Compensation and Benefits Unit 2

Unit 2 Job Evaluation, Grading and

Compensation Structure
Structure:
2.1 Introduction
Objectives
2.2 Concept of Salary Structure
Designing a salary structure
Graded salary structures
Salary progression curves
Components of pay structure
2.3 Salary Progression
Incremental systems
Dearness allowance
Overtime payment
Annual bonus
2.4 Methods of Payment
2.5 Limitations of Job Related Compensation
2.6 Competency-based Compensation
Broad pay bands
360 degree feedback
2.7 Summary
2.8 Glossary
2.9 Terminal Questions
2.10 Answers
2.11 Case Study

2.1 Introduction
In the previous unit, you studied the concept of compensation management
and its strategy for retaining employees. You also studied about the
compensation and non-compensation dimensions. Later, you learned about
the 3 – P concept in compensation management. The earlier unit also
examined compensation for special groups and significant compensation
issues. In this unit, you will study about the compensation structure in India.
Compensation is a critical area of human resource (HR) management, and
one that can greatly affect employee behaviour. To be effective,

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compensation must be perceived by employees as fair, competitive in the

market, accurately based, motivating and easy to understand.
Hence, this unit will help you gain insight into the concept of salary structure
and salary progression curves. You will also come to know about the
different modes of payment and competency based compensation structure.
Objectives:
After studying this unit, you should be able to:
• discuss the structure of salary
• define graded salary structures and salary progression curves
• identify the components of pay structure
• describe salary progression with respect to incremental systems,
dearness allowance, overtime payment and annual bonus
• assess various methods of payment
• recognise the limitations of job related compensation
• explain the competency based compensation structure

2.2 Concept of Salary Structure

You must know that the structure of salary comprises of organisation’s
salary ranges or grades and its various levels of salary for a single or group
of jobs. The basic objective of job evaluation exercise is to design the salary
structure where jobs can be graded correctly on the basis of evaluation of
relative value to the organisation. You should keep two things in mind while
designing the salary structure:
1. maintain the competitive pay rates
2. provide internal equity in grading and paying staff
Thus, you can evolve a structure of salary which may either be any one of
the above or a combination of both of them. This will address the
motivational aspects and advancement opportunities for employees which
must be taken as a very important part of the compensation structure.
2.2.1 Designing a salary structure
One of the critical areas in Human Resource Management is compensation
which may affect the behaviour of the employee. The HR professional may
design a sound salary structure for their employees. The simplest way to
design the salary structure is as follows:

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Step 1: Job analysis

It is a method of studying and identifying various jobs in the organisation
which result in description of job. The contents are as follows:
• a summary of the job tasks
• a description of the work context
• job title
• abilities, knowledge, skills needed to perform the job
• a list of the essential responsibilities and tasks

Step 2: Job evaluation

It is a procedure of analysing the relative worth of the jobs in an organisation
which may result in the hierarchical ranking or development of an internal
structure of jobs. It helps to make sure that pay is perceived to be fair and
internally aligned by the employees. You can note that there are three
methods of job-based evaluation which are as follows:
• Ranking method
• Classification method
• Point method

Step 3: Pay policy identification

The identification of the pay policy examines whether the organisation wants
to meet, lead or lag the market in the compensation structure or not. This
pay strategy or policy will help the organisations in attracting new
employees and retaining its existing employees. The variations in pay
structure can be seen across job levels and job families (i.e., groups of
similar jobs). These variations are caused by the higher authorities’ as they
think that the several strategies or policies can be useful at various levels of
the organisations.
Step 4: Pay survey analysis
In this, the compensation data is collected and gathered from various
employers of the relevant labour market in a survey. Then, data analysis is
conducted. Collection of external pay structure such as bonuses, benefits,
stock options and base pay is important to make the compensation structure
of the organisation externally competitive within its industry. Improvement in
employee attraction and retention can be maintained by aligning the
external structures of pay.

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Step 5: Pay structure creation

The last step in designing a sound pay structure is its creation in which the
internal pay structure which you have seen in Step 2 is combined with the
external market pay rates which you have seen in Step 4 in order to build a
market pay line. The market pay line can be adjusted up or down depending
upon whether the organisation wants to meet, lead or lag the market.
2.2.2 Graded salary structures
You will come to know that in this type of salary structure, the actual salaries
depend on the length of the service and the performance of the employees.
Here, you may wrap all the jobs in your firm by the same length of service
and also by designing the different pay structures for different categories or
levels of job. The features of properly designed pay structure are as follows:
• Due to pronounced movement in market rates as well as change in
responsibilities, jobs can be regarded within the structure when it is
determined that value has been changed.
• General increases in the market rates or in the cost of living are
associated with the proportionate increases in the maximum and
minimum levels of salary.
• Within the structure, all jobs are allocated into various salary grades
which are carried out on the basis of external and internal value of the
organisation.
• Between the mid-points, differentials must be maintained for each salary
grade so that there is no wide gap between adjacent grades.
• The number of salary ranges or grades will depend on the following:
1. the width of each salary grade
2. the salary levels appropriate for the most senior and most junior jobs
3. the number of distinct levels of jobs in the hierarchy
4. the extent of the overlap, if any, between the grades

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However, you can find three different types of this progression zones which
is shown in table 2.1.
Table 2.1: Different Progression Zones
The Learning Zone The Qualified Zone The Premium Zone
This is a zone where a This is a zone which This is reserved for those
person is on his/her covers the period when employees who achieve
learning curve, the person is a jobholder, exceptional results but
familiarising himself/ his/her capacity to do the suitable promotion
herself with the skills work and to improve his opportunities do not exist
and knowledge which performance and the for them. This enables you
are required for minimum salary in this to reward and encourage
becoming fully zone should be the outstanding employees.
competent. The length market rate for the job.
of the time may vary
accordingly to the
individual’s ability to
learn, experience and
competence.

2.2.3 Salary progression curves

The salary progression curves are also regarded as career or maturity
curves. These are suitable for scientific or highly qualified staff whose basic
objective is to link increases in pay for a long period so as to increase
experience or maturity. These curves are mostly used for scientific/
professional staff whose initial salary is associated to a professional
qualification or to the market rate for their degree. The basic objective of the
progression curve system is to permit plenty of scope for advancing people
according to their contribution.
Thus, you can see three categories of Salary Progression strategies which
can either be used singly or in combination. These are:
1. Development of Competency/skill based pay strategies which basically
reward the employees overall development as well as revealed the
proficiency in newly learned skills, knowledge, value adding
characteristics, attributes, aptitudes and abilities.
2. Time based pay strategies which determines the increase in the pay that
solely depend on the the time spent at a pay level.

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3. Performance based pay strategies which includes all those approaches

in analysing and judging the performance level of the employees so as
to determine the amount to be raised in the pay structure.
2.2.4 Components of pay structure
The three basic components of pay structure are as follows:
1. Basic wage: It is a pay which could be given on weekly, daily or
monthly basis at a given level of output for a normal rate. It is a price
which is paid to get a particular job done.
2. Dearness allowance (DA): This allowance is given to the wage earners
so as to give assistance to them in the inflationary situations by giving
an additional allowance to offset the cost of living.
3. Profit sharing bonus: In payment of bonus, an employee willingly looks
forward to an annual issue. In India every year, the payment of annual
bonus is a constant source of friction.
The other components of pay packet are as follows:
• Medical benefits
• Provident fund
• Leave travel concession
• ESIS
• Educational allowances for children etc.
• Compensatory city allowance
• Group-linked insurance scheme
• Leave with pay
• House rent allowance

Case Let

Infosys Technologies (Infosys)

In the financial year 1995-96, Infosys Technologies (Infosys) became the
first software company to value its human resources in India. The
company valued its human resources assets at ` 1.86 billion. Infosys had
always given utmost importance to the role of employees in contributing
to the company’s success. Analysts felt that Human Resources

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Accounting (HRA) was a step further in Infosys’ focus on its employees.

Narayana Murthy (Murthy), the then Chairman and Managing Director of
Infosys, said: “Comparing this figure over the years will tell us whether
the value of our human resources is appreciating or not. For a knowledge
intensive company like ours, that is vital information.” Infosys’ HRA model
was based on the present value of the employees’ future earnings with
the following assumptions:
1. An employee’s salary package included all benefits, whether direct
or otherwise, earned both in India and in a foreign nation.
2. The additional earnings on the basis of age and group were also
taken into account.
To calculate the value of its human assets in 1995-96, all the 1,172
employees of Infosys were divided into five groups, based on their
average age. Each group’s average compensation was calculated.
Infosys also calculated the compensation of each employee at retirement
by using an average rate of increment.
The increments were based on the industry standards, and the
employee’s performance and productivity. Finally, the total compensation
of each group was calculated. This value was discounted at the rate of
27.36 percent per annum which was the cost of capital of Infosys, and
the sum of the values of all the groups was calculated to arrive at the
figure of ` 1.86 billion. The formula used by Infosys is as per the Lev and
Schwartz model.
Infosys believed that valuing intangible assets and reporting it in the
balance sheet and other financial statements would help the investors to
evaluate the market worthiness of the company. In its 2001 annual
report, the company stated, “The dichotomy in accounting between
human and non-human capital is fundamental. The latter is recognized
as an asset and is therefore recorded in the books and reported in the
financial statements, whereas the former is totally ignored by
accountants. The definition of wealth as a source of income inevitably
leads to the recognition of human capital as one of the several forms of
wealth such as money, securities and physical capital.” To evaluate its
intangible assets including the human assets and the Infosys’ brand,

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Infosys had framed models based on a score sheet.

In 2001, Infosys valued its human resources based on the present value
of the future earnings of its employees with the following assumptions:
Employee compensation included all direct and indirect benefits earned
both in India and abroad.
The incremental earnings based on group/age was considered.
The future earnings were discounted at 21.08% in the year 2001,
compared to 22.29% in the year 2000 being the cost of capital for
Infosys.
Murthy felt that by adopting HRA, the company could determine whether
its human asset was appreciating over the years or not. This information
was important for the company as its success depended solely on the
knowledge of the employees. In addition, the company could also use
this information internally to compare the performance and productivity of
employees in various departments.
HRA also helped Infosys to decide the compensation of employees. The
company ensured that it compensated each employee according to
his/her worth. Mohandas Pai, CFO, Infosys explained, “We are entering
an era when compensation will be directly correlated to what an
individual is capable of earning - not to his rank or seniority.” Above all,
HRA helped Infosys in identifying and retaining valuable employees.
It also helped to take managerial decisions based on the availability and
the necessity of human resources. When the human resources were
quantified, it gave the investors and other clients true insights into the
organization and its future potential. Proper valuation of human resources
helped organizations to eliminate the negative effects of redundant labor.
This, in turn, helped them to channelize the available skills, talents,
knowledge and experience of their employees more efficiently.
According to HR managers, HRA helped in identifying the right person for
the right job, based on the person’s specialized skills, knowledge,
capabilities, experience, etc. Valuation of human assets could also be
effectively used to motivate employees to achieve best results, using the
best of their abilities. Valuation of human capital also ensured continuous
evaluation and follow-up of various human resource policies associated

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with recruitment, selection, training, development and retention.

In spite of its benefits, a majority of companies in various industries in
India were not valuing their human assets. One of the major reasons for
not adopting HRA was that the Companies Act, 1956, did not have a
provision for the inclusion of human assets value in the financial
statements. Moreover, there was no legal requirement for Indian
companies to publish their HR accounting information, due to the
absence of a prescribed format and guidelines. The awareness level of
this concept seemed to be very low. The HR departments of some
companies in India were reported to be completely unaware of this
concept and its utility.
Most of the companies in India valued human assets on the present
value of the individual’s future earnings. However, critics argued that
placing an amount or value on the individuals might offend them. They
felt that adopting this approach would amount to treating humans as
commodities and doubting an individual’s abilities, knowledge, skills and
experience. They further felt that assigning a definite value to each
individual may not be proper because the knowledge of each individual
differed from that of another.
Analysts also argued that various companies used various models of
HRA and that comparing two companies using two different models
would be difficult, R. Narayanaswamy, Professor (Finance & Control), IIM
Bangalore, commented, “There could be concern for the credibility of
numbers reported.” Some analysts also felt that companies could misuse
HRA to enhance their image. Bharati Gupta Ramola, Senior Director,
PriceWaterhouse, explained, “A company could use this information to
prop up its image in the investor’s mind, and change assumptions, to
keep the value positive. Therefore care must be taken to ensure that it is
an honest exercise.”
Source: http://www.docstoc.com/docs/65652413/Caselets-on-Human-Resource-
Management

Self Assessment Questions

1. In graded salary structure, the actual salaries are based on the length
of the service and the performance of the employees. (True/False)
2. Out of the following, which is not related to the progression zone?

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(a) Qualified
(b) Learning
(c) Payment
(d) Premium
3. In ______________ the compensation data, which is collected and
gathered from various employers of the relevant labour market in a
survey, is analysed.

Activity 1
You are the HR of the consulting firm which is expanding its business in
Bangalore. The firm’s headquarter is in New Delhi. As per the mission
statement of your organisation, you came to know that the firm strives to
create technically and customised expert electrical engineering plan for
their regional clients. So in order to start up their Bangalore operations,
there are requirements of the following personnel which are as follows:
• Director of regional operations
• Assistant to the director of operations
• Operations analyst
• Operations trainee
• Payroll assistant
• Engineers
Now you have to prepare and design a salary structure for the above
personnel according to their designation.

2.3 Salary Progression

Salary progression is a process by which an employee receives higher
levels of salary by reaching a certain level which is affected by levels of
hierarchy, pay grades and span of each pay grade. The aim of salary
progression is that the organisation must look after the interest of the loyal
employees and workers as well as retain the experienced employees or
workers. Thus, various factors related to salary progression are:
• Age related increment
• Pay rise based on individual and skills
• Length of service of an employee in the firm
• Due to change in market rates increase in pay
• Salary progression based on organisational performance
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• Merit based pay rise on the recommendation of the line manager

Features of salary progression
The essential features of a systematic procedure for salary progression
should be:
1. According to experience or merit, there should be incremental systems
at which individuals can progress. These systems will indicate the rates.
2. The salary ranges are divided into defined zones or areas and the
individual will have to pass through these zones.
Salary progression curves have already been discussed in the previous
section. You need to understand the following terms in order to know salary
progression in a better way.
2.3.1 Incremental systems
Incremental systems may vary in flexibility and rigidity as at one side there
are systems which are flexible in which management exercises complete
discretion over the size of increments as well as the award without any rule.
On the other side, it has extreme procedures which are rigid with
predetermined and fixed movements through a scale which are associated
to the service in the firm, age and job experience. Incremental systems must
ensure that individuals are correctly placed according to their range and
performance.
Most salary planning decisions are short-term which are concerned with
deciding on the next increment to be paid on the basis of promotion or merit.
Career planning procedures are linked with the long-term salary plans. On
the contrary, short-term salary planning is carried out by way of variable
incremental structure with a course of action that specifies different rates.
With the help of this particular salary zone, people can make progress.
2.3.2 Dearness allowance
‘Dearness Allowance’ refers to the allowance which is paid to employees in
order to enable them to face the increasing dearness of essential
commodities. It was instituted in order to protect real income of the wage
earners by neutralising the better cost of living.
Hence, it is provided to give relief to the workers in inflationary conditions by
trying to offset the cost of living with an additional allowance. You can find
two systems in the payment of DA:

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1. Flat rate system of neutralisation: It is easy to administer as it

provides a lump-sum payment to the employees over a period of time to
adjust for the growth in inflation.
2. Consumer price-linked system: It is more realistic as it attempts to
neutralise the actual increase in the cost of living because it regulates
the payment of allowance on the basis of actual price movement in a
given region.
Dearness allowance is influenced by the following:
• The ability of the employer’s to pay DA as it is regarded as a critical
matter of argument between management, industrial tribunals and
workforce.
• The problem of neutralisation which has become the matter of
controversy.
Now you will be able to understand this with the help of following example:
Example: As per the law of low wage earners in India, full neutralisation has
been supported by the industrial tribunals but 50 – 90 percent of price
increase has been recommended. Following are the considerations which
are governed by the tribunals:
i) The recognition does not allow full neutralisation as per the paying
capacity of the industry.
ii) More inflation may arise due to full neutralisation.
iii) Due to inflation, the employees share their hardships.

2.3.3 Overtime payment

Overtime working in the organisation is as old as the industrial revolution.
The management seeks to motivate overtime in order to overcome the
following elements:
• Absenteeism
• Unsuitable manpower allocation
• Unforeseen circumstances that arise because of authentic problems like
breakdown of machines
• Improper scheduling
In most of the organisations, overtime becomes necessary in order to meet
vital dates of delivery, to provide management a point of flexibility so that

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labour capacity can match the demands of production and sudden upswings
in production schedules.
2.3.4 Annual bonus
The annual bonus is regarded as one of the oldest components which is
understood as a statutory status with the enactment of the Payment of
Bonus Act, 1965. This Act is applicable to establishments and factories
which employ more than 20 employees and has made a commitment on the
part of the employer to pay minimum rate of 8.33% (maximum is 20%)
bonus to their employees on their salaries.
This Act has constrained the bonus payment to only those employees who
are drawing their salaries up to ` 3500 per month. On the other hand, the

employees who are earning more than ` 3500 per month, it is calculated as `
2500 per month. Under this Act the quantum of bonus relies totally upon
“available surplus.”
Self Assessment Questions
4. Out of the following, which is not related to the payment of overtime?
(a) Improper scheduling
(b) Annual bonus
(c) Absenteeism
(d) Unforeseen situations
5. ______________ can be carried out by means of a variable
incremental system with guidelines, which will indicate the various rates
at which people can progress through a zoned salary range.
6. Incremental systems may not vary in flexibility and rigidity. (True/False)

2.4 Methods of Payment

You must remember that a payment system refers to the criteria which
determine the worth of a job produced, the time taken to produce it or the
quantity produced in a specified time which means how the wages are
earned, what rewards to be paid and when it is to be paid. There is a distinct
attempt in the payment system, which seeks to compensate an employee
for different types of contribution.

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Now you will be able to understand the payment methods with the help of
the following figure 2.1:

System of Wage Payments

Time rated Incentive Piece rated Performance based

payment system Payments payment system payment system

Straight Time Depending upon Piece Time rate

System Productivity (Proportional)
T × R = Earning Qe × R = Earning Q p × R = Earning

Source: Compensation Management, 1st Edition, Er Soni Shyam Singh,

Excel Books
Figure 2.1: Types of Compensation Systems

Here,
T = Time (daily, weekly, monthly)
R = Standard Rate
Qe = Extra Quantity produced
Qp = Quantity produced in given system
Now let’s study the four types of payment systems which are listed as
below:
(a) Time rated payment system: It is the most profitable, convenient and
simple payment system where the output per worker is not measurable.
In this system, the employees are paid according to the work done
during a certain period of time, i.e., a day, a week, or a month. Under
this system, the basic rate for pay is fixed through negotiation, by
reference to the local market, the competency of employee and the job
evaluation method. The minimum wage rates, the need based wage
rate, fair wage or living wage fixed by government and/or collective
bargain are on time based principles. Thus, Time Rated Pay System is
calculated with the help of Straight time system where earnings are
calculated with the help of time and standard rate. The equation is given
below:
T X R = Earning

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(b) Piece rated payment system: This is a highly motivating system for
employees for earning more based on the quantitative production as well
as for improving their productivity. It is based on the output of a worker
where payment is paid to the employee as per the output given in an
existing work environment, the expected quality standards and
machinery condition. This system is effective where there is a proper
inventory of raw material, set quality norms, uniform working conditions
and consistent supporting services. Thus, Piece Rated Pay System is
calculated with the help of Piece time rate where earnings are calculated
with the help of Quantity produced in given system and standard rate.
The equation is given below:
Qp X R = Earning
(c) Incentive payments system: This payment system is also known as
payments by result system as it provides the opportunity to earn more
on showing additional results than normal and thus enhancing the
productivity. Here, the workers are rewarded financially for their
increased rate of output which provides motivation to them to produce
more. The most common incentive system is piecework which is
effective where the product specifications do not change frequently and
the output is accurately measurable in homogeneous units. In Incentive
Payments System, the earnings are calculated with the help of extra or
additional quantity produced and standard rate. The equation is given
below:
Qe X R = Earning
Example: Bonus plans represent another type of incentive payment
system which represents the degree to which increased production will
be rewarded is pre-decided and only after passing that limit one
becomes eligible to get that inventive.
(d) Performance based payment system: This payment system refers to
the increased payment to a group or an individual so as to increase the
performance in a given work or task. Here in order to improve the
efficiency, the payment structure is designed to award the incentives
such as what level of knowledge, skill and motivation will earn how much
on producing extra.

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Self Assessment Questions

7. Out of the following, which is not one of the compensation payment
methods?
(a) Piece rated payment system
(b) Performance based payment system
(c) Job evaluation
(d) Incentive payments system
8. Bonus plans represent another type of incentive payment system.
(True/False)
9. A ____________ system refers to the criteria which determine the
worth of a job produced, the time taken to produce it or the quantity
produced in a specified time.

2.5 Limitations of Job Related Compensation

You will be able to find various drawbacks which are associated with the job
related compensation system which are as follows:
1. Technological revolution and globalisation of business has forced the
organisations to tear down hierarchies, do away with functional
specialisations and organise all activities according to the entire
business processes that cut across traditional departments and
functions.
2. New developments have replaced the job by a role that has much vague
boundaries and require much greater depth and breadth of skills and
abilities.
3. It is becoming difficult to identify the precise boundaries of the job, an
employee is assigned. What can be identified is the role he is likely to
play in the pursuit of strategic objectives of the team he is assigned to
and what he can personally do and his contribution to the business
process then becomes a measure of his value to the organisation.
4. Since jobs are disappearing in the work place, the traditional approach
to compensation is becoming irrelevant and in a way dysfunctional.
5. The more an organisation moves towards flattening of hierarchies,
process orientation and customer focus, the more will be the irrelevance
of the traditional system as an instrument of motivation.

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Self Assessment Questions

10. Technological revolution and globalisation of business have forced the
organisations to tear down _________________.
11. Out of the following, which is not the drawback of the job related
compensation system?
(a) New developments have replaced the job by a role that has much
vague boundaries.
(b) The structure becomes essential where the progression becomes
totally dependent on the availability of the vacancies.
(c) Traditional approach to compensation is becoming irrelevant and
in a way dysfunctional as the organisation is moving towards
flattening of hierarchies.
(d) It is becoming difficult to identify the precise boundaries of the job,
an employee is assigned.
12. The modern approach to compensation is becoming irrelevant and in a
way dysfunctional. (True/False)

2.6 Competency-based Compensation

The competency-based compensation system is based upon the principle
that the possession of appropriate competencies is highly correlated with
superior performance.
Therefore, demonstration and acquisition of competencies, which are
applicable to the task assigned to the employee, can be taken as a
surrogate measure of performance for the purpose of compensation. Now
you will be able to see the building blocks of competency which are as
follows:
2.6.1 Broad pay bands
The compensation which is based on competencies comprises of a few
broad bands. Each band has a sufficient range to accommodate pay steps
from entry to a level where the employee acquires and demonstrates
competencies for his promotion to the next band. Bands are fewer in
number than traditional pay grades. Thus you can find two aspects of the
linkages between pay bands and competency levels which are as follows:
• Movements between the levels do not depend upon the availability of
vacancies but are totally dependent on the required competencies that
are acquired by the jobholder.
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• At some point of time, the structure becomes essential where the

progression becomes totally dependent on the availability of the
vacancies which are based on the demonstrated competencies.
Thus, such structure has significant implications on the salary costs and
controlling wages. As each level of competency has its own progression pay
levels which is not constrained by the vacancies, it creates the risk of paying
for inputs without a strong linkage to the output. Therefore, this problem is
minimised by careful selection of norm/principle for defining the
competencies. Hence for implementing the effective competency model, it
must be based on:
• the competencies that reflect the basic needs of the organisation
• the competencies that drive superior performance
• clarity about the requirements so as to move to the next level which
bring out improvement in the performance.
2.6.2 360 degree feedback
360 degree feedback is the second building block of the competency based
compensation system. Here the data which is related to the demonstration
of task critical competencies are gathered from subordinates, fellow team
members, internal and external customers and peers.

Assessee
invites
respondents

Review and
feedback
by Respondents
Mentor/Trainer Submit their
assessment
360 Degree
Feedback

Assessee
submits
self-assessment

Source: http://simonjamesclegg.co.uk/360-degree-feedback/
Figure 2.2: Process of 360 Degree Feedback

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Figure 2.2 demonstrates the various steps of a 360 degree feedback.

The employee, his manager and individual have the summary of this data
where managers have the strong position to develop and coach their reports
directly and the individuals have the realistic information about how others
see them and their contribution to the organisation.
Self Assessment Questions
13. The structure of broad pay bands has significant implications on the
salary costs and controlling wages. (True/False)
14. The ______________ based compensation system is based upon the
principle that the possession of appropriate competencies is highly
correlated with superior performance.
15. Out of the following, which is not an effective instrument for
implementing the competency model?
(a) Requirement clarity
(b) 360 degree feedback
(c) competencies that reflect the basic needs
(d) competencies that drive superior performance

Activity 2
As a manager of XYZ Ltd., how would you integrate 360 degree feedback
in your organisation in order to evaluate the performance of your
employees?

2.7 Summary
Let us recapitulate the important concepts discussed in this unit:
• The structure of salary comprises of organisation’s salary ranges or
grades and its various levels of salary for a single or group of jobs.
• There are various steps involved in designing a salary structure.
• The salary progression curves are better suited for professional or highly
qualified employees whose basic objective is to build a linkage of
increases in pay over a long period to increased experience or maturity.
• The three basic components of pay structure are basic wage, dearness
allowance (DA) and profit sharing bonus.
• A payment system refers to the criteria which determine the worth of a
job produced
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• There are various limitations of job related compensation.

• The competency-based compensation system is based upon the
principle that the possession of appropriate competencies is highly
correlated with superior performance.

2.8 Glossary
360-degree feedback: It is a performance evaluation system in which
employees receive anonymous and confidential feedback from the people
who work around them.
Base pay: It is a fixed salary or wage which comprises of the basic job rate
which is fixed. It may differ according to the job grade or for manual workers,
the degree of competencies needed for a particular task to be carried on.
Compensation: It is related to financial return, tangible benefits as well as
services which employees get as a part of service rendered to the
organisation.
Competency: It is basically determining the relative value of the particular
job so as to design and create the structure of a job for the firm.
Dearness allowance: The dearness allowance is a part of the total salary
which an employee gets for the outcome of his or her job performance.
Job analysis: It is a method of determination and identification of the
particular job responsibilities, duties and requirements.
Job evaluation: It is the process of systematically determining the relative
worth of jobs to create a job structure for the organisation.
Salary progression: Salary progression is a process by which an employee
receives higher levels of salary by reaching a certain level which is affected
by levels of hierarchy, pay grades and span of each pay grade.
Salary: The payment for employees whose pay is calculated at a monthly or
annual rate instead of hourly.
Wage: The payment which the workers receive on hourly or daily basis.

2.9 Terminal Questions

1. What are salary progression curves? List out different progression
zones.
2. Highlight the basic components of pay structure.

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3. Briefly describe the following terms:

(a) Graded salary structures
(b) Dearness allowance
(c) Annual bonus
(d) Overtime payment
(e) Incremental systems
4. What are the different compensation payment systems that are generally
used for effective compensation management?
5. Elucidate the building blocks of competency based compensation.
6. Discuss the limitations of job related compensation.

2.10 Answers
Self Assessment Questions
1. True
2. (c) Payment
3. Pay survey analysis
4. (b) Annual bonus
5. Long-term salary plans
6. False
7. (c) Job evaluation
8. True
9. Payment
10. Hierarchies
11. (b) The structure becomes essential where the progression becomes
totally dependent on the availability of the vacancies
12. False
13. True
14. Competency
15. (b) 360 degree feedback
Terminal Questions
1. Salary progression is a process by which an employee receives a higher
level of salary by reaching a certain level which is affected by levels of
hierarchy, pay grades and span of each pay grade. For more details
refer to section 2.3 and Table 2.1.
2. There are three basic components of pay structure. For more details
refer to section 2.2.4.
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3 (a) Graded Salary Structures: In this type of salary structure, the actual
salaries are based on the length of the service and the performance
of the employees. For more details refer to section 2.2.2.
(b) Dearness Allowance: It refers to the allowance which is paid to
employees in order to enable them to face the increasing dearness
of essential commodities. For more details refer to section 2.3.3.
(c) Annual Bonus: The annual bonus is regarded as one of the old
component which is assumed a statutory status only with the
enactment of the Payment of Bonus Act, 1965. For more details refer
to section 2.3.5.
(d) Overtime Payment: Overtime working in the organisation is as old as
the industrial revolution. For more details refer to section 2.3.4.
(e) Incremental Systems: It must ensure that individuals are correctly
placed according to their range and performance. For more details
refer to section 2.3.2.
4. There is a distinct attempt in the payment system, which seeks to
compensate an employee for different types of contribution. For more
details refer to section 2.4.
5. The competency-based compensation system is based upon the
principle that the possession of appropriate competencies is highly
correlated with superior performance. For more details refer to section
2.6.
6. There are various job related compensation plans. For more details refer
to section 2.5.

2.11 Case Study

Plan Future with Few Benchmarks
Juaison Private Limited was set up in the seventies by enterprising partners
and has been making a reasonable profit till the beginning of the 1980s.
Since 1978, it started facing competitive challenges in the product market
and apprehended that unless there was a substantial increase in production;
profit making would be an acute problem.
The company had two workers' unions operating and the management
generally favoured the union having a larger number of members. So far as
the staff is concerned, it has well qualified and experienced technical as well

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as administrative staff. Therefore, incentive schemes considered more

favourable and acceptable were tried for the first year, i.e., in 1979. They
also consulted professionals and the consultants' observation was that with
the available technical competency and level of workers there was a
possibility of achieving only a 50% increase in production, even with
incentive schemes.
However, due to differences in perception about the fair wages or treatment
among the two unions, problems for implementing incentive schemes also
started. The other union raised the question of job descriptions and job
evaluation systems suggested by the consultants and demanded the basic
rise in pay before taking up any schemes. Because of price inflation during
the previous few years, they were demanding at least a 20% rise in wages.
The management on this issue suggested and advocated that the incentive
schemes would not only increase the production to meet the product
demand but it would also help them to earn more, even what is being
expected. But the workers went back to their issue of pay rise before signing
a new incentive agreement.
HR consultants were again consulted for this new issue and they came to
know that in the consultants' observations, the wage differentiations and
numbers of grades and hierarchies were the main cause of this issue.
The unit had an opportunity to compete with the expected increased
productivity but the management was facing this new issue of not being able
to implement an incentive scheme.
1. What could have been a mistake in diagnosing the real cause of the
problem?
2. What could have motivated the workers?
3. What types of benchmarking do you suggest to solve such problems?
Source: Compensation Management, 1st Edition, Er. Soni Shyam Singh,
Excel Books

References:
• Singh, B. D. (2007), Compensation and Reward Management, Excel
Books Pvt. Ltd.
• Bhattacharya, M.S. & Sengupta, S. (2009), Compensation Management,
Excel Books Pvt. Ltd.

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Compensation and Benefits Unit 2

• Singh, S. S. (2008), Compensation Management, Excel Books Pvt. Ltd.

• Robinson, S. L. & Rousseau, D. M. (1994), "Violating the psychological
contract: Not the exception but the norm" Journal of Organizational
Behaviour 15, pp 245-259.
• Milkovich G. T. & Newman J. M. (2005), Compensation Management,
Tata McGraw Hill.
E-Reference:
• http://www.shrm.org/Education/hreducation/Documents/Designing%
20a%20Pay%20Structure_IM_9.08.pdf/ Retrieved on 11 July 2012,
Time 11:40 AM
• http://www.egyankosh.ac.in/bitstream/123456789/38301/1/unit-21.pdf/
Retrieved on 11 July 2012, Time 02:25 PM
• http://www.deldot.gov/information/pubs_forms/manuals/professional_
services/pdf/APPG.pdf/ Retrieved on 12 July 2012, Time 10:55 AM
• http://www.fhwa.dot.gov/programadmin/172qa_04.cfm/ Retrieved on 12
July 2012, Time 12:30 PM

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