UNIT-4 performance appraisal

Nature of performance appraisal :

A performance appraisal is a systematic and objective method of judging the
quality of an employee in performing his job and a part of guiding and
managing career development. It is the process to obtain, analyse, and record
the information about the relative worth of an employee to the organization.
Performance appraisal is an analysis of an employee‟s recent successes and
failures, personal strengths and weaknesses, and his/her suitability for
promotion or further training.

It is also the judgment of an employee‟s performance in a job based on

considerations other than productivity alone.

Performance appraisal is done periodically, but on a continuous basis. It is a

part of a larger performance management system and includes both managerial
and non-managerial employees in its scope.

Objectives of Performance Appraisal

(i) To provide employees feedback on their performance.

(ii) Identify employee training needs.

(iii) Document criteria used to allocate organizational rewards.

(iv) A basis for decisions relating to salary increases, promotions, disciplinary

actions, bonuses, etc.

(v) Provide the opportunity for organisational diagnosis and development.

(vi) Facilitate communication between employee and employer.

(vii) Validate selection techniques and human resource policies to meet

regulatory requirements.

(viii) To improve performance through counselling, coaching and development.

(ix) To motivate employees through recognition and support.

Advantages of Performance Appraisal

It is said that performance appraisal is an investment for the company which can
be justified by following advantages:

Promotion: Performance Appraisal helps the supervisors to chalk out the

promotion programmes for efficient employees. In this regards, inefficient
workers can be dismissed or demoted in case.

Compensation: Performance Appraisal helps in chalking out compensation

packages for employees. Merit rating is possible through performance appraisal.
Performance Appraisal tries to give worth to a performance. Compensation
packages which include bonus, high salary rates, extra benefits, allowances and
pre-requisites are dependent on performance appraisal. The criteria should be
merit rather than seniority.

Employees Development: The systematic procedure of performance appraisal

helps the supervisors to frame training policies and programmes. It helps to
analyse strengths and weaknesses of employees so that new jobs can be
designed for efficient employees. It also helps in framing future development
programmes.

Selection Validation: Performance Appraisal helps the supervisors to

understand the validity and importance of the selection procedure. The
supervisors come to know the validity and thereby the strengths and weaknesses
of selection procedure. Future changes in selection methods can be made in this
regard.

Communication: For an organization, effective communication between

employees and employers is very important. Through performance appraisal,
communication can be sought for in the following ways:

Through performance appraisal, the employers can understand and accept skills
of subordinates.

The subordinates can also understand and create a trust and confidence in
superiors.

It also helps in maintaining cordial and congenial labour management

relationship.

It develops the spirit of work and boosts the morale of employees.

All the above factors ensure effective communication.

Motivation: Performance appraisal serves as a motivation tool. Through

evaluating performance of employees, a person‟s efficiency can be determined
if the targets are achieved. This very well motivates a person for better job and
helps him to improve his performance in the future.

MODERN TECHNIQUES OF PERFORMANCE APPRAISAL

Traditional Trait Appraisal Methods:

1. Ranking Methods:

Ranking can be based on the followings:

(а) Straight Ranking Method:

This is one of the oldest and simplest techniques of performance appraisal. In

this method, the appraiser or evaluator ranks the employees from the best to the
poorest on the basis of their overall performance. It is very useful for a
comparative evaluation.

(b) Paired Comparison Method:

It is a better way of comparison than the straight ranking method. In this method
each employee is compared with all others on a one- to-one basis, and then
ranked.

(c) Forced Distribution Method:

It is a method of appraising employees on the basis of a predetermined

distribution scale. The evaluator is asked to rank 10% employees in the best
category, 20% in the next category, 40% in the middle category, 20% in before
the low, and 10% in the lowest brackets.

2. Graphic Rating Scale Method:

In this method, an employee‟s quality and quantity of work is assessed in a

graphic scale indicating different degrees of a particular trait, i.e., behavior or
characteristics as they relate to work performance.

For example a trait like Job knowledge may be judged on the range of average,
above average, outstanding or unsatisfactory or on the basis of numbers
(1,2,3,4, 5, and so on). The list of factors to be appraised is dependent upon the
company requirements.

3. Critical Incidents Methods:

In this method, the evaluator rates the employee on the basis of critical events
and how the employee behaved during those incidents. It includes both negative
and positive points. The negative point incident might be damage to machinery
because of not following safety measures.

Positive point incident may be staying beyond working hours to repair a

machine. The drawback of this method is that the supervisor has to note down
the critical incidents and the employee behavior as and when they occur.

4. Checklist Methods:

The appraiser is given a checklist of several behaviours, traits, or job

characteristics of the employees on job. The checklist contains a list of
statements on the basis of which the evaluator describes the on the job
performance of the employees. If the rather believes that employee does have a
particular listed trait it is marked as positive check, otherwise the item is left
blank.

The company has a choice to choose either Weighted Checklist Method or

Forced Checklist Method.

5. Essay Appraisal Method:

It is also known as “Free Form Method”. It involves a description of the

performance in a number of broad performance criteria of an individual
employee by his superior based on the facts and often supported by examples
and evidences. A major drawback of the method is how to keep the bias of the
evaluator away.

6. Field Review Method:

In this method, a representative of the HR department or a training officer

discusses and interviews the supervisors to evaluate and rate their respective
subordinates. This method is very time consuming method. However, this
method helps to reduce the superiors‟ personal bias.

At this stage it would not be out of context to mention some of the limitations
associated with trait-based methods of performance evaluation. First, the trait-
based methods are based upon traits (like integrity and consciousness) which
may not be directly related to successful job performance. An employee can
change behaviour, but not personality. An employee who is dishonest, may stop
stealing, but is likely to involve the moment he feels the threat of being caught
is gone. Second, trait-based methods are easily influenced by „office politics‟
and is thus, less reliable.

Six modern performance appraisal methods

With the right performance appraisal method, organizations can enhance
employee performance within the organization. A good employee performance
review method can make the whole experience effective and rewarding. Now
that the drawbacks of traditional methods are clear.

Modern techniques of performance appraisal

1. Management by Objectives (MBO)

Management by objectives (MBO) is the appraisal method where managers and

employees together identify, plan, organize, and communicate goals. After
setting clear goals, managers and subordinates periodically discuss the progress
made to control and debate on the feasibility.

This process usually lays more stress on tangible work or career-oriented goals.
So, intangible aspects like interpersonal skills, job commitment, etc. are often
brushed under the rug. This method is slightly expensive and time-intensive.

2. 360-Degree Feedback

Once-in-a-year performance appraisals are lackadaisical and don‟t work.

Workers need ongoing communication with team leaders and managers. A
continuous process, like 360-degree feedback, can help employees stay
motivated. This is one of the most widely used appraisal methods.

In 360-degree feedback, every employee in an organization appraises his/her

managers, peers, customers, suppliers, and also does a self-evaluation. This
method ensures effective performance analysis and Total Employee Involved
(TEI). If not handled properly, this method can also suffer from the subjectivity
of theWhat is 360-degree feedback?

360-degree feedback is a method of gathering both positive and constructive

feedback on employee performance as part of the wider appraisal process. The
traditional way relies on receiving feedback from the employee‟s manager. This
method, however, gathers a variety of feedback from multiple sources,
including the employee‟s peers, external stakeholders/clients, direct line
manager, and subordinates, where appropriate. This feedback can be gathered in
several different ways, such as verbally, via a paper or email form, or through
an automated system.

The purpose of 360-degree feedback

The main purpose of implementing a 360-degree feedback system is to allow

employees the opportunity to receive meaningful and constructive feedback
from more than one source, instead of just from their direct line manager. This
can be quite useful. Depending on their job role, the employee may work
closely with a colleague or even a customer who is external to the business, and
would benefit from hearing their structured feedback. 360-degree feedback,
therefore, provides a mechanism for gathering the views and opinions of these
people to give the employee in question much more well-rounded, relevant, and
specific evaluation on his/her job performance.

Benefits of 360-degree feedback in the appraisal process

360-degree feedback can also be an excellent way to promote effective

communication among staff members. It encourages an open and honest
organizational structure where successes are celebrated and areas of opportunity
are identified and supported. It means that feedback is much less one-sided and
more collaborative, with teams working together to improve both personal and
organizational performance in a culture where ongoing self-development is
encouraged and celebrated. appraiser.

3. Assessment Centre Method

The assessment centre method tests employees in a social-related situation. This

concept was introduced way back in 1930 by the German Army but it has been
polished and tailored to fit today‟s environment. Employees are asked to take
part in situation exercises like in-basket exercises, work groups, simulations,
and role-playing exercises that ensure success in a role.

While it gives an insight of the employee‟s personality (ethics, tolerance,

problem-solving skill, introversion/extroversion, adaptability, etc.), it can also
breed unhealthy competition among the workers and bears adverse effects on
low performers.

4. Behaviorally Anchored Rating Scale (BARS)

Behaviorally anchored rating scales (BARS) bring out both the qualitative and
quantitative benefits in a performance appraisal process. BARS compares
employee performance with specific behavioral examples that are anchored to
numerical ratings.

Psychological Appraisals: This is one of the most frequently used modern

methods of performance appraisal, wherein the psychologist assesses the
employee‟s potential for the future performance rather than the past one. Under
this method, the psychologist conducts the in-depth interviews, psychological
tests, discussions with the supervisors and the reviews of other evaluations.

This assessment is done to determine the intellectual, emotional, motivational

and other related characteristics of an employee that is necessary to predict his
potential for the future performance.

The potential appraisal :

Refers to the appraisal i.e. identification of the hidden talents and skills of a
person. The person might or might not be aware of them. Potential appraisal is a
future – oriented appraisal whose main objective is to identify and evaluate the
potential of the employees to assume higher positions and responsibilities in the
organizational hierarchy. Many organisations consider and use potential
appraisal as a part of the performance appraisal processes.
The purposes of a potential review are:

1) to inform employees of their future prospects;

2) to enable the organisation to draft a management succession programme;
3) to update training and recruitment activities;
4) to advise employees about the work to be done to enhance .their career
opportunities.

Techniques of potential appraisal:

1) Self – appraisals
2) Peer appraisals
3) Superior appraisals
4) MBO
5) Psychological and psychometric tests
6) Management games like role playing
7) Leadership exercises etc.

Potential appraisal helps to identify what can happen in future so that it can be
guided and directed towards the achievement of individual and organizational
growth and goals. Therefore, potential should be included as a part of the
Performance appraisal in organisations.

The Potential for Improving Performance, or PIP, measures the performance of

the average worker versus the best person performing a particular task. Large
differences suggest that performance can be improved by bringing average
performance up closer to the best performance. Small differences suggest little
potential for improvement.

The following are some of the requirements and steps to be followed when
introducing a potential appraisal system:

Role Description: A good potential appraisal system would be based on clarity

of roles and functions associated with the different roles in an organisation. This
requires extensive job descriptions to be made available for each job. These job
descriptions should spell out the various functions involved in performing the
job.

Qualities Required: Besides job descriptions, it is necessary to have a detailed

list of qualities required to perform each of these functions. These qualities may
be broadly divided into four categories -

(1) technical knowledge and skills,

(2)managerial capabilities and qualities,

(3) behavioural capabilities, and

(4)conceptual capabilities.

Indicators of Qualities: A good potential appraisal system besides listing down

the functions and qualities would also have various mechanisms for judging
these qualities in a given individual. Some of the mechanisms for judging these
qualities are -

(a) rating by others,

(b) psychological tests,

(c) simulation games and exercises,

(d) performance appraisal records.

Organising the System: Once the functions, the qualities required to perform
these functions, indicators of these qualities, and mechanisms for generating
these indicators are clear, the organisation is in a sound position to establish and
operate the potential appraisal system. Such establishment requires clarity in
organisational policies and systematisation of its efforts.
Feedback: If the organisation believes in the development of human resources
it should attempt to generate a climate of openness. Such a climate is required
for helping the employees to understand their strengths and weaknesses and to
create opportunities for development. A good potential appraisal system should
provide an opportunity for every employee to know the results of assessment.
He should be helped to understand the qualities actually required for performing
the role for which he thinks he has the potential, the mechanisms used by the
organisation to appraise his potential, and the results of such an appraisal.

A good potential appraisal system provides opportunities continuously for the

employee to know his strengths and weaknesses. These are done through
periodic counselling and guidance sessions by either the personnel department
or the managers concerned. This should enable the employee to develop
realistic self-perceptions and plan his own career and development.

Potential Appraisal Vs. Performance Appraisal

Potential Appraisal is forward looking process whether performance appraisal is

backward looking process. Any good or worse assessment results of
performance appraisal may not be a good factor for potential appraisal. But
current performance of an employee could show evidence somewhere whether
he/she is flexible for new working conditions.

Employee counselling :
Employee counselling is a vital part of performance review and potential
appraisal, if these are to achieve their basic purpose of helping employees to
improve and develop. Unless carefully and sensitively handled, employees may
become more dissatisfied after the counselling than before.

Counselling is described as the help provided by the supervisor to the

subordinates in analysing their performance and other behaviours on the job, in
order to improve their performance. Counselling is also used sometimes in the
sense of coaching and reviewing one‟s performance. Such a review identifies
not only the potential for development but also the training needs for further
improvements.

(i) Counselling deals with emotional problems.

(ii) Counselling involves discussion i.e., it is an act of communication.
Successful counselling depends on communication skills, primarily face- to-
face, by which one person‟s emotions can be shared with another.

(iii) The general objective of counselling is to understand and/or decrease an

employee‟s emotional disorder. If two individuals merely discuss an emotional
problem of either of them, a social relationship may be established, but hardly a
counselling one, because intent is not there. For counselling to exist, an
employee must be seeking an understanding or help and/or the other (known as
counsellor) must be offering it.

Employee Counselling – Need and Objectives

Need for Employee Counselling:

Employees undergo tremendous stress of completing the targets, work-load,

meeting deadlines, relations with subordinates or colleagues, work-life balance,
lack of time and higher responsibility.

Therefore, following are some of the reasons as to why there should be

counselling at work places:

1. There is a need for the employees to come out from the problems, gives a
new way to deal with the problems.

2. The employees need to know as to how much the employer care for the
employee.

3. There is also a need to identify the work related problems and the poor
performance.

4. There is a need to increase the productivity of employee and the confidence

about the work.

Objectives of Employee Counselling:

The objectives of employee counselling are multidimensional and all concerned

parties are benefitted due to employees counselling.

The objectives of counselling could be stated as follows:

(i) Counselling is an exchange of ideas and feelings between two persons.

(ii) It is concerned with both personal and work problems.

(iii) Counselling may be performed by both professionals and non--
professionals.

(iv)Counselling is usually confidential so as to have free talk and discussion.

(v) It tries to improve organisational performance by helping the employees to

cope with their problems.

i. Helping employees to realize their potential.

ii. Helping employees to understand their strengths and weaknesses.

iii. Providing employees an opportunity to acquire more insight into their

behaviour and analyse the dynamics of such behaviour.

iv. Helping employees to have a better understanding of the environment.

v. Increasing personal and interpersonal effectiveness through effective

feedback.

vi. Encouraging employees to set goals for further improvement; and

vii. Providing employees an atmosphere for sharing and discussing their

tension, conflicts, concerns, and problems.

Communication involves receiving messages (listening), giving messages

(responding), and giving feed-back. The counsellor or the mentor does all these.
The process of empowering enables the other person to exercise more
autonomy, providing positive reinforcement so that the desirable behaviour is
further strengthened and creates conditions in which the person is able to learn
from the behaviour of the men-tor. Finally, helping primarily involves
identification of the developmental needs of the person being counselled so that
he/she may be able to develop and increase his/her effectiveness.

JOB CHANGES (TRANSFERS AND PROMOTION)

job change is defined as a move to a different job (different job code and
job title) in the same or lower grade which may result in a pay change.
Lateral. A lateral job change is defined as a move to the same job (same job
code and job title) outside of your current department.
Promotion
A promotion is when an employee advances to a position that is classified at
a higher salary grade, or in certain circumstances, an acknowledgment of

significant greater responsibilities within the same grade. A salary increase is

typically appropriate at the time of the promotion, based upon an evaluation

of relevant experience, performance, relative position in the new salary

range, internal equity, and external competitiveness.

Transfer

A transfer is when an employee moves to a position outside his or her current

department. A transfer can be lateral (no change in grade), a promotion

(increase in grade), or demotion (decrease in grade). Salary changes may or

may not be warranted in the case of a transfer.

Promotions

,Promotion is advancement of an employee to a better job – better in terms of

greater responsibility, more prestige or status, greater skill and especially
increased rate of pay or salary”.

Conditions of promotions are:

Reassignment of higher level job to an employee than what he is presently

performing

The employee will naturally be delegated with greater responsibility and

authority than what he has had earlier. Promotion normally accompanied higher
pay. It means in some cases, the employee perform higher level job and receive
the salary related to the lower level job.

Promotion may be temporary or permanent depending upon the organizational

needs and employee performance.

Purposes of Promotion:
 1) To utilize the employee‟s skill knowledge at the appropriate level in the
organizational hierarchy
2) To develop competitive spirit and inculcate the zeal in the employees to
acquire the skill, knowledge etc. required by higher level jobs.
3) To develop competent internal source of employees ready to take up jobs
at higher levels in the changing environment.
4) To promote employees‟ self-development and make them await their turn
of promotions. It reduces labour turnover.
5) To promote a feeling of contentment with the existing conditions of the
company and a sense of belongingness.
6) To promote interest in training, development programmes and in team
development areas.
7) To build loyalty and to boost morale.
8) To reward committed and loyal employees
9) To get rid of the problems created by the leaders of workers‟ unions by
promoting them to the officers‟ levels where they are less effective in
creating problems.

10) Promotion places the employees in a position where an employee‟s

skills and knowledge can be better utilized.
11) It creates and increases the interest of other employees in the
company as they believe that they will also get their turn.
12) It creates among employees a feeling of content with the existing
conditions of work and employment.
13) It increases interest in acquiring h9gher qualifications, in training
and in self-development with a view to meet the requirements of
promotion.
14) It improves morale and job satisfaction
15) Ultimately it improves organizational health.

Problems with promotion:

Glass Ceiling- Glass ceiling is an invisible barrier to promotion based in race,

community, tribe, nationality, gender etc.

Promotion disappoints come employees

Some employees refuse promotion

Transfer
Transfer is defined as “… the moving of an employee from one job to another.
It may involve a promotion, demotion or no change in job status other than
moving from one job to another”.

Reasons Types of transfers

1 To meet the Production Transfer

organizational
requirements
2 To satisfy employees‟ Personal Transfer
needs
3 to utilize employee‟s
skill knowledge etc
4 To improve employee‟s Remedial Transfer
background by placing
him in different jobs of
various departments,
units etc.
5 To correct inter-personal
conflicts
6 To adjust the workforce
of one section/plant in
other section/plant
during lay-off, closure or
adverse business
conditions etc.
7 To give relief to the Replacement Transfer
employees who are
overburdened or doing
complicated or risky
work for a long period
8 To punish the employees Penal Transfer
who violate the
disciplinary rules
9 To help the employees Shift Transfer
whose working hours or
place of work is
inconvenient to them
10 To increase the Versatile Transfer
versatility of employees (Rotation transfer)

(Compensation:Concept of Compensation)
The literal meaning of compensation is to counter-balance. In the case of human
resource management, compensation is referred to as money and other benefits
received by an employee for providing services to his employer. Money and
benefits received may be in different forms-base compensation in money form
and various benefits, which may be associated with employee‟s service to the
employer like provident fund, gratuity, insurance scheme and any other
payment which the employee receives or benefits he enjoys in lieu of such
payment.

“Compensation includes direct cash payments, indirect payments in the

form of employee benefits and incentives to motivate employees to strive
for higher levels of productivity”

Based on above description of compensation, we may identify its various

components as follows:

1) Wage and Salary: Wage and salary are the most important component
of compensation and these are essential irrespective of the type of
organisation. Wage is referred to as remuneration to workers particularly,
hourly-rated payment. Salary refers to as remuneration paid to white-
collar employees including managerial personnel. Wages and salary are
paid on the basis of fixed period of time and normally not associated
with productivity of an employee at a particular time.
2) Incentives: Incentives are the additional payment to employees besides
the payment of wages and salaries. Often these are linked with
productivity, either in terms of higher production or cost saving or both.
These incentives may be given on individual basis or group basis.
3) Fringe Benefits: Fringe benefits include such benefits which are
provided to the employees either having long-term impact like provident
fund, gratuity, pension; or occurrence of certain events like medical
benefits,
 4) accident relief, health and life insurance; or facilitation in performance
of job like uniforms, canteens, recreation, etc.

5) Perquisites: These are normally provided to managerial personnel

either to facilitate their job performance or to retain them in the organisation.
Such perquisites include company car, club membership, free residential
accommodation, paid holiday trips, stock options, etc.

Concept of Compensation Management

Compensation management, also known as wage and salary administration,

remuneration management, or reward management, is concerned with designing
and implementing total compensation package. The traditional concept of wage
and salary administration emphasized on only determination of wage and salary
structures in organisational settings. However, over the passage of time, many
more forms of compensation entered the business field which necessitated to
take wage and salary administration in comprehensive way with a suitable
change in its nomenclature.

Objectives of Compensation Management

The compensation paid to employees is agency consideration. Each party to

agency tries to fix this consideration in its own favor. The employers want to
pay as little as possible to keep their costs low. Employees want to get as high
as possible. The compensation management tries to strike a balance between
these two with following specific objectives:

1. Attracting and Retaining Personnel

From organisation‟s point of view, the compensation management aims at

attracting and retaining right personnel in the organisation. In the Indian
corporate scene, there is no dearth of personnel at operative levels but the
problems come at the managerial and technical levels particularly for growing
companies. Not only they require persons who are well qualified but they are
also retained in the organisation. In the present day context, managerial turnover
is a big problem particularly in high knowledge-based organisations.

2. Motivating Personnel

Compensation management aims at motivating personnel for higher

productivity. Monetary compensation has its own limitations in motivating
people for superior performance. Alfie Kohn (an American author and lecturer
who has explored a number of topics in education, parenting, and human
behavior.) has gone to the extent of arguing that corporate incentive plans not
only fail to work as intended but also undermine the objectives they intend to
achieve. He argues that this is due to inadequate psychological assumptions on
which reward systems are based. His conclusions are as follows:

Rewards rupture relationships-they create competition where teamwork and

collaboration are desired.

Rewards ignore reasons-they relieve managers from the urgent need to explore
why an employee is effective or ineffective.

Rewards discourage risk taking-employees tend to do exactly what is required

to earn the reward, and not any more.

Rewards undermine interest-they distract both manager and the employee from
consideration of intrinsic motivation.

Notwithstanding these arguments, compensation management can be designed

to motivate people through monetary compensation to some extent.

3. Optimizing Cost of Compensation

Compensation management aims at optimizing cost of compensation by

establishing some kind of linkage with performance and compensation. It is not
necessary that higher level of wages and salaries will bring higher performance
automatically but depends on the kind of linkage that is established between
performance and wages and salaries. Compensation management tries to
attempt at this.

4. Consistency in Compensation

Compensation management tries to achieve consistency-both internal and

external-in compensating employees. Internal consistency involves payment on
the basis of criticality of jobs and employees‟ performance on jobs. Thus, higher
compensation is attached to higher-level jobs. Similarly, higher compensation is
attached to higher performers in the same job. Level of jobs within an
organisation is determined by job evaluation. External consistency involves
similar compensation for a job in all organisations. Though there are many
factors involved in the determination of wage and salary structure for a job in an
organisation which may result into some kind of disparity in the compensation
of a particular job as compared to other organisations, compensation
management tries to reduce this disparity.

Compensation Policy

The compensation policy is the basic document, which drives the detail of the
compensation practices in the organization. As the compensation strategy sets
the high level compensation goals of the organization, the compensation policy
describes the details of the individual compensation components, their behavior
and their role in the compensation scheme of the organization.

JOB EVALUATION:

Job evaluation is the process of analysing and assessing various jobs

systematically to ascertain their relative worth in an organization.

Job evaluation is an assessment of the relative worth of various jobs on the basis
of a consistent set of job and personal factors, such as qualifications and skills
required.

The objective of job evaluation is to determine which jobs should get more pay
than others. Several methods such as job ranking, job grading, and factor
comparison are employed in job evaluation. Research indicates, however, that
each method is nearly as accurate and reliable as the other in ranking and
pricing different jobs. Job evaluation forms the basis for wage and salary
negotiations.

The objectives of job evaluation, to put in a more systematic manner are to:

1. Establish a standard procedure for determining the relative worth of

Each job in an organization;

2. Ensure equitable wage for a job and reasonable wage differentials

Between different jobs in a hierarchical organization;

3. Determine the rate of pay for each job which is fair and equitable with

Relation to other jobs in the plant, community or industry;

4. Eliminate wage inequalities;

5. Use as a basis for fixing incentives and different bonus plans;

6. Promote a fair and accurate consideration of all employees for

Advancement and transfer;

7. Provide information for work organization, employees‟ selection,

Placement, training and other similar purposes;

8. Provide a benchmark for making career planning for the employees in

The organization and;

9. Ensure that like wages are paid to all qualified employees for like

Work.

METHODS OF WAGE PAYMENTS :

Some of the systems of wage payments commonly used are

1. Time Rate System

2. Piece Rate System

3. Combination of Time and Piece Rate System.

Method # 1. Time Rate System:

Time rate system is the simplest and oldest method of wage payment.
According to this system, the workers are paid in accordance with the time
spent on the job. The time may be on hourly, daily, weekly, fortnightly or
monthly basis. The work or production done by an employee is not taken into
consideration.

For example,

If the worker is paid at the rate of Rs.20 per hour and he spends 50 hours during
a week, the weekly payment is:

Weekly wages = (Number of hours worked during the week) x (Rate per
hours) = 50 x 20 = Rs.1000 per week.

Advantages:
a. This method of wage payment is very simple. The workers will not find any
difficulty in calculating the wages.

b. This method is acceptable to trade unions because it does not distinguish

between workers on the basis of their performance.

c. The quality of goods will be better as workers are assured of wages on time
basis.

d. This system is good for the beginners because they may not be able to reach a
particular level of production in the beginning.

e. There will be less wastage, as workers will not be in a hurry to push through
production.

Disadvantages:

a. 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.

b. There will be wastage of time, as the workers are not following a target of
production.

c. Because wages are not related to output, employees find it difficult in

determining labour cost per unit.

d. Work needs supervision. Thus, cost of supervision increases.

Method # 2. Piece Rate System:

Piece rate system is a system in which wages are paid in accordance with the
number of units of work produced. This is independent of time spent on the job.
A fixed rate of wage is paid for each piece of unit produced.

For example,

If a worker produces 100 pieces per day and he is paid at the rate of Rs.1.2
per piece, the daily wage is 100 x 1.2 = Rs.120.

Advantages:
a. This system is simple in working and the workers can easily calculate their
wages.

b. This system helps in distinguishing efficient and inefficient workers.

c. Strict supervision is not required in this system.

d. This system is fair to employee and employer both.

e. There will be no dispute for wages, as workers will be rewarded satisfactory

for their work.

Disadvantages:

a. This system does not guarantee a fixed minimum wage to a worker.

b. The quality of goods will be poor as workers try to speed up their work in
order to produce more.

c. There will be increase in wastage of materials.

d. Workers intentionally ignore safety rules, inviting accidents.

e. Workers neglect their health in order to put their maximum efforts.

f. The wages of beginners will be less, as their output cannot be equal to the
experienced workers.

Method # 3. Combination of Time and Piece Rate System:

In this system, both time and product are taken into consideration. The
minimum weekly wages are fixed for every worker, which are to be paid
irrespective of his output during the week, provided he has worked for full
working hours required in a week. The wages for the period of his absence are
deducted from the total amount of his wages.

The piece rate system is also combined with time rate system as follows:

A job card of each worker is maintained which clearly shows the number of
jobs completed by the worker during a week. Payment for each job is fixed in
advance. If the piece rate wages earned by the worker are more than time rate
wages, the balance is paid to the worker. On the other hand, if piece rate wages
are less than time rate wages, then the worker will have to compensate the same
by making more pieces during next week.
Advantages:

a. This system provides incentives to workers to produce more,

b. It is simple in its working and the workers can easily calculate their wages.

Disadvantages:

a. It needs check on quality.

b. It needs careful piece rate fixing.

c. The entire benefit of extra payment goes to worker.

Types of incentive plans

2 types or kinds or methods of incentive plans

1) Individual incentive plan

2) Group incentive plan

1) Individual incentive plan: it may either be time based or production based.

Under time based plan a standard time is fixed for doing the job. A worker is
said to be efficient if he completes the job in time and he is given the reward for
his efficiency.

i) The time based individual incentive plans are:

a) Halsey plan
b) Rowan plan

c) Emerson plan

d) Bedeaux plan

a) Halsey plan: under Halsey plan minimum wages are guaranteed to every
worker. A standard time is fixed for the workers. If the workers finish the work
before standard time they are given bonus. But no penalty if they fails to do
that.

b) Rowan plan: it is the modification of the Halsey plan it also guarantees the
minimum wages and does not penalize the slow workers. Standard time is fixed
and the bonus is paid on the basis of time saved

c) Emerson plan: in this plan minimum wages are guaranteed to the workers
efficiency is measured on the basis of the comparison of actual performance
with the standard fixed. Under this method if the efficiency is 100% the bonus
would be paid at 20% and above 100% bonus at 30% would be paid. Thus
efficient workers will be rewarded at an increasing rate with the increase in
saving time.

d) Bedeaux plan: under this minute is the time unit described as the standard
minute. The standard time for each job is fixed after undertaking time and
motion study expressed in terms of B. the standard time for a job is the number
of B‟s allowed to complete it. Generally the bonus paid to the worker is 75% of
the wages for time saved. The rest 25% goes to the foreman.

Standard time(S) = 360 B‟s (6hours*60 minutes)

Actual time (T) =300 B‟s (5hours*60 minutes)

Wage rate(R) = Rs 10 per hour

Value of time saved=360-300/60*10

=Rs10

Total wages (W) =S*R+75%of valuE

=6*10+75/100*10

=Rs67.
ii) The production based individual incentive plans are:

Under the production based incentive plan a standard output is fixed and the
workers are paid on the basis of the production. They are given incentive if they
produced more number of units than the standard fixed. it includes the

a) Taylor plan

b) Merrick plan

c) Gantt plan

a) Taylor’s differential piece rate system: in this plan, Taylor did not give
minimum guarantee to each worker. As per his statement it is possible to
calculate standard workload for every worker on the basis of time and motion
studies. He gave two piece rates for the workers. The lower rate for average and
less efficient workers who produce less than the standard production and the
higher piece rate for the above average or efficient workers. So the efficient
workers are paid more than the inefficient workers.

Standard production = 40 units in a day

Wage rate = between 60 to 70 rs

If the worker produces 40 units in a day he will be paid 40* 70= rs 280

If the worker produces 30 units in a day he will be paid 30* 60 = rs 180

As only those who give standard output or more will be paid at rs 70 and rest
will be paid at rs 60 only.

Thus in this method inefficient workers are penalized. Workers are treated like
machines and there is no guarantee of minimum wages in this method.

b) Merrick’s multiple piece rate plan: under this plan there are three grade
piece rate rather than two given by Taylor.

Workers who produce Less than 83% are paid basic piece rate

Workers who produce between 83%- 100% are paid 110% of basic piece rate

Workers who produce more than 110% paid 120% of basic

Thus this system is improvement over the Taylor‟s plan. But this system also
does not give guarantee minimum wages to the workers. All the workers
producing between 1 to 82% of standard output are considered same and paid at
the same piece rate.

c) Gantt’s bonus plan: under this method minimum wages are guaranteed. If
the worker fails to complete the task within the standard time he receives only
the wages for actual time spent at the specified rate. But if he completes the task
within time he gets extra wages.

Standard time= 10 hours

Rate= rs 8 per hour

Bonus 25% of the standard time

If the worker finishes his job within 8 hours he will get rs 80 plus 25% of the
day‟s wages i.e. 80*25%=20 that means total rs 80+20= rs 100 so he will get
bonus for 8 hours work.

2) Group incentive plan: under this method group bonus is given instead of
individual bonus. The bonus is distributed among all the employees of the
organization on the different basis which are as follows:

a) Priestman’s plan: under this method Bonus is increased in proportion to

increase in output.

Increased production/standard production*100

b) Profit sharing method: under this method increased profit is shared among
the workers and management as agreed between both the parties.

c) Scanlon plan: under this method bonus is paid in proportion to the

production 1% bonus if 1% increases in production.

FRINGE BENEFITS :

What Are Fringe Benefits?

Fringe benefits are additions to compensation that companies give their

employees. Some fringe benefits are given universally to all employees of a
company while others may be offered only to those at executive levels. Some
benefits are awarded to compensate employees for costs related to their work
while others are geared to general job satisfaction. In any case, employers use
fringe benefits to help them recruit, motivate, and keep high-quality people.

Features of Fringe Benefits:

1) They are paid to all the employees ( unlike incentives which are paid only
to the extra ordinary performers) based on their membership in the
organisation.
2) Fringe benefits are indirect compensation because they are extended as a
condition for employment and are not directly related with the
performance.
3) These benefits may be statutory or voluntary. For example Provident
funds are statutory but the transportation facility is voluntary.
4) These benefits help raise the living standards of the employees.

Need for Fringe benefits:

1) Employee demand: The employees now a days demand for fringe

benefits rather than pay hikes because of reduction in tax burden on the
employee‟s side and in view of galloping price index and cost of living.
2) Trade Unions demand: Various trade union are competing with each
other for getting more and more benefits for there members. If one union
succeeds in persuading the management for a new benefit the other union
will try to convince the management for an additional benefit.
3) Employer‟s Preference: Employer may also wish to provide fringe
benefits to the employees in a view of increasing productivity and
motivating the employees.
4) As a social security: Fringe benefits are also provided to the employees to
protect them from certain risk such as contingencies of life like accidents
and occupational diseases.
5) To improve human relations: Improving human relation is a process of
addressing the needs of the employees and satisfying them. Fringe benefit
satiates employee‟s economical, social and psychological needs.

Objectives of Fringe benefits:

1) To create and improve sound industrial relations.

2) To motivate the employees.
3) To protect health of the employees and safety to the employees against
threats such as accidents and occupational diseases.
 4) To promote employee welfare.
5) To provide security against social risks such as old age benefits and
maternity benefits.
6) To create a sense of belongingness among the employee and to retain
them. Fringe benefits are also known as golden handcuffs.
7) To meet the various legislative requirements relating to fringe benefits.

Types of Fringe benefits:

1) Payment for Time not worked:

Hours of work: Factory‟s Act , 1948 specifies that no adult workers shall be
required to work in factory more than 48 hours a week. In some organisations
number of working hours per week are less than the legal requirements.

Paid Holidays: According to Factory‟s Act, 1948 an adult worker shall have a
weekly paid holiday, normally Sunday. When a worker is deprived of weekly
paid holidays he/ she is to be compensated with the same number of holidays in
the same month. Some organisations offer two weekly paid holidays.

Shift Premium: Workers working on odd shift are to be compensated with

more than the normal wage rate, generally known as premium.

Holiday Pay: Generally organisations offer double the normal rate to those
workers who work on holidays.

Paid Vacation: Workers in mining , manufacturing and plantation who have

worked for 240 days in year are entitled for paid vacations at a rate of 1 day for
every 20 days worked in case of adult workers and 1 day for every 15 days
worked in case of child workers.

2. Employee Security:

Physical and job security to the employees should also be provided with a view
to ensure security to the employee and his family members. When the
employee‟s services get confirmed, his job becomes secures. Further, a
minimum and continuous wage or salary gives a sense of security to the life.

Retrenchment Compensation: The Industrial Disputes Act, 1947 provides for

the payment of compensation in case if lay off and retrenchment.The non-
seasonal industrial establishment employing 50 or more workers have to give
one month‟s advance notice or one month‟s wages to all the employees who are
retrenched after one year‟s continuous service. The compensation is paid at the
rate of 45 day wage for every completed year of service. Workers are eligible
for compensation as stated above in case of closing down of undertakings.

Lay Off Compensation: In case of lay off the employees are entitled to lay off
compensation at the rate equal to 50% of the total of the basic wage and
dearness allowance for the period of their lay off except for the weekly
holidays. Lay off compensation can normally be paid up to 45 days a year.

3. Safety and Healthy:

Employee‟s safety and health should be taken care in order to protect the
employees against accidents, unhealthy working conditions and to protect the
worker‟s productive capacity. In India, Factory‟s Act, 1948 stipulated certain
requirements regarding working conditions with a view to provide safe working
environment. These provisions relate to cleanliness, disposal of waste and
effluents, ventilation and temperature, dust and fumes, artificial humidification,
overcrowding, lighting, urinals, drinking water, latrines, spittoons etc.

Provisions relating to safety measures include fencing of machinery, work on or

near machinery in motion, employment of young persons on dangerous
machines, self acting machines, casing of new machinery,hoists and lifts
excessive weights, lifting machines, chains, ropes explosive or inflammable
dust , gas etc.

4. Workmen’s Compensation:

In addition to safety and health measures, provisions for payments of

compensation has also been made under the Workmen‟s Compensation Act,
1923. The Act is intended to meet the contingencies of death and invalidity of
worker due to employment injury and occupational diseases specified under the
Act as the sole responsibility of employer. Under the Act the amount of
compensation depands upon the nature of injury and and monthly wages of the
employee. Dependants of the employee are are eligible for compensation in case
of death of the employee.

5. Heath Benefits:These benefits include

Sickness bnefits: Sickness benefit is roughly 50% of average daily wages and
is payable for 91 days during 2 consecutive benefit period.
Medical benefit: The Employee‟s state Insurance Scheme provides full medical
care in the form of medical attendance, treatments, drugs and injections,
specialist consultation, and hospitalization to insured person and also to
members of their families where the facility has been extended to the families.

Temporary Disablement benefits: TDB is payable to an employee suffers

from employment injury or occupational diseases and is certified to temporarily
incapable of work.

Permanent Disablement Benefit: PDB is payable to an employee who suffers

permanent residual disablement as a result of employment accident or
occupational diseases. The maximum rate of PDB can be equal to TDB.

Maternity Benefits: Maternity benefits is payable to and insured women in the

following cases subject to contributory conditions: – (a) Confinement, (b)
Miscarriage or medical termination of pregnancy (MTP), (c) sickness arising
out of pregnancy.

6. Voluntary Arrangement:

However, most of the large organisations provide health services over and
above the legal requirements to their employees free of cost by setting up
hospitals, clinics, dispensaries, and homeopathic dispensaries. Company‟s
elaborate health service programmes includes:

Providing health maintenance services, emergency care, on the job treatment

for minor complaints, health counselings, medical supervision in rehabilitation,
accidents and sickness prevention, health education programmes, treatment in
employee colonies etc.

Medical benefits are extended to employee family members and to the retired
employees and their family members.

Small organisations which cannot setup hospitals provide the medical services
through local hospitals and doctors. Sometimes they provides reimbursements
of medical expenses borne by the employee.

7. Welfare and Recreational facilities:

These benefits include canteens, consumer stores, credit societies, housing,

legal aids, employee counselling, welfare organisation, holiday homes,
educational facilities, transportation, picnics and parties etc.
PERFORMANCE LINKED COMPENSATION :

Performance Linked Compensation : Performance-related pay or pay for

performance is a salary paid relating to how well one works. Car salesmen or
production line workers, for example, may be paid in this way, or through
commission.

One of the latest strategies being followed in all sectors through out the world
for retention and talent management is “linking compensation to performance”.
Commonly known as “Performance pay” or “Performance based pay”, it links
the compensation of the employees to their performance and their contribution
to the organizational goals. Therefore, periodic performance reviews play a vital
role and provide the basis of performance related pay.

Commissions, incentives and bonuses, piece rate pay help the employer to pay
the employee according to their productivity and hard work.

Linking Compensation & Performance Management

The overarching goal of the compensation strategy is to make sure an

organization has the right amount of money necessary to motivate the types of
performance needed to achieve the business strategy. To that end, compensation
should tie into the overall performance management strategy. Your practices
must therefore be understood by employees and based on hard, objective data. It
is essential to maintain an approach in which equal pay is given for equal work.
These critical objectives can be achieved by:
 1) Standardizing pay practices and basing the compensation system on
benchmarks
2) Achieving internal parity
3) Providing competitive hiring scales
4) Reformatting or rewriting job descriptions
5) Creating a meaningful performance management tool

Many companies find rewriting their job descriptions to include more results-
oriented and measurable information is beneficial in their compensation
planning activities. Instead of simply including the specific tasks or duties of the
job description, consider including why the duty is performed (or which results
it aims to achieve) and how the performance will be measured.

For example, for the role of marketing director in an assisted living facility, the
roles and responsibilities might look like this:

Facilitate the move-in process to build relationships with new residents, which
will be measured by new resident satisfaction

Ensure respite apartments are ready to show to ensure marketability, which will
be measured by apartment turnover

Develop and maintain a detailed marketing plan to great market share, which
will be measured through competitive market data

Types of Performance Pay

Merit pay – The first step to performance pay, merit pay means setting some
basic salary according to the position and the rank of the employee and the
variable part of the salary is based on the periodic performance reviews.

Profit Sharing – Sharing the profits of the enterprise with the employees as
bonus.

Incentives and Performance Bonus – Rewards for special accomplishments or

fulfillment of the targets set such as sales commission.

Gain sharing – Sharing of gains as a result of the increased performance of the

employees with them.

…………………………….THANK YOU ………………………….