stock options.

New trends expected

- Changes expected-
– Sign-on bonuses
– Golden parachutes
– Severance packages, all mechanisms that insure CEOs from
uncertainties prevalent in today's job market will become
more prevalent
• Additional stock option grants
JOB EVALUATION
JOB ANALYSIS
-The analysis, measurement, control and redesign of a set of activities –
performed on ongoing jobs
50
-A detailed and systematic study of jobs to know the nature &
characteristics of people to be employed for each job
-Involves identification and description of what is happening on the job
– It is a labor intensive, time consuming job
– Demands a greater understanding of human behaviors, job
requirements, writing skills
– Differentiate compensation provided to employees on basis of job
content, job specifications, working conditions, employee job
performance wrt the required tasks, the knowledge and skills
required to perform them, and the conditions under which they
must be performed
– Helps in establishing a sound compensation system, using criteria
that measures and differentiates job & performance requirements so
that all employees receive fair and just treatment
- It is conducted in the following situations-
– Employees or union reps demand change in JDs and assignments of
jobs to pay grades, or
– Development of a classification system that reflects more accurately
the work they perform, or
– Reallocation of job activities at the time of organizational
restructuring, or
– Redesigning of the organization & its jobs
- Preliminary considerations for undertaking this costly operation-
– Senior Management support
– Workforce Cooperation & Involvement
• All employees must understand the responsibilities and duties of
their jobs
• Employees and supervisors must be in agreement to these
responsibilities and duties
• All employees must receive fair rewards for the knowledge necessary
to solve work-related problems, make decisions and accept other
responsibilities to perform their jobs successfully
- Steps for conducting this process
– Schedule the necessary and logical work steps
• Developing budget & forecasting financial requirements
• Determine the organizational use of job content and other related
data
• Learn about the structure, operations, jobs of the organization
• org. chart, process chart, procedure manuals
• Identify and select methods for collecting job content data and
other related facts
• through interview, questionnaire, observation, diary/log, or
combination of any of these
Uses of Job Analysis
– Employment
– Training
– Organization design and staffing
– Compensation
– Performance review
– Safety and health
– Affirmative action planning during organizational design & job
51
 design
– Employee counseling
– Hiring the handicapped
The analysis of the job-
– Activity / task / function / element / duty / responsibility /
behavior / essential job function / competency
JOB DESCRIPTION
- Statements of fact that describe the job
- An organized factual statement of job contents in the form of duties
& responsibilities of a specific job
- Emphasizes the job requirements
- Contents include
– Job identification - Job title, location, supervisor, grade, pay
range, plant/division & department/section
– Job summary
– Job definition - Responsibilities & Duties
– KSAs (knowledge, skills & ability) & competency
– Machines, tools, equipments, materials
– Relation with other jobs
– Nature of supervision & accountabilities
– Working environment & conditions
- Process of preparation of JDs
– Observation of job being performed
– Discussion with the supervisor of the job
– Getting questionnaire filled up by supervisor
– Discussion with employees
– Getting questionnaire filled up by employees
- Uses of JD
– In planning activities including organization design, staffing
levels, career ladders, career paths, job design, pay system
design
– In day-to-day operations including recruitment & screening,
designing selection tests, hiring and placement, orientation,
developing procedures, training and development
– In exercising Control to ensure compliance with legal
requirements & meeting union demands especially while
setting performance standards, following legislations,
collective bargaining

INTERNAL & EXTERNAL EQUITY

Once job analysis has been done organizations need to decide upon the
pay structures. Pay structure refers to the process of setting up the pay for
a job in an organization. The process deals with internal and external
analysis to estimate the compensation package for a job profile. Internal
equity, External equity and Individual equity are the most popular pay
structures. Job description provides the in depth knowledge about the job
profile and its worth.

Pay structures are the strong determinant of employee‘s value in the

organization. It helps in analyzing the employee‘s role and status in the
52
organization. It provides for fair treatment to all employees. Pay structures
also include the estimation of incentives.

The level of incentives also depends on the level of job position in the
organizational hierarchy.

Internal Equity

The internal equity method undertakes the job position in the

organizational hierarchy. The process aims at balancing the compensation
provided to a job profile in comparison to the compensation provided to its
senior and junior level in the hierarchy. The fairness is ensured using job
ranking, job classification, level of management, level of status and factor
comparison.

External Equity

Here the market pricing analysis is done. Organizations formulate their

compensation strategies by assessing the competitors‘ or industry
standards. Organizations set the compensation packages of their
employees aligned with the prevailing compensation packages in the
market. This entails for fair treatment to the employees. At times
organizations offer higher compensation packages to attract and retain the
best talent in their organizations.

53
The first thing employers should consider when developing compensation
packages is fairness. It is absolutely vital that businesses maintain
internal and external equity. Internal equity refers to fairness between
employees in the same business while external equity refers to relative
wage fairness compared to wages with other farms or businesses. No
matter the compensation level, if either internal or external equity is
violated, a business will most likely experience employee dissatisfaction
and employees with begin to balance their performance through a variety
of ways ranging from decreased productivity to absenteeism and
eventually to leaving the business.
So, what constitutes a fair wage? One approach to determining a fair wage
is a market survey. These are typically fast and easy ways to establish
compensation guidelines for many businesses. A few phone calls to other
employees in similar businesses can determine the "market" value for a
specific job.

JOB EVALUATION
 Job evaluation can be defined as ―a systematic procedure designed
to aid in establishing pay differentials among jobs…‖
*Compensation: Milkovich, George T. and Jerry M. Newman;
BPI/Irwin, 1990; p. 103.
 Process to determine and compare the demands which the normal
performance of particular jobs makes on normal workers without
taking into account of the individual abilities or performance of the
workers concerned
 Process of analysis & assessment of jobs to ascertain reliably their
relative worth using the assessment as a basis for a balanced wage
structure
 Rating of the jobs to determine their position in a job hierarchy
 Widely used in the establishment of wage rate structures & elimination
of wage inequities
 Applied to jobs rather than the qualities of individuals on the jobs
54
 Basic goal is to ascertain the relative worth of each job through an
objective evaluation so that relative remuneration may be fixed for
different jobs.
 A systematic procedure which enables wage structure to be fair &
equitable

Some Principles of Job Evaluation

 Clearly defined and identifiable jobs must exist. These jobs will be
accurately described in an agreed job description.
 All jobs in an organisation will be evaluated using an agreed job
evaluation scheme.
 Job evaluators will need to gain a thorough understanding of the job
 Job evaluation is concerned with jobs, not people. It is not the
person that is being evaluated.
 The job is assessed as if it were being carried out in a fully competent
and acceptable manner.
 Job evaluation is based on judgement and is not scientific. However
if applied correctly it can enable objective judgements to be made.
 It is possible to make a judgement about a job's contribution relative
to other jobs in an organisation.
 The real test of the evaluation results is their acceptability to all
participants.
 Job evaluation can aid organisational problem solving as it
highlights duplication of tasks and gaps between jobs and functions.

JOB EVALUATION vs. JOB ANALYSIS

- Job evaluation is a step ahead of Job analysis
- Job analysis is not concerned with the calculation of a job‘s worth
while job evaluation is the basis for a balanced wage structure
- Job analysis is only concerned with the collection of data concerning
the particular job while Job evaluation follows the job analysis
which provides basic data to be evaluated
- Job evaluation measures the value of JDs & translates it in terms of
money to have a balanced wage structure
- Job evaluation starts from job analysis & ends with the
classification of jobs according to their worth

JOB EVALUATION
Objectives:
– Establishing a sound wage foundation for incentive & bonus
programmes
– Maintaining a consistent wage policy
– Enabling management to gauge &control its payroll costs more
accurately
– Provide framework for periodic review of wages & salaries
– Classify functions, authority & responsibility which in turn aids in
work simplification & elimination of duplicate operations
– Reduces employee grievances and labor turnover thus increasing
employee morale & improving management-employee relationship
– Serves as a basis for union negotiations
Importance
55
 – Valuable technique for management to establishing a rational
& consistent wage & salary structure both internally &
externally
– Helps in bringing harmonious relations between labor &
management by eliminating wage inequalities
– Standardizes process of determining wage differentials
– Takes into account not only skill differences but other factors
like risks, working conditions also – all relevant factors taken
into consideration
– Provides a rate for the job not for the man
– Helps keep down costs of recruitment & selection of workers,
retaining workers
Limitations
– No standard list of factors to be considered for job evaluation
– Lacks scientific precision - All job factors cannot be measured
accurately
– Wages fixed for a job on basis of job evaluation may not retain
them
– Individual merit is ignored which is not appreciated by
workers & employees
– Presumes that jobs of equal worth will be attractive but not so
in reality – as there are no prospects of a rise
– Is inflexible, which does not have high chances of survival in a
dynamic environment
– Regarded with suspicion by trade workers as methods are not
scientific & often are difficult to understand
Process
– A thorough examination of the jobs
– Preparation of JDs & analysis of job requirements
– Comparison of one job with others
– Arrangement of jobs in their corrective sequence in terms of
value to the firm
– Relation of the sequence to a money scale
Requirements
– Should be carried out with a high degree of integrity & fairness;
calls for mutual trust between management and unions;
evaluators must have wide knowledge of the jobs; workers
must be informed of the purpose & assurance must be given
that no pay-cuts due to job evaluation will happen

METHODS FOR CONDUCTING JOB EVALUATION

NON-QUANTITAVE METHODS
1 Ranking or job comparison
2 Grading or job classification

QUANTITATIVE METHODS
1 Factor comparison method
2 Point rating method
RANKING
Ranking simply orders the job descriptions from smallest to largest based
on the evaluator‘s perception of relative value or contribution to the
56
organization‘s success.
This method is one of the simplest to administer. Jobs are compared to
each other based on the overall worth of the job to the organization. The
'worth' of a job is usually based on judgments of skill, effort (physical and
mental), responsibility (supervisory and fiscal), and working conditions.
Advantages Disadvantages
 Simple.  Difficult to administer as the
 Very effective when there are number of jobs increases.
relatively few jobs to be  Rank judgments are
evaluated (less than 30). subjective.
 Since there is no standard
used for comparison, new jobs
would have to be compared
with the existing jobs to
determine its appropriate
rank. In essence, the ranking
process would have to be
repeated each time a new job
is added to the organization.
Ranking Methods

1. Ordering Simply place job titles on 3x5 inch index cards then order
the titles by relative importance to the organization.

2. Weighting

3. Paired Comparison

Grouping
After ranking, the jobs should be grouped to determine the appropriate
salary levels.

JOB CLASSIFICATION

Jobs are classified into an existing grade/category structure or hierarchy.

Each level in the grade/category structure has a description and
associated job titles. Each job is assigned to the grade/category providing
the closest match to the job. The classification of a position is decided by
comparing the whole job with the appropriate job grading standard. To
ensure equity in job grading and wage rates, a common set of job grading
standards and instructions are used. Because of differences in duties,
skills and knowledge, and other aspects of trades and labor jobs, job
grading standards are developed mainly along occupational lines.
The standards do not attempt to describe every work assignment of each
position in the occupation covered. The standards identify and describe
those key characteristics of occupations which are significant for
distinguishing different levels of work. They define these key
characteristics in such a way as to provide a basis for assigning the
appropriate grade level to all positions in the occupation to which the
standards apply.
57
Advantages
 Simple.
 The grade/category structure
exists independent of the jobs.
Therefore, new jobs can be
classified more easily than the
Ranking Method.
FACTOR COMPARISON
Disadvantages
 Classification judgments are
subjective.
 The standard used for
comparison (the
grade/category structure)
may have built in biases that
would affect certain groups of
employees (females or
minorities).
 Some jobs may appear to fit
within more than one
grade/category.

A set of compensable factors are identified as determining the worth of jobs.

Typically the number of compensable factors is small (4 or 5). Examples of
compensable factors are:
1. Skill
2. Responsibilities
3. Effort
4. Working Conditions
Next, benchmark jobs are identified. Benchmark jobs should be selected
as having certain characteristics.
1. equitable pay (not overpaid or underpaid)
2. range of the factors (for each factor, some jobs would be at the low
end of the factor while others would be at the high end of the factor).
The jobs are then priced and the total pay for each job is divided into pay
for each factor. See example matrix below:
Job Evaluation: Factor Comparison

The hourly rate is divided into pay for each of the

following factors:
Hourly Pay for Pay for Pay for Pay for Working
.
Job Rate Skill Effort Responsibility Conditions

Secretary $9.00 4.50 2.00 2.00 0.50

Admin
$11.00 5.50 2.50 2.50 0.50
Assistant
Supervisor $15.00 6.00 3.50 4.00 1.50
Manager $21.00 9.00 3.50 7.00 1.50

This process establishes the rate of pay for each factor for each benchmark
job. Slight adjustments may need o be made to the matrix to ensure
equitable dollar weighting of the factors.

The other jobs in the organization are then compared with the benchmark
jobs and rates of pay for each factor are summed to determine the rates of
pay for each of the other jobs.
58
Advantages
 The value of the job is
expressed in monetary terms.
 Can be applied to a wide range
of jobs.
 Can be applied to newly
created jobs.
Disadvantages
 The pay for each factor is
based on judgments that are
subjective.
 The standard used for
determining the pay for each
factor may have build in
biases that would affect
certain groups of employees
(females or minorities).

POINT METHOD
A set of compensable factors are identified as determining the worth of jobs.
Typically the compensable factors include the major categories of:
1. Skill
2. Responsibilities
3. Effort
4. Working Conditions
These factors can then be further defined.
1. Skill
1. Experience
2. Education
3. Ability
2. Responsibilities
1. Fiscal
2. Supervisory
3. Effort
1. Mental
2. Physical
4. Working Conditions
1. Location
2. Hazards
3. Extremes in Environment

The point method is an extension of the factor comparison method.

Each factor is then divided into levels or degrees which are then assigned
points. Each job is rated using the job evaluation instrument. The points
for each factor are summed to form a total point score for the job.

Jobs are then grouped by total point score and assigned to wage/salary
grades so that similarly rated jobs would be placed in the same
wage/salary grade.

Advantages Disadvantages
 The value of the job is  The pay for each factor is
expressed in monetary terms. based on judgments that are
 Can be applied to a wide range subjective.
of jobs.  The standard used for
 Can be applied to newly determining the pay for each

59
 created jobs. factor may have built-in
biases that would affect
certain groups of employees
(females or minorities).

Job Evaluation - The Future

As organisations constantly evolve and new organisations emerge there
will be challenges to existing principles of job evaluation. Whether existing
job evaluation techniques and accompanying schemes remain relevant in
a faster moving and constantly changing world, where new jobs and roles
are invented on a regular basis, remains to be seen. The formal points
systems, used by so many organisations is often already seen to be
inflexible. Sticking rigidly to an existing scheme may impose barriers to
change. Constantly updating and writing new jobs together with the time
that has to be spent administering the job evaluation schemes may
become too cumbersome and time consuming for the benefits that are
derived.

COMPETENCY-BASED COMPENSATION SYSTEMS &

SKILL-BASED COMPENSATION SYSTEMS

All of these evaluation methodologies are based on one or a combination of

the following two approaches: (1) an analysis of the job as a whole or (2) an
analysis of the job's individual components.

Most evaluation methods compare jobs in the organization to one another

and a few compare jobs against a set scale. After a review of the various job
evaluation methodologies, the compensation management system will
retain a modified version of the position classification method or whole job
evaluation approach. This non-quantitative whole job approach
determines the relative value of positions by comparing them with job
descriptions as well as with other positions.

COMPENSABLE FACTORS
Human resource professionals or line managers should be able to assign
positions to the appropriate career groups by comparing the overall duties
and responsibilities listed in the employee work profile to the concept of
work outlined in the career group description. The compensable factors
will be used primarily to determine the appropriate role to which a position
should be allocated within a career group.

Definitions of the three compensable factors are as follows:

1. Complexity of Work
This factor describes the nature of work in terms of resources (e.g.,
machines, manuals, guidelines and forms) used or encountered and the
processes applied. This factor takes into account the number and variety
of variables considered, the depth and breath of activity and the originality
exercised.
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Difficulty - the relative character of the work process and the
corresponding, thinking, analysis and judgment required of the employee
while doing the work.
Scope and Range of Assignments - the breadth and variety of the
employee's assignments.
Knowledge, Skills and Abilities - the level of information, experience and
qualifications needed by the employee in order to perform the assigned
duties.
Nature of Contacts - the extent of the employee's human interactions
within and/or outside the organization in terms of both frequency and the
depth of information exchanged.

2. Results
This factor describes the work outcomes and the range and impact of
effects, such as the benefit or harm to citizens, the gain or loss of resources
and the goodwill created.
Impact - the range of people, things, and organizations directly affected by
the employee.
Effect of Services - the extent to which decisions and work products made
by the employee affect the level of service, quality of work, welfare of
constituents, the organization's image and cost of operations.
Consequence of Error - the potential costs of the employee's mistakes in
terms of financial and human costs, efficiency, morale, physical
maintenance and image.
3. Accountability
This factor describes the employee's responsibility or authority exercised
in terms of guidance given to fellow workers, independence and autonomy
of functioning and finality of decisions made.
Leadership - the level of control the employee has over resources such as
people, functions, facilities and budget.
Judgment and Decision-making - the types and kinds of decisions made
by the employee and the finality of these decisions and actions taken.
Independence of Action - latitude or freedom of action exercised by the
employee.

COMPETENCY-BASED SYSTEM

For the past fifty years, the concept of "jobs" has been the focus of all
human resource practices that affected recruitment, selection,
performance planning, performance evaluation, pay systems, training and
career development. Organizations have hired employees, evaluated
performance, paid salaries, developed skills, and planned careers based on
jobs.

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.
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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:

Human Resource Professional

Behavioral Competencies

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 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

How are Competency Models used?

Competency models can serve as a way to integrate human resource

practices under the Compensation Management System. Agencies that
elect to use Competency Models need to consider exactly how they will be
used to support the agency's mission and desired strategic outcomes, and
determine the extent to which Competency Models will impact and affect
the agency's human resource practices. The following is a list of human
resource practices that should be taken into consideration when
determining the purpose and intent of an agency's rationale for using
Competency Models:

Training and Development - connection to agency business need is a

major focus of Competency Models. These models can serve as a tool to
assess employees' current behaviors, knowledge and skills; identify
learning areas for development and improvement and be used for career
planning purposes.

Recruitment and Selection - models can be developed to identify criteria

for recruiting and assessing applicants for agency positions.

Performance Management - models can be used to support the

assessment of employee performance.

Compensation Decisions - models can be developed to determine internal

alignment and how pay will be administered based on defined
competencies (e.g. starting pay, promotions, in-band adjustments, etc.).

How are Competency Models linked to pay?

The 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;
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 Market availability;
Salary reference data;
Total compensation;
Budget implications;
Long term impact; and
Current salary
Competency Models can be used to help evaluate performance or to
determine internal salary alignment and starting pay. Various formats
may be used to determine actual employee pay rates. Formats can range
from comprehensive inventories of individual competency ratings to pay
matrices that reference a general evaluation of competencies and
expertise.

Comprehensive inventories provide detailed information that can be used

for development purposes and simpler pay matrices can save time in
determining pay.

With a comprehensive inventory including staged competency rating, an

assessment form (or automated format) may be used. The feedback
provider checks off indicator levels for each competency. This data results
in a competency rating summarized into a total rating score, which is then
mapped to a pay band.

A pay matrix is a point system in which points are accumulated based on

educational level, work experience, and other value added compensable
factors such as licensure, certification and specialized coursework that
lead to a competency level. These pay matrices serve as a guide for
determining pay for new hires and pay adjustments for current employees.
Total pay matrix points are converted to a range of pay on the pay band.
The total matrix points help identify internal alignment considerations and
are used with the other pay factors to arrive at appropriate pay.

How are Competency Models linked to performance planning and

evaluation?

Competency Models provide the supervisor and employee with a clear

understanding of performance expectations, and address training and
development activities necessary for successful performance. Models that
include specific performance criteria ensure that supervisors and
employees share the same understanding of performance expectations.
Most Competency Models require an employee self-assessment of their
performance that provides input to the supervisor in their appraisal of the
employee. Additionally, some may elicit performance feedback from other
internal and external peers, direct reports and customers.

How is Competency-based System evaluated?

The final step in the development of a Competency Model is the design and
implementation of an on-going evaluation plan to measure the
effectiveness of the model's content and usage. Competency Models must
be reviewed and modified periodically to reflect changes in desired
behaviors and technical knowledge and skills that result from an evolving

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work environment. The evaluation plan, at the minimum, should include
the individual(s) responsible for evaluating the Competency Model,
evaluation timelines and may follow the same process used to develop the
original Competency Model.

SKILL-BASED COMPENSATION SYSTEM

The Compensation Management System is designed to provide a direct

link between organizational performance and employee contribution and
pay. Skill-based Systems are one method of achieving this linkage.
Skill-based pay refers to a pay system in which pay increases are linked to
the number or depth of skills an employee acquires and applies and it is a
means of developing broader and deeper skills among the workforce. Such
increases are in addition to, and not in lieu of, general pay increases
employees may receive. The pay increases are usually tied to three types of
skills:
 horizontal skills, which involve a broadening of skills in terms of the
range of tasks

 vertical skills, which involve acquiring skills of a higher level

 depth skills, which involve a high level of skills in specialised areas

relating to the same job.
Skill-based pay differs in the following respects from traditional pay
systems which reflect skills differences in a structure consisting of rates of
pay for unskilled, semi-skilled and skilled workers:
 Skill-based pay is a person-based and not a job-based, system. It
rewards a person for what he/she, rather than the job, is worth. Job
worth is reflected in a basic rate of pay for minimum skills, but pay
progression is directly linked to skills acquisition (rather than to
general pay increases applicable to all) .

 It rewards (and therefore emphasizes) a broad range of skills which

makes the employee multi-skilled and therefore flexible.

 It positively encourages skills development.

 A skill-based pay system may not necessarily reflect how well the
skill is used, as this falls within the performance component of pay.
But there is nothing to prevent injecting performance criteria into
the system. In such cases the system will be more
performance-oriented than a structure which merely recognizes
different rates of pay for skills.

 The system needs to be underpinned by opportunities for training

which is critical to the success of the system. The traditional
structure is not dependent on such opportunities.
Reasons for Skill based Pay
More than ever before in industrial relations history a commonality of
interests in the skills of employees has developed between employers and
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employees. Skills provide employees with a measure of protection against
unemployment, as well as opportunities for higher earnings. At the same
time, skills provide employers with an important means of achieving
competitiveness.
Many countries today are seeking to advance to more technology and
skill-based industries, while others have become (or are becoming) 'post
industrial' societies, in which the application of knowledge determines
productivity, performance and competitiveness. Comparative advantage
based on, for instance, cheap labour or raw materials, has declined in
importance relative to competitive advantage based on the ability to add
value to a particular resource or advantage. Such comparative advantage
partly (often largely) depends on people - their standards of literacy and
education, work attitudes, value systems, skills and motivation. Critical
today is the ability to innovate and develop clusters of competitive
enterprises in particular industries. For the more industrialized countries
this means 'capturing' some of the key industries of the next century -
micro-electronics, biotechnology, new materials science industries,
telecommunications, civil aviation, computers and software, robotics and
machine tools and entertainment. An employee with skills is most flexible
and productive when he develops a broad range of skills, is able to learn
the next higher skill, develop analytical skills and is also able to work in a
team. Important aspects of today's skills package include multi-skills,
cognitive skills, interpersonal and communication skills, positive work
attitudes and quality consciousness. Training is no longer only for current
competence, but is also to prepare for the next stage of skills. Thus pay
systems which promote current and future skills needs are increasing in
importance among employers.

The impact of rapid technological change, the increasing globalization of

product markets, greater customer choice and the emphasis on quality
necessitate a frequent updating of skills, and flexibility to respond to rapid
changes in the requirements of markets. A flexible workforce, which is one
that is multi-skilled, ensures that production is not interrupted due to the
narrow skills of workers, and that workers are themselves responsible for
the quality of products.

Introducing a skill-based pay system requires several steps to be taken

and several issues to be addressed:

 The skills requirements of the enterprise should be analysed

 The availability of resources for training should be ascertained

 The jobs to be covered by the scheme should be identified

 The individual jobs have to be grouped into 'job families' on the basis
that in each 'family' the skills needs are similar. The skills within
each job family and the tasks needed to perform the job should be
analyzed

 The above will lead to an identification of the skill blocks or levels.

The skill level is the pay grade relative to the competence to use

66
 particular skills, and the skill block is the training input which has
to be completed to the satisfaction of the certifying authority in order
to gain entitlement to the extra pay. It is not unusual for skill levels
to consist of several skill blocks, each to be acquired through
training.

 Training modules have to be formulated

 The way in which certification is obtained that the skill has been
acquired should be agreed upon.

 The base rates for 'job families' have to be set, as well as the
payments that will be made thereafter when an employee moves
upwards through the skills route.

 The criterion for extra payment is not acquisition of the skill, but its
application.

 The period during which the skill should be applied before a new one
is acquired should normally be decided on, as the skill should
benefit the employer who should receive a return on the investment
made.

 A difficult question is how obsolete skills should be dealt with e.g.

through retraining or redundancy.
Problems in Skill-based Pay
There are several problems associated with the introduction of skill-based
pay which should not be underestimated. They can be extremely costly
having regard to
 the extra payment involved

 training costs

 the fact that some skills may be paid for but used infrequently

 the possibility that unusable skills may be acquired unless the

system is properly administered

 the fact that it is not always easy for an employer to anticipate

accurately what skills will be needed in a few years' time
The administration of the system is complex, both in regard to certification
of skills acquisition and payment. Therefore, unless administered properly,
the costs can outweigh the productivity and flexibility gains. Further, the
employees who reach the maximum of the skill levels can be demotivated
when extra payments, as distinct from general pay increases, cease.
Therefore the gains from flexibility, improved quality, the elimination of
some jobs and so on depend on the employer's ability to administer the
system properly, making clear also that it is not the acquisition of any
skills, but agreed skills, that fall within the scope of the scheme. Hence the
need to negotiate the system. It is easier to introduce skill-based pay in an
entirely new (greenfield) site, than in an already existing one where there is
in existence a pay system based on different criteria.

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Some of the circumstances which contribute to the success of skill-based
pay are:
 the employer's commitment to continuous training and development

 the value attached by the employer to personal growth and

encouragement of a learning orientation

 dismantling strong bureaucratic hierarchies and narrow job

demarcations

 participative management practices, independent and cooperative

forms of work

Skill-based pay systems are most appropriate to enterprises which depend

on a high level of skills, and in which labour costs represent a relatively
small portion of total costs, unlike in labour intensive industries. Though
such pay systems have been commonest in manufacturing organizations,
they are applicable to service industries as well though the objectives may
differ. In banks and airlines, for example, skill-based pay can be used to
encourage people to work in areas where manpower is most needed at a
given point of time due to customer flows. Skill-based pay is particularly
consistent with knowledge-based work.

Advantages of Skilled Based Pay

Among the advantages of skill-based pay are the following:
 It contributes to job enlargement and enrichment by breaking down
narrow job classifications.

 Flexibility is increased by encouraging the performance of multiple

tasks. It enables job rotation, and filling of temporary vacancies due,
for instance, to absenteeism. It therefore contributes to a leaner
workforce.

 It enhances productivity and quality through better use of human

resources.

 It facilitates technological change, which may meet with resistance

in a purely job-based system.

 The higher pay levels, continuous training, and job enlargement

through the broadening of skills, tend to reduce staff turnover.

 Elimination of unnecessary jobs can result from a workplace having

broad, rather than narrow, skills. It also reduces the need for
supervision.

 Job satisfaction is engendered through employees having greater

control over the planning and implementation of their work.

 Broadening of skills leads employees to develop a better perspective

of operations as a whole.

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  It is an incentive for self-development.

 It provides employment security through skills enhancement.

 It reduces the need to look to promotion to higher levels (which are

always limited) as the only way to enhance earnings, and it
facilitates the planning of an employee's career development path.

 Since the reward flows from the application of a skill and it does not
reduce opportunities for others to similarly increase their skills and
earnings, there is likely to be less competition among individuals.

 Since the pay increases on account of skills are linked to a

measurable standard, the criticism of subjectivity often associated
with performance appraisals and individual-based
performance-related pay, is avoided

Skill-based Systems reward employees for the range, depth and type of
skills they possess that are key to the organization's work functions and
operations. Additionally, Skill-based Systems may be used to directly link
an employee's compensation to work-related skills learned and used on
the job. As the needs of the organization change, compensable skills can
be added or eliminated to encourage employee development to meet the
changing business needs. Skill-based Systems represent a person-based
rewards system, as opposed to a job-based reward system.

Agencies interested in developing a Skill-based System must identify what

goal(s) they are seeking to achieve. Questions to consider are "what
outcomes or results will be expected from implementing a Skill-based
System?" and "what skill sets are valued?". Some potential answers may
be increased productivity, multi-skilled workforce, acquisition of new
skills needed for changing work environment, increased employee morale,
or to solve a specific problem, issue or need.
In a Skill-based System, the focus is on skill acquisition that can be
observed and objectively measured. Therefore, this type of system is most
commonly found in trades or labor settings. Skill-based Systems can be
designed from two perspectives:
 horizontal or breadth of skills where cross training is emphasized (e.g. a
multi-skilled trades worker possess electrical, plumbing, and carpentry
skills); and
 vertical or depth of skills where specialization and expertise is valued
(e.g. an electronic technician possesses the entire range of electrical
and electronic skills).
Skill blocks are identified sets of skills, knowledge and tasks that are
required based on the work to be performed. Skill blocks focused on
breadth of skills or the versatility of the individual tend to have an array of
different categories of skills. Skill blocks that focus on the depth of skills or
expertise in a particular area tend to have a more narrowly defined,
specialized set of skills. Determining whether the Skill-based System will
be based on breadth, depth or a combination is a key design decision.

69
Like other alternative pay and job evaluation systems, a Skill-based
System is fairly labor intensive and requires the agency's commitment to
designate the necessary staff resources during the development stages.

Additionally, Skill-based Systems should not be perceived as a "one size

fits all" approach. It would be highly unlikely, given the workforce, that an
agency would implement a Skill-based System agency-wide for the entire
employee population. It is important that an agency identify the specific
work unit(s) where observable and measurable skills may be identified and
would contribute to the overall success of the work unit(s) and agency.

While there are many benefits to implementing a Skill-based System under

the right circumstances, it is not totally free from potential risks. Poorly
designed Skill-based Systems can lead to paying for skills that are not
used or not relevant to the business needs of the agency. Employees may
reach their maximum pay rates with the attainment of the entire set of
identified skills which limits opportunity for further salary increase but
allows for a fully skilled workforce. Paying employees based on skills
attained and used makes it more difficult to make pay comparisons with
the labor market that focuses on job-based rather than individual
skill-based comparisons. Agencies will need to convert skill blocks into
benchmark descriptions in order to continuously review and match salary
reference data.

What are skills and skill blocks?

Skills are the basic components of a Skill-based System. These skills

typically are grouped into skill blocks that include predefined set of skills,
knowledge and tasks. When performed by employees, these skill blocks
will add value to the work process and increase the likelihood of the work
unit's success. Skills and skill blocks should be directly related to the
business needs of the agency. Based on business needs, agencies should
encourage employees in a Skill-based System to achieve the highest
potential skill level required.

As more skill blocks are acquired and are used, the potential value of the
employee increases.

How are Skill-based Systems used?

Skill-based Systems can serve as a way to integrate human resource

practices under the Compensation Management System. Agencies that
elect to use Skill-based Systems need to consider exactly how they will be
used to support the agency's mission and desired strategic outcomes.
Furthermore, agencies will need to determine the extent to which this type
of system will impact and affect the agency's human resource practices.
The following is a list that should be taken into consideration when
determining the purpose and intent of an agency's rationale for using
Skill-based Systems.

 Training and Development - connection to agency business need is

the cornerstone to Skill-based Systems. The agency's commitment to
learning is vital to the success of the system. Employees must be given
70
 the opportunity to acquire the knowledge and/or skills required for the
progression through the skill blocks. The skills identified within a skill
block may serve as curriculum for training. Training plans should be
well documented, include specific training objectives and
communicated to employees.

 Recruitment and Selection - systems can be developed to identify

knowledge and skills for recruiting and assessing applicants for agency
positions.

 Performance Management - systems can be used to support the

assessment of employee performance.

 Compensation Decisions - systems will determine how pay will be

administered based on defined skill blocks and guide other pay
decisions (e.g. starting pay, promotions, in-band adjustments, etc.).

What are the steps for developing Skill-based Systems?

The following is a suggested approach, but agencies need to tailor the

process to meet business needs and objectives.

1. Identify the group of employees to be covered: This step consists of

linking the business goals with the Career Group or agency work unit(s)
that are most appropriate for a Skill-based System. Typically, skill blocks
are created to reflect the skills needed for employees in Career Group(s),
Role(s) or functions within a Role. Skill-based Systems compliment job and
pay structures that have broad Roles and extended pay bands.

2. Gather data: Identify knowledge and skills that are important to the
work unit(s) and can be objectively measured. The use of Focus Group(s)
comprised of Subject Matter Experts (managers and employees) is the
desired method to be used to identify skills and skill blocks. It may be
helpful to initially have the Focus Group(s) identify the tasks performed in
the work unit(s) and then identify the skills needed to perform these work
tasks. The "essential' tasks or skills should be explicitly identified,
organized into skill blocks and rank ordered by degree of difficulty or
complexity. Each skill must be clearly articulated to the point that
verifiable measures or standards of performance can be established.

3. Develop skill and skill inventories: Based on the information identified

in the data collection step, skill inventories are developed that list the
discrete knowledge and skills needed to complete the required tasks. The
skill inventories are helpful to both supervisors and employees for career
development purposes and outline clearly how performance will be
measured and assessed.

How are Skill-based Systems validated?

After the skill blocks and/or skill inventories have been developed, each
skill should be validated. Functional supervisors that have a detailed
understanding of the work and its relationship to business need should be
asked to validate the accuracy of the identified skill blocks and/or skill

71
inventories. As business needs or skill requirements change, functional
supervisors should provide input to modify the skill blocks and/or skill
inventories.

How are Skill-based Systems linked to pay?

The 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
Using the skill blocks, agencies determine which skills are compensable.
Market data can be obtained to identify a sub-band or pay band to support
a Skill-based System. Once the sub-band or pay band has been
established, the skill blocks can then be assigned to the continuum. Thus,
the skill blocks become the unit measurement for pay increases within a
sub-band or pay band.

There are a number of design options that should be taken into

consideration when administering pay in a Skill-based System.
Progression through a skill block can be compensated by a variety of
methods including constant dollar amount, increasing dollar amount,
fixed percentage or increasing percentage amount. The timing of pay
increases should also be considered. Oftentimes an agency will want to
establish some limitations on the pay increase process in order to control
cost. For example, a control measure may be to require the employee to
remain at a skill level for a fixed period of time or another option would be
for the agency to establish a policy that sets the maximum increase an
employee may receive during a specific time period.

The timing of pay increases and any cost control measure has a significant
impact on both employee morale and cost escalation. Consideration
should be given to any other type of direct compensation awards the
employee may be eligible for such as recognition awards, retention and
market-based adjustments. Other compensation actions should support
the goals and intent of the Skill-based System.

Procedures must be developed for establishing starting pay for new hires
and/or employees transitioning from a traditional pay and job evaluation
system to a Skill-based System. A key issue during the transition is how
current employees will be moved to the Skill-based System. Key
implementation decisions such as how current employees will be paid
72
initially under the system need to be determined (e.g. placed at the entry
level or obtain an initial or baseline assessment certifying the employee's
current skill level).

Lastly, consideration must be given to how the agency will handle

employees whose skills diminish (e.g. freeze employee's pay or reduce
pay).

How is a Skill-based System linked to performance planning and

evaluation?

Skill-based Systems provide the supervisor and the employee with a clear
understanding of the performance expectations and clearly address the
learning activities that are necessary for successful performance.
Additionally, this type of system helps supervisors and employees to share
the same understanding of expected performance.

Agencies must determine the overall method for determining the

employee's skill level. The process developed will serve as a way to certify
that the employee has met all performance standards established for a
skill block. Evaluation methods to consider include checklists, skill
demonstration or testing. Consideration must be given to the timing of the
performance measure. Questions to be answered include: Will
performance be measured at a designed time (annually, semi-annually,
quarterly)? Will the employee be assessed on skills only one time or will the
continued mastery of the skill be required?

After identifying a method for assessing the employee's skills, the next step
is to identify who will assess the performance. Evaluators can be managers,
technical and functional experts, peers or an assessment team with
optional rotating membership. The evaluation of skills can be
accomplished either by a paper or automated process.

How are Skill-based Systems evaluated?

The skill block(s) and pay mechanism that is established must make sense
in terms of the goal the agency is seeking to accomplish and must be
understandable to employees. An evaluation plan should be established
and implemented to ensure that the Skill-based System is effectively
meeting the agency needs and reflects the desired knowledge and skills
needed by the agency.
KNOWLEDGE-BASED PAY

It is defined as the compensation predicated upon an employee's level of

skill and educational attainment. Knowledge-based pay can be an
incentive for employees to acquire additional training and education, thus
upgrading overall work force skills. Pay-for-learning programs, also known
as pay-for-knowledge, skill-based compensation, knowledge-based pay, or
pay-for-skill programs can be defined as follows: Pay-for-learning
structures link pay to depth or breadth of the skills, abilities, and
knowledge a person acquires that are relevant to the work. Structures
based on skill pay individuals for all the skills for which they have been
73
certified regardless of whether the work they are doing requires all or just a
few of those particular skills. Simply put, pay-for-learning programs
compensate employees for knowledge and skills that they posses, not for
the job in which they are performing.

The critical processes to determine a skill-based structure should include

the following steps. An organization must make sure that there
pay-for-learning structure is:
1) Internally aligned with work relationships within the organization,
perform a
2) Skill analysis: a systematic process to identify and collect information
about skills required to perform work in an organization, select
3) Skill blocks,
4) Skill certification, and,
5) Skill-based structure. Skill analysis decisions also include: what is the
objective of the plan, what information should be collected, what methods
should be used to determine and certify skills, who should be involved,
and how useful are the results for pay purposes. Upon answering these
questions in their respective order, it is important to remember that
skill-based systems focus on inputs, not results. There success is closely
correlated with how well the plan is aligned with an organization‘s strategy.
The information that is collected should be very specific information on
every aspect of the production process. There are many different methods
used to verify certification of skills, some companies use peer review,
on-the-job demonstrations, tests, and also completion of formal courses
related to certain subject areas. The most important group of people that
should be involved in building a skill-based structure, are the employees of
an organization. Employee involvement is almost built into skill-based
plans, as there opinion in all levels will ensure that they find the
pay-for-learning system to be fair.

Skill-based pay systems can be found in some form in approximately 5 to 8

percent of U.S. corporations. They are usually applied to so-called
blue-collar work, most of these firms are in manufacturing and assembly
work where the work can be specified and defined. The advantage of a
skill-based plan is that people can be deployed in a way that better
matches the flow or work, thus avoiding bottlenecks as well as idle hands.
So far skill-based pay systems, particularly multi-skill-based systems,
have been thought to be most successful and have been implemented with
the greatest ease in new plants with a participative team management
style. In a participative new plant environment, such systems fit the
management style, reinforce employees for learning new skills, and
implementation is easier because traditional attitudes about job
ownership don't have to be overcome. In established planes, such systems
are more difficult to implement precisely because of traditional views about
job ownership but offer the possibility of breaking down such views and
providing an incentive for veteran employees to learn new skills.

74
Using Pay-for-Learning Systems
As stated before, pay-for-learning plans can focus on depth or breadth. In
fact, there are two basic forms of skill-based pay systems,
increased-knowledge-based systems and multi-skill-based systems.

Increased-knowledge or depth deals with specialists, such as: specialists

in corporate law, finance, or welding and hydraulic maintenance. These
are a few examples to help understand that specialists are likely paid
based on their knowledge as measured by education level. Increased
knowledge-based systems pay employees based upon the range of skills
they possess in a single specialty or job classification. These are probably
the most common skill-based pay systems and at their simplest are
nothing more than technical skill ladders. For example, skilled trades
often have a pay scale that increases as employees acquire additional skills
and move from an entry to a journeyman level. Similar pay progressions
based upon skill level can be found in universities, law offices, and
research and development labs. Increased knowledge based systems are
sometimes called "Vertical" systems because pay is tied to the depth of
knowledge or skill in a defined job.

Multi-skill based systems or breadth deals with generalists with

knowledge in all phases of operations including marketing, manufacturing,
finance, and human resource. Employees in a multi-skill system earn pay
increases by acquiring new knowledge, but the knowledge is specific to a
range of related jobs. This means that pay increases come with
certification of new skills, rather than with job assignments. Multi-skilled
based systems are a newer, less common, and more revolutionary form of
skill-based pay. In this case, pay progression is tied to the number of
different jobs an employee can perform throughout the entire organization.
For example, in a manufacturing environment, employees might be paid
higher rates based upon their ability to perform jobs upstream and
downstream from their normal assignment in the production process.
Maximum pay rates would be paid to employees who can perform most or
all jobs within the plant.

Because they tie pay to the number of different jobs a person can perform,
Multi-skilled-based systems are sometimes called horizontal systems.
These will enhance the benefits of greater labor flexibility and job mobility
for employees.

Advantages of Pay-for-Learning Systems

• Greater Flexibility
• Leaner Staff
• Improved Problem Solving
• Improved Horizontal Communication
• Improved Vertical Communication
• Supports Employment Security
• Improved Lob Satisfaction

Limitations of Pay-for-learning

75
 • Increase in Labor Costs
• Increase in Training Costs
• Increased Administrative Costs
• Potential bureaucracy

Real World Use of Pay-for-Learning Systems

There are well-known companies using pay-for-learning systems. AT&T,
Corning, Ford Motor Company, General Mills, General Motors, Maxwell
House, and Volvo to name a few. General Mills uses four skill ―categories‖
corresponding to the steps in the production process: materials handling,
mixing, filling, and packaging. Each skill category has three blocks: 1)
entry level, 2) accomplished, and 3) advanced. An employee can start at
entry level and after becoming certified on the skill needed for the next
block, will be compensated for learning those skills. The employee can
continue this process as allowed.

What is valued Skill Blocks

Quantify the value Skill Levels
Mechanisms to Certification and price skills in external market
translate into pay
Pay structure Based on skills certified/market
Pay increase Skill acquisition
Managers focus 1) Utilize skills efficiently 2) Provide training 3)
Control costs via training, certification, and work
assignments
Employee focus Seek skills
Procedures Skill analysis, and Skill certification
Advantages Continuous learning, Flexibility, and Reduced
work force
Limitations Requires cost controls and Potential bureaucracy

TEAM BASED COMPENSATION

Teams have become a popular way to organize business because they offer
companies the flexibility needed to meet the demands of the changing
business environment. While many companies have been quick to
organize their workforce into teams, they have not been as eager to
implement team-based compensation systems. However, if team-based
organizations continue to utilize old, individually-oriented pay systems,
they will not fully realize the benefit of highly cooperative and motivated
work teams.

Team compensation is a way of rewarding performance in team settings.

That is, individuals are rewarded based on the performance of the team as

76
opposed to individual performance. There are different kinds of
compensation such as a portion of base pay, other financial rewards such
as gain-sharing, and non-financial rewards such as movie passes and gift
certificates.

Teams are defined as groups of individuals who work together to develop

products or deliver services for which they are mutually accountable.
Because of this new shift in organizational structure, employees are being
Organizations have been using teams more and more to carry out different
functions in the asked to work with others and their collective performance
is evaluated. Traditionally, employees have been compensated based on
their individual performance, but now they are being evaluated based on
how their teams perform. Therefore, it does not seem to make much sense
to compensate employees individually based on how their whole team
performs. Therefore, organizations are moving toward compensating
individuals based on team performance. Team compensation is a way of
rewarding performance in team settings. That is, individuals are rewarded
based on the performance of the team as opposed to individual
performance. Team compensation is often referred to as team-based
rewards or team-based pay. People learn to behave in certain ways based
on the rewards they receive. Therefore, in order to convey to people that
they want them to produce more in teams, reinforcement of behaviors that
lead to and sustain team performance is necessary. Individual bonuses
work against the team, thus lessening the team spirit.

Some examples of different forms of team-based rewards are: a portion of

the individual‘s base pay, other financial rewards such as gain-sharing,
and non-financial rewards such as recognition and praise. Gain-sharing
combines pay for performance and employee involvement; as performance
improves, employees share financially in the gain generally monthly or
quarterly. In surveys of the Fortune 1000 companies in 1990 and then in
1993, team-based pay has increased its prevalence and usage in
organizations from 59% to 70% in three years time. Anfuso, however,
warns that only 1 to 20% of the workforce in these organizations receive
team-based incentives.

If companies stress the organizational role of the employee, then the

employee will view their incentives as entitlements based upon that
membership role. This will de-emphasize the "personal" role where they
only think about themselves and not about the organization as a whole.
This helps the organization in that it increases the amount of commitment
from the employee. Team pay has also been associated with an increased
level of motivation. A company needs to be prepared to support
organizational changes in order to reward the new behaviors and results
produced. This allows them to become capable team members. Therefore,

77
it is recommended that team-based reward systems should be
implemented in order to reinforce team behavior.

Various forms of team-based rewards are used in organizations - they fall

into three categories: a proportion of their base pay, other financial
rewards, and non-financial rewards. 5-10% of the base pay is usually a
sufficient amount to reward individuals. Gain-sharing, defined more
specifically, is another type of financial reward that shares group
improvement in productivity, cost savings, and quality with each employee
in the group. Other types of financial rewards are lump-sum awards where
individuals receive an amount of money that is independent of their base
pay, discretionary bonuses given to teams based on after-the fact
judgment of their performance, and profit sharing where the employees
share a percentage of the organization‘s profit. Finally, non-financial
rewards are another alternative. For example, organizations may award
teams by recognizing them for exceeding expectations on the job.
Additional examples include coffee mugs, T-shirts, plaques, TV, DVD
Player, vacation vouchers etc.

Several companies give team bonuses to sales, management, and

engineering staff. Their performance criteria are based on customer
satisfaction, sales revenue, and market share. It is important to link
employee objectives to company goals. The team‘s performance is
measured against the team revenue target and the market share. The
bonus is paid quarterly but not to poor performers.

Strategy and culture, are important first steps in any kind of design
process of a team-based compensation plan. Pay sends a loud message to
the employees about what is important in an organization. If teamwork is
what the company wants to emphasize, then it is important that the pay
structure reinforces that behavior. Strategy and culture and competencies
(personal attributes and behaviors such as attitudes, motives, and traits
that predict longer-term success) all need to be aligned with compensation
in order to be effective. Culture is important in the sense that it tells the
organization where you are and allows you to assess where it is that you
want to be. This process allows the organization to identify missing values,
skills, and behavior necessary to make the transition from one to the
other.

Team rewards are very difficult to develop and must be custom-tailored to

the organization‘s configuration. The effectiveness of rewards depends
upon the review and evaluation processes. Therefore, it is imperative that
organizations set up these programs only when the organization feels that
they have a stable design and has assessed which teams should be
rewarded.

78
Design Considerations

There are many considerations in the designing of the new compensation

plan. After the alignment of pay with strategy, culture, and competencies
of the employee, then the next step is to determine the type or types of
team in a particular organization. There are four types of teams: The first is
the parallel team that is defined as a part-time team that can be temporary
or permanent that employees participate on in addition to their normal
activities. The second type of team is a process team that carries out the
work processes and is done collectively by members of a team. A project, or
time-based team, is the third type of team and is the opposite of a parallel
team in that members work full-time for the duration and until completion
of a project. A fourth type is a hybrid organization that includes a mixture
of the teams described above.

Another consideration that the organization should take into account is

the number of job categories in an organization. The concept is termed
broad banding, or encompassing more jobs into fewer bands, and it is used
to determine the number of pay grades. The narrower the band, the fewer
the differences, and the greater the equality of pay opportunity among the
people within that band. After determining the bands, one must determine
the parameters used to pay every job. This is the base pay for each job.
Setting base pay is usually based on market pricing and job evaluations.
Market pricing indicates what others in the market would pay for the same
job. Job evaluations assess what skills and work is involved in a particular
job. Also, one must determine the total pay allocated to the base pay.

The next step in the design of a team-based compensation system is the

performance appraisal stage. The criteria upon which the rewards are
given are necessary in order to create the link between strategy and reward.
An organization must define the performance criteria of their employees.
There are four criteria used in measuring team performance. The first is a
demonstration of behavioral competencies that are personal attributes
and behaviors such as attitude, motives, and traits that predict
longer-term success. The second criterion is the acquisition and/or the
demonstration of skills and knowledge. Thirdly, there needs to be an
achievement of specific objectives within a specified period of time, best
known as management by objectives (MBO‘s). Finally, the results
(quantitative or qualitative) are used to measure the performance of the
team.

These criteria are different depending on the type of team present in an

organization. The parallel teams would primarily use the MBO‘s approach
followed by the demonstration of behavioral competencies and the results
of the team effort. In a process team, the primary criterion used is the
demonstration of behavioral competencies followed by the acquisition of
skills and knowledge and results. Finally, in a project team, the most

79
important criteria is what the results are followed by demonstration of
behavioral competencies and the achievement of specific objectives in a
specified period of time.

Another component of pay is the increase in base pay. Individuals will

sometimes ask for raises and in a team-based environment, it is much
more difficult. One reason for the difficulty lies in the fact that different
types of teams require different ways in which to handle the demands to
increase base pay.

Table 1. Different Approaches to Increase Base

Pay as a Function of Team Type

Team Type Increase Approach

 Parallel Merit Increases are desired with

team and regular job performance
 Process General Wage Increase
 Skill-based Pay
 Pay tied to demonstration of Competencies
 Peer Evaluations that assess the team
members‘ contribution to the performance
of the entire team
 Project Merit Increases are desired where
the demonstration of required skills and
competencies are the criteria used to
determine whether or not an increase is in
order.
Note: Adapted from Compensation for Teams: How
to Design and Implement Team-Based Reward
Systems (p. 125), by S. E. Gross, 1995, NewYork:
American Management Association. Copyright
1995 by The Hay Group, Inc.

The third component of pay is recognition. Recognizing team results is very

important in the sense that it can motivate team members and increase
the team‘s level of cohesiveness. If team members are praised for a job on
which they all contributed, their teamwork will be reinforced. Recognition
can actually have more of a motivating effect that reaches into the future.
Non-monetary rewards such as plaques, trophies, vacation trips, and
small gifts can be the best incentive for team members. However, the most
important part of this kind of recognition is that management must give it
with sincerity. In implementing recognition, the organization must reward
teams that exceed objectives, they must determine who is eligible, and

80
they should have several levels of recognition. For example, appreciation
non-cash rewards, awards for significant financial contribution, and
awards for extraordinary financial results. It is recommended that
non-cash rewards be the primary type of recognition for all team types,
and cash be the secondary reward for parallel and process teams but not
for project teams.

The fourth main component of a compensation plan is the incentive plan.

There are nine basic elements to an incentive plan that needs to be
assessed beforehand. These are eligibility to receive incentives,
participation, measurement, alignment of team and organizational goals,
funding, timing (shorter time between payoffs is better because it raises
motivation), benefits, administration, and evaluation of the whether or not
the plan needs changes.

Implementation of a reward system is the next step after identifying and

assessing the different pay components. There are three phases to
implementation. The first phase is labeled feasibility, which asks whether
the strategy in the organization is feasible at the stage, they are in
currently. It includes planning, environmental assessment, readiness
diagnostic, and the compensation strategy. The second phase is the design
phase and it includes the design concept, the design components, testing
of the compensation strategy, transition approach, union participation
strategy, and administrative requirements. The third phase is the actual
implementation of the program and it includes education/communication
program, organizational integration, and ongoing monitoring. As
mentioned earlier, it is important that the organization be ready to
implement the new compensation system. The team design needs to be
stable before implementing a new pay structure. The organization must
stress communication and flexibility. There must be management support
of teams; the culture must be one of cooperation; and there also needs to
be strong administrative support that records team performance. Only
after these elements are in place should an organization attempt to design
and implement a team-based compensation system.

For any team-based pay plans to be implemented, there must be a link to

the organization‘s strategy. Team goals should be subsumed under the
organization‘s overall goals and objectives. Pay should be aligned with the
accomplishment of those objectives. A performance measurement system
also needs to be established. It is imperative that there are explicit
measures of how well the team is performing in reaching the desired goals.
These measures usually include such factors as productivity and quality.
This is important in meeting goals and also measuring how much the team
members should be paid according to their measured performance from
the predetermined criteria. Another important design consideration is the
allocation method to the team members. Various methods of distributing

81
rewards - Equal payments to all members of the team; differential
payments to team members based on their contribution to the team‘s
performance; and differential payments determined by a ratio of each
group member‘s base pay to the total base pay of the group. The first
method fosters cooperation, whereas the second method may result in
some members feeling slighted. A measure of cooperation and teamwork
must be built in to this plan if used. The third ratio method reflects the
market rates of the jobs. The last design consideration is the payment
method. Team rewards should be kept separated from base pay so that the
team member knows that their reward is strictly because of the
performance of their team.

Team pay results in- Improved productivity (Better results are reported for
those using team incentives than those using individual incentives in a
team environment. These results seem to be long-term, as well); Improved
employee satisfaction with the job and pay (This is due, in large part, to the
improvement of their skills through teamwork and to the greater control
over their pay than in the past); Reduced costs (Production costs are often
decreased as employees perform more effectively and efficiently as a team);
Reduced turnover and absence(because employees feel that they have a
stake in the production, and they are more satisfied); An advantage to the
customers is that the product is improved and the service quality is
improved (This is because the employees start becoming well versed in the
operations of the team and can, therefore, identify some of the important
product and service improvements that can be made).

Conclusion

Because more and more organizations are moving toward the use of teams
to do most of the work, a shift in the way that workers are being
compensated are in order. No longer is it appropriate to reward employees
strictly on how they perform individually when they are no longer
performing individually. Their performance is based solely on how the
team performs. Therefore, organizations need to start compensating
individuals based on how their team performs through team-based
rewards.

Under whatever circumstances, the compensation plan must be one that

can be communicated easily to the employees. Another consideration that
must be taken into account is fairness. Fairness is subjective, but it can be
remedied by having employees participate in the design of the
compensation plan.

There are a number of prerequisites to an effective teaming environment

that creates a foundation for the reward system. These are: interdependent
jobs; accurate and objective measures of the team‘s performance;
management support for teams, the organizational culture emphasizes

82
cooperation among the team members at all levels; there are effective
communication skills and flexible channels between managers and
employees; a flat organizational structure that is ideal in fostering a team
approach, because there are fewer levels of hierarchy; a small group size
that facilitates communication and cooperation; no union or positive
union-management relations that forces a hierarchy on the organization;
there is strong administrative support that records performance based on
team accomplishments; and there are variable external environmental
factors that have flexibility to deal with changing technology.

One must not forget the individual in a team. The rewarding of individuals
is still important, but it must be combined with some sort of team-based
reward as well. The most effective recognition programs are those that
recognize outstanding individuals but also reward the collaborative efforts
of the team. Ideally, individual rewards should reward the fact that the
employee has been a "team player." This helps to foster an environment of
cooperation and collaboration.

All team-based reward systems are different in different organizations.

There is no template that can be placed in an organization to determine
what kind of plan they should use. Finding the "correct formula" for any
particular organization will be the most difficult part, but with a lot of
planning, an organization will be able to find the right mix of rewards for
the teams in their organization.

ROLE OF WAGE BOARD & PAY COMMISSIONS

A Pay Commission is a panel comprised of members of the Union Cabinet

of India for hiking the salaries of government employees. Pay Commissions
were set up to reshape & revise the salary structure of central government
servants.
The Central Pay Commissions were set up in the past at intervals of 10 to
13 years. These Pay Commissions examined various issues such as pay
and allowances, retirement benefits, conditions of service, promotion
policies, etc. and submitted recommendations thereon. The extant rules
do not stipulate any specific time period for constitution of a Pay
Commission for Central Government employees.

83
Till now five Central Pay Commissions have been constituted as under: -
Pay Commission Date of Date of Submission of Report
Appointment
First Pay May, 1946 May, 1947
Commission
Second Pay August, 1957 August, 1959
Commission
Third Pay April, 1970 March, 1973
Commission
Fourth Pay June, 1983 Three Reports submitted in June,
Commission 1986; December, 1986 and May,
1987 respectively.
Fifth Pay April, 1994 January, 1997
Commission
The first pay commission was constituted in May 1946, and had submitted
its report in a year. The second panel had been set up in August 1957 and
had given its report exactly after two years, with a financial impact was
Rs.396 million. The third pay commission set up in April 1970 gave its
report in March 1973, and created proposals that cost the government
Rs.1.44 billion. The fourth was constituted in June 1983, its report was
given in three phases within four years and the financial burden to the
government was Rs.12.82 billion.[1] The Fifth Pay Commission was set up
in 1994 and implemented in 1997 at a cost of Rs. 17,000 crore. In July
2006, the Cabinet approved setting up of the sixth pay commission which.
The cost of hikes in salaries is anticipated to be about Rs. 20,000 crore for
a total of 5.5 million government employees as per the 6th Pay Commission.
The employees had threatened to go on a nationwide strike if the
government failed to hike their salaries.
Reasons for the hikes include rising inflation due to the forces of
globalization and liberalization of the Indian economy.
The Class 1 officers in India are grossly underpaid with an IAS officer after
25 years of work experience earning just Rs.550000 as his take home pay.
Even a fresh graduate can earn Rs.20000 as initial salary but the person
with talent and skill who even earned reputation as good and result
oriented worker in government job is getting much lesser salary after
serving for more than a decade in government department is very much
dejected which reduces his performance leve.

The government should be model employer in all aspects. But if the burden
on taxpayers keeps increasing in return for successively inferior
governments there are only two ways to deal with the situation: Impose a
wage freeze across the board for next 10 yrs and resume revision based on
84
performance. Alternatively,make the 6th pay commission a permanent
performance evaluation cum pay commission with statutary authority and
appellate remedies to deal with grievances of each organised group
including cadres based on mutually agreed norms by an independent body
of people outside the government.

Sixth Pay Commission

Last year, the central government approved the setting up of the sixth pay
commission to upwardly revise salaries and perks for its 550,000
employees across the country. A cabinet meeting headed by Prime Minister
Manmohan Singh decided that the term of the commission would be for 18
months. 'The commission will comprise one chairman of the rank of
minister of state, one part time member and one member-secretary of the
rank of secretary or additional secretary in the central government. The
proposal is estimated to cost the government an additional Rs.200 billion
($4.2 billion). The Commission will consider certain aspects of service
conditions of central government employees. But several guesstimates are
being made before the report is announced. For over four million
government employees, including military personnel, the Sixth Pay
Commission may not usher in a dramatic new era where salaries are more
in tune with skyrocketing wages in the private sector. As per the draft
salary structure that is now under discussion between the commission
and the finance ministry, even at the top-most level — the Union cabinet
secretary — the fixed salary will be just about Rs.80,000 per month, up
from Rs.30,000 earlier.

As head of the Indian bureaucracy, the cabinet secretary notionally runs

India‘s largest corporation of almost 3.3 million people, excluding over a
million men in military uniform. His proposed salary wouldn‘t be a patch
on CEO salaries in the corporate sector, where annual compensation
packages run into crores of rupees for even medium-sized companies.
At the bottom of the totem pole, starting salaries for Class IV employees
would rise from a basic of Rs2,550 to Rs6,500 — which is the new
minimum pay for anybody working in government. And the jump is not as
high as it seems since the new basic salary would absorb the earlier
dearness allowance (DA).

WAGE BOARDS

The Wage Board Division comes under Ministry of Labour and

Employment and majorly deals with the following:
1. Payment of Bonus Act, 1965
2. Working Journalists and Other Newspaper Employees (Conditions of
Service) and Miscellaneous Provisions Act, 1955

85
In the 1950s and 60s, when the organized labour sector was at a nascent
stage of its development without adequate unionization or with trade
unions without adequate bargaining power, Government in appreciation of
the problems which arise in the arena of wage fixation due to absence of
such bargaining power, constituted various Wage Boards. The Wage
Boards are tripartite in character in which representatives of workers,
employers and independent members participate and finalize the
recommendations. The utility and contribution of such boards in the
present context are not beyond question. Except for the Wage Boards for
journalists and non-journalists newspaper and news-agency employees,
which are statutory Wage Board, all other Wage Boards are non-statutory
in nature. Therefore, recommendations made by these Wage Boards are
not enforceable under the law.

The importance of the non-statutory Wage Boards has consequently

declined over a period of time and no non-statutory Wage Board has been
set up after 1966, except for sugar industry, where last such Wage Board
was constituted in 1985. The trade unions, having grown in strength in
these industries, are themselves able to negotiate their wages with the
management. This trend is likely to continue in future.

The Working Journalists and other Newspaper Employees (Conditions of

Service) and Miscellaneous Provisions Act, 1955 (45 of 1955) (in short, the
Act) provides for regulation of conditions of service of working journalists
and non-journalists newspaper employees. The Section 9 and 13 C of the
Act, inter-alia, provide for constitution of two Wage Boards for fixing or
revising rates of wages in respect of working journalists and
non-journalists newspaper employees, respectively. The Central
Government shall, as and when necessary, constitute Wage Boards, which
shall consist of
(a) Three persons representing employers in relation to Newspaper
Establishments;
(b) Three persons representing working journalists for Wage Board under
Section 9 and three persons representing non-Journalist newspaper
employees for Wage Board under Section 13 C of the Act.
(c) Four independent persons, one of whom shall be a person who is, or has
been a judge of High Court or the Supreme Court, and who shall be
appointed by the Government as the Chairman thereof.

Since 1955, the government has constituted 5 wage boards at regular

intervals for the working journalists and non-journalist newspaper
employees. The following table gives the details of the constitution of wage
boards and other relevant details: Constitution of Wage Boards for
Working Journalists and Non-Journalists Newspaper Employees in the
Past

86
S. Name of the Date of Date on Date of Remarks
No. Wage Board appointment which final acceptance of
of Wage report was recommendations
Board submitted by the Govt.
to the Govt
I Wage Board for 02-05-1956 NA 10-05-1957 -
Working
Journalists
II (a) Wage Board 12-11-1963 17-07-1967 27-10-1967 -
for Working
Journalists
(b) Wage Board 25-2-64 17-7-67 18-11-67 -
for
Non-Journalist
Newspaper
Empl.
III (a) Wage Board 11-06-1975 13-08-1980 26-12-1980 Converted
for Working into 1
Journalists man
Tribunals
on 9th
Feb 1979.
(b) Wage Board 06-02-1976 13-08-1980 20-07-1981
for
Non-Journalist
Newspaper
Employees
IV Wage Boards 17-07-1985 30-05-1989 31-08-1989 -
for Working
Journalists
and
Non-Journalist
Newspaper
Employees
V Wage Boards 02-09-1994 25-07-2000 05-12-2000 and -
for Working 15-12-2000
Journalists
and
Non-Journalist
Newspaper
Employees

The last Wage Board, namely the Manisana Wage Board, was set up on
2nd September 1994, which submitted its report to the Government on
25th July, 2000. The Government accepted the recommendations of the

87
Manisana Wage Board, and notified the same for implementation with
minor modifications, vide notifications dated 5.12.2000 and 15.12.2000.
The prime responsibility for implementing the recommendations of the
Wage Board rests with the concerned State Governments / Union
Territories under the provision of the Act.

The newspaper employees unions have been demanding constitution of

fresh Wage Boards as more than 10 years have elapsed after the
constitution of last Wage Board and they felt the last Wage Boards had not
taken into consideration the boom in the newspaper sector on account of
globalization and liberalization.

Although the Working Journalists and Other Newspaper Employees

(Conditions of Service) and Miscellaneous Provisions Act, 1955 does not
say anything about the periodicity of constitution of Wage Boards, it was
felt that the time was ripe for constitution of fresh Wage Boards as more
than 10 years have elapsed since the last Wage Boards were constituted.

The Cabinet in its meeting held on 18.12.2006 approved the proposal for
constitution of two Wage Boards, one for working journalists and another
one for non-journalist newspaper employees, under Sections 9 and 13 C of
the Working Journalists and Other Newspaper Employees (Conditions of
Service) and Miscellaneous Provisions Act, 1955. The Wage Boards have
been given 3 years to submit there reports to the Government.

The present Wage Boards have been constituted vide Notification

No.V-24040/3/2004-WB dated 24th May, 2007 under the Chairmanship
of Dr. Justice K. Narayana Kurup, formerly Judge High Court of Kerala
and Acting Chief Justice High Court of Madras. Sh. K.M.Sahni, former
Secretary, Ministry of Labour and Employment has been appointed as
full-time Member-Secretary of the Wage Boards. The Wage Boards have
started functioning from Delhi. The Composition of the two Wage Boards is
indicated in the relevant notifications.

Wage boards are constituted under the Working Journalists and other
Newspaper Employees (Conditions of Service) and Miscellaneous
Provisions Act, 1955 that regulates the conditions of employment of
journalists and employees of news agencies and newspapers. It has been
instrumental in recognizing the key role decent working conditions play in
building quality media. The country‘s three major journalists groups – the
Indian Journalists‘ Union, the National Union of Journalists, India and the
All India Newspaper Employees Federation – formed a confederation to
demand that the government made good on promises to re-launch the
country‘s wage board system.

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Key Definitions / Concepts

Commission A commission is compensation based on a percentage of

sales in units or dollars.
Competency-based pay A combination of skill-based, knowledge-based
and credential-based pay
Cost-of-living adjustment (COLA) Wage increase or decrease pegged to
the rise and fall in the cost-of-living index.
Differential piece rate (Taylor plan) A piecework plan that pays on the
basis of two separate piecework rates: one for those who produce below or
up to standard and another for those who produce above standard.
Feedback pay Based on aligning pay with strategic business objectives
and then establishing a direct connection between the job
holder and his or her part in accomplishing these goals.
Gainsharing plans Companywide group incentive plans that, through a
financial formula for distributing organization-wide gains,
unite diverse organizational elements in the common pursuit of improved
organizational effectiveness.
Guaranteed annual wage (GAW) A plan in which the employer guarantees
the employee a certain number of weeks of work at a certain wage after the
worker has passed a probation period.
Knowledge-based pay Knowledge-based pay rewards employees for
acquiring additional knowledge both within the current job and in new job
categories.
Merit pay Individual pay increases based on the rated performance
of the individual employee in a previous time period.
Open system A pay system where pay ranges and even an individual's pay
are open to the public and fellow employees.
Pay compression A situation in which employees perceive too narrow a
difference between their own pay and that of their colleagues.
Production bonus system An individual incentive system that pays an
employee an hourly rate plus a bonus when the employee exceeds the
standard.
Profit sharing plans Profit-sharing plans distribute a fixed percentage of
total organizational profit to employees in the form of cash-deferred bonus
amounts.
Salary Pay calculated at an annual or monthly rate rather than hourly.
Secret system A compensation system where pay is regarded as privileged
information known only to the employee, the supervisor, and staff
employees such as HRM and payroll.
Severance pay An income bridge from employment to unemployment and
back to employment, provided by some employers.

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Skill-based pay An alternative to job-based pay that sets pay levels on the
basis of how many skills employees have or how many jobs they can do.
Spot gainsharing A gainsharing system that focuses on a specific problem
in a specific department rather than on performance improvements for the
whole organization.
Standard-hour plan An individual incentive plan that sets wages on the
basis of completion of the job or task in some expected period of time.
Straight piecework An individual incentive plan where pay fluctuates on
the basis of units of production per time period.
Suggestion system A formal method of obtaining employees' advice for
improvement in organizational effectiveness; it includes some kind of
reward based on the successful application of the idea.
Supplementary Unemployment Benefits (SUB) The employer adds to
unemployment compensation payments to help the employee achieve
income security.
Total Compensation Approach Total compensation is made up of base
pay, variable pay, and indirect pay (benefits).
Variable pay Any compensation plan that emphasizes a share focus on
organizational success, broadens the opportunities for incentives to
nontraditional groups (such as non-executives or non-managers), and
operates outside the base pay increase system.
Wage Pay calculated at an hourly rate.

Piece Rate
Wage Payment Systems are the different methods adopted
by organizations by which they remunerating labour. There exist several
systems of employee wage payment and incentives, which can be
classified under the following heads :
Time Rate Systems
- Time Rate System: Under this system, the worker is paid by the
hour, day, week, or month.
- High Wage plan: Under this plan a worker is paid a wage rate which
is substantially higher than the rate prevailing in the area or in the
industry. In return, he is expected to maintain a very high level of
performance, both quantitative and qualitative.
- Measured day work: According to this method the hourly rate of
the time worker consists of two parts viz, fixed and variable. The
fixed element is based on the nature of the job i.e. the rate for this
part is fixed on the basis of job requirements. The variable portion
varies for each worker depending upon his merit rating and
the cost-of-living index.
- Differential time rate: According to this method, different hourly
rates are fixed for different levels of efficiency.
Payment by Results
- Piece Work

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 o Straight piecework system: The wages of the worker depend
upon his output and rate of each unit of output; it is in fact
independent of the time taken by him.
o Differential piece work system: This system provide for higher
rewards to more efficient workers. For different levels of
output below and above the standard, different piece rates are
applicable.
- Combination of Time and Piece Work
o Gantt task and bonus system: the system consists of paying a
worker on time basis if he does not attain the standard and on
piece basis (high rate) if he does.
o Emerson‘s efficiency system: Under this system minimum
time wages are guaranteed. But beyond a certain efficiency
level, bonus in addition to minimum day wages is given.

Piece-rate pay gives a payment for each item produced – it is therefore the
easiest way for a business to ensure that employees are paid for the
amount of work they do. Piece-rate pay is also sometimes referred to as a
―payment by results system‖.

Piece-rate pay encourages effort, but, it is argued, often at the expense of

quality. From the employee‘s perspective, there are some problems. What
happens if production machinery breaks down? What happens if there is a
problem with the delivery of raw materials that slows production? These
factors are outside of the employee‘s control – but could potentially affect
their pay.

The answer to these problems is that piece-rate pay systems tend, in

reality, to have two elements:
• A basic pay element – this is fixed (time-based)
• An output-related element (piece-rate). Often the piece-rate element is
only triggered by the business exceeding a target output in a defined
period of time

Case study: Piece-rate pay in practice in the UK – Home-based

workers
In the UK many thousands of people engage in what is known as
―home-based work‖. This refers to work:
• In the home, or near the home in premises that are not those of an
employer
• For a cash income (i.e. not unpaid household work)
Whilst there are many successful business people and well-paid
professionals working from home, the use of piece-rate pay is focused is
on those at the other end of the scale – home-based workers, mainly
women, who earn only a subsistence level income.
Subsistence level home-based workers fall into two broad categories:
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• Those who work for an employer, intermediary or subcontractor for
a piece-rate, who are not responsible for designing or marketing the
product, but simply contribute their labour. These workers are often called
subcontracted or dependent home-workers
• Workers who design and market their own products, but who cannot be
considered to be running small businesses - known as own-account
workers.
The majority of home-based workers are women who do home based work
in order to combine earning cash with other responsibilities, such as
child-care and household management. Many earn well below the local
minimum wage or average earnings. Most dependent workers work
informally, without a proper employment contract. They are rarely
organised or supported by formal trade unions.
Home-based work is found in most sectors of the economy, both modern
and traditional industries.
Good examples include:
• Production of garments and shoes
• Assembly of electronic, plastic and metal components
• Many kinds of packing work
• Weaving and dyeing of textiles in the traditional sectors
• Handicraft work
• Sewing and knitting garments
• Assembling toys
• Data-processing

It used to be thought that home-based work was an old-fashioned form of

employment that would die out with the rise of modern industry. However,
over the last 20 years much large-scale industry has reorganised its
production, subcontracting work to smaller companies, often in other
countries. At the end of the chain there are often informal workshops and
home-based workers.
Subcontracted homework is a form of production which allows companies
to reduce their costs by:
• Outsourcing production to lower-paid workers, usually without formal
contracts, employment and social protection or even a regular supply of
work
• Passing on some of the costs of heating, lighting and storage to the
workers themselves
• Avoiding responsibility for health and safety for these workers
• Using home-based workers as a source of flexible labour
Some of the problems faced by home-based workers include:
• Irregular work – and therefore irregular income
• Earnings well below average
• No economic or social security for sickness, maternity or old age
• Long working hours

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• Potential health problems caused by repetitive processes and inadequate
health and safety

Frederick Taylor, 1895

Frederick Taylor's theories about manufacturing methods helped to
revolutionize production as well as business management. Taylor, a
mechanical engineer, first presented the results of his researches at a
meeting of the American Society of Mechanical Engineers in June 1895. His
paper, a portion of which appears below, impressed his colleagues and
quickly led to the implementation of his ideas in various industrial
operations. One of Taylor's assistants described his system as one in which
"the employer attempts to do justice to the employee, and in return requires
the employee to be honest." Taylor's analysis of the most efficient ways to
pay workers for their efforts appealed to industrialists because of its
"scientific" nature as well as its commonsensical approach to human
relations. Taylorization, which was widely copied after 1900, was the
forerunner of present-day industrial management, especially in the area of
time and motion studies.

The ordinary piecework system involves a permanent antagonism between

employers and men, and a certainty of punishment for each workman who
reaches a high rate of efficiency. The demoralizing effect of this system is
most serious. Under it, even the best workmen are forced continually to act
the part of hypocrites to hold their own in the struggle against the
encroachments of their employers.
The system introduced by the writer, however, is directly the opposite,
both in theory and in its results. It makes each workman's interests the
same as that of his employer, pays a premium for high efficiency, and soon
convinces each man that it is for his permanent advantage to turn out
each day the best quality and maximum quantity of work.

The writer has endeavored in the following pages to describe the system of
management introduced by him in the works of the Midvale Steel
Company, of Philadelphia, which has been employed by them during the
past ten years with the most satisfactory results.

The system consists of three principal elements: (1) an elementary

rate-fixing department; (2) the differential rate system of piecework;
(3) what he believes to be the best method of managing men who work
by the day.

Elementary rate fixing differs from other methods of making piecework

prices in that a careful study is made of the time required to do each of the
many elementary operations into which the manufacturing of an
establishment may be analyzed or divided. These elementary operations
are then classified, recorded, and indexed, and, when a piecework price is
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wanted for work, the job is first divided into its elementary operations, the
time required to do each elementary operation is found from the records,
and the total time for the job is summed up from these data. While this
method seems complicated at the first glance, it is, in fact, far simpler and
more effective than the old method of recording the time required to do
whole jobs of work, and then, after looking over the records of similar jobs,
guessing at the time required for any new piece of work.

The differential rate system of piecework consists briefly in offering two

different rates for the same job; a high price per piece, in case the work is
finished in the shortest possible time and in perfect condition, and a low
price, if it takes a longer time to do the job or if there are any imperfections
in the work. (The high rate should be such that the workman can earn
more per day than is usually paid in similar establishments.) This is
directly the opposite of the ordinary plan of piecework; in which the wages
of the workmen are reduced when they increase their productivity.

The system by which the writer proposes managing the men who are on
daywork consists in paying men and not positions. Each man's wages, as
far as possible, are fixed according to the skill and energy with which he
performs his work and not according to the position which he fills. Every
endeavor is made to stimulate each man's personal ambition. This involves
keeping systematic and careful records of the performance of each man as
to his punctuality, attendance, integrity, rapidity, skill, and accuracy, and
a readjustment from time to time of the wages paid him in accordance with
this record.

The time rate system is that system of wage payment in which the
workers are paid on the basis of time spent by them in the factory.
Time rate system is quite useful for organizations that use costly
inputs for quality outputs. It is beneficial for average and below
workers. It assures regular income and creates the feeling of
economic security among the workers. Time rate system does not
discriminate the workers and is preferred by trade unions.

Under this system, the workers and employees are paid wages on the
basis of the time they have worked rather than the volume of output
they have produced. Hence, according to this system, wages are paid
on hourly, weekly or monthly basis. Under time rate system, the
wages earned by a worker is determined by using the following
formula.

Wages Earned = Time spent (Attended) x Wage rate per

hour/day/week/month

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The advantages of this system of management are:
First, that the manufactures are produced cheaper under it, while at the
same time the workmen earn higher wages than are usually paid.
Second, since the rate fixing is done from accurate knowledge instead of
more or less by guesswork, the motive for holding back on work, or
"soldiering," and endeavoring to deceive the employers as to the time
required to do work is entirely removed, and with it the greatest cause for
hard feelings and war between the management and the men.
Third, since the basis from which piecework as well as day rates are fixed
is that of exact observation instead of being founded upon accident or
deception, as is too frequently the case under ordinary systems, the men
are treated with greater uniformity and justice, and respond by doing more
and better work.
Fourth, it is for the common interest of both the management and the men
to cooperate in every way so as to turn out each day the maximum
quantity and best quality of work.
Fifth, the system is rapid, while other systems are slow, in attaining the
maximum productivity of each machine and man; and when this
maximum is once reached, it is automatically maintained by the
differential rate.
Sixth, it automatically selects and attracts the best men for each class of
work, and it develops many first-class men who would otherwise remain
slow or inaccurate, while at the same time it discourages and sifts out men
who are incurably lazy or inferior.
Finally, one of the chief advantages derived from the above effects of the
system is that it promotes a most friendly feeling between the men and
their employers, and so renders labor unions and strikes unnecessary.
There has never been a strike under the differential rate system of
piecework, although it has been in operation for the past ten years in the
steel business, which has been during this period more subject to strikes
and labor troubles than almost any other industry.
Other advantages
Simplicity: -The method of wage payment is very simple. The workers will
not find any difficulty in calculating the wages. Time rate system is simple
to understand and easy to calculate.
Security: - Workers are guaranteed minimum wages for the spent by then.
There is no link between wages and output; wages are paid irrespective of
output. They are not supposed to complete a particular task for getting
their wages.
Better quality of goods: - When workers are assured of wages on time basis.
They will improve the quality of goods. If wages are related to output then
workers may think for increasing production without bothering about
quality of goods.
Support of unions: - This method is acceptable to trade unions because it
does not distinguish between workers on the basis of their performance.

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Beneficial for beginners: - Wage rate system is good for the beginners
because they may not be able to reach a particular level of production in
the beginning.
Less wastage: - The workers will not be in a hurry to push through
production. The material and equipotent will be properly handled without
wastage.

Disadvantages of Time Rate System

* Time rate system does not help in increasing output and improving
efficiency as there is no correlation between effort and reward.
* Time rate system is not justifiable between efficient and inefficient
workers and skilled and unskilled workers.
* Time rate system pays for idle time, which increases the cost of
production.

Time rate system encourages a go-slow tendency among workers during

working hours and encourages them to work overtime.
* It is difficult to estimate exact labor cost in advance.
* It requires strict supervision to get the required quantity of output.
This is the oldest method of wage payment. The time is made basis for
determining wages of a person. The wages are paid according to the time
spent by worker4s irrespective of his output of work done.
No incentive for efficiency: - This method does not distinguish between
efficient and inefficient workers. The payment of wages is related to time
and not output. Thus, the method gives no incentive for producing more.
Wastage of time: - Workers may while away their time because they will
not be following a target of production. Efficient workers may also follow
slow workers because there is no distinction between them.
Low production: - Since wages are not related to output, workers may be
producing at slower rate. The responsibility for increasing production may
mostly lie on supervision.
Difficulty to determine labor cost: - Because wages are not related to
output, employees find it difficult in determining labor cost per unit.
More supervision requires: - Under this system workers are not offered
incentives for production. To get more work from them there will be a need
for greater supervision.
Employer-employee trouble: - When all employee, irrespective of their
merit are treated equally there is likely to be a trouble between
management and workers.

Job rate is defined as the highest rate of compensation for a job class.
Compensation includes all payments and benefits paid to an employee
who performs functions which entitle that individual to be paid a fixed or
ascertainable amount. When comparing job rates, we have to consider all
forms of compensation. Normally the job rate for a job class will be the

96
highest actual rate paid to an incumbent in the job class, but there are
some exceptions. For example, a newly hired employee in a single
incumbent job class is likely to be paid a start rate rather than job rate; in
this case, it is necessary to determine what that job rate would realistically
be. Similarly, a job rate exists for a job class, even if that job class is
temporarily vacant.
Calculating Salaries, Wages and Payments
Calculating the job rate for a job class depends on the compensation
system the employer uses to set the pay. The following are commonly used
methods for determining how pay levels are applied to jobs.
1. No formal system for determining pay
If there is no pay administration system in place, the maximum rate
paid to any incumbent of a job class is usually considered to be the
job rate for that job class. There may be exceptions, however. If, as a
result of turn-over and new hires, an incumbent is making less than
the previous maximum rate, the employer must determine the
highest rate which would be available to a job class at any given time.
For example, an employer identifying a wage gap on January 1, 1993,
sees the highest rate paid to an incumbent in a job class under
consideration is $10.00 per hour. However, that incumbent has
been in the job for only 2 months. It is necessary to determine the
highest rate paid to that job class over a longer period to time,
perhaps one or two years. If the previous employee had earned
$12.00 per hour, and there were no general increases or clawbacks
since that time, $12.00 would be deemed the job rate.
2. Single rate of pay
In a single rate of pay structure, a rate of pay is specified for a job
class and an employee's pay does not vary from that rate for any
reason. In this case, the job rate is the single rate of pay.
3. Predefined salary or wage ranges
Many employers maintain a definite salary or wage range with a
minimum and a maximum for some or all of their job classes. The
maximum of the range is the job rate, provided that the maximum
can be demonstrated to be attainable (this does not mean that
employees have to be at the stated maximum). Typically, the
maximum is achieved based on length of service, merit provisions,
or some combination of the two.

Pay ranges for different job classes in the same establishment may
differ in width and/or number of steps. In these cases, it is the
differences between the job rate or maximum for female job classes
and that for their comparators which are used to calculate the pay
gap. Care is required in comparing job classes with different pay
bands. The Pay Equity Hearings Tribunal has considered the intent
of the Act on this issue, and commented in Gloucester (No. 2) (1991)

97
 2 P.E.R. "that it would be inappropriate for employees in female job
classes to take twice as long [as employees in the male comparator
job class] to get the job rate."

Regardless of the compensation system in place, job rate is the top

rate available to a job class. Any differences in compensation to be
corrected under the Pay Equity Act are the amounts by which job
rates for male job classes exceeded the job rates for the female job
classes for which they were comparators. Circumstances under
which some part of the wage gap need not be incorporated into a
wage adjustment are discussed in Guideline 12 – Permissible
Differences in Compensation.
Commissions, Bonuses, Tips and Other Incentive Pay
Payments that are based on work performance or output must be included
as part of job rate, even where the calculation is difficult. Sales
commissions, bonuses, tips and other kinds of incentive pay are included
in this category. Frequently, these payments are paid in addition to a base
wage or salary. In some cases, they are the only pay received.
To ascertain the portion of job rate expressed as incentive pay, it may be
necessary to identify how much an employee can realistically earn. For
example, sales forecasts and past sales performance will provide
information on what level of sales can be expected of employees. Applying
commission structure to these numbers can tell you what level of
payments contribute to job rate for these positions. For example, an
employer may pay a minimum regular salary to servers in a restaurant
with the expectation that tips will provide most of the servers' incomes. In
this case, since all of the servers can expect a significant part of their pay
to come from tips, at least some portion of the tips will have to be counted
into the job rate because that portion of the tips is a part of their normal
pay. This is particularly obvious where tips are pooled for distribution.
In another example, an employer may pay a bonus to the salesperson with
the highest sales each month. If it could be shown that the bonus is
awarded on sales achieved as a measure of merit and not on a rotating
basis, the bonus could likely be omitted from the job rate.
The variety of payment plans included in this category makes it impossible
to cover every situation in this guideline. When costing these cash
payments, use consistent procedures to convert them to an hourly or
common rate.
Calculating Benefits
The Act does not specifically define benefits which are part of
compensation. Benefits are something "paid or provided to or for the
benefit of a person who performs functions that entitle the person to be
paid a fixed or ascertainable amount." If a benefit's value can be
determined, it must be considered for pay equity purposes. A benefit is a
component of job rate if it contributes to the total compensation of a job

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class or provides an advantage to that job class over others that do not
have the same benefit.
It is the availability of benefits, not their use by individuals, that must be
considered. If a benefit is available to employees in a job class who can
freely choose whether to use it or not, that benefit is generally included in
the job rate for that job class.
Different benefits may be available to different job classes as a result of:
 Job classes belonging to different employee groups, for example,
union vs. non-union employees, management vs. non-management
or executives, job classes covered by different bargaining units with
different collective agreements;
 Job classes with different employment status or appointment type.
Employees working less than full-time, on a contract basis, or on a
casual or contingent basis may work in job classes which do not
have access to full benefits.
Determining the Value of Benefits
In practice, if benefits are basically the same between two job classes, it is
unlikely that costing will be necessary. For a benefit to be identical,
however, access to it has to be equal.
Comparing the compensation of one job class to that of another with
different benefits requires determining the value of their respective
benefits.
Benefits may differ between two job classes because:
 One job class has the benefit(s) and the other does not.
 Both job classes have the benefit(s) but with different levels of
payment or advantage.
 The difference is linked to the difference in pay.
In the first two cases, adjustments are required. In the third case,
adjusting the salary or wages portion of the total compensation will adjust
the benefit.
Many employers in implementing pay equity have simply granted the
additional benefit to the job class that does not have it. If so, there is no
need to calculate the benefit's value to compare the two job classes. This
practice must be negotiated with the bargaining agent in a union
workplace.
When using the proportional value comparison method, the benefit levels
of the representative group of male job classes and the relevant female job
classes must be considered.
In a workplace where many job classes have a number of different benefit
packages and a large number of comparisons are needed, the most
efficient approach is to calculate and add the value of each benefit package
to the salary and wage component of the job rate. For example, with the
proportional value comparison method, this approach might be used with
male job classes that have different benefit plans when calculating the
male job rate line. In a workplace with few job classes and benefit packages,

99
determine whether benefits differ when each comparison is made and
simply make adjustments as needed.
If employees have to qualify for a benefit, for example, by having to work for
a certain length of time to get increased vacation, they are still considered
to have access to that benefit. However, where the qualification is different
between two job classes for the same benefit, for example, two years in one
job class and five years in another to get the same vacation, an adjustment
will have to be made. The Hearings Tribunal decided in the Lady Dunn
General Hospital and Regional Municipality of Peel cases that the
qualification periods had to be adjusted in such circumstances to make
access equal.
When a benefit is based on a percentage of pay, the percentage should be
compared to determine relative value. If the percentage is made equal,
when the pay rate for the female job class is made equal to the male
comparator job class, the value of the benefit will be the same. When a
benefit is based on a dollar value, the benefit must be calculated in dollars.
Reasonable attempts must be made to incorporate the value of benefits
which are not time related (such as dental plans) into job rate, but not by
reducing them to separate hourly values for each job class. For example, if
dental plan premiums cost an employer $200.00 per year for each
employee enrolled, and coverage is open to full time and part time
employees, prorating the cost to hours worked would suggest that the
benefit is of greater value to part-time than full-time employees. Thus,
another meaningful measure, such as average hourly value to all eligible
employees, must be determined.

Wage Policy

Wage Policy are principles acting as guidelines for determining a wage

structure.

Initially as an economic issue it was mainly the concern of the employer

while state was adopting laissez faire policy. But, with the industrial
progress and subsequent industrial balance between employers,
employees, wage bargain has become a matter for three fold concern of the
employer, employee, and the state

In India it is built around certain cardinal principles:

 Equal pay for equal work
 Living wages for all workers so that they lead a decent life
 Payment of wages on appointed dates without unauthorized
deductions
 Resolving wage related issues through collective bargaining
 Payment of statutory bonus at 8.33 percent as per legal provisions

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  Ensuring a fair, equitable wage plan for various employees without
significant wage differences.
 The capacity to pay(according to supreme court ruling- ‗an employer
who cannot pay minimum wages has no right to exist‘
 Determining fair wages over and above minimum wages with due
regards to (i) the productivity of labour (ii) the prevailing level of
wages (iii) the level of national income and distribution (iv) the place
of industry in the economy of the company.
 To compensate for the rise in cost of living

Economic Objectives of Wage Policy:

 Full employment and optimum allocation of all resources
 The highest degree of economic stability consistent with an optimum
rate of economic progress
 Maximum income security for all sections of the community

Social Objectives of Wage Policy:

 The elimination of exceptionally low wages
 The establishment of ‗fair‘ labour standards
 The protection of wage earners from the effects of rising prices
 The incentive for workers to improve their productive performance

Wage Policy is a democratic set up so it cannot be enforced by the Govt

alone. Its implementation has to be secured through employers and
employees organizations at bargaining table i.e. by consensus

Limitations of Wage Policy:

 Socio-economic setup of our society
 Enforcement in unorganized sector
 Lack of unity among unions
 Prices rise almost beyond Govt‘s regulatory capabilities
 Wages lag far behind labour productivity
 Lesser number of workers in organized sector take away bulk of
wages than unorganized
 Wage incomes are consumption oriented rather than savings
oriented so increased wages would mean increased consumption.
Therefore economic growth may not be affected positively as it
depends upon rate of investment possible through savings.
 Ever increasing addition to workforce yet dearth of skilled labour
 High wages may force employer to shift towards capital intensive
methods
 High wages reduce capital for growth

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Wage Policy in India
First Five Year Plan (1951-56) suggested:
 Pre-war levels of real wages be restored as a first step towards
‗living wages‘ through increased productivity
 Reduction of disparities in income
 Reduction of gap between existing and living wages
 Standardization and maintenance of wage differentials to
provide incentives

Second Five Year Plan (1956-61) stressed:

 Improvement in wages through increased productivity
 Improved layout of plants, working conditions
 Application of system of payment by result
 Improvement in management practices
 Recommended settlement of industry wise wage disputes
through tripartite wage boards

Third Five Year Plan (1961-66) reinforced:

 Wage policy of preceding two plans
 Rationalization of work load/ work methods and functions of
management

Three Annual plans (1966-69) aims at framing Wage Policy after

taking considering:
 Price level
 Employment level
 Social Justice
 Capital required by firm for future growth

Fourth Five Year Plan (1969-74) emphasized:

 Price stability
 Extension of system of payment by results

Fifth Five Year Plan (1974-79) recommended:

 That the reward system in terms of wages and
non-wage benefits must be related to performance records
 A wage structure to narrow down disparities within the
organized sector itself.
 Govt. to intervene in setting up of wages & prices

Sixth Five Year Plan (1980-85) stressed on:

 The need for bringing about a greater rationalization of wage
structure and linking of wages at least in some measure to
labour productivity.

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  Modernization in industry
 Evolve wage structure without restrictions on negotiations

Seventh Five Year Plan (1985-90) asserted that:

 There is a need for improvement in capacity utilization,
efficiency and productivity
 Rise in levels of real income
 Reduction in disparities
 Sectoral shifts in desired directions

Eighth Five Year Plan (1992-97) focused on:

 Formulation of wage policy relating to child labour, bonded
labour, rural labour, women labour and inter-state migrant
labour.

Types of Wages
Subsistence Wage: - The wage that can meet only bare physical needs of a
worker and his family is called subsistence wage.

Minimum Wage: - Minimum wage is the wage that is able to provide not
only for bare physical needs but also for preservation of efficiency of
worker plus some measure of education, health and other things.

Fair Wage:- Fair wages is an adjustable step that moves up according to

the capacity of the industry to pay, and the prevailing rates of wages in the
area of industry.

Living Wage:- Living wage is that which workers can maintain the health
and decency, a measure of comfort and some insurance against the more
important misfortune of lie.

In any even the minimum wage must be paid irrespective of the extent of
profits, the financial condition of the establishment or the availability of
workmen at lower wages.

The wages must be fair, i.e. sufficiently high to provide standard family
with, food, shelter, clothing, medical care and education of children
appropriate to the workmen.

A fair wage lies between the minimum wage and the living wage which is
the goal.

Wages must be paid on an industry wise and region basis having due
regard to the financial capacity of the unit.

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Living Wages
Living wage is a term used to describe the minimum hourly wage
necessary for an individual to meet basic needs, including shelter (housing)
and other incidentals such as clothing and nutrition, for an extended
period of time or a lifetime. In developed countries such as the United
Kingdom or Switzerland, this standard generally means that a person
working forty hours a week, with no additional income, should be able to
afford a specified quality or quantity of housing, food, utilities, transport,
health care, and recreation.

This concept differs from the minimum wage in that the latter is set by law
and may fail to meet the requirements of a living wage. It differs somewhat
from basic needs in that the basic needs model usually measures a
minimum level of consumption, without regard for the source of the
income. A related concept is that of a family wage – one sufficient to not
only live on oneself, but also to raise a family, though these notions may be
conflated.

A minimum wage is the lowest hourly, daily or monthly remuneration

that employers may legally pay to workers. Equivalently, it is the lowest
wage at which workers may sell their labour. Although minimum wage
laws are in effect in a great many jurisdictions, there are differences of
opinion about the benefits and drawbacks of a minimum wage. Supporters
of the minimum wage say that it increases the standard of living of workers
and reduces poverty. Opponents say that if it is high enough to be effective,
it increases unemployment, particularly among workers with very low
productivity due to inexperience or handicap, thereby harming lesser
skilled workers to the benefit of better skilled workers.[

Minimum Wages India – Current Minimum Wage Rate India

Legislative protection for workers to receive a minimum wage, can be
considered as the hall mark of any progressive nation. It is one of the
fundamental premises of decent work. In India, the Minimum Wages Act,
1948 provides for fixation and enforcement of minimum wages in respect
of scheduled employments.
The Act aims to prevent sweating or exploitation of labour:

Delhi: Minimum Wages w.e.f. February 1, 2011

Minimum Wages in Delhi Hiked By 15 Percent
The decision was taken at a cabinet meeting headed by Chief Minister
Sheila Dikshit. The revised rates will be effective from February 1,
2011.Revised Wages were announced by the Labour Minister Ramakant
Goswami.

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 Category of Minimum Wages per Day Minimum Wages per
Workers (in Rs) Month (in Rs)
Unskilled 234 6084
Semi-Skilled 259 6734
Skilled 285 7410
Non Matriculate 259 6734
Matriculate 285 7410
Graduate 310 8060

Definition of Unskilled, Semi-skilled, Skilled & Highly Skilled Workers

(i)Unskilled: An unskilled employee is one who does operations that
involve the performance of simple duties, which require the experience
of little of no independent judgment or previous experience although
familiarity with the occupational environment is necessary. His work
may thus require in addition to physical exertion familiarity with
variety of articles or goods.
(ii) Semi-skilled: A semiskilled worker is one who does work generally
of defined routine nature wherein the major requirement is not so much
of the judgment, skill and but for proper discharge of duties assigned to
him or relatively narrow job and where important decisions made by
others. His work is thus limited to the performance of routine
operations of limited scope.
(iii) Skilled: A skilled employee is one who is capable of working
efficiently of exercising considerable independent judgment and of
discharging his duties with responsibility. He must possess a thorough
and comprehensive knowledge of the trade, craft or industry in which
he is employed.
(iv) Highly Skilled: A highly skilled worker is one who is capable of
working efficiently and supervises efficiently the work of skilled
employees.

Dearness Allowance
The dearness allowance is a part of the total compensation a
person receives for having performed his or her job. For example, workers
in India might have a base salary or pension, along with an allowance for
housing and the dearness allowance. D.A. is a percentage of the original
salary. The percentage is reviewed and may be changed on a six-month
cycle.
In India, Dearness allowance (D.A.) is part of a person's salary. D.A. is
calculated as a percent of the basic salary. This amount is then added to
the basic salary along with house rent allowance to get the total salary.
Rates vary as per rural/urban areas etc.

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Dearness Allowance is provided to help against rise in prices for those on
pension. This allowance may also be provided to family members receiving
benefits from a worker‘s pension. For example, a central government order
might change the Dearness Allowance by 6 percent for employees of the
main branch of government, due to new information about living expenses
and price increases. The amount might be paid in a lump sum at some
point to bring the overall pension and allowances up to what they should
be.
There are also times when a new level of Dearness Allowance might be
established along with housing and transportation allowances.
Pensioners and the family pensioners are granted D.A. against the price
rise. During the reemployment under Central or State Government,
Government undertaking, Autonomous body or Local Body, they are not
eligible to draw D.A., in which case D.A. is allowed in addition to fixed pay
or time scale. In other cases of reemployment D.A. is allowed subject to the
limit of emoluments last drawn. D.A. is not allowed while the pensioner
stays abroad and also in case of employees absorbed in public undertaking
or bodies. If the pensioner stayed abroad without reemployment, he shall
be eligible to draw D.A. on pension.

Prior to 1972, there was no element of D.A. on pensions. From 01.04.1972

there was a flat rate of D.A. to all the pensioners:
 01.04.1972 - Rs.5
 01.04.1973 - Rs.10
 01.10.1973 - Rs.15
 01.04.1974 - Rs.20
 01.02.1975 - Rs.28
 01.02.1976 - Rs.32
 01.04.1977 - 10%, subject to maximum of Rs.15
 15.09.1977 - Rs.10 for those retired prior to 01.06.1961, Rs.5 after
01.06.1961
 01.04.1978 - 5% increase, minimum Rs.10, maximum Rs.25
From 01.04.1979 to 30.09.1984 there were 28 installments of D.A. paid to
the pensioners at certain fixed rates for 13 slabs of pension amounts. From
01.10.1984 to date, the pensioners are paid D.A. at certain percentage of
basic pension.
Dearness Allowance is calculated on the original pension without
commutation.
Dearness Allowance is granted at certain percentage of basic pension and
it is revised every 6 months from 01.07.1986 onwards based on cost of
living index.

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Latest DA Rate for Central Government Employees:
With effect from 1.1.2006, Dearness allowance is granted to compensate
price increase above to which the revised pay scales relate. This will be
sanctioned twice a year, payable from 1 January and 1 July.
The following table shows the rates of Dearness Allowance (as on August
2010)
Date From Which Payable Rate (in Percentage) 1-1-2007 6
1-7-2007 9
1-1-2008 12
1-7-2008 16
1-1-2009 22
1-7-2009 27
1-1-2010 35
1-7-2010 45
1-1-2011 51 (6 % hike declared on 21st March from 45% to 51%)
Expected DA from January 2011
DA for central government employees from January 2011 is expected to be
51 %. This calculation is based on the AICPIN up to the month of
November 2010. Once the DA rate touches 50%, the allowances like
conveyance allowance, children education allowance etc will be increased
25% more.

Determination of individual pay - Pay differentials are based on

individual differences in experience, skills, performance; expectations that
seniority and higher performance deserve higher pay; reasons for choosing
to pay employees at different rates for doing the same job include: pay
differentials allow firms to recognize that different employees
performing the same job make substantially different contributions to
meeting organizational goals; differentials allow employers to
communicate a changed emphasis on important job roles, skills,
knowledge, etc; differentials provide organizations with an important tool
for emphasizing norms of the enterprise without having employees change
jobs; without differentials, the pay system violates the internal equity
norms of most employees, reducing employee satisfaction with pay and
making attraction and retention of employees more difficult; pay
differentials allow firms to recognize market changes between jobs in the
same grade without requiring a major overhaul of the whole compensation
system

Methods of Payment
a. flat rate -single rate in unionized firms (treating everyone equally)
b. recognizing individual differences - assumes workers are not
interchangeable/equally productive
c. payment for time worked: wage (calculated on hourly basis); salary
(calculated on monthly/annual basis); pay adjusted upwards through four

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types of increases: general across-the-board increase, merit increase,
cost-of-living-adjustment (COLA), seniority
d. variable pay: incentive compensation - based on shared organizational
success, available to nontraditional groups & operates outside base pay,
plans need to be based on clear goals, unambiguous measures; key design
factors need to include: management support, employee acceptance,
supportive organizational culture (teamwork, trust), timing (minimal risk
of economic downturn), total compensation approach includes: variable
pay puts a percentage of employee's paycheck at risk, pay rate will not rise
above lower base pay if goals aren't met, flexibility can be built into the
system of total compensation, base pay: matched closely with the
competition, variable pay: methods like gainsharing, lump-sum bonuses,
indirect pay: like benefits
e. merit incentives - study shows merit needs to be 6-7%; less (unmotivate)
more (demotivate) in practice merit pay systems fail because: employees
fail to make the connection between pay & performance, secrecy of reward
is perceived by other employees as inequity, size of merit award has little
effect on performance
f. individual incentives - straight piecework, differential piece rate,
standard hour plan, production bonus system, straight sales commission,
variation (salary plus commission) / (salary plus draw)
g. team/group incentives (used when:) there is a strong dependence
among individuals in a group, it is hard to determine which individual is
responsible for the level of achievement because of interrelated work, the
organization wishes to reinforce teamwork, group planning and
problem-solving
h. organization-wide incentives - suggestion systems, gainsharing
incentive plan (Scanlon plan, Rucker plan, ImproShare, Winsharing), spot
gainsharing, profit-sharing incentive plan, Lincoln Electric plan, cash &
deferred bonuses,
i. ownership- defined contribution plans vs. defined benefits
j.. people-based pay (alternative to job-based pay) - skill-based pay
(breadth of skills), knowledge-based pay (depth of skills), credential-based
pay (qualification dependent), feedback pay (fulfill strategic goals –
research bonus ex. NDSU), competency-based pay (skills + knowledge +
traits + motives),
k. executive pay - executive salaries, bonuses, stock options, executive
perquisites, executive pay package dependent on comparative
performance. The pay design has five underlying principles: compensation
committees consist of stockholders & directors who link CEO
compensation to shareholder returns, variable performance-based pay is
emphasized over guarantees (bonuses), CEOs are encouraged to invest in
company stock (stock options), performance yardsticks are linked to
actual key productivity indices or to competition, CEOs are held

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responsible for cost of capital, forcing them to look for vehicles of growth
rather than amassing wealth

Issues in Compensation Administration - pay secrecy or openness, pay

security, guaranteed annual wage (GAW), supplementary unemployment
benefits (SUB), COLAs, severance pay, pay compression solutions for pay
compression - re-examining how many entry-level people are needed,
reassessing recruitment itself, focusing on the job evaluation process
emphasizing performance, basing all salaries on longevity, giving first line
supervisors the authority to recommend equity adjustments for victims of
pay compression

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