Compensation and Benefits - Ebook

Compensation & Benefits
Rajeesh Viswanathan
Pondicherry University
School of Management
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Compensation & Benefits
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Contents v
CURRICULUM
1. Compensation Management—An Overview: Introduction, Organizational Strategy, Goals

and Compensation of Employees, Pay Elements, Compensating Individual Employees,
Compensating Groups, Employee Motivation, Concept of Broad banding, Moving From
Participation to Ownership, Employee Stock Options (ESOPS), Pay for Performance,
Roshans Limited-Transport Facility
2. Understanding Payroll Operations, Job Evaluation—Approaches & Methods: Cost
to Company (CTC), The System of Rankings, Classification of Jobs or Grading System,
Points-based systems activity
3. Designing Skill, Knowledge & Competency-based Pay: SKC Perks, The Survival of
Pay for SKCS, The Market Rate Analysis Process, Initial Decision to Conduct Market
Rate Analysis, Select Benchmark Positions, Sources for Obtaining Market Data, Capsule
Job Description, Broadbanding Represents A Significant Departure, Reasons for Using
Broadbanding have Changed, Band Design and Communication, Breaking The Bargaining
Pattern
4. Compensation & Wage Theories, An overview of Wage Policy & Legislation: Wage
Determination Process, Breaking the Cycle of Negotiation, Nature’s Dilemma, Workmen’s
Compensation Act, Payment of Wages Act, 1936, Employee’s Provident Fund Act, 1952,
Additional Bonuses, Employee State Insurance
5. Linking Variable Pay & Team Based Incentives to Achieve Organization Goals: Multiple
Incentive Plans can be Applied, Advantages and Disadvantages of Using Team-Based
Incentives, Bonus Affiliated with Team Performance, Identifying Team Incentives, Setting
of Goals, Integration, How to Improve the Success of Team-Based Pay, Sears, Roebuck &
Company: Operating Performance, Turnaround with HR Scorecard
6. Designing Compensation For Sales Team: The Need for Inspired HR Participation, Skills,
and Knowledge Needed for Increased Involvement, Aligning the Business Strategy and
Sales Compensation, Plan Design “Ground Rules” Established, Six Essential Plan Design
Elements, Using Fixed Compensation to Drive Productivity, Using Variable Compensation
to Drive Productivity, Workforce Management, The Alignment Model.

Contents vii
Contents
CHAPTER 1 Compensation Management—An Overview 1

Introduction 1
Layer 1: A Winning Business Strategy Begins with a Focused Strategy 2
Layer 2: The HR Strategy Based on the Creation of the
Winning Business Strategy of a Successful Business Culture 2
Layer 3: The Organization’s Pay Strategy is Developed
and Implemented to Support tts Talent Management Strategy
Built Upon tts Employee Classification System 4
Traditional versus Strategic Pay 6
Organizational Strategy, Goals and Compensation of Employees 6
Pay Elements 7
Components of Direct Pay 7
Cost of living adjustments (COLA) 7
Components of Indirect Pay 8
Leave with pay 8
Services and Perquisites 8
Compensating Individual Employees 8
Piece Rate System 8
Commission System 8
Bonus System 8
Skill Based System 9
Merit Pay System 9
Compensating Groups 9
Profit Sharing Plan 9
Current Distribution Plan 9
Deferred Payout Plan 9
Combination Plan 10
Gain Sharing Plan 10
Compensating CEOs 10
Objectives of Executive Compensation 10
Elements of Executive Compensation 10
Executive incentives 10
Long term incentives 11
Performance Bonuses 11
Executive Compensation—Indian Scenario 11
Paying the CEO the Right Way 11
Employee Motivation 11
Equity 11
Wage and Salary Surveys 13
Identification of Key Jobs 14
Selecting Organizations for Surveying 14
Collecting Data 14
Individual Equity 14
Concept of Broadbanding 14
Moving From Participation to Ownership 15
vii

viii Contents
Employee Stock Options (ESOPS) 15

Characteristics of Stock Options 15
Accounting Systems Ignore Stock Options 16
Stock Options affect Bottom-line 16
Pay for Performance 16
Concept of Variable Pay 16
Problems in Implementing Variable Pay 16
Case Study 18
Roshans Limited-Transport Facility 18
Multiple-choice Questions 19
CHAPTER 2 Understanding Payroll Operations 21

What is payroll? 22
Components of Payroll: 23
Advantages of payroll management software 23
Aim of having payroll 24
Factors to be kept in mind while choosing payroll management software 24
Reputation and dependability 24
Security 24
Your company’s size 24
Reporting and backup for software 25
Compatibility 25
Cost to Company (CTC) 25
Meaning 25
CTC comprises 25
CTC calculation 26
CTC vs. Gross Salary 26
Net Salary vs CTC 26
CTC’s component parts 26
Expected CTC vs. Current CTC 27
Splitting of CTC 27
Indirect Advantages comprise 27
Ideal CTC 27
Case Study 29
Remaking Mix 29
Job Evaluation—Approaches & Methods

CHAPTER 3 31
What is a job assessment? 31
Job evaluation 31
Conceptual Debate 32
Objective of job evaluation 32
Goals for Job Evaluation 33
Prevalence of job evaluations 34
Responsibility of Job Evaluation 34
Acceptance of Job Evaluation by Employee 36
Job Evaluation and Job Analysis Relationship 36
Approaches to Job Evaluation 37
Job assessment 37
1. The System of Rankings 37
Merits 38
Demerits 38

Contents ix
2. Classification of Jobs or Grading System 38

Merits 39
Demerits 39
3. Points-based systems 40
Mechanism 40
“Packed” point schemes 42
Activity 44
Expectations of Employees and HR Managers 44
Reduced Roles 44
Findings from Surveys 44
Case Study 45
Sweetwater Match 45
esigning Skill, Knowledge &

D
CHAPTER 4
Competency based Pay 47
Many plan options for compensation for skills, knowledge,
and competencies 48
Pay Based on Skills 49
Plans for Competency Pay 49
Strategic Competencies-Based Plans 50
SKC Perks 51
The Design Surface 52
Organizational Culture 53
Institutional Factors 53
Compensation Management 53
Training and Development 54
Assessment of SKC Acquisition 54
The Survival of Pay for SKCS 55
Market Rate Analysis 55
Defining Market Rate Analysis 55
The Objective Of Market Rate Analysis 55
Challenges In Defining The Market Rate 55
Market rate data’s validity and reliability 56
Job Matching 56
The Market Rate Analysis Process 57
Initial Decision to Conduct Market Rate Analysis 57
Select Benchmark Positions 57
Sources for Obtaining Market Data 58
Pay data online 58
Published Surveys 58
General local surveys published 59
Industry surveys 59
Occupational polls 59
Databases used by management consultants 59
Customized surveys 59
Pay clubs 61
Published Journal Data 61
Agencies and consultants for hiring 61
Manpower Consultants 61
Other market information 62
Selecting sources of data 62

x Contents
Analyse Data 62
Make Data About The Positions To Be Surveyed 63
Publicly Present Data By Interpreting Market 63
Capsule Job Description 63
Retail marketing analyst 63
Broadbanding 65
Broadbanding Represents A Significant Departure 65
Broadbanding Defined 66
The Evolution of Broadbanding 66
Reasons for Using Broadbanding have Changed 66
Band Design and Communication 67
Myths and Realities 67
Broadbanding is Effective 67
Companies Would do it Again 68
Case Study 69
Breaking The Bargaining Pattern 69
CHAPTER 5 Compensation & Wage Theories 71

Wages 71
Employment and Pay 72
Expert Labor 72
Low-Skilled Work 72
Professionals 73
Wages Theory 73
Acceptance of a Wage Level by the Employee 75
The Internal Pay System 75
Pay, Salaries, and Motivation 75
Wage Determination Process 75
Process for determining wages 75
The Job Analysis Process 76
Wage Surveys 76
Relevant Organizational Problems 77
Preparation of Wage Structure 77
Drawing a pay curve involves the following stages 78
Rate Ranges 79
Setting of Rate Ranges 79
Single-Rate Wage Systems 79
Dimensions of Ranges 79
Range Breadth 79
Number of Grades 80
Overlap 81
Moving Employees Through Rate Ranges 81
Rate Ranges and Recruitment 81
Wage and Salary Structure 82
What variables affect pay and salary structures? 82
Description in Detail 83
Concept of Minimum, Fair and Living Wage 84
Legal Minimum Wage 85
Basic Minimum Wage, or Bare 85
An hourly wage 85
Minimum Wage 86

Contents xi
Fair Wages 86
The Minimum Wage Based on Need 86
Wages in Real Money 87
Minimum Wage–Global Perspective 87
Research minimum wage laws 87
Case Study 91
Breaking the Cycle of Negotiation 91
Case Study 92
Nature’s Dilemma 92
CHAPTER 6 An overview of Wage Policy & Legislation 95

Workmen’s Compensation Act, 1923 95
Employee’s Provident Fund Act, 1952 96
Law of Minimum Wages Act, 1948 97
Payment of Wages Act, 1936 98
Equal Remuneration Act, 1976. 98
Bonus Act – 1965 99
Do all employers fall under the Act’s purview? 99
What does an accounting year mean for bonuses? 99
Act’s non-applicability 99
Do all employees fall under the Act’s jurisdiction? 100
Maximum allowed under Bonus 100
Bonus Minimum and Maximum 100
Determining Bonus 101
When will the bonus be paid out? 102
Bonus Disqualification 102
Ex Gratia 102
Additional Bonuses 102
Recruiting Bonus 102
Referral fee 102
Performance reward 102
Retention incentive 103
In lieu of a hike, a Bonus 103
Contracts for bonuses 103
Holiday bonus 103
Taxes on Bonuses 103
Payment of Gratuity Act–1972 103
Estimating the gratuity 105
Gratuity taxation 106
What time is gratuity due? 106
Giving up of Gratuity 107
Additional Suggestions 107
Employee State Insurance (ESI) 107
Employee State Insurance 107
Act governing 107
Do all employers fall under the Act’s purview? 107
Do all employees fall under the Act’s jurisdiction? 108
Contributions 108
Provisional contributions 108
Calculating Salary for ESI 108
Calculating the contribution to the ESI Fund 109

xii Contents
Periods of Contribution and Benefit 109

Date of payment due 110
Contribution Gathering 110
Benefits under the ESI programme 111
Scheme for ESIC Covid-19 Relief 112
Payback for Wage Loss Caused by COVID-19 112
Payment of costs associated with the worker’s last rites 112
Grievance Resolution 113
ABVKYANA, Atal Beemit Vyakti Kalyan Yojana (ABVKY) 113
Yojana Rajiv Gandhi Shramik Kalyan 113
Advantages for Employers 113
Important Employer Recommendations 114
Benefits & Conditions for Contribution 115
The National Pension Plan 115
Controlling Body 116
Who may enrol in NPS? 116
The NPS Program 116
NPS Account Types 116
Contributions 117
NPS taxation 117
Benefits from taxes for corporations: 117
Other Tax Advantages 118
NPS withdrawal 118
Case Study 119
inking Variable Pay & Team Based

L
CHAPTER 7
Incentive to Achieve Organization Goal 121
Variable pay as a tool for attraction 121
A Tool To Motivate Employees - Variable Pay 122
Bonus Plan Vs. Variable Pay Plan 123
Design Elements of a Variable Pay Plan 123
Different Variable Pay Plan Types 124
Multiple Incentive Plans can be Applied 126
Other Variable Pay Elements 126
Team-Based Rewards 127
Advantages and Dis Advantages of Using Team Based Incentives 128
Bonus Affiliated with Team Performance 129
Identifying Team Incentives 129
Nature of Work 129
Setting of Goals 130
Self-Managed Work Teams and Research and Development
Teams Are Two Examples 130
Integration 132
The Value of Individualism in Culture 132
Innovation: Using the ROI Share Plan to Combine Team
Incentives and Employee Surveys 133
How are bonuses calculated? 133
How to Improve the Success of Team-Based Pay 134

Contents xiii
CHAPTER 8 Designing Compensation For Sales Team 139

The Need for Inspired HR Participation 140
Skills and Knowledge Needed for Increased Involvement 142
Aligning the Business Strategy and Sales Compensation 143
Plan Design “Ground Rules” Established 144
Six Essential Plan Design Elements 146
Verify employment and eligibility in Step 1 146
Establish Pay Levels and Mix in Step 2 146
Determine Performance Measures in Step 3 146
Set goals in Step 4 148
Develop Incentive Mechanics in Step 5 148
Sixth step: Cost model 149
Case Study 151
ABC Distribution 151
nhancing Work Force Productivity

E
CHAPTER 9
Through Compensation 153

Exploring the Drivers of Productivity 154
Using Fixed Compensation to Drive Productivity 154
Using Variable Compensation to Drive Productivity 155
Case Study 157
Max Photo Film Manuracturing Company 157
CHAPTER 10 ompensation—A tool for Organizational

C
Transformation & Talent Management 159
Workforce Management 159
The Alignment Model 161
Appendix 1 esigning Compensation based

D
Performing Metrics 173
Rule 1: Select Measures that Link to Key Outcomes Employees
can Influence 173
Rule 2: Avoid Linking Compensation to Overall Company
Performance 174
Rule 3: Avoid Basing Compensation on Metrics that are
Easy to Manipulate 174
Rule 4: Avoid Overly Complicated Compensation Formulas 175
Rule 5: Set Realistic and Achievable Targets 175
Rule 6: Measure Performance as Often as Possible 176
Rule 7: Base Performance-Based Pay on Individual and
Team Performance 176
Rule 8: Provide Employees with an Easy Way to Track
Performance Throughout the Year 177
Rule 9: Beware of Strategy Maps to Define Metrics 177
Rule 10: Eliminate Chicken Efficiency Measures 178

chapter 1
Compensation
Management—An Overview
Learning Objectives
In this Chapter we will discuss
Overview of compensation management Characteristics of Stock Options
Objectives of compensation management Compensating individual employees
Elements of Executive Compensation
GI Design is a branded company based in Pondicherry into the sale of leather products across the globe.
The company pays a decent salary. It has retail outlets across India in all the leading malls and airports
and exports its products to Europe and US. Every retail outlet has targets which must be met by the
set of employees working in that specific outlet. Management believed that this culture would develop
bonding and close-knit working. However, in the course of time, the company observed high attrition
rate among the retail outlets. They looked in from every angle but were not able to identify the issue.
In such a scenario, a management consultant was invited to diagnose the problem and it was found
that most of the employees in the retail outlets were into social loafing. If you were asked to advise,
what would you suggest to minimize social loafing and bring down the attrition rate, while meeting the
hygiene factors according to Herzberg? Focus should be from the angle of compensation management.
INTRODUCTION
‘Work for ten minutes. Get paid for twelve hours’. This is the system for compensating employees who
work temporarily on nuclear reactors. The workers who repair and maintain nuclear reactors are called
Jumpers. They work in an extremely hazardous environments. They are paid at an hourly rate for every ten
minutes of work. According to a study conducted by the Nuclear Regulatory Commission in the United
States, three to eight Jumpers die of cancer caused by excessive radiation. The high compensation attracts
many people to such dangerous jobs. One of the major reasons for workers working in such a dangerous
environment is high compensation being offered for these kind of jobs. The system an organization uses
for rewarding their employees is called the compensation system. This chapter examines the importance of
compensation systems, types of compensation system and different compensation strategies.
Compensation management is a riddle wrapped-up inside an enigma with a mystery. As Winston
Churchill claimed that “it was a conundrum wrapped in a mystery inside an enigma,” he may have been
referring to their compensation instead of Russia. By unravelling the mystery and clarifying the enigma,
this chapter seeks to answer the riddle what compensation management is all about.
The compensation program’s most identifiable delivery to employees is their personal remuneration
package. This deliverable’s transparency is crucial to the organisation. The difficulty for the practitioner
is to maintain transparency by rationalizing the employee’s compensation package as the outcome of
a clear, deliberate, and explicable thought process based on a cohesive business and human resources
M01 Compensation and Benefits 50296 CH01.indd 1 18/01/23 2:40 PM

2 Chapter 1
strategy. By revealing three levels of mystery, we will be able to explain the conundrum (how the pay
Notes
components are determined).
Layer 1: A Winning Business Strategy Begins With a Focused

Strategy
A strategy is a risk management plan for directing significant resources now to areas where there are
identified future competitive opportunities and returns.
According to A. Berger & Associates research, a successful business strategy is built on spending
significant resources to achieve the three objectives shown in Figure 1.1.
When creating action plans to achieve the three goals, successful businesses look for answers to the
following three questions.
Customer, employee, shareholder, supplier, and vendor satisfaction: Are they all pleased that their
individual objectives have been and will continue to be met?
Was the company’s position among the top three in its competitive comparison group sustained
Do employees and recruits consistently choose your company above rivals as a place to work?
Do turnover rates seem to be low? Does the company have a culture that is focused on perfor-
mance?
We must participate in strategic thinking from a human resources viewpoint to assist a business in
addressing these issues and achieving these objectives. How does strategic thinking work? Application
of intuition, creativity, synthesis, and analysis in strategic thinking and discretion to create a plan. In this
situation, strategic thinking is being used to develop a human resources environment that supports the
three goals of a successful corporate strategy.
FIGURE 1.1 A winning business strategy
Continuous
stakeholder
satisfaction
Organizational
success
Sustained Perpetual
“employer competitive
of choice” advantage
Layer 2: The HR Strategy Based On The Creation Of The

Winning Business Strategy Of A Successful Business Culture
We must first establish what culture means before delving into the components of a successful culture.
We define culture as the collective information, experience, feelings, thoughts, values, attitudes, and
conceptions that have been created, acquired, and transmitted by the members of an organisation.
The culture dictates whether incentive structures will be effective inside the culture and whether

Compensation Management—An Overview 3
business goals can and/or will be supported at an employee’s personal risk level. The only culture that
Notes
is acceptable in this fiercely competitive environment is one that promotes corporate excellence as
determined by strategic objectives. A culture of excellence is one where individuals share knowledge,
experience, emotions, beliefs, values, attitudes, meanings, and concepts that support current and future
business, group, and individual success. An organisation can become a “employer of choice,” maintain
a competitive advantage, and consistently satisfy stakeholders when it has a strong culture. Cultural
excellence has multiple components and three aspects. Figure 1.2 illustrates the three dimensions as
competency clusters.
FIGURE 1.2 The three dimensions of cultural excellence
Business/
Professional
Cultural
Excellence
Personal Social
These competences (factors of organisational and individual performance) make up these clusters:
Technical and functional knowledge-based competencies (business/professional), customer- and
results-oriented competencies required to produce a good or service
Social: Citizenship, teamwork, leadership, and interpersonal skills (ethics and morality)
Personal: communication skills, risk taking, and creativity
In many firms, culture develops in a haphazard manner, mostly as a result of a patchwork of unrelated,
non-strategic activities that have an impact on how employees are hired, promoted, developed, and let
go. To mechanically govern daily work and employee habits, bureaucratic and ineffective regulations,
procedures, and employee manuals are used to convey culture. Organizations cannot, however, allow
culture to develop in a disorganised manner in today’s fiercely competitive environment. Companies
are responsible for managing the emergence, growth, and maintenance of an excellent culture based on
the traits of the aforementioned skill clusters. A culture of excellence can only be fostered by an orga-
nization’s talent pool when employee behaviour is linked to organisational performance. Every human
resource and pay plan needs to be openly targeted towards encouraging the attitudes and actions that
support an organisational excellence culture.
The excellence culture is driven by three talent management techniques. Figure 1.3 depicts these
tactics in detail.
These are the three definitions of talent management strategies:
Develop a Superkeeper TM pool—the guardians of the excellence culture (2–3 percent of the
workforce)
In key/mission-critical jobs, strengthen incumbents and restrain strong backups (8–12 percent of
positions are critical)

4 Chapter 1
Allocate TREADs (training, rewards, education, and development) in accordance with the current
Notes
and potential contributions of the workforce (actual and potential achievement)
An organisation must be able to categorise every member of its workforce according to her actual and
potential contribution to success in order to allocate resources in accordance with a talent management
plan like the one described above. We classified employees into the following groups based on our
findings.
1. SuperkeeperTM—exemplifies organisational competencies, motivates others to achieve great
results, and exhibits outstanding successes (about 2–3 percent of the workforce)
2. Keeper: Exceeds expectations in terms of performance, leadership abilities, and organisational
qualities (about 20 percent of the workforce)
3. Solid citizen—meets performance goals, is able to collaborate with others, and possesses organisa-
tional competencies as required (about 70 percent of the workforce)
4. Unfit: fails to perform as expected, interacts poorly with others, and fails to demonstrate institu-
tional competencies (about 7 percent of the workforce)
The majority of prosperous firms classify their personnel using a combination of three different forms
of evaluation. Performance, capacities (past and present), and potential are these.
Performance. This is an evaluation of the actual outcomes obtained in the domains for which the
employee is responsible. To link the employee to organisational success, all individual and group per-
formance metrics must be knitted into the fabric of organisational success metrics.
Institutional and core competencies. The achievement of each individual and the success of the entire
organisation depend on meeting these behavioural and skill standards. The majority of firms use between
seven and eleven institutional skills in their assessment process, according to our research. Communi-
cation, innovation, critical thinking, customer focus, interpersonal skills, leadership, teamwork, and
technical/functional knowledge are examples of typical core competencies.
The following is an illustration of an organization’s competency definition:
Effectively conveys ideas both orally and in writing. Effectively communicates information and
thoughts with others. Demonstrates attentive listening and understanding of many viewpoints. Presents
concepts succinctly and clearly, and comprehends all pertinent facts.
Definitions of competencies can be further subdivided into glossaries of behaviours related to each
level of the organisation. The definition is strengthened, made clearer, and more precisely stated as
a result. As an illustration, when it comes to communications, all employees are expected to express
their needs and desires in a clear and appropriate manner, while supervisors are also expected to tailor
their messages to the needs of their audiences in order to maximise understanding, managers are
expected to actively present information and ideas to all relevant levels and to encourage others to do
the same, and those in top management are expected to encourage candid discussion and promote open
communication.
Potential. Based on an employee’s past, present, and predicted performance reviews, training and
development needs, career preferences, and actual and projected competency levels, this forecast
shows how many levels (of an organisation or employment) someone can advance through. The
employee’s drive to advance, need to produce measurable outcomes, likelihood of acceptance by
higher peer levels, self-confidence, and emotional stability serve as the foundation for the assessment
of potential.
Layer 3: The Organization’s Pay Strategy Is Developed And

Implemented To Support Its Talent Management Strategy
Built Upon Its Employee Classification System
According to the aforementioned human resources strategy, pay must first be filtered through a set of
guidelines known as a pay strategy before it can be delivered to each employee in a transparent manner.
A pay strategy is made up of the following five components: philosophy, pay/talent market, competitive
level, mix, and contribution. The rules for a pay strategy are defined and described below.

FIGURE 1.3 Three talent management strategies

Notes
Superkeepers
Strategy
Key
Resource
position
allocation
back-ups
Compensatory Theory. Based on their unique business and human resource needs, organisations tailor
their compensation philosophy. These approaches typically centre on providing pay based on institu-
tional affordability in a way that enables them to recruit, retain, and reward employee performance in a
fair, competitive, and lawful manner. Organizations are now including the objective of “allocating com-
pensation based on business and human resources strategies” like those mentioned above to complete
the statement of philosophy.
Talent/Pay Markets. An organisation must conduct a pay or talent market survey to ascertain how
competitive the pay for a specific position is. A pay/talent market comprises of established businesses
that are either a source of talent for an organisation or would steal talent from one. For the purpose of
setting pay in an organisation, the surveyed remuneration for workers in benchmark (frequently occur-
ring) jobs in a selected talent market should be used as the benchmark. The most reliable polls are those
that precisely assess a wage market gathered from sources of hiring and termination interviews. A com-
parison of relative organisational worth with those jobs that can be surveyed can be used to determine
the value of positions within a talent market but lack a survey counterpart. Keep in mind that rivals in
the pay/talent market may not always operate in the same industry.
Level of competition. Management must decide the competitive level of total human resources costs it
can afford to pay within each pay/talent market and within the business as a whole in order to recruit,
retain, and reward its personnel. In surveys related to a certain pay/talent market, the competitive level
is typically reported as a percentile (25th, 50th, 75th). The allocation of pay is based on the overall pool
of available funds. It’s probable that the peculiarities of various talent and pay marketplaces (supply
and demand) will call for various compensation structures and levels of competition. Regardless, each
employee should receive compensation commensurate with their past, present, and anticipated worth
to the company.
Pay Component Mix. Each pay component’s mix (base salary, annual incentives, and long-term incen-
tives) is determined by the portion of total pay that is targeted for it. Additionally, multiple competitive
levels may be sought for base, annual incentives, long-term incentives, and total compensation under a
total pay package. The more variable or non-base pay an employee receives, the more leverage (upside
opportunity) or risk (non-guaranteed pay) is included in their total remuneration. In general, when
an organization’s financial strength advances from that of a risky start-up to that of a safe established
organisation, the level of risk or leverage in employee compensation packages declines. The level of
leverage in a pay package within an organisation also represents the risk and responsibilities connected

6 Chapter 1
FIGURE 1.4 Pay mix and stage of business growth

Notes
80
70
Base
Long Term
60
Short Term
50
Fast Grow No
to a particular role. The variable pay for senior management and line positions is often higher than for
staff positions. The usual wage mix in businesses at various phases of growth is shown in Figure 1.4.
Contribution. This is the classification of the employee based on her estimated current and future
organisational value, which is determined by elements like those previously described (performance,
competencies, and potential). Now in place is the final pay package architecture for a single employee.
In light of the features of her local talent market and taking into account her own contribution, the
employee’s mix and competitive level of compensation can now be described in such as the ones out-
lined here. For any employee whose pay category is anticipated to rise to or stay at a higher contribution
level over time, there may be an additional pay premium. Similar to baseball players’ batting averages,
an employee’s classification must be acquired again every year.
Table 1.1 demonstrates how the pay strategy (philosophy, pay/talent market, competitive level, and
mix) of an organisation can be applied to the contribution level (classified) of a specific employee. The
“riddle wrapped in a mystery inside an enigma” finally has a solution.
Traditional versus Strategic Pay

Traditionally, the pay of employees was kept secret. The main objective behind compensation was to
pay employees for the work done by them. Compensation was used as a tool by management for achiev-
ing various purposes. Strategic pay, however, uses compensation as a tool for rewarding, motivating and
retaining talented employees. Other major differences between traditional and strategic pay are listed
in the Table 1.1.
ORGANIZATIONAL STRATEGY, GOALS AND COMPENSATION

OF EMPLOYEES
E.E. Lawler has coined the term ‘New Pay’ for rewards and compensation that aims to align
organizational goals with the compensation system. In prnny organizations, compensation systems
Table 1.1 Application of Employee Classification and Compensation Strategy

Employee Pay/Talent Market Compensation Compensation
Classification Position Competitive Level Mix
SuperkeeperTM Top 3% Accelerate much than Strong use of long-term

pay markets incentive devices
Keeper Top 20% Accelerate faster than Use of long-term incentive

pay markets devices
Solid citizen Middle 70% Accelerate at pace of Consistent with pay/talent

pay market market

Table 1.2 Differences between Traditional and Strategic Pay

Notes
Traditional Pay Strategic Pay
To support and control management and traditional Designed for attaining business objectives and
job hierarchies strategic plans
Emphasis on doing job according to job description Focus on employee’s contribution.
Highly structured pay design; pay structure inflexible Pay structure changes with change in business
priorities
Information pertaining to compensation is kept Compensation information is not secret.

confidential. Performance standards for getting pay hikes and
incentives are communicated to employees
Corporate Strategy Compensation Strategy
Growth Encourage entrepreneurship
Maturity Recognize and reward accomplishments and

management skills
Retrenchment Control cost and try to retain the best employees
Source: Wayne F. Cascio, Managing Human Resources (McGraw Hill Publications—4th

Edition).
are designed rather vaguely. Organizations apply different compensation strategies depending upon
overall corporate strategies. They also rely on external salary surveys for collecting information about
compensation levels in other organizations within the same industry. This is not the best method for
collecting information because different organizations apply different business strategies, and these
strategies govern their compensation system. Table 1.2 shows the relationship between corporate
strategy and compensation.
As a major portion of the organization’s budget is spent on employee compensation & benefits, orga-
nizations must align their compensation strategy with their corporate strategy.
PAY ELEMENTS
The pay of the employees can be divided into two types of elements: direct pay elements and indirect
pay elements. Pay in the form of cash, stock etc. directly paid to the employee constitute direct pay
elements.
Components of Direct Pay

Base Pay: Minimum amount of money invariably paid to the employee is called base pay. This is deter-
mined by the nature and number of tasks performed by the employee.
Merit pay: Organizations conduct a performance evaluation of employees at least once a year. Employ-
ees who have performed well receive a raise. This is called merit pay.
Incentives: An Incentive is a lump sum amount paid to employees when the productivity and profit of
an organization increases. For example, employees receive a bonus as an incentive when a company’s
productivity exceeds expected productivity in terms of volume.
Cost of living adjustments (COLA)

This is a lump sum amount for helping employees cope with adverse changes in the consumer price
index.

8 Chapter 1
Notes Components of Indirect Pay

The perquisites and benefits provided by an organization, as welfare measure or to meet the legal
requirements, are known as indirect pay elements.
Some of the indirect pay elements are:
Leave with pay:

Employees are entitled to paid leave for fixed number of days. For example, in some organizations,
every sick leave taken by an employee is a paid leave for a stipulated number of days.
Protection programs. Organizations bear the premium for employee protection programs like insur-
ance, disability, social security etc.
Services and Perquisites

Organizations pay for recreational activities and travels and tours of employees. Many companies also
provide employees with cars, as a perquisite. Let us now discuss the various compensation systems
adopted by the organizations towards individual employees and groups of employees.
COMPENSATING INDIVIDUAL EMPLOYEES

Organizations mostly compensate employees on an individual basis. Some of the pay systems used by
organizations for compensating individuals are:
Piece rate system
Commission system
Bonus system
Skill based system
Merit Pay system
Piece Rate System

Organizations involved in the production or manufacturing of goods adopt this pay system. In this sys-
tem, employees are paid on the basis of the number of units manufactured by them during a time period.
Organizations use the output data of other companies, along with time and motion studies to arrive at
the minimum number of units that must be made by a worker.
A major disadvantage of this system is that employees feel that management is only concerned about
productivity and not their welfare. A feeling of distrust may develop between management and workers.
As the productivity per worker increases, workers may resort to ‘go-slow’ techniques to prevent man-
agement from laying off workers. The Lincoln Electric plant in Cleveland, has modified the piece rate
system of compensation. Their piece rate system is backed by a merit rating based bonus system. This
combination of piece rate and bonus system has led to improvement in product quality because workers
want to get a good rating to earn a higher bonus.
Commission System
Employees whose productivity can be quantified are usually paid on a commission basis. For example,
sales professionals are paid commission on the basis of sales achieved by them. Salespersons feel moti-
vated when they are paid commission in recognition of their efforts. The commission system is an
objective and efficient system for compensating salespersons. However, such a system may lead to the
use of unethical techniques for increasing sales, thereby increasing the commission.
Bonus System
This refers to a lump sum payment given to employees at the end of the year for achieving productivity
or performance targets. Since the bonus is paid in the form of a lumpsum, employees feel they have

received a large sum of money. Consequently, they feel content about the amount they have received.
Notes
If the employees were given the same amount spread over twelve months, they may not feel the same
sense of contentment. The bonus system is one of the most successful and reliable system for compen-
sating employees.
Skill Based System

In this type of compensation system, employees are paid on the basis of number of the skills they possess.
Unlike the merit rating or bonus system where employees are paid for performance, in this system they
are paid for the skills they learn on the job. Employees are put through various job activities. Over a
period of time, they are expected to develop expertise in all the activities of the job. The purpose of
adopting a skill based system is to train employees in the various aspects of the job. Organizations
having high performance work systems and self managed work groups adopt a skill based pay system for
compensating employees. An example for skill based compensation is seen in the IT industry. Table 1.1
shows the trends in compensation in the IT industry over the last few years.
Merit Pay System

Organizations conduct performance reviews at the end of every year. The main purpose of this review is
to measure the performance of employees in the previous year. On the basis of their performance in the
previous year, employees receive a hike in pay. This increment is called merit pay because it is commen-
surate with performance. The major problem with merit increments is that organizations have to commit
themselves to these hikes and cannot withdraw these increments even when the organization incurs losses.
Merit increments are cumulative in nature and prove to be very costly for the organization in the long run.
Merit pay is dependent on the merit rating one gets from the concerned supervisor. Hence, there may be an
element of bias in these ratings. A supervisor’s errors in perception may result in unfair ratings. Although
the merit rating system has many inherent problems, it is still used by a large number of organizations.
COMPENSATING GROUPS
Employees usually work in groups in different departments of the organization. Compensation of
employees on the basis of the performance of the group in which they work instead of their individual
performance is called group compensation. Group incentive schemes have worked well in a number of
companies. They have increased productivity and encouraged creativity. For example, the group incen-
tive scheme at the Navy Personnel Research and Development Center at Pearl Harbor has been a great
success. The workers who worked in groups also called gangs, reported that the group compensation
scheme resulted in an increase in productivity. The groups took less time completing their work and
showed a marked increase in efficiency. Group incentive schemes can be categorized into profit sharing
plan and gain sharing plan.
Profit Sharing Plan

In a profit sharing plan, a part of the profit earned by the organization is distributed among designated
employees. Organizations set a target profit for profit sharing plans. If the profit earned is greater than
the target profit, it is distributed among employees. The profits can be distributed equally among the
designated employees or it can be distributed in proportion to their income. Employees receive their
share of the profit either on retirement or termination.
There are three types of profit sharing plans:
Current Distribution Plan

In this plan, profits are distributed in the form of cash or company shares
Deferred Payout Plan

In this plan, the profits are transferred to a fund created in the name of employees. Employees are given
their share of the profit at the time of retirement or termination.

10 Chapter 1
Notes Combination Plan

In this plan employees receive periodic cash payments. At the same time, a fund is created in which
profits are transferred to be given to employees at the time of retirement or termination. The major
advantage of profit sharing plan is that it motivates employees to achieve higher profits. When the orga-
nization fails to earn any profits, the employees try to find out why and where they failed. Such a plan
thus develops a sense of ownership and employees work together to maximize profits. But profit sharing
plans become meaningless when organizations fail to make profits.
Gain Sharing Plan

In this plan, the gains made by the organization are distributed at unit level or group level. The basic
difference between profit sharing and gain sharing is that in profit sharing profits are distributed among
designated employees, whereas in gain sharing plan they are limited to the department or unit that has
contributed to the profit. In addition, profit sharing plans are formula computed on the basis of math-
ematical formulae whereas gain sharing plans are based on the improvements made in productivity in
comparison with the previous year.
Compensating CEOs
The topic of executive compensation has gained considerable importance during the last few decades.
It has given rise to many heated debates because of the inequity between executive compensation and
the compensation of other employees. Executives have been criticized for drawing huge pay packs
even when the company was not doing well. A survey conducted by workforce.com in the year 2000,
has revealed that over the last decade executive compensation has increased by 2 12%, whereas worker
compensation has increased by only 53%. CEOs receive such high compensation because they provide
the company a vision and also give direction to all its activities.
Conferenceboard.com conducted a survey of 1711 companies belonging to 14 major industries in the
US in 1997. The aini was to find out the pattern for compensation of top executives in these industries.
The survey found that top executives of the insurance industry were the highest paid.
Objectives of Executive Compensation

The performance of Chief Executive Officers (CEO) is reflected in the performance of the company.
The individual performance of the CEO is insignificant if the organizational performance is poor. The
CEO is responsible for the development and growth of the organization. Various sophisticated financial
measures like EVA (Economic Value Added) and Total Shareholder Return (TSR) are being used for
monitoring CEO performance in relation to organizational performance. Though a number of studies
have been taken up in this area, none of them have concluded that a high degree of correlation exists
between executive compensation and organizational performance.
Elements of Executive Compensation

Various elements of executive compensation are:
Executive Incentives
Long Term Incentives
Performance Bonuses
Perquisites
Executive incentives
The incentives or rewards CEO of a company gets (apart from his salary ) for his contribution to perfor-
mance of a firm are called executive incentive.

Long term incentives Notes

Long term incentives are gradual payments made over a period of time. The main aim of long term
incentives is to retain executives for a longer period of time. Apart from this, the aim is also to create
a link between executive incentive and organizational performance. Long term incentives are usually
given in the form of stock options.
Performance Bonuses
More than 90% of companies in the US have a bonus plan for their CEOs. The method of calculating
the bonus varies from company to company. In some companies cash bonus, amounting to 20-25% of
the salary, is paid. Some other companies use a mathematical formula to calculate bonus on the basis
of return on investment and net profit. In certain companies, the Board of Directors decides the bonus
amount on the basis of the performance of the company. Perquisites Perks are special facilities given to
CEOs apart from their salary. These perks add glamour to the executive’s job. They could be in the form
of free jet planes for traveling, club memberships, fully paid vacations etc. The perks offered by some
companies are more attractive than their salary.
Executive Compensation—Indian Scenario

Executive compensation in India is still in its infancy. Though it is increasing steadily, it cannot be
compared to the compensation of executives in the west especially the US. The CEOs salary primarily
has two components, i.e. fixed and variable. In the case of Indian CEOs the fixed component is higher that
of American CEOs in terms of percentage. An American CEOs salary generally has a high percentage of
variable pay. According to a survey conducted by Omam2 Consultants in 2001, the average income of
a CEO in India is Rs. 9.88 million per annum, while a CEO in the US earns $13.1 million3 per annum.
CEO salaries keep fluctuating and differ from industry to industry. CEOs of IT companies in India used
to have high salaries, but this is not the case any more. Nowadays, salaries of CEOs of automobile and
FMCG industries are on par with the salaries of CEOs of IT companies.
The Kumaramangalam Birla Committee report on Corporate Governance has suggested the for-
mation of remuneration committees within companies for determining the CEO’s pay. The Board
of Directors, along with the shareholders, should play a proactive role in designing the CEO’s pay
structure.
Paying the CEO the Right Way

CEO pay should be linked to the achievement of the company’s strategic goals. Strategic perfor-
mance measures like
EVA(Economic Value Added) should be used for measuring CEO performance
Independent compensation committees should be formed to measure the performance of CEOs
CEO pay should be linked to the performance of the company’s stock as well as the resulting wealth
created for the shareholders.
EMPLOYEE MOTIVATION
Employee performance depends on employee motivation. One of the biggest motivating factors is pay.
In order to understand the relationship between pay, employee motivation and performance, we shall
study the concept of equity.
Equity
Equity is a perceived feeling of being treated fairly by the firm in terms of compensation. Employees
develop this feeling by comparing their salaries with that of their colleagues. Equity theory helps us
understand the relationship between motivation and pay. According to the Equity theory4, workers
compare the work done by them and the compensation they get with that of their peers who do similar
work. Employees need to perceive an equity between the jobs they do and those done by their peers in

12 Chapter 1
terms of their input (education, skills, knowledge, number of hours worked etc.) and the outcome (pay,
Notes
recognition and other rewards they get for doing that job). The pay differential should be fair to moti-
vate employees. When the employees perceive an inequitable situation, he will try to alter his inputs or
outcomes to achieve equity.
For example, let us assume that there are two lecturers in a college. One is more experienced than the
other and is being paid more by the college. The other lecturer perceives this as an inequity and tries to
alter his inputs. He may start taking fewer classes or demand higher pay for himself to achieve equity
between his job and the other lecturer’s job.
In case an employee feels he is being under- rewarded then he will try to alter his inputs by working
less number of hours or will try to enhance his outcomes i.e. ask for higher pay. An employee who per-
ceives an inequity may also try to alter the inputs of the other employees by asking the management to
increase their workload. If these efforts do not achieve the deserved results, he may quit. In some cases,
an employee may be over rewarded. Such an employee may feel that other employees are being treated
unfairly. In such a situation, he may try to increase his efforts or reduce their workload.He may also ask
for a pay cut in extreme circumstances. There are three types of equity depending upon comparisons
that can be drawn. They are
External equity
Internal equity
Internal equity
Organizations have different types of jobs within their work system. These jobs need people with dif-
ferent competencies and skills. The effort needed for doing these jobs differs too. That is why a general
manager earns more than a manager and a manager earns more than a supervisor. These differences in
pay are said to be fair when they are in proportion to the work done by the employee. To determine
internal equity, two jobs within the same company are compared. Organizations employ various job
evaluation techniques to establish equity between jobs.
Job Evaluation
This technique is used for calculating the relative worth of jobs in an organization. There are various
methods for finding out the intrinsic value of the jobs and the contribution of these jobs to the achievement
of the overall objectives of the organization. The factors which create the difference in the value of jobs
are called compensable factors5. Take the case of two engineers with similar background and work
experience, working in the same factory but receiving different pay packets. They may be paid different
salaries because their job responsibilities differ.
There are three major techniques of job evaluation.
Job ranking
Job classification
Point system
Job Ranking
This is the easiest method for evaluating jobs. The job evaluation team ranks jobs according to their job
descriptions. This technique is highly subjective. As a result, it is very difficult for managers to assign
salaries for jobs evaluated by these techniques. It is difficult to assess the relative difficulty in doing two
jobs which have been given the same rank under this technique.
Job C1assfication
This is also referred to as a job grading technique. It is the most widely used technique for evaluating
jobs in public sector companies. In this technique, jobs are assigned to a predetermined job grade. For
example, in public sector companies there are seven grades: GI to G7. The jobs are grouped under these
grades. Job grading is easy, flexible but also highly subjective. In addition, more importance is given to
job titles rather than the job content.

Point System Notes

This is the most widely used job evaluation method in private sector companies. In this system, jobs are
split into various job elements. These elements are assigned points. The point method is objective and
easy to administer. It uses a four step process for evaluating jobs.
Step I: Identification of compensable factors—Various compensable factors common to all the jobs in
the organization are identified. A few examples of compensable factors are education, skill, job condi-
tions, effort etc.
Step II: Factor scales—Once the compensable factors have been identified, scales are designed to
reflect the degrees within each factor. These degrees arc listed in ascending order of complexity. The
degrees for a factor like numeric skills would look something like this.
l Degree—Ability to read and write numbers. Should know how to add and subtract numbers
2’ Degree—Should be adept at multiplication, division and basic algebra. Should be able to interpret
graphs and other mathematical diagrams.
3rd Degree—Should be good at geometry and drawing three dimensional objects. Should know how
to use precision instruments.
In this way, degrees have to be developed for all the compensable factors which the organization has
identified.
Step III: Assigning Points to degrees—Once the degrees have been identified, they are assigned points.
The lower degrees are given less points than the higher degrees.
Step IV: Applying degrees and points to a job. This is the last stage of this technique. After the
compensable factors have been identified and the degrees have been assigned points, the points are
assigned to the jobs in the organization. The following table shows how points are assigned for a
supervisors and a shop floor worker’s job.
For example, compare the job of supervisor with that of a shop floor worker. Supervisor’s job scores
higher on experience and education than a shop floor workers job. The supervisors job is thus assigned
more points than the shop floor worker’s. Hence, the job of a supervisor has more intrinsic value than
the job of a shop floor worker. In this example, we took into consideration only three compensable fac-
tors, but organizations usually have 7–25 factors for evaluating different jobs in the organization. The
higher the job scores, the greater the value of the job for the organization.
External Equity
Employees compare their inputs and outcomes with the inputs and outcomes of employees in other
organizations. For example, a general manager working in a fast moving consumer goods company
compares his effort and income with the effort and income of another general manager working in a
similar company within the industry.
Employees must be careful when making comparisons with other organizations. The comparisons
should be fair and rational. For example, the general manager of a company with a turnover of ` l00
million cannot compare his inputs and outcomes with the general manager of a company with a turnover
of ` l500 million.
When there is external inequity, employees feel demotivated and do not perform well. These
organizations also experience a high rate of turnover. Organizations should keep track of latest salary
and wage surveys so that they achieve external equity. The data collected through salary surveys is
mapped with the internal job evaluation. This process is called wage pricing.
Wage and Salary Surveys

A wage and salary survey involves three steps
Identification of key jobs.
Selecting organizations for surveying.
Collecting data from selected organizations.

14 Chapter 1
Notes Identification of Key Jobs

Organizations need to identify’ the jobs for which they want to collect salary data. Ideally, they should
select those jobs that are essential for an organization’s growth. For example, organizations should try to
get the salary data for managerial rather than secretarial jobs. Organizations should also try to select jobs
from different levels of an organization. In addition, jobs spanning all management levels (operational,
tactical and strategic) should be identified for data collection.
Selecting Organizations for Surveying

The organizations selected for surveying should be similar to the organization conducting the survey in
terms of size, turnover, culture; should be within a specified geographic area; and should be a part of the
same industry. Comparing the salaries found in a big organization with those in a small organization is a
meaningless exercise because the salaries of big organizations would inevitably be higher than salaries
in small organizations. The workers employed by the organizations being compared should also be
similar in terms of education, experience, skills etc.
Collecting Data
Organizations either conduct a salary survey themselves or access the data collected by specialist
organizations which conduct these surveys on a regular basis. For example, Hewitt Associates and
Hay Group. Conduct salary surveys on a periodic basis and share this data with other organizations
for a small price. The collection of salary data can at times, be a laborios process and may require
considerable amount of money. Organizations specializing in such surveys provide detailed information
regarding the size of the workforce, their direct and indirect compensation elements, benefits offered by
the organization etc. This data is collected on an ongoing basis and is updated as and when required. As
the people collecting and tabulating the data are professionals, the data is generally error free.
Individual Equity
The terms ‘internal equity’ and ‘individual equity’ are often used interchangeably though there is a lot
of difference between the two. In internal equity a relationship is drawn between jobs but in individual
equity, individual employees doing the same job are compared. It is difficult to achieve individual equity
when designing the compensation system. The salary expectations of employees differ because of their
experience, education, skills etc. Because of differences in qualification, organizations pay different
salaries to different employees. This is where the problem rises. Organizations need to pay variable
salaries and still maintain equity within the organization. For example, the remuneration for two sales
managers in an organization should be different if one has more experience than the other. The sales
manager with more experience should be given higher salary, commensurate with his experience. But
this creates problem. As both of them hold the same position i.e. of a sales manager, the less experienced
sales manager may feel that although his duties and responsibilities are equal to the other sales manager,
he gets a lower pay when compared to him. To overcome this problem organizations use pay ranges for
compensating employees. Pay ranges are designed keeping in mind the number of job grades within the
organization. Pay ranges have an upper limit and a lower limit of pay. For example, an organization may
have a pay range of 8,000 to 10,000 for sales managers. This means that all sales managers will get a
pay between 8000 to 10,000 in the organization.
CONCEPT OF BROADBANDING
Organizations that either downsize or restructure their human resources have to redesign their com-
pensation system. In this situation, organizations use broad banding for designing the compensation
system. This is a temporary move to prevent the chaos that often results rlom unrqrar? pay during the
post restructuring period. In broad banding, an employer clubs together a number of wage grades. As a
result employees who used to get different salaries would now get salaries within a range.
Broad banding can be done taking the lower limit of the lowest wage grade and the upper limit of highest
wage grade. Broad banding helps simplify compensation procedures during restructuring. It also increases
the responsibilities of employees and gives them a sense of direction during the restructuring process.

MOVING FROM PARTICIPATION TO OWNERSHIP Notes

The concept of worker participation gained importance after the human relations movement. The aim
of workers participation is to involve employees in all the activities of management and build a par-
ticipative culture. To achieve employee involvement, organizations have tried different ways of linking
organizational performance to individual performance. However, in spite of many efforts, organizations
have more often than not been unable to achieve employee involvement. Employees remained aloof and
often uninterested in organizational performance. While profit sharing schemes and productivity linked
bonuses encouraged employee involvement, they were only short term measures and such schemes did
not sustain employee interest in overall organizational performance.
Quite often, employees raised questions like — why should we participate? What will we gain from
participation? This negative attitude of employees can only be tackled by developing a sense of owner-
ship in employees.
Organizations should take the following steps to develop an ownership culture:
Create a balance between organizational and employee needs
Make employees understand the advantage of long-term growth oriented measures over short-term
schemes
Make employees understand the long-term objectives and goals of the company
Encourage transparency and create knowledge sharing culture
A major challenge in developing an ownership culture lies in overcoming the previously advocated par-
ticipative culture. In organizations that have a highly participative culture, productivity-linked bonuses,
3600 feedback etc, employees find it difficult to differentiate between participation and ownership.
Organizations can overcome this problem by educating employees about the differences between own-
ership and participation.
EMPLOYEE STOCK OPTIONS (ESOPS)

Employee stock options, a form of equity compensation paid to employees, are used
To motivate employees and create a sense of ownership in them
To retain and attract outside talent
To reward employees for their performance. (If ESOPs are given to a number of employees, then
they are called broad-based stock options plans).
Initially, stock options were synonymous with technology companies. Since these companies had a
high rate of turnover, they offered stock options to retain talented employees. Currently, many retailing
businesses and pharmaceuticals companies also give stock options to their employees. Research con-
ducted by the National Center for Employee Ownership in the US reveals that 10 million employees
in the US receive stock options. This indicates the increasing use of stock options for compensating
employees
Another objective of granting stock options is to create employee ownership. From an employer’s
perspective, stock options create ownership as stock options are not given for free and employees buy
the options at some point of time. However, employees feel that stock options do not create ownership
because most of the options granted are call options in which employees have the right to purchase the
stock but are under no obligation to do so.
Characteristics of Stock Options

Stock Options as a Motivational Tool
Organizations are increasingly using stock options to motivate employees and improve their performance.
In a study conducted by the economist John Abowd6, it was revealed that corporate performance
improved when stock options were given as compensation. Research conducted by economists Clifford
Hoiderness, Randall Krozner and Dennis Sheehan showed that stock options created a sense of ownership
in the top management of the company. This sense of ownership encourages the top management to

16 Chapter 1
perform better, thus leading to better organizational performance. On the flip side, stock options can
Notes
create uncertainty and anxiety in the mind of employees, causing their performance to suffer.
Stock Options are Mostly given to Top Management

Most companies do not adopt a broad based stock options plan, and even if they do so, the stock options
given to top managers are far higher than those given to other employees. According to a survey con-
ducted by the Financial Market Center (FMC) of 220 Fortune 500 companies, the number of stock
options given to top managers was 279 times the stock options given to other employees. In another
survey of 50 firms conducted by FMC in 1998, it was found that 11% of stock options were given to
CEOs and another 21% was distributed among five executives of the firm. This means that more than
30% of the stock options were shared among the top executives.
Accounting Systems Ignore Stock Options

Accounting rules and standards do not make it obligatory on the part of the company to include the
stock options given to employees or the CEO in their balance sheet. Generally, a footnote is given in a
company’s financial statements to indicate the stock options granted to employees. In 1992, Financial
Standards Accounting Board of America stressed the need to include stock options in the companies.
Its recommendations went unheeded because of lobbying by big technology companies.
Stock Options affect Bottom-line

Do stock options affect the bottom-line or profitability of a company? The value of stock options granted
to CEOs multiplies over a period of time so stock options do have a bearing on the profitability of a firm.
Research conducted by Bear Stearns, accountants, revealed that the profits of companies listed on the
S&P 500 index fell by 4% when their stock options were taken into account. A survey of top 145 com-
panies in the US by Smithers and Company, showed that these firms understated their profits by 30% in
the year 1995. Profits were understated because stock options were not taken into account.
PAY FOR PERFORMANCE

The world economy is going through a bad phase. With investor confidence waning and capital markets
performing badly, companies have been badly hit. Stock options have lost their attractiveness due to
the resulting market slump. Pay hikes are distant possibility in this situation. This has made companies
demand more from their employees. In turn, management promises to recognize the efforts of the
employees and pay them according to their performance. As a result, concept of pay for performance
has become important. In the years to come, it will be adopted by companies world over.
Concept of Variable Pay

Earlier, employees were compensated on the basis of the number of hours they worked rather than on
the basis on their performance or output. Now, uniform pay has been replaced by the concept of vari-
able pay. The concept of variable pay has importance because the performance of no two employees is
the same. The quantity and quality of their output differs. Since their performance differs, they should
be paid differently. Variable pay consists of numerous pay elements like skill based pay, commission,
non-financial rewards etc.
Problems in Implementing Variable Pay

A variable pay system is difficult to implement because there are no standard and objective performance
measurement methods for measuring employee performance. If the work can be quantified, then its easy
to measure performance. For example, in a call center company. The performance of a call center execu-
tive can be measured by the number of calls successfully answered by the employee. But it’s difficult
to measure the performance of a front office executive in the hotel industry because the tasks cannot be
quantified. Thus, it is necessary to have an objective, efficient and effective performance management
system before implementing a variable pay system.

SUMMARY Notes
Employees are paid for the services they render usually includes long term incentives, performance
to organizations. They receive both monetary and bonuses and perquisites. It is believed that employee
non- monetary rewards. The system organizations performance is dependent on employee motivation.
use for rewarding their employees is called the One of the most important motivating factors is pay.
compensation system. The major objective of a Equity is a perceived feeling of being treated fairly
compensation system is to motivate employees. ICs by the firm in terms of compensation. There are three
the driving force behind employee performance. It types of equity: internal equity, external equity and
attracts outside talent and helps organizations retain individual equity. Organizations employ various
employee. The pay of employees can be divided job evaluation techniques to establish internal
into two elements: direct pay elements and indirect equity at the workplace. Some of the job evaluation
pay elements. Compensation given directly to the 100 techniques are job ranking, job classification
employee in the form of cash, stock etc. is called and point system. To establish external equity,
direct pay. Perquisites and benefits, provided by the organizations have to conduct salary and wage
organization either as a legal requirement or as a surveys. Organizations try to achieve individual
welfare measure is called as indirect. Organizations equity by using pay ranges. Organizations that
compensate employees on the basis of individual either downsize or restructure their human resources
or group performance. Some of the pay systems have to redesign their compensation system. In
used by organizations for compensating employees this situation, organizations use broad banding for
for individual performance are -Piece rate system, designing the compensation system. Organizations
Commission system, Skill based system, Bonus have adopted different methods of compensation
system, and Merit Pay system. Organizations for developing a sense of employee ownership.
also compensate employees on the basis of the Many companies give ESOPs to make employees
performance of the unit or group in which they feel that they own the firm. These stock options
work. Group incentive schemes can be categorized are generally given to top management. Another
into profit sharing schemes and gain sharing modern system of compensation is the system of
schemes, Over the last few decades the amount variable pay. In this system, employees are paid on
of compensation given to executives has attracted the basis of performance or output rather than on
considerable attention. Executive compensation the number of hours they have put in.
Let’s discuss
1. Discuss the concept of compensation. What 2. What is the basic purpose behind the establish-
factors affect compensation of employees in ment of a sound Compensation and Reward
industrial organizations? administration system in the organizations?
Lets come with a strategy

You are working as a CEO of a manufacturing further more difficult to retain employees. In such
company based in Chennai, India. Market has a scenario design a model to motivate and retain
become highly competitive and it has become employees.

18 Chapter 1
Notes case study
Roshans Limited-Transport Facility

HR Manager of Coversto Limited have received an application for the introduction of company
conveyance for employees staying in town. Although Coversto Limited has provided living facili-
ties to its employees still about 60 percent of its 1000 employees still have to commute an aver-
age of 10 km to come to work. The union and some of the employee s living on campus have
supported the demand. Though the management might favour such a move, some sections of the
work force are concerned that the introduction of the company conveyance facility may cut down
their wages .the company under disguise of compensation allowance pays Rs.20/- per month for
traveling to employees staying more than 8 km away from the company premises.
1. What factors would you take into account in evaluation of this demand from the workers?
2. Provide the rationale for implementing or not implementing this demand.

Multiple-choice Questions
1-1. Employees are paid on the basis of the number of (c) Experience
units manufactured by them during a time period. (d) Attitude
(a) Basic wage 1-4. In a _______ plan, a part of the profit earned by
(b) Piece rate the organization is distributed among designated
(c) Merit pay employees
(d) Gross pay (a) profit sharing
1-2. Employees whose _______ can be quantified are (b) merit
usually paid on a commission basis. (c) piece rate
(a) Productivity (d) gross pay
(b) Work 1-5. ___________ describes the nature of the job and
(c) Age potential needed for performing the job
(d) Quality (a) Job description
1-3. Employees are put through various job activities. (b) Job analysis
Over a period of time, they are expected to develop (c) Job ranking
expertise in all the activities of the job. (d) Job potential
(a) Skills
(b) Maturity
Answer Keys:
1-1. (b) 1-2. (a) 1-3. (a) 1-4. (a) 1-5. (b)

chapter 2
Understanding Payroll Operations
Learning Objectives
To understand the meaning and purpose of Payroll Components of payroll
Recognize the significance of Payroll Factors to be kept in mind while choosing the payroll
Understand the Payroll process CTC–Cost to company
Bylon hotels is a chain of hotels headquartered in Fairfax county, Virginia, USA. Nik Patel, founding
partner, wanted to increase the efficiency of the HR department and operations. One of the main issues
wherein employees were not satisfied was with regards to the salary disbursement time. As most of
the employees are hourly paid and work in different shifts, the working hours vary from employee to
employee. Hence, there needs to be an employee who can document the movements exactly. Nik tried
his best to put things in place but still there were issues almost every month – discrepancy was com-
mon. Finally, Nik thought of outsourcing the payroll activity but again, issues remained the same as the
work was done manually. If you are a consultant, how would you go about reducing the operating cost
especially in HR functions and at the same time, increase efficiency?
Payroll is the fundamental to an organization. In India, several laws and regulations are in place. In
order to protect the interest of the stakeholders the payroll process has to be designed in the most smooth
and effective manner where in there is no ambiguity. Though it is quite cumbersome process but a well-
designed one get rids of managers nightmare.
Payroll comprises of a complete list of details of an employee payable. Every employee employed
has to be rewarded for the work done by him or her during the period of time. For example, if Employee.
Ram is on our payroll. That means. RAM is an employee of the organization.
Payroll is one of the most crucial yet complicated activity in a business process. Every organization
takes at most effort to make this operation the most efficient way. Even the slightest error might cause
serious consequences. It leads to demoralizing of the employees.
SME’s have a lesser employee as compared to mid and large-scale organizations. Hence. They pro-
cess their payroll through spreadsheets or outsource it to a professional.
A slightest error, while processing and executing salary will impact the morale of the employee and
at the same time hamper the productivity. Hence, it is important to make sure everything is accurate.
And timely calculated. To the statutory compliance.
In order to make this operation successful and run in the most efficient way an organization need to
have an excellent payroll process without any ambiguity. So that the entire process is clear and that is
why today many organizations go for payroll automation.

22 Chapter 2
Notes What is payroll?

Organizations and businesses utilise payroll as a crucial document for managing their personnel on a
daily basis. It is a document that includes a list of all the employees of a business that are paid for work
done or services rendered to the business. It offers a breakdown of all the cash that a business paid out
to employees within a particular period.
It is defined as a process of paying remuneration or salary to an employee who has been working
with an institution? Payroll process. Starts with preparing the list of employees to be paid. Ends with
generating the payslip for the employee which explains clearly the breakup of the salary with all deduc-
tions etc.
In simple words, it the process which involves in arriving at what is due for an employee. After
adjusting the necessary deductions like TDS, PF. ESI. And other deductions if any.
Payroll cycle is a time gap between two salary disbursements. Generally, it is processed once in a
month in India, whereas In the United States, it is bi weekly.
Steps involved in executing payroll. As an entrepreneur. Or CEO you should be clear about the com-
plexities involved in payroll process as it is the highest expense every month an organization encounters
and quite time-consuming. Finally, the most sensitive one. The team has to monitor the entire process
carefully. Below are given steps involved in executing a payroll. In the most effective way. One.
1. On board employees: This is the first step of payroll processing. HR has to prepare the database
of the employees to be paid. It includes including the fresh recruit who has joined the organization
during the payroll cycle.
2. Define the payroll policy: The HR should define the payroll policies and it should be approved by
the board and management. Policy should clearly specify the norms and policies related to leave,
Attendance policy. Employee Benefit policy. Deductions etc.
3. Gather Employee Inputs: HR should ensure that all the basic details of an employee right from
PAN, Residential address, bank account details. Aadhar card number etc are gathered for process-
ing, the payroll. These inputs are collected from employees at the time of joining and employee
has to keep updating if any change takes place., eg: like changing in the bank account or residential
address etc.
4. Validate employee inputs: Once employees, details are received it has to be validated as per the
company norms and policies and ensure that it full fills all the required details.
5. Organization has also to ensure that employees are active employees and if any employee has
resigned should be excluded.
6. Calculate payroll: Once the Inputs are validated data has to be fed in the system for processing
the payroll. It results in generating net payment calculation after adjusting necessary deductions
Steps involved in executing Payroll
Define Gather Validate

Onboard employee employee
payroll
Employee inputs inputs
policy
Distribute payslips Pay Disburse

Calculate
and tax computation statutory employee
payroll
sheets dues salary

Understanding Payroll Operations 23
and taxes. These calculations are done by some organizations using spreadsheet. So, it becomes
Notes
difficult to reconcile and verify the value to avoid any errors. However, automated software payroll
could have eliminated the risk of clerical and mathematical error.
7. Disperse employee salary. Once this entire process is over, the salary has to be transferred to the
employee’s bank account as given by the employee.
8. Pay Statutory Dues: During the time of payroll processing, all the statutory deductions made have
to be transferred to the government heads as per the norms.
9. Finally distribute Pay slips. HR has to ensure. That the payslip is made available to every employee.
Either in the printed format or online. Wherein employee can cross check and verify the amount of
salary received. This is the last stage of payroll cycle and again the fresh cycle starts.
Compliance and Regulations

TDS PF ESI PT
(Tax Deducted at Source) (Provident Fund) (Employee's State Insurance) (Professional Tax)
What What What What

Employers are required to Contribution made towards An amount is deducted from Tax deducted from
deduct their employees' the EPS scheme by the employees to provide insurance employees
taxes and deposit it to the employees are the employers for medical expenses including
government. in an equal proportion. accidents and maternity.
When When When When

This is applicable to the Applicable when the total Applicable when the total Applicable to
very first employee if their number of employees in number of employees is an organisation
salary exceeds the basic an organisation, including greater than 10 from the very first
exemption limit contractual staff, is employee
greater than 20. (Voluntary
contributions for an
organisation with less than
20 employees is allowed)
Components of Payroll:
Salary of an employee comprises of several components which has to be brought together within the
specific date in order to run the payroll. Employee have a gross salary which comprises of multiple
components which form a part of salary and also the statutory and normal deductions.
Framing the salary component is a huge challenge as one has to manage the payroll system. Payroll
comprises of taxable and tax exemptible variables, allowances and deductions.
Some of the common allowances are as follows:
Dearness allowance (DA)
House Rent Allowance
Child Education Allowance
Transport Allowances
Advantages of payroll management software

It is software with which all the compliance can be applied and monitored
Facilitates to speed up the payroll process and generate the reports as desired.
Ensures privacy of the employees and the data
Portals facilitate the employees to access their payroll data and update itself as and when needed.
The fact there is a self-service option can result in wrong data entry. Once new data different from
the previous pay checks is entered, the system sends an alert to the HR department that can then
check and correct the error if necessary. This ensures no discrepancy can go undetected.

24 Chapter 2
Notes Aim of having payroll

Main aim is to bring a common platform to accumulate information as a ready reference, not necessarily
covering only aspects of law but to take you through the complete process. We will look into:
An overview of the Indian payroll
Knowledge of components that structure a Salary and CTC
Applicability of Statutory Social Securities to organisations and employees
Calculation of PF, ESI, PT contributions
Relevance of HRA component in the salary and taxation impacts
Insights on Bonus, Gratuity and Ex-Gratia payments
Benefits available under various schemes of ESI
A guide through employee IT declarations and Form 16
Importance of an Attendance Management System
Detailed guide on Leave policies, Maternity leaves
Statutory registers to be maintained by organizations
Ingredients of an Ideal Salary Structure
Knowledge of Payslip, Salary sheet, Form T and Muster Roll
A summary of payroll compliances and relevant Due dates
Walk-through process of joining requirements, necessary documentation and precautions during
full & final settlement
Factors to be kept in mind while choosing payroll

management software
Organizations and businesses utilise payroll as a crucial document for managing their personnel on a
daily basis. It is a document that includes a list of all the employees of a business that are paid for work
done or services rendered to the business. It offers a breakdown of all the cash that a business paid out
to employees within a particular period.
Every company ought to have a payroll management system, ideally. However, the type of payroll
software that best suits a company will depend on its demands. The following guidelines should help
you select payroll management software.
Reputation and dependability

The reputation and track record of a preferred service provider can be seen in its reviews and current
clientele. Second, choose a demo to confirm whether it is compatible with your company’s needs and
requirements and how well it matches your needs and requirements.
Security
The most crucial factor is security. Payroll records for a firm often include private data about both the
company and its employees. Only dependable individuals should handle and secure this data. Make sure
the payroll software company you choose has never experienced a security breach and that they accept
full responsibility for any such incidents.
Your company’s size

Compared to large enterprises, which require a complex payroll system, small and medium-sized firms
may need one that only does the basics. Budgeting for the proper system is also crucial for your com-
pany. If your company is small, set aside money for affordable software. A large business must make
significant investments in reliable and secure software.

Notes
Reporting and backup for software

You must have access to the payroll reports as a business when necessary. In the event that you need to
fix some mistakes, the Tye system must to be ready to offer manual update alternatives. It is necessary
to properly backup all payroll information in the system because systems do occasionally fail.
Compatibility
Software that can communicate with the other systems in your company must be purchased. Addition-
ally, the software needs to be adaptable enough to handle changes brought on by your company’s expan-
sion. Integrating it with any other financial software you might be using ought to be simple.
Cost to Company (CTC)

Meaning
Cost to firm is a term used to describe all costs associated with employing a worker. From the standpoint
of the employer, it is the sum of all costs incurred on his behalf, from the cost of hiring employees to
retention bonuses and retirement pay-outs (if any). However, because the aforementioned individual
payments to an employee only happen once, CTC is typically used to quantify the annual spending a
company makes on that person. It is the total of all benefits provided to the employee, both financial
and non-financial.
CTC comprises.
gross income (both fixed and variable- inclusive of basic pay, allowances, incentives, bonus, com-
mission etc.)
donations to statutory funds, as well as
Additional non-cash advantages in the form of perquisites

26 Chapter 2
Notes
01 02 03
Gross salary both
Other non-
fixed and variable-
Contributions monetary
inclusive of basic of
to statutory benefits in
basic pay, allowances,
funds the form of
incentives, bonus,
perquisites
commission etc.
Cost to Company (CTC)
Example: An employee’s wage, for instance, is ` 30,000 per month. The employee receives free pick-
up and drop-off cab service, as well as free food at the workplace. The employer, however, spends 2000
and 1000 rupees, respectively.
Additionally, the business contributes 12% of the PF as Employer Contribution, or ` 3,600 per month.
Additionally, if a person works for an organisation for five years, they must receive a gratuity equal
to 15 days of pay. This comes to ` 1250 each month or ` 30,000 * 0.5 /12. If the company gives an 8.33%
incentive, that comes out to 30000 * 8.33%/100, or ` 2499 every month.
So, the total cost to the company is:
30,000 (Salary) plus 2,000 (Travel) plus 1,000 (Food) rupees, 3600 (PF), plus 1,250 rupees (Gratuity),
plus 2499 (Bonus) = Monthly CTC of ` 40,349, or ` 4,84,188 annually.
CTC calculation
The total of direct benefits (paid monthly and annually) and indirect benefits is known as the CTC
(a sum that the employer pays on behalf of the employee). Additionally, it covers employee contri-
butions to social security benefits and savings plans.
CTC vs. Gross Salary

A worker’s total earnings while working for a person, place, or thing are referred to as their gross salary.
This sum, though, is before any taxes or other deductions. And the total cost to the company would be
the sum of the total compensation.
Net Salary vs CTC

Before any tax or other deductions, an employee’s gross compensation is what they are paid. The
amount that the employee receives after such deductions is known as their net salary, take-home pay, or
salary in hand. Contributions to the provident fund, taxes withheld at the source, and professional taxes
are examples of general deductions. CTC is the total remuneration, of which Net Salary is a component.
CTC’s component parts

Benefits provided to the employee that are both monetary and non-monetary are included in CTC. These
consist of:
Base Salary
Dearness Compensation (DA)
Rewards, bonuses, and commissions

Renter’s Assistance
Notes
Per day allowance
Employee Provident Fund donations
Grants for Children’s Education
Transport reimbursement
Medical reimbursement
Compensation for the city
Leave Travel Concession or Allowance
Employer contributions to state insurance
health insurance payments
Allowance for a phone or mobile device
Special Compensation
Gratuity fund contributions
Free Accommodation for Rent
Extra benefits include free or discounted food, interest-free loans, use of moveable property, etc.
Shares of sweat equity issued or transferred
Employer pays insurance premium
Amount of any contributions made to a superannuation fund that has been approved
Reduction in rent
Any additional compensation, stipend, or benefit not mentioned above.
Expected CTC vs. Current CTC

These phrases typically come into play when a worker in an organisation search for a new job with greater
possibilities. An employee’s current CTC is the salary they are receiving from the company they work for
right now. Expected CTC is the sum, which includes the pay grade, that an employee is anticipating based on
the experience accumulated throughout the course of employment. The expected CTC increase rate is influ-
enced by a number of variables, including market norms and the subject knowledge and skill of the worker.
Splitting of CTC
CTC consists of a number of parts. You can group things into three groups in general.
Direct financial advantages such as basic pay, dearness allowance, incentives, bonus, commission,
housing rent allowance, transportation allowance, etc. that are given to the employee each month
as part of their take-home pay.
Typically, indirect advantages are non-financial. These are the advantages that the employee
receives free of charge. The cost is borne by the employer.
Indirect Advantages comprise

rental-free housing,
Free or discounted food, use of the company’s moveable assets, interest-free loans, and other perks
are examples of fringe benefits.
contributions made by employers to the benefits and savings plans of their employees, such as
employer contributions to PF, ESI, etc.
Ideal CTC
There is no single, universal framework that can meet all industry needs due to the diversity of business
markets and industrial routes. However, taking into account the vast majority of small and medium-

28 Chapter 2
sized businesses in our nation, we have created a tool to quickly compute a CTC structure that employ-
Notes
ers can use and customise to meet their business needs.
Cite this website: https://officeanywhere.io/payroll/salary-optimisation-tool
Using this tool will also help you comprehend the calculated Gross Salary, Net Salary, and CTC bet-
ter through a visual presentation.
Summary
Organizations and businesses utilise payroll as a Ends with generating the payslip for the employee
crucial document for managing their personnel on which explains clearly the breakup of the salary
a daily basis. It is a document that includes a list with all deductions etc.
of all the employees of a business that are paid for In simple words, it the process which involves
work done or services rendered to the business. It in arriving at what is due for an employee. After
offers a breakdown of all the cash that a business adjusting the necessary deductions like TDS, PF.
paid out to employees within a particular period. ESI. And other deductions if any.
It is defined as a process of paying remunera- Payroll cycle is a time gap between two salary
tion or salary to an employee who has been work- disbursements. Generally, it is processed once in
ing with an institution? Payroll process. Starts a month in India, whereas In the United States, it
with preparing the list of employees to be paid. is bi weekly.
Let’s discuss
1. Explain the importance of payroll 2. Factors to be kept in mind while choosing
payroll management software
Lets come with a strategy:

1. You are heading the HR activities at ABC decided to have a payroll system for the orga-
company limited and the management has nization. How are going to go about

case study Notes
Remaking Mix
In 1996, ABX stated record losses in its 86-year history of ` 1.83 billion, as compared to earnings of ` 598
million in 1995. Chairman R.D. Mehta can claim to have brought ABX through its most difficult year by
ending a six-month steel strike and fending off, for the time being, raider C.C. Madan.
Mehta is analysing some of the largest Indian companies to find acquisitions that will offset the uncer-
tain prospects for steel. Due to one acquisition, ABX is now considered more of an oil and gas company.
Mehta has declared that ABX wishes to change its steel operations into a wholly owned subsidiary in
order to give flexibility to the company to sell off its steel segment. But for now, the major task is to turn
its steel unit around, with its aim to earn steady returns equal to that of the average manufacturing
company.
Changes
After becoming Chairman in 1989, Mehta has brought about a lot of changes in ABX. He has made three
main changes:
Change in the Culture: Mehta, who climbed up through the company’s finance ranks, is irreverently
called “the top bean counter.” He has astounded production-minded managers with his “no scared
cow” decree that profitability is more important than conserving the original empire.
Cut Costs and Inefficiencies: Under Mehta’s leadership, ABX has shrunk dramatically. By 1995,
he had shut down more than 150 plants and facilities, decreasing steel-making capability by more
than 30 per cent. He cut white-collar jobs by 54 per cent. And by early 1997, he had cut capacity
another 27 per cent. That drop translated into about 5,000 fewer employees, who joined the 23,000
workers already on indefinite lay-off.
Acquired New Companies: In one of his bravest moves, Mehta acquired Marathon Oil Co. for
` 5.9 billion, thus transforming ABX into more of an oil company than a steel producer. The change
in name from A. B. Steel to ABX was to help change the public and employee’s perception of the
company.
Even though Mehta brought about a lot of changes, ABX is still affected by the inefficiencies, poor man-
agement, and hostile labour relations that bothered it for decades.
The biggest challenge that Mehta faces is to transform one of corporate India’s most hierarchical;
bureaucratic management into a lean, aggressive, market-driven team. Among his challenges include:
1. Challenges: For his part, Mehta believes that he is on his way to creating adds “We’ve b A.B.
Steel” and Abhay Lal, Executive Vice-president for employee relations says “We’ve been required
to shed yesterday.”
2. Culture: Changing a culture cast over 75 years could take almost a decade.
3. Management Style: A “militaristic” management style is responsible for blocking change. The little
feedback that existed was often lost as it passed through the maze of bureaucracy.
In summary, ABX is faced with changing an ingrained, old-fashioned corporate culture.
Questions
1. Would you agree with Mehta that ABX should make changes?
2. Would organization development be appropriate in a situation like this?
3. Can we design a payroll to improve efficiency?
Source: Organisation Change and Development 2nd Edition, © 2010, Kavita Singh

30 Chapter 2
2-1. Which department should have the sole ability to 2-4. Regarding the use of incentives, commissions and
provide information to the AIS about hiring, termi- bonuses in payroll, which of the following state-
nations, and pay rate changes? ments is false?
(a) payroll (a) Using incentives, commissions, and bonuses
(b) timekeeping requires linking the payroll system and the informa-
(c) production tion systems of sales and other cycles in order to col-
lect the data used to calculate bonuses.
(d) HRM
(b) Bonus/incentive schemes must be properly
2-2. Which of the following is not one of the major
designed with realistic, attainable goals that can be
sources of input to the payroll system?
objectively measured.
(a) payroll rate changes
(c) Incentive schemes can result in undesirable
(b) time and attendance data behavior.
(c) checks to insurance and benefits providers (d) All of the above are true.
(d) withholdings and deduction requests from 2-5. Why is a separate payroll account used to clear pay-
employees roll checks?
2-3. In the payroll system, checks are issued to (a) for internal control purposes to help limit any
(a) employees and to banks participating in direct exposure to loss by the company
deposit. (b) to make bank reconciliation easier
(b) a company payroll bank account. (c) banks don’t like to commingle payroll and
(c) government agencies. expense checks
(d) All of the above are correct. (d) All of the above are correct.
Answer Keys:
2-1. (d) 2-2. (c) 2-3. (d) 2-4. (d) 2-5. (a)

chapter 3
Job Evaluation—Approaches & Methods
Learning Objectives
To understand the meaning and purpose of job evaluation To examine the connection between job analysis and job
Recognize the significance of job evaluation evaluation
To be aware of the goals of a job evaluation Basic Evaluation Systems Overview
Researching the frequency of job evaluation Should be aware of four fundamentals, established methods
of job evaluation
Recognize the significance of job evaluation and the numer-
ous organisations in charge of it.
Intelligentsia is an e-publishing company based in Pondicherry. The company started its operations
with just 7 employees and now it has nearly 4000 employees working in two shifts. During expansion,
the management was concerned about paying salaries based on position, potential and performance.
Intelligentsia had to expand its structure horizontally and vertically. But then, the nature of jobs in the
same vertical at a particular level won’t be the same. Hence, the management had to do a job analysis
of all the positions as per the structure proposed and evaluate each job. As a consultant, how would you
go about designing the job structure and evaluating the positions?
What is a job assessment?

An organization’s work structure is established methodically through the process of job evaluation,
which takes into account the needs and substance of each position in turn. The hierarchy of jobs or
job structures serves as the foundation for the pay system. As was discussed in earlier courses, the
job structure is only one factor that affects the wage structure. But it is a crucial one that is frequently
applied.
Job evaluation
Several key definitions of job evaluation are provided below:
Job evaluation is described by the International Labour Organization (I.L.O.) as “an attempt to deter-
mine and compare demands which the regular execution of a particular job makes on typical workers
without taking into account the individual abilities or performance of the workers concerned.”
“Job evaluation is the evaluation or rating of jobs to determine,” according to the Bureau of Labour
Statistics in the United States. the hierarchy of jobs they have. The evaluation might be done by giving
points for important work requirements including abilities, experience, and responsibility, or by using
some other methodical way.

32 Chapter 3
“Job evaluation is a procedure which helps to develop a justifiable rank order of jobs as a whole
Notes
Being a foundation for the establishment of salaries,” according to the Netherlands Committee of
Experts on Job Evaluation. The single initial factor establishing the relative disparity of base wage rates
is job evaluation.
Position evaluation is described by Kimball and Kimball as “an effort to evaluate the relative each
job in a plant to determine what the far basic remuneration for such a job should be.”
The relative worth of a job refers to value produced factors as responsibilities, skill, effort, and
working conditions. Wendell French states that “job evaluation is a process of determining the
worth of the various jobs within the organisation, so that differential wages may to jobs of different
worth.”
We could say that job evaluation is. a method of examining and defining occupations, classifying
them, and judging their relative worth by contrasting the responsibilities and other requirements of
various roles.
It is the quantitative evaluation of comparative work value with the aim of establishing objectively
consistent wage rate differentials. With the goal of determining compensation for wage administration
purposes, it compares the differences in job requirements between jobs.
It just establishes the relative worth of a job; it does not determine its cost.
It represents an attempt to assess the relative worth of each job in a plant and to establish what the
appropriate pay rate for that job should be. It does not assess the worth of the employee doing the work.
The task of employee rating is to rate the job, not the merits of the specific employee.
Conceptual Debate
Practices for civil service classification led to the development of job evaluation. Job analysis was used
in early employer job and pay classification systems, time study, and selection. Whether Frederick W.
Taylor or the United States Civil Service Commission started formal job evaluation in 1881 or 1871, it
has been around for about a century.
In the 1920s, the first point system was created. The implementation of such programmes has been
considerably aided by employer associations. The implementation of job assessment has been impacted
by the growth of unionism in that companies began to pay more attention to rationalised wage structures
as unionism gained ground. During World War II, the War Labor Board promoted the extension of job
evaluation as a strategy for lowering pay disparities.
Because of the public’s concern over discrimination, job appraisal has gotten a lot of attention
lately.
The National Research Council conducted a research on job evaluation as a potential cause of and/or
a potential remedy to sex discrimination in pay while working under a contract from the Equal Employ-
ment Opportunity Commission.
According to the report, jobs held primarily by women and people of colour may not be given
enough credit. Such discrimination may be brought on by the employment of various plans for various
employee groups, the compensable variables used, the weights given to the elements, and the precon-
ceptions connected to particular jobs.
Although the preliminary research avoided taking a position on employment evaluation, the final
report came to the conclusion that it has some promise for addressing discriminatory issues.
Objective of job evaluation

Establishing their employment structure is typically where organisations start when building a wave
structure. There are two prevalent compensation guidelines:
1. Equal compensation for equal work
2. A higher wage for more significant job. Both indicate that employers compensate workers for the
contributions that come with their occupations.
The majority of firms use employee contributions as a key factor in determining job assignment.
Except in very small firms, a formal wage structure—defined as a rate or range of rates specified for

Job Evaluation—Approaches & Methods 33
job classifications—seems to be the norm. The practically universal basis of pay rates is official job
Notes
evaluation or informal comparison of job content.
The focus of employment appraisal is on jobs, not people. Work tasks are grouped together into
jobs. It is a subjective idea that needs careful definition within the company. The relative position of
a job within an organization’s hierarchy is determined by job evaluation. It is believed that, as long as
the nature of the job doesn’t change, it may be carried out by people of various skill levels.
Goals for Job Evaluation

Several more focused objectives may be included in the general goal of job evaluation:
1. To act as a foundation for a straightforward, logical salary system;
2. To offer a standardised system for categorising newly created or altered occupations;
3. To act as a foundation for measuring each person’s performance;
4. To lessen pay grievances by narrowing their scope and provide a mutually agreeable method of
settling differences;
5. To encourage staff to pursue positions at higher levels;
6. To supply details for wage discussions;
7. To offer information on job relationships for use in career management, internal and external selec-
tion, personnel planning, and other personnel tasks.
Additionally, according to an I.L.O. Report, “the majority of Systems of job evaluation try to determine
the relative worth of a work by establishing the relative values of several tasks in a specific plant or
piece of machinery on a logically agreed-upon basis.
The guiding idea behind all job evaluation plans is to describe and evaluate the worth of occupa-
tions in the company in terms of a variety of variables, the relative weight of which changes from job
to job:
(i) To obtain and keep up-to-date descriptions of every specific job or activity throughout the
entire plant that are thorough, accurate, and impersonal;
(ii) To offer a uniform method for assessing the relative value of each job in a plant;
(iii) To establish a fair and equitable pay rate for each position in comparison to other jobs in the
facility, neighbourhood, or sector;
(iv) To guarantee that all qualified employees get comparable pay for comparable work;
(v) To publicise an event. accurate assessment of each employee’s potential for promotion and
transfer;
(vi) To offer a factual foundation for the evaluation of pay scales for comparable employment in
a neighbourhood and an industry; and
(vii) To offer information for issues relating to staff placement, training, and many other issues of
a similar nature.
Actually, determining pay and salaries based on the comparable work or occupations inside the organ-
isation is the main goal of job evaluation. It accomplishes this by offering a basis for the following
issues:
(a) Equity and the goal of salary administration, which is to pay those whose tasks are similar the
same compensation and to provide fair wage differentials across positions requiring various
abilities and responsibilities;
(b) Effective salary and pay management;
(c) Wage bargaining between management and the union; and
(d) A comparison of the employee’s pay and hourly rates to those of other workers In addition to
determining pay, job evaluation aids in:
(e) Providing for the standardisation of working conditions and their improvement;

34 Chapter 3
(f) Making clear the obligations, powers, and responsibilities of workers;

Notes
(g) Creating guidelines for the resolution of complaints resulting from specific rates and for dis-
cussions with a trade union on internal pay structures and differentials;
(h) Creating tools for a methodical evaluation of job rates as job contents change; and
(i) Creating employee statistics.
Prevalence of job evaluations

Worldwide, job evaluation is practised. The United States seems to use job evaluation more frequently
than other countries, despite the lack of recent research to support this.
However, according to a paper from the International Labor Office from 1982, job evaluation is
widely utilised in economies that are centrally planned or that have pay or income regulations.
Since 1948, Holland’s national salaries and incomes policy has been based on a nationwide job
evaluation plan. Several industry-wide initiatives are in place in Germany and Sweden.
Like the US, Great Britain often uses job evaluation at the corporate or plant level. Australia and
a few Asian nations have implemented various employment evaluation systems. Job classification is
widely used in Russia and certain Eastern European nations.
According to data on job assessment use in the United States, smaller businesses are a little less
likely to employ job evaluation. However, some sort of employment evaluation is used by almost all
government agencies.
In the last 20 years, job appraisal has faced criticism in the US. This is the result of a shift in the
“new” economy of today and in the organisations that rule the American economy.
Large bureaucratic organisations are the most suited for job evaluation. These titans of the American
economy have struggled to stay competitive during the past twenty years.
As a result, they drastically reduced their size and eliminated several organisational layers. Employ-
ees are increasingly leaving their current employer for positions in other businesses while vertical
movement within organisations has halted.
The new businesses that are establishing themselves in the economy are more agile organization-
ally and smaller. Additionally, unions are no longer in use; instead, people now negotiate their own
pay. Finally, firms are placing more value on employee performance and abilities than on the job
itself.
All of this does not imply that businesses disregard the work as a factor in pay. What has changed is
that wage structures are now more flexible and place a higher value on talent and performance.
As information has been more easily accessible online, the use of market pay data for an increasing
number of jobs is expanding and becoming more practicable. Workplaces generally have job
Evaluation processes have grown less formal, less complicated, and simpler.
Broadbanding is a key trend in this direction. Broadbanding reduces the number of levels in the
job evaluation plan while significantly widening the grade levels. With no need to advance to a new
grade level linked to a higher organisational level, employees can now get compensation increases.
Responsibility of Job Evaluation

There are duties associated with setting up and using job evaluation. There are numerous ways to put
the method into practise.
It is possible to choose one or more committees, create a new department or allocate an existing one,
or hire a consulting firm. These options are not exclusive of one another.
Because installing the software requires time, money, and effort commitments, support for the
programme is crucial. Such support is typically acquired with the cooperation of other managers and
organisation members as well as the endorsement of top management. A committee formed specifically
for this purpose is frequently used to acquire this consent.

Let’s go through the methods below involved in the activity of job evaluation Notes
1. The Committee Method
This committee is provided a description of job evaluation, the goals it is intended to achieve, a general
timeline, and maybe an estimation of the program’s cost. The committee determines the need for job
evaluation, establishes the project’s parameters, and designates who will be responsible for each task.
In both large and small businesses, the real job appraisal work is typically done in committee,
whether the assignment is either carried out independently by organisation members or with a consul-
tant’s assistance.
The ability to pool the opinions of numerous people is a benefit of committees. Typically, the
committee decides on the compensable variables, weighting, way of comparing occupations, and job
evaluation.
The committee’s chair is often a member of the compensation industry, though a consultant may fill
in for part of the chair’s duties if hired. Other members are often other managers who have been chosen
for the project due to their analytical prowess, fairness, and dedication.
Broad representation within the organisation helps with acceptance and communication. But to make
decision-making easier, employment evaluation panels should be maintained small. Maximum mem-
bership is ten, with five being ideal. Inviting supervisors to committee meetings when positions in their
department are being examined is a standard practise.
Union members are regular committee members in union-management settings. Employee represen-
tation frequently changes in situations where the union is not involved. Participation of employees on
committees appears to improve communication and acceptability.
Pooled judgments are used to determine committee job ratings. This typically indicates that indi-
vidual scores are averaged or that a consensus is formed after debate.
Committee members need to receive training. The procedure steps are followed in a lot of this train-
ing. However, it is advisable to teach committee members how to avoid bias and typical rating mistakes.
2. Consultants
Installing employment evaluation strategies occasionally involves consulting. Successful consultants
take care to make sure that team members are deeply involved in the plan installation and are capable
of running the plan independently.
The likelihood of hiring consultants is highest in small businesses where no one in the staff possesses
the relevant knowledge. Additionally, they are more likely to be used when a complex scheme is being
deployed as opposed to a simple one. Consultants frequently own pre-made blueprints of their own.
For the purpose of ensuring objectivity in union-management installations, advisors are occasionally
hired. It is also standard practise to employ experts to assess managerial positions because committee
members’ impartiality when evaluating positions at levels higher than their own may be called into doubt.
3. Involvement of the compensation department
It is entirely feasible for the company to entrust the compensation department with the installation and
management of a work evaluation plan. The activity is occasionally carried out by a number of job ana-
lysts as well as the compensation professional overseeing the unit.
Those who prefer this last strategy underline how technical the task is. They might also be respond-
ing to the challenge of persuading operating managers to invest the necessary time in the programme.
They may be aware of the committees’ benefits in education and communication, but they think these
benefits can be achieved in other ways. However, it is questionable if this stance can be supported.
Accepting the outcomes of a job evaluation installation probably requires input from operations
managers and possibly employees. But after the programme is set up, it doesn’t seem like there’s any
reason why a department couldn’t use it and make the necessary provisions for handling complaints.
4. Participation of Unions in Job Evaluation
The justification for union participation is the same as the one put forth in our discussion of job evalua-
tion panels. The desired outcomes of involvement include acceptance and understanding.
Union involvement in job appraisal has varied widely in practise. Some unions claim to independently
and formally evaluate the jobs within a business, using the results as a tool for collective bargaining.

36 Chapter 3
A cooperative effort has been used to install and maintain several job evaluation schemes. The steel
Notes
sector has a well-known union-management employment evaluation plan. The cooperative plan in the
West Coast paper business is less widely recognised. There is proof that collaborative strategies perform
better than unilateral ones. This, however, is not always the case.
Many unions in companies with job assessment plans analyse the results after management has
implemented them and either file grievances on specific occupations or insist on negotiating the pay
scale. In the second scenario, the agreed-upon compensation structure may be a compromise or it may
correspond to the job structure established by the job evaluation.
Some unions have disregarded management-installed job evaluation programmes. This attitude is
preferred by some employers who feel that management should have the authority to design and evalu-
ate jobs. Other businesses encourage union involvement in the goal of learning about and approval of
the plan
A logical hierarchy of occupations must exist, and if a union refuses to take part in job appraisal
and disregards the plan, the employer unilaterally implements the plan. The research is put to use when
negotiating the pay scale.
For a number of reasons, unions have attacked employment evaluation.

1. That it limits pay collective bargaining,
2. Wages shouldn’t be determined exclusively by the nature of the employment,
3. That managers are unable or unwilling to explain the idea to staff;
4. That management does not carry out the plan as it has described; and
5. That it is arbitrary.
Acceptance of Job Evaluation by Employee

When workers, unions, and organisations express pleasure with a job review, it is typically deemed
successful. The majority of surveys show 90 percent or higher organisation satisfaction ratings. The
main factor is employee acceptance organisations utilise to assess a job evaluation plan’s effectiveness.
This is demonstrated by the growing participation of staff members on job assessment committees and
the communication procedures that go along with job evaluation installations.
Job Evaluation and Job Analysis Relationship

The result of a job analysis is a job evaluation. As was already said, job analysis outlines a position’s
responsibilities, authority structures, necessary skills, working conditions, and other pertinent details.
On the other side, job assessment makes use of the data from job analysis to assess the relative worth of
each work by valuing its constituent parts.
In order to create a wage or compensation hierarchy, it entails a formal and systematic comparison of
jobs to determine the relative value of each position. So it is a procedure for evaluating job performance
within an organisation.
The relative value of a specific set of tasks and responsibilities to the organisation is examined when
positions are appraised. This procedure is used by management to keep employee productivity and
satisfaction at high levels.
Jobs would very likely not be adequately realised, i.e., high valued jobs might be paid less than low
valued jobs, if job values are not properly assessed.
Employees become unhappy when they realise this is taking place. They might stop working for the
organisation, put forth less effort, or even start acting in ways that are bad for it.
As a result, the worth of a job is given a lot of emphasis in modern culture. The value of a judgement
regarding the value of a job has a significant impact on what should be paid for a certain work. In other
words, a person is compensated for the knowledge, skills, and abilities he brings to the job, so long as
they are relevant to the demands of the position to which he is allocated.

APPROACHES TO JOB EVALUATION Notes
There are four fundamental, conventional approaches to
Job assessment
1. The system of rankings;
2. the system for evaluating or classifying jobs;
3. The scoring method; and
4. the system of factor comparison.
The first two systems are usually referred to as the non-analytical, non-quantitative, or summary sys-
tems since they are simple and employ non-quantitative methods to evaluate jobs in order of complex-
ity. The following two systems are referred to be analytical or quantitative systems since they list the
vocations using quantitative techniques. They are more difficult and take longer.
The main variations between these techniques reflect

1. Taking into account the “task as a whole” as opposed to “compassable aspects”; and
2. judging and contrasting jobs instead of putting numbers on a scale and evaluating them.
Plans utilised now are modifications of these fundamental techniques.

1. The System of Rankings
Mechanism:
In this method, all occupations are sorted or ranked in order of priority, from the easiest to the most dif-
ficult, or vice versa, with each work coming after it being either more important or less important than
the one before it. Despite their potential value, job descriptions are not required.
All the employment in the organisation may occasionally be divided into a number of grades or
zones. The grouping or classification of all the jobs once they have been rated according to their
needs is a more typical approach.
The method that is typically used is to rank jobs based on “the full job” as opposed to a number of
condensable variables.
This is one possible ranking for a university based on this methodology.
Following rating, additional jobs in between those that have previously been ranked may be given a
suitable location and pay rate.
Generally speaking, system involves the following five steps:
Step 1: Creating a job description is the first step, especially when multiple people are ranking the posi-
tions and there is conflict among them.
Step2: The choice of the raters is done in the second phase; normally, jobs are evaluated by depart-
ment or in “Clusters” (i.e., factory workers, clerical workers, menials, etc). This eliminates the need to
directly compare jobs in factories and offices. Most businesses use a panel of raters.
Step 3: Key tasks are picked, and rates are chosen. Typically, 10 to 20 essential roles—covering all
major departments and functions—are assessed first, and the other positions are subsequently roughly
graded in comparison to these key positions.
Step 4: Ranking each position. To determine each job’s precise ranking on the scale, it is then compared
in-depth to other jobs that are similar to it.
For this, a set of “index cards” with a brief summary of each work may be provided to each ratter.

38 Chapter 3
Then, these positions are ranked from “highest to lowest” or from “lowest to highest,” starting with
Notes
the top position and continuing with the next highest and lowest positions, and so on, until all of the
cards have been ranked.
Step 5: The fifth step is to create a job classification using the rating. The total rating is then divided
into an appropriate number of groupings or categories, typically 8 to 12. a single class or set of jobs that
share the same wage or pay scale.
The relative weights of the following five elements are typically used in the ranking system of job
evaluation to compare each position to others:
(i) Controlling and leading subordinates
(ii) Cooperation with colleagues who are not directly reporting to you;
(iii) The likelihood of errors and their effects (in terms of waste, equipment damage, delays, com-
plaints, Confusion, product spoiling, discrepancies, etc.)
(iv) Minimal level of expertise; and
(v) Minimum necessary education;
Merits
(i) The system is straightforward, understandable, and simple to convey to staff members (or a
union). As a result, it is appropriate for small businesses with clearly defined job roles.
(ii) Compared to other systems, it is far less expensive to implement and requires little mainte-
nance work.
(iii) Unless it is carried to a detailed used by firm, it takes less time, less forms, and less labour.
Demerits
(i) Due to the lack of a norm for a comprehensive job analysis, many bases for rate comparisons
arise. Since the process is initially dependent on judgement, a range of personal biases fre-
quently have an impact.
(ii) In most cases, distinct work criteria (such skill, effort, and responsibility) are not examined
individually. The rater’s assessment is frequently heavily influenced by their current salary.
(iii) The system essentially generates a job order without specifying how much more important
it is than the one below it. It does not say how much higher or more difficult it is; it only
informs us its rank or that it is more tough than another.
2. Classification of Jobs or Grading System

This method involves creating a number of specified grades or classifications before allocating specific
positions within each grade or classification. Grade descriptors are produced from the fundamental job
information, which is often gathered from a work analysis.
Jobs are categorised into classes or grades that indicate a range of pay levels, from low to high, after
developing and reviewing work descriptions and job standards.
Common duties, responsibilities, expertise, and experience can be determined using the job analysis
process. Then, certain jobs can be given a general grade or classification.
General grade descriptions are produced for each classification, and these are then used as a standard
for determining the precise pay scale for each position.
Mechanism
There are typically five steps involved:
(i) Job analyses are typically used to create job descriptions, which provide us with fundamental
job information.
(ii) The development of grade descriptions that will make it possible to distinguish between dif-
ferent labour levels or grades. Each grade level must be distinct from the one below it, but it
must also show a typical evolution through time as opposed to a big jump or gap.

After the grade level has been established based on the difficulty of the duties, non-supervisory respon-
Notes
sibilities, and provisory responsibilities, each position is assigned a suitable grade level.
(iii) Choosing grades and critical positions. A selection of 10 to 20 positions, covering all the
grades and excluding all the important departments and functions, is made.
(iv) Grade the important tasks. The association between key tasks and their appropriate grade
level is investigated.
(v) Classifying every work. Using grade definitions, jobs are categorised. The PayScale or range
of rates is the same for all jobs in the same grade. For instance, one class could be for
menials, another for clerks, a higher class for junior officers, and a class for the top executive.
The gradations of five classes, each with a title label and a rising value, are shown in Table 3.1.
Table 3.1
Grades Classification Job Description
• IIIrd grade clerk • Purely routine focus, quickness, and accuracy; under supervision; might
or might not be held accountable for oversight.
• II Graded Clerk • Without outside oversight, with special expertise for the position by
possessing in-depth understanding of every aspect
• Clerk level • I need to behave like a second-class clerk and take on more responsibility.
• Senior Clerk • Occasionally, technical work that varies. Due to the challenging task
that necessitates outstanding clerical competence and in-depth
understanding of the principles and fundamentals of his department’s
business, he is forced to engage in independent thought and action.
Not required to supervise others in any way; works under a light check;
trustworthy, resourceful, and competent to make judgments.
• Chief Clerk • Those in charge of or capable of making a significant judgement regard-

ing the work they conduct; complex work needing a great deal of inde-
pendent thought; able to take into account details outside their control.
Merits
(i) Given that it takes little time and does not need specialised knowledge, this method is easy
to use and comprehend.
(ii) The need for employing systematic criteria to rate jobs according to importance is satisfied
by the use of carefully defined job classifications. Since many employees consider their posi-
tions to be part of or connected to clusters or groups, this method makes it easier for them to
comprehend rankings
(iii) The jobs might be broken down into five classes, ranked from most important to least impor-
tant, and described class by class if a company had 500 employees in various positions.
According to this classification, a person’s level of education, mental ability, financial impact,
or a mix of these variables, are generally represented.
(iv) Administrative issues with pay determination are made easier to manage by classifying jobs.
Each and every job classification has a pay grade attributed to it.
(v) Although it is effectively employed in crucial government functions, industries hardly ever use it.
Demerits
These flaws are present in this system:
(i) Although it is more accurate than the ranking technique, there is still significant room for
improvement because executive personal evaluations—made by people who are not trained
in such tasks—are used to construct the primary classes and decide which classes each job
belongs in.

40 Chapter 3
(ii) Because no in-depth examination of a job is conducted, the classification of a broad range of
Notes
jobs may be erroneous.
(iii) The writing of a grade description is not easy. The system gets more challenging to manage
as there are more jobs available.
(iv) It is challenging to determine how much a job’s rank is affected by the guy doing the job.
(v) The system is too inflexible for a big organisation or for a lot of different types of work.
3. Points-based systems
This type of job evaluation approach is the most prevalent. By first identifying a number of compassable
factors, determine the amount to which each of these components is present in the work (i.e., different
job qualities).
A specific number of points is frequently assigned to each degree of each element. The total point
value is established by adding the corresponding number of points for each factor once the degree factor
has been determined.
The basis for the point system is the notion that certain factors that are essential for judging a per-
son’s performance can be given points. These scores are tallied to provide us with an assessment of the
ranking jobs’ relative relevance.
Mechanism
This strategy demands a thorough examination of the jobs. The steps in this procedure are as follows:
Step 1: The occupations that need to be appraised must first be identified.
The grouping of them. The tasks that call for:
(i) Comparable activities,
(ii) The same type of worker (related machinery, tools, materials, and instruments) and the same
kind of material (for example, wood or metal) are grouped together or assigned to the same
family. Using factors from five categories, Gonyea and Lunneborg have grouped 22 vocations
into five groups.
Table 3.2
22 occupations are grouped into five groups based on common factors
(after Gonyea and Lunneborg)
• A-Business organisation • Contains the following jobs: accountant, secretary, buyer, office manager,
personnel manager, interior decorator, and insurance salesperson.
• The B-Male group • onsists of auto mechanics, surveyors, radio operators, police officers,
C
and engineers.
• C–Aesthetic Group • Writers, artists, and interior designers.

• Services group D • Police officer, social worker, attorney, doctor, and personnel counsellor.
• E–Scientific Group • A wireless operator, chemist, doctor, engineer, and medical lab technician.
Step 2: For this, raters randomly select a particular number of elements. There are up to 50 elements
that can be used, although most companies only use about 15. From firm to company, the number of
parameters considered varies substantially.
Sometimes the only three factors are the circumstances, the physical capabilities, and the mental require-
ments. A different company might use 4 variables (skill, effort, responsibility and job conditions). The
criteria that were picked can, to the best of our ability, be applied to all jobs.
Education and training, experience, physical aptitude and skills, preparation for the supervision of
others, external and internal interactions, sensitive information, and the workplace environment are all
shared by all of them.

Additionally, elements that are distinct and relevant to one another are stated in terms of changing
Notes
degrees. Factors that overlap in meaning are avoided. Additionally, they ought to be defined and
articulated in a way that ensures that the terminology used are understood by all parties involved in
the plan.
Step 3: The following step is categorising each component into levels or degrees and giving each level
or degree a point value. One of the most important employment variables, experience, for instance, can
be further broken down into 5 degrees.
The first degree, defined as three months or less, may receive five points; the second degree, defined as
three to six months; the third degree, defined as six to twelve months; the fourth degree, defined as one
to three years; and the fifth degree, defined as more than three years, receives twenty points.
The same procedure is used for each factor at each level or degree, which is represented by an appropriate
number of points. It’s crucial to keep in mind that each of the major components is divided into smaller
groups with clear definitions, and that each of these smaller groups receives points toward the large
group’s ultimate score.
Le Tourneau provided a job work point rating scale example.
CHART 3.1
Several items from Le Tourneau’s rating system, with scale values corresponding to various factors (indi-
cated by numbers)
Rated by........ Job .............................. Department ........................... Date... ......

...........
Factor Check the Correct Item for Each Factor
I. Education School College High Elem. Math’s Addl Subjects Read & Write
5 4 3 2 1
II. Experience. Over 12 9 to 12 6 to 9 3 to 6 Months 1 to 3 Months
Months Months Months
12 12 9 6 3
III. Learning Period Over 3 yrs. 1 to 3 yrs. 6 months 3 months 1 to 3 months
to 1 yr. to 6 months
10 8 6 4 2
IV. Mental Effort Very High High Average Below Low/ Slight
Average
5 4 3 2 1
V. Mechanical Ability Very High High Average Below Slight
Average
5 4 3 .2 1
VI. Physical A, B, C, D E, F, G H, I, J K, L M
Effort 10 8 6 4 2
VII. Job Conditions A B, C D, E F, G H, I
10 8 6 4. 2
VIII. Hazards Very High High Average Below Slight
5 4 3 2 1
IX. Responsibility Over $ $ 25 M to $ 10 M to $1 M to Less
Equipment / 50 $ 50 M $ 25 M $1OM $ 1M
M
5 4 3 2 1

42 Chapter 3
Notes X Responsibility Over 16 11 to 15 6 to 10 2 to 5 1

Persons 5 4 3 2
XI. Responsibility Over $60M 5 $25 M to $ $10 m to $ 1M to
to M 4 25M $10 M Less $ 1 M
5 2
XII Complexity Very High 5 High 4 Average Below Average 2 Slight I
3
XIII Effect on Very High 5 High 4 Average 3 Below Average 2 Slight 1
XIV Attention to Very High 5 High 4 Average 3 Below Average 2 Slight 1

operations
XV Know other Very High 5 High 4 Average 3 Below Average 2 Slight 1

operation
Skill, effort, responsibility, and job conditions are the four characteristics of a job that are often taken
into account when assigning points for a job. According to their relative importance, these are as fol-
lows: skill: 50%; effort: 15%; responsibility: 20%; and working conditions: 15%.
Step 4: The fourth stage is picking the relative weights or values to assign each factor. For each job or
category of jobs, some factors are more important than others. For example, the “mental requirements”
component would be more significant for CEOs than “Physical necessities.” “Factory jobs” may be the
exact opposite.
Step 5: The next step is to assign monetary values to the points. To accomplish this, points are added
together to calculate the task’s overall value. Then, using a specified formula, this value is translated
into money.
Table 3.3
Point Range Hourly Basic Rate Range Job Grade
101-050 ` 6 to 10 1
165-200 ` 8 to 12 2
201-250 ` 10 to 15 3
251-300 ` 15 to 20 4
301-350 ` 20 to 25 5
351-400 ` 25 to 30 6
401-450 ` 30 to 35 7
451-500 ` 35 to 45 8
The job points are converted into job rupees in Table 3.3.
“Packed” point schemes

It takes time to create a point strategy for a particular organisation. As a result, those developed by well-
known grOUP5 (such as in America) are frequently used. These include pre-made definitions of factors,
degrees, and point allocations for a variety of jobs that can be utilised directly or with minimal change.
The National Metal Traders Association of the United States of1- America (NMTA) has one of the most
well-liked point systems.
In the NMTA point system for hourly rated positions, age, responsibility, and employment circum-
stances have been given 20%, 20%, and 15% weightings, respectively. Each element’s points have once

more been broken down into sub-factors and divided among them in accordance with their relative
Notes
importance to job performance.
The “skill” factor, for instance, has received 250 points. Its sub-factors include education, experi-
ence, initiative, and inventiveness.
Have been given, respectively, 70, 110, and 40 points. Additionally, measurement scales that provide
points and definitions of the severity of a given factor have been developed. As a result, the 70 points
designated for “education” have been distributed over five degrees using a 14-point mathematical
progression (Tables 3.4 and 3.5)
Table 3.4 Job Elements and Degree Value Points Assigned to each factor and key to grades
(for machine operators)
No. of 1st Degree 2nd Degree 3rd Degree 4th Degree 5th Degree
Points
1. Skill 250
(i) Education 70 14 28 42 56 70
(ii) Experience 110 22 44 66 88 110
(iii) Initiative and Ingenuity 70 14 25 42 56 70
2. Effort 75
(iv) Physical demand 50 10 20 30 40 50
(v) Mental/Visual Demand 25 5 10 15 20 25
3. Responsibility 100
(vi) Equipment/Process 25 5 10 15 20 25
(vii) Material or Product 25 5 10 15 20 25
(viii) Safety of others 25 5 10 15 20 25
(ix) Work of Others 25 5 10 15 20 25
4. Job Conditions
(x) Working Conditions 50 10 20 30 40 50
(xi) Hazards 25 5 10 15 20 50
Table 3.5 Value Scale in the NMTA Point System for the “Education” Factor
14 28 42 56 70
Read, write Equivalent Equivalent Equivalent Equivalent
add to 2 years 4 years 4 years H.S 4 years
and High School to 3 years Trade University

Training
Summary
The discussion in this chapter demonstrated that must also take labor-cost ratios, competitiveness in
a variety of factors contribute to the creation of a the product market, and union demands into account.
pay structure. These variables range from those that Furthermore, many labour markets are abstrac-
management has considerable control over to those tions that don’t closely match the employment oppor-
where management must merely be responsive. tunities or wage-paying capacity of an organisation.
It is also unlikely that organisations will always The internal alignment of jobs in a wage hier-
be able to create the best structures, and it is pos- archy is related to wage structures. An organisa-
sible that current structures may need to be modi- tional hierarchy or job structure is necessary for
fied in the future given the range of factors. this to happen. Identifying the goal of job evalua-
Although the labour market’s economics are an tion is to determine internal job structure. To build
important factor, they are not the sole one that affects the job hierarchy, this technique evaluates jobs—
how compensation structures are designed. When not people—in terms of a list of criteria known as
deciding on their pay structure, the majority of firms compensable elements.

44 Chapter 3
Organizations frequently use job evaluation to sional, much like salary surveys do. On the other
Notes
compare jobs in order to assess the relative equity hand, the acceptability of job evaluation results
of positions held within the organisation. There is depends on the perceptions of management and
an interesting conflict in job evaluation. employees, making their involvement in job eval-
On the one hand, this approach calls for the uation appear to be a need.
technical know-how of a compensation profes-
Activity
Expectations of Employees and HR Managers
These two case studies give a good idea of the nature of HR: competency mapping, job evaluation and
classification, incentive systems management, and performance.
India is a nation that prioritises relationships over processes. As a result, each employee has high
standards for the HR division. According to TV Rao, HR managers are unable to satisfy the needs of
some or many employees due to their administration-heavy duties and end up annoying a lot of people.
There are many HR or HRD managers today in India and other Asian nations. They can be found
anywhere in an organisation. These days, HR managers are considered in even tiny industries. Without
them, organisational life feels lacking. One HR manager is practically the standard in the IT industry
for every 50 IT specialists.
The author discovered that there were only 11 HR managers to supervise 300 IT personnel during
one of the audits of an IT organisation.
Each of them was paired with 30 IT specialists. According to their job descriptions, they are expected
to acquaint themselves with each new hire, mentor them, explain the specifics of their work, including
the performance evaluation and reward system, and maintain contact with them so that they may pro-
vide their best. HR managers were hired and placed as recent social work school graduates. They are the
ones who the company’s IT specialists despise the most, the audit found.
They were perceived as being difficult to work with, uncaring, always creating obstacles, ignorant of
the fundamentals of IT, inattentive to changes in the compensation structure, and overly focused on the
performance of new hires.
Reduced Roles
Although the number of HR managers has increased unevenly over the past few years, their level of
expertise has remained quite low. Along with their duties, their credibility has diminished, and in cer-
tain cases, they have evolved into power brokers. Some of the more competent HR managers have kept
their reputations intact by limiting their scope to training and organisational development. The people
in charge of conducting performance reviews have also endured a significant lot of negative press since
they were unable to win over the majority of line managers who believed that they were top achievers.
During the past ten years, as a result of economic Jobs in Industrial Relations (IR) have been eliminated
as a result of liberalisation.
As a result, the majority of businesses have transferred many of their IR managers to the HR depart-
ment to serve as HR managers. Thus, there is a new breed of HR managers trying to figure out how they
can undertake an HRD-oriented IR, with many of them being preoccupied with competency mapping,
job evaluation and categorization, reward systems management, performance appraisal, and training.
They weren’t adequately ready for this jump. They were saved by outsourcing, and they kept them-
selves occupied by looking for companies to which they could outsource surveys on pay, employee
happiness, organisational atmosphere, etc.
Findings from Surveys

Currently, there aren’t many scientific studies on HRD managers. The author has participated in the
HRD audit of numerous businesses. The following descriptions of the scenario are derived from some
of India’s top industries.
We looked at one of the organisations, which has over 16 HRD employees. The company’s HRD
department is distinct from the 30-plus employee personnel administration and industrial relations
departments. The following profile was discovered among the 16 HRD employees who were examined:

Approximately one-third of them are over 50 years old, with a 44-year-old average age. Consider
Notes
the type of credentials they had 25 years ago, before HRD existed. None of them possessed any HRD-
related professional credentials. Four of them had training in training and development, and two of them
had degrees in human management. They had the combined experience listed in the table.
In total, they have participated in 171 training sessions over the past five years, totalling around 556
man days of instruction. After joining the company, some of them skipped several programmes. Only
45 of the 556 man-days of training were devoted to HRD-related topics. They were only found to be
members of three relevant professional HRD bodies.
However, the line managers of this organisation thought that the top management places a high value
on the HRD function. This was given a very high rating by 66%. The corporate personnel function was
run by a total of 11 employees in another examination of a competently managed business. Four senior
general managers and deputy general managers were among them.
Less than 29% of the chief of personnel’s time was reportedly spent on HRD-related tasks. Only
two of them had HR-related professional credentials. They were only judged to have a passable level of
expertise in performance management.
This is blatant evidence of the HRD function’s egregious neglect. The nature of HR and some typical
areas where HRD managers fall short are well illustrated by this case study.
1. How do we go about in this situation if you are asked to advise
Let’s discuss
1. Examine the sentence, “Job evaluation job holder,” and describe the purpose of job
determines the merit of the job and not of the evaluation.
Case Study
Sweetwater Match
Robin Welch, a computer programmer at the sweet maker company’s first annual mixed –doubles
tennis tournament. He and his lady friend, Gloria Kovac, who works as an accountant in the
company’s finance department, have become accomplished tennis player. They felt that they
have a chance to win it all. Because of the growing interest in tennis by a large proportion of the
firm’s employees and their increased productivity at work’ the company arranged the tournament
to be played on Friday. This was declared as tennis holiday. By the company founder and the
president Robert sweet water. Gloria and robin advanced to the tournament finals. Leading in the
third and decisive set’ robin tripped going back to play an opponent’s lab shot. He twisted his ankle
badly. Despite this injury ‘robin and Gloria went on to win the game and the tournament. However,
the ankle became worse and he was confined to bed. X-rays showed a hairline fracture. Robin
had to miss four days of work for medical attention. Company sick leave policy provides for only
two days per month. Under state law, workers compensation provides payments if the worker is
“functioning within the scope of employment”.
Problem
If Robin files for workers compensation, what are the points for and against allowing his claim?
Are there any alternative possibilities for compensation?

1. You are working in HR as compensation the basis of work load and productivity. Give
management expert. You are told to revise a blue print of the process.
the entire pay structure of the organization on

46 Chapter 3
3-1. The purpose of job evaluation is to determine (c) Job analysis

(a) Worth of a job in relation to other jobs (d) Any of the above
(b) time duration of a job 3-4. The __________ provides the essential information
(c) Expenses incurred to make a jo on which each job is evaluation
(d) None of the above (a) Job ranking
3-2. Job Evaluation tries to make a systematic comparison (b) Job enrichment
between (c) Job description
(a) Workers (d) Job enlargement
(b) jobs 3-5. A ______________ is a written record of the duties,
(c) Machines responsibilities and conditions of the job
(d) Departments (a) Job ranking
3-3. Basis of Job Evaluation is (b) Job enrichment
(a) Job Design (c) Job description
(b) Job ranking (d) Job enlargement
Answer Keys:
3-1. (a) 3-2. (b) 3-3. (c) 3-4. (c) 3-5. (c)

chapter 4
Designing Skill, Knowledge &

Competency based Pay
Learning Objectives
To understand pay based competency Trends in broadbanding
Plan options for compensation for skills, knowledge, and Understanding market rate analysis
competencies Challenges in defining market rate analysis
Strategic competencies-based plans Market rate analysis process
The evolution of broadbanding
In many organizations, employees perform tasks which are not theirs but of their counterparts who
may be in the same vertical at higher or lower positions. ABC Infotech was a BPO based in Chennai
employing nearly 3000 executives. One of the issues being faced during appraisal was that most of the
employees in their self-appraisal justified the reasons for salary hike based on the tasks they performed
which do not match their profile. It was observed that many employees working at senior positions
performed tasks which were not expected from them. For example, General Manager - Recruitment’s
job was to review the recruitment policies of the company with its competitors and at times, conduct
interviews for candidates applying for senior positions. On the other hand, it was observed that GM was
performing the job of shortlisting the candidates and conducting written tests and group discussions.
Why does such an issue arise and how can the company overcome it? If competency-based pay and
reward system is introduced, will it overcome this lacuna? If so, design organization structure on that
basis.
In contrast to traditional job-based compensation systems, compensation systems that pay for skills,
knowledge, and competencies (SKCs) employ a different logic. Job-based compensation schemes
reward employees for the work they are doing at any given time. Systems that reward competencies,
knowledge, and skills, on the other hand, range of competencies of an employee. A formal certifica-
tion that the employee has gained SKCs is often followed by remuneration. In contrast, a change in
the employee’s job, not a demonstration of skill, is what causes a change in job-based pay. In the most
extreme case, if an individual switches tasks momentarily throughout the workday, their job-based
remuneration level may also change.
Pay for SKC programmes, by definition, do not directly reward performance. Instead, these
programmes aim to provide workers the SKCs they need to perform better. Starting points for developing
an SKC compensation scheme include team-level position descriptions, organizational-level core
competencies (which make actions connected with the organization’s fundamental values apparent),
and, ultimately, individual-level SKCs (see Figure 11.1).
M04 Compensation and Benefits 50296 CH04.indd 47 18/01/23 12:10 AM

48 Chapter 4
Plans that reward knowledge, skills, and competences are now very popular. 56 percent of businesses
Notes
utilise compensation for knowledge or ability, according to the Center for Effective Organizations’ sixth
triennial assessment of human resource practises in Fortune 1000 companies, which was published in
2002. This number has been largely stable since 1993. 1 However, these plans typically only cover a
small portion of the workforce. Only 7% of Fortune 1000 companies offered these plans to more than
50% of their staff. Another poll, performed in 2003 by Mercer Human Resource Consulting 2, revealed
that 15% of the organisations utilised competency-based pay and that 12% were exploring it. In contrast,
17% of the companies used skill-based compensation and 9% were contemplating it. The number of
businesses exploring adoption may indicate a rise in the use of these programmes in the future.
Pay for talents, knowledge, and competences is currently used on a global scale. According to a 2007
Towers Perrin study3 of more than 600 managers across 21 countries, wage increases for executives
are based on competencies in 27% of cases, managers and professionals in 36% of cases, and non-
management employees in 28% of cases.
FIGURE 4.1 Types of skills, knowledge, and competencies
Strategic Core
Competencies
Role Descriptions
Employee Skills, Knowledge,

and Competencies
Frthermore, in 15% of organisations, for managers and professionals, skill-based increases were made
for executives, while in 9% of organisations, skill-based increases were made for nonmanagers. Even in
the public sector, skill-based pay programmes are rather widespread. In 2007, 22 percent of the public
sector organisations polled by the International Public Management Association for Human Resources
utilised skill-based pay.
The research that is currently available suggests that these approaches typically have success. These
programmes consistently receive very positive feedback from their customers. For instance, a study of
97 skill-based pay plans conducted by the American Compensation Association revealed that two-thirds
to three-quarters of these plans were regarded as successful on a variety of outcome metrics, including
greater workforce flexibility, decreased staffing, and productivity. 5 According to a thorough case study,
skill-based pay in a manufacturing environment led to higher productivity, a cheaper cost of labour per
unit, and better quality outcomes.
Two significant difficulties relating to these proposals will be covered in this chapter. We will first
look at several plan kinds and how they are used. Second, we’ll think about how to develop these plans
while taking into account the infrastructure that will be required to support them.
Many plan options for compensation for skills, knowledge,

and competencies
Plans covered in this chapter go by numerous names and are frequently used for various employee
categories. However, they all have in common that the person is paid for their repertoire of abilities

Designing Skill, Knowledge & Competency based Pay 49
rather than for the specific task they are now working on. The main categories of skill-, knowledge-, and
Notes
competency-based pay systems are discussed in this section, along with the circumstances under which
they seem to function most effectively.
Pay Based on Skills

Incentives for cross-skilling among nonexempt employees led to the development of skill-based remu-
neration. These programmes may also be known by the names knowledge-based pay, pay for skills, or
pay for applied skills in different organisations. We can trace the current approach to high-involvement
manufacturing facilities that Procter & Gamble established in the 1960s, despite the fact that some
variations of this technique date back to antiquity. To encourage employees to learn the variety of jobs
required to support self-managed teams and business involvement, line managers created skill-based
pay plans. The skill-based compensation schemes are much more tightly aligned with the specific activi-
ties that employees carry out than the other types of pay for SKCs. The traditional skill-based pay plan
that is still widely used today has traits with the original Procter & Gamble plans. The following attri-
butes define the traditional skill-based pay structure.
Compensation strategy—the traditional system consists only of base salary, without any bonuses or
other additional compensation.
Design methodology: The traditional system is based on a fairly thorough examination and cataloguing
of all the abilities required to carry out the organization’s tasks. Employees earn base pay increases for
mastering the skill blocks that were created from the talents found through this analysis, which represent
compensable units of skill. Management establishes training systems to enable employees to learn new
skill blocks and develops evaluation methods to determine whether employees have learned new skill
blocks.
Classic plans are most frequently used in manufacturing or service environments that resemble man-
ufacturing, such as the back offices of the insurance and finance industries. The phrase “skill-based
pay” is still frequently used to describe nonexempt benefit programmes for workers at the bottom of the
organisational ladder.
Implicit assumptions: Traditional skill-based pay systems demand a high initial outlay. In a big
plant or equivalent unit, the entire design process typically takes 6 to 18 months to complete. These
strategies rely on the organisation being stable enough to see a return on the investment in the design
process.
Compared to other types of plans that pay for SKCs, these skill-based compensation plans have
far more experience. Despite some well-publicized failures, the study reveals that the vast majority of
these initiatives are effective at promoting multiskilling and boosting organisational performance (such
as one at Motorola). A very consistent finding in the research is that these plans function best and are
more frequently observed in environments that value significant employee involvement, including par-
ticipation by employees in the creation and management of the compensation plan. A high involvement
system is more likely than a traditional bureaucratic management system to take full advantage of the
new abilities that employees acquire, in addition to the usual benefits of employee involvement in the
process of organisational change. A system that increases skills without utilising the ability of new hires
just increases costs without generating any compensating gains.
Plans for Competency Pay

David McClelland, a psychologist, and others’ research on the value of abilities in assessing individual
job performance led to the development of competency pay plans. Competencies, which include knowl-
edge, skills, and behaviours, are observable personal traits of the person that enable performance. In
this tradition, managers and professionals who work in exempt positions have received the majority
of attention. The competencies rewarded in these systems typically are more abstract and less tightly
related to the specific responsibilities of individuals on the plan, in keeping with the nature of the job
of these populations. Values, self-image (such as confidence), motivational patterns, cognitive abilities

50 Chapter 4
(such as analytical thinking), and even personality traits have all been employed as competences that
Notes
are rewarded in pay plans.
The definition of a competency and the differences between the various types of competencies are
frequently covered in-depth in writings about competency pay. Every author often uses their own clas-
sification system. It is customary to draw a distinction between competences that are required for work
performance but do not provide competitive advantage and those that are harder to attain and more
strategic in character but offer the possibility of competitive advantage. The latter are referred to as
strategic or differentiating competencies, whereas the former are referred to as requisite or threshold
competencies, for example.
The following are typical traits of competency pay systems.
Compensation strategy: The usual competency pay system only includes base pay; there are no
bonuses or other add-ons.
The most popular process for establishing competency pay systems involves studying a group of
performers who are assessed to be superior on given performance criteria and gathering a lot of data
to find out what makes the best performers different from average or poor performers. To find these
disparities, a wide range of assessments, interviews, observations, and ratings may be used. The dif-
ferentiators are organised into competencies, which are connected to systems of human resources, such
as remuneration.
The phrase competency pay is most frequently used to describe systems that cover managers, super-
visors, professionals (including human resource professionals), and technical workers in common
organisational contexts. These systems are frequently used by numerous employees in various depart-
ments and locations throughout a firm. When this happens, it’s possible that the system isn’t very tightly
related to the particular task that covered employees do.
Implicit assumptions: Since competency pay plans entail extensive design and installation work, they
are subject to the same organisational stability requirements as skill-based pay plans in order to realise
a return on the plan’s initial investment. These plans also make a strong premise that if more employees
adopt the attitudes and behaviours of top-performing individuals, overall performance will improve.
Although some evidence implies that organisational success is not simply the sum of individual perfor-
mance, this assumption is rarely verified. The issue is that while group behaviours (such establishing an
effective performance plan and coordinating effort) may be necessary to produce strong organisational
performance, they are not necessary to provide the superior individual performance that the competency
modelling approach captures.
There is some proof that these kinds of programmes can be effective. For instance, the use of rewards
to promote key abilities was linked to success, according to a Hewitt study8 of model companies for
executive development. Hewitt discovered that “Top 20” companies employed base pay, annual incen-
tive pay, and long-term incentives twice as frequently as other companies to reward leadership skills; 60
percent or more of Top 20 companies used each of these compensation methods.
The effectiveness of competency pay systems in boosting organisational performance is not well
studied. Too few competency pay cases were observed in a 1996 study9 to make inferences regarding
these schemes’ organisational impacts. Although many validation studies that employ the industrial
psychology paradigm are encouraging, they typically measure success against individual rather than
organisational performance.
The possibility of legal trouble for inadequately designed and approved competency pay systems
that can unlawfully discriminate against minorities and other protected groups is a specific worry with
competency pay programmes. This is a particular issue with personality-based competences and other
abstract competencies that are unrelated to the real activity. These might not pass the “face valid” crite-
ria and might be subject to legal disputes.
Strategic Competencies-Based Plans

The third strategy is in its infancy. Due to the 1990s’ increased interest in “core competences” in busi-
ness strategy literature and among senior executives, it has generated a lot of discussion. 10 According
to the core competencies approach, superiority in certain markets or product categories is not as reliable
or potent a source of competitive advantage as a small collection of organisational and technological

skill complexes. As products change quickly, market leadership is ephemeral, but competencies endure.
Notes
For instance, underlying sources of competitive advantage that persist despite rapidly shifting mar-
kets and products include Sony’s core competencies in miniaturization and precision manufacturing,
Toyota’s expertise in lean manufacturing, and WalMart’s core competencies in distribution, marketing,
and information technology.
Human resource managers and consultants have introduced competency-based pay schemes in many
firms by taking advantage of executives’ interest in core competencies. It’s crucial to understand, how-
ever, that the “core competences” described in the strategy literature are unrelated to those included in
many pay schemes. Finding the few “core competences” that corporate strategists envision requires
substantial investigation and work. According to the literature on strategy management, a corporation
gains a sustainable competitive advantage when it creates resources that are valued, uncommon, and
challenging to duplicate. In contrast, “core” in the competency pay literature frequently refers to some-
thing fundamental or necessary, which is different from the connotation in the strategy literature. Worse
yet, executives and strategists who are interested in finding the distinct abilities that give the company
a competitive advantage may undermine the plan by merely choosing competencies from a consultant’s
menu of prepackaged selections, a practise that is all too prevalent.
The emphasis on strategic capabilities has many advantages, one of which is that it promotes futuris-
tic thinking. In contrast, the competency pay approach’s emphasis on figuring out why certain workers
perform better than others is fundamentally backward-looking because it finds the skills that have led
to success in the past for some individuals. Reinforcing long-established profitable behaviours can be a
formula for catastrophe for businesses that are poised to undergo significant change in response to mar-
ket conditions. At the start of the PC and telecommunications revolutions in 1980, think about IBM or
AT&T. Which system—one that looks forward or backward—would have been more beneficial to them
if they had paid for competencies? Many businesses think that their current predicament is comparable
to what IBM and AT&T were going through 20 years ago.
There aren’t many examples of pay structures that reward strategic competitiveness. In contrast to
corporate strategy, how this methodology might be applied to human resource systems has received
little attention from business leaders and authors. However, certain aspects of this strategy appear
obvious.
Base pay compensation systems are the most common form of compensation.
Design approach—Instead of developing from employees’ actual work, the design methodology
is “top down,” emerging from the top management group’s recognition of the corporation’s funda-
mental capabilities. This enables the identification and rewarding of future-focused skills that have
not previously received much attention from the organisation. The remuneration of managers and
professionals appears to be the most likely to be impacted by these programmes, despite the scant
experience to far.
Implicit assumptions—One crucial assumption is that a successful pay plan can be built on very
abstract strategic competencies that may not be familiar to the majority of employees. This puts a lot
of pressure on management to defend their position and convince workers of the value of the strategic
competency strategy.
The first author has undertaken an unpublished analysis of a strategy that complies with the concept of
a strategic competency. A large food company’s plan included about 1000 managers from various levels
and functions. All were awarded for mastering just four competencies that were applicable to all those
included by the strategy by moving within a broad band. The firm’s business plan and the competen-
cies were tightly related. For instance, one competency aided the company’s then-new Total Quality
Management strategy by supporting the customer focus. According to the survey, the regions of the
organisation that were most successful in adopting and sustaining the competency pay plan and excelled
on objective performance metrics (productivity, cost, and quality).
SKC PERKS
Three different basic pay systems have been taken into consideration so far to incentivise the acquisition
of SKCs. Base pay arrangements are beneficial in general. In contrast to the casual adoption of a new
pay plan, the adoption of a base pay system tends to demand a relatively thorough consideration

52 Chapter 4
of necessary SKCs. Additionally, base pay plans are not easily eliminated at will. Finally, base pay
Notes
increases are frequently seen as a positive and worthwhile reward by employees. One-time bonuses,
however, are a frequently underutilised alternative to base pay increases and they are highly appropriate
in two circumstances.
First, bonuses might maintain a market-competitive wage position. It may not be possible for an
existing company to offer further base wage increases without losing its competitive edge when switch-
ing to a pay for skills plan if base salaries are already above market. One-time bonuses may seem an
alluring option, but it is difficult to see how existing factories in the auto sector, for instance, can offer
considerable base wage incentives for skill acquisition. This is so because the recurrent annuity cost of
base wage increases does not apply to bonuses. Second, when the sorts and mixture of skills, knowl-
edge, and competences that a business needs to succeed are changing quickly, bonuses are alluring. For
instance, the competitive environment in high technology changes so often that long-term planning is
challenging. The organisation might not have the luxury of dedicating a year or two to developing a
competency pay plan because of the velocity of technological obsolescence. Even before the design was
finished, the plan can be largely out of date. Given how rapidly they may be created and implemented,
bonuses are a desirable alternative. Plans of this nature are flexible. For instance, each year, a fresh set
of bonuses can be adopted modifying as economic circumstances do.
Bonuses have additional benefits as well as issues. They can focus on a small number of competen-
cies without disrupting the base pay structure. Compared to a basic pay system, administrative support
is significantly less. Because there is no annuity element, shoddy or even bad designs in any one year
have less detrimental effects. Bonuses, on the other hand, might not be as effective at motivating person-
nel. Additionally, these programmes may be more challenging to maintain over time because manage-
ment frequently feels better at ease discontinuing bonus programmes than base pay programmes. If the
potential for a quickly executed plan becomes an excuse for neglecting to support it with an adequate
communications and training infrastructure, the plan may lack credibility with employees.
SKC bonus schemes have been implemented by organisations like Monsanto and Rockwell, but
little research has been done on them. The anecdotal evidence is very positive. A corporation with a
large engineering workforce put thousands of workers on a competency pay incentive system. Learning
agreements were negotiated by all exempt personnel with their
Supervisors participate in assessment cycles that are six months apart from those for performance
reviews. Employees might receive a $750 incentive under the proposal if they completed the agreed-upon
learning contract. At a relatively low cost in bonuses, the company saw a five-fold rise in the amount of
development activities. Technical staff ceased enrolling in classes that weren’t directly related to their
jobs, which resulted in a windfall for the tuition reimbursement budget (and their learning contracts).
The Design Surface

Managers frequently exhibit an irresistible impulse to dive right into the specifics of skill block design
when creating plans that pay for skills, knowledge, and competencies. The system’s alignment with
the organisational environment is significantly more crucial than any decision made about the design
of specific skill blocks, according to study and experience. The system must be tightly wedded to the
business context, in particular.
Business-based goals, such as skill-based pay plans, can be particularly beneficial in enhancing
employee flexibility, promoting training, and bolstering self-management abilities. The suggested pay
plan’s ability to reinforce essential behavioural patterns, as well as how the intended advantages will be
achieved, must all be considered by designers. How flexible the company is able to raise typical salaries
levels is a crucial business factor to take into account because it will have an impact on the availability
of motivating rewards for acquiring new skills, knowledge, and competences.
Plans that reward knowledge, expertise, and competency can either support or undermine organisa-
tional structure, depending on the technology used. For instance, cross-skilling inside teams rather than
cross-skilling across the board may be more appropriate if the firm is promoting the usage of employee
teams. Production technology used by the company is frequently a significant barrier, and in certain
situations, it may need to be changed to accommodate training requirements. Instead of referring ques-
tions to various departments, modern technology can, for instance, give fully trained customer service
professionals all the information they need to effectively serve a consumer. In production settings vs

service settings, implementation is typically simpler. In sophisticated, interconnected production envi-

Notes
ronments requiring a high level of human skill, skill-based remuneration seems to perform best.
In contrast to other pay systems, pay for SKCs does not directly reward performance, making it fall
short of being a full compensation scheme. As a result, it must be compatible with the organization’s
overall compensation structure and performance incentives. Thankfully, compensation for SKCs is fre-
quently very complementary to
Organizational Culture
As we have indicated, organizations that adopt pay for SKCs should have or be moving to an open, par-
ticipative culture. This is one of the strongest predictors of success, in part because cultures with such
characteristics are far more likely to take advantage of the new capabilities employees develop through
the plan. A hierarchical culture may make it difficult to take advantage of the employee flexibility and
self-management capability that pay for SKCs encourages.
Institutional Factors
The economic and social context has a great deal to do with the receptivity to payfor SKCs and its pros-
pects for success. For example, after unions in France lost momentum and wage increases tied to infla-
tion nearly disappeared, institutional pressure has promoted the use of pay based on the person rather
than the job. Towards the end of 1990s, about one-fourth of top French companies used some form of
skill-based pay.11 In Britain, competence-related pay is not replacing traditional pay approaches but fus-
ing with them. Such a combination helps to address both the measurement concerns of trade unionists
and others and the results-focused orientation of line managers.
The Design of Compensable Skills, Knowledge, and Competencies

The design of pay for skills, knowledge and competencies must be based on a holistic human resource
management approach, which means that it is closely tied in with training, recruitment and other human
resource management systems in the organization. Whatever form the pay system takes, it will be consti-
tuted of certain units ofskills, knowledge, and competency that the organization is willing to compensate.
We address three major issues that must be addressed in the design of compensable units: compensation
management, training and development, and assessment.
Compensation Management
First, the architecture of the overall compensation system requires attention. The nature of the SKC
blocks will be determined primarily by the type of plan being implemented. A number of questions arise
after the basic blocks are defined. Howwill SKC blocks or units be ordered, indicating career paths, and
minimum and maximum advancement opportunities? Decisions about these matters will give employ-
ees messages about the sequencing necessary to advance and to remain an employee in good standing.
In general, it is best to err on the side of conservatismin these decisions early in the history of the plan.
Employees rarely complain if they end up with more career opportunities, easier minimum require-
ments, and greater maximum earning potential later, but the opposite condition feels like a “take-away”
if the plan is modified because it was overly generous.
An important issue concerns the pricing of plans that pay for skills, knowledge, and competencies.
Often, it is impossible to price each competency or skill block to the market, in the way that each job
in a job-based system can be priced. Rather, the typical procedure is to price the overall system rather
than each element of it. The entry rate is set at the level just high enough to get talented peopleto join the
organization. The top rate is set based on market conditions as well. Forexample, in skill-based pay plans
for semi-skilled factory workers, the top end of the range may be placed appropriately near the bottom
of the skilled worker classification. Finally, in some cases an average rate pay rate is also set to market,
based on labor market or industry benchmarks. Within these anchor points, skill blocks or competen-
cies are assigned value based on their relative degree of difficulty. To take a simple example, assume
that the entry rate is $10 per hour and thetop rate is $20 per hour, both determined by the market. If there
are 10 skill blocks of equal difficulty (as indicated by learning time or some other metric), each block an
employee masters might have a value of $1 per hour.

54 Chapter 4
Employees need to have some idea of how long it will take to master competencies or skill blocks.
Notes
The amount of time required to master a block or competency can vary tremendously, from a few
months to several years. In general, it is desirable to break very complex blocks or competencies into
several pieces so at least annual advancement is possible on the system. If the blocks or competencies
require only a few weeks to master, on the other hand, it is better to group them into a longer and more
meaningful grouping or reconsider whether the plan really fits the skill requirements of the organization.
The organization does not want too many blocks or competencies because this makes the plan difficult
to administer and communicate, and because it sets up the expectation that employees will receive com-
pensation every time they learn anything.
Training and Development

Unless employees have the opportunity to develop the skills and competencies that make up the pay sys-
tem, they will be frustrated by the incentives they have no opportunity to earn. Experience and research
clearly indicate that demand for training greatly increases once employee pay is attached to mastery of
skills and competencies.
It is desirable to create a solid training plan in advance of the installation of the pay system. The start-
ing point of the plan is the assessment of the training required to master each skill block or competency
in the system, together with an estimate of the likely speed and path of progression of employees through
the system. A menu of training courses relevant to the system, a specific schedule of offerings, and the
assignment of instructors (which may be peers, vendors, managers, or trainers) are part of the plan. An
adequate training budget is essential.
Job rotation is a critical part of the acquisition of many skills and competencies, especially in skill-
based pay systems. No classroom training can take the place of the experiences on the job that are
needed for mastery of most skills included in the typical system. Rotation issues can become very
contentious, and it is best to anticipate the problems and plan for rotation ahead of time. Many issues
need to be determined. Who will decide when to rotate, and according to what timetable? How will the
organization balance production needs with employeedesires for training? How will it handle slow learn-
ers and those who refuse to rotate, which can lock up the whole rotation system? Competency systems
for exempt employees may require new assignments rather than something analogous to job rotation.
However, the same types of issues are relevant.
Assessment of SKC Acquisition

Any system requires some way of determining whether an employee has mastered skill blocks or com-
petencies. The methods and procedures for assessment can be quite contentious if they are not thought
through well. The assessment step has nocounterpart in job-based pay systems. Unless it is done well in
SKC pay plans, however, the plan will deteriorate into a de facto time in grade system, and the
organization will receive no value for the increased wages provided underthe system.
Part of the design of each skill block or competency is the specification of the standards for deter-
mining how we can verify that an employee has mastered it. In skill-based pay plans for nonexempt
employees, the process can be fairly elaborate, involving measurement of on-the-job performance, test-
ing, and other methods. In general, management should rely on work samples whenever possible. Work
samples are face valid, meaning they have natural credibility with employees. However, work samples
may need to be supplemented with oral testing, written testing, or live demonstrations, if it is impor-
tant to know how the employee would respond to rare or hazardous conditions that are not likely to be
encountered during the work sample of a few weeks or months.
In skill-based pay systems, certification may become one of the most time-consuming supervisory
duties. Thus, it is important to think through the scheduling of certifications and the procedures for han-
dling those who fail the tests. For example, how soon will they be allowed to retest? Is there any queuing
of certification opportunities in the work unit?
Periodic recertification, perhaps annually, seems to be an increasing trend in skill-based systems. This
insures that employees maintain the skills for which theyreceive compensation. Without recertifications,
the pay plan can result in increased wages that are attached to skills long lost through disuse.
Competency pay plans tend to incorporate competency assessments intothe performance appraisal
system. By their nature, most competencies are demonstrated on the job over a long period of time.

Increasingly, assessments have a “360 degree” component, with reviews by peers, subordinates,
Notes
supervisors, and customers who have relevant knowledge of the employee’s demonstrated competency.
THE SURVIVAL OF PAY FOR SKCS

Some recent research has explored the reasons why plans paying for skills, knowledge, and competen-
cies not only are successful, but also what explains their survival or termination. The most detailed
study examined longitudinal results for 59 plans. It found that the survival of these plans was most
strongly associated with organizational characteristics (plans manufacturing was more likely to survive,
and a business strategy based on innovation was negatively related to survival). Employee involvement
in the design and certain plan characteristics (focus on breadth of skill, number of skill blocks) also
predicted survival.
A study of five Finnish cases found that some plans failed due to poor skill definitions and compen-
sation assessment that employees considered unfair. Good training opportunities and clarity of learning
goals were critical to the success and survival of these plans.
Market Rate Analysis

The creation and maintenance of a competitive pay and benefits position that enables firms to draw in and
keep top talent is one of the essential components of an effective reward management strategy. This is
only possible if market rate analysis is used to routinely examine data on pay levels in the external market.
Beginning with definitions of market rate analysis and its objectives The idea of a market rate is then
discussed, which is not at all as simple as it first appears to be. The sources of data and the procedures
for gathering it are covered in the chapter’s following sections. A overview of techniques for presenting
and understanding data comes at the chapter’s conclusion.
Defining Market Rate Analysis

The process of gathering and analysing information on the pay and benefits offered for equivalent
occupations in other firms, as well as the rates at which pay is rising elsewhere, is known as market rate
analysis. Surveys are used to do it, reviewing public data and/or gathering data from multiple sources.
The Objective Of Market Rate Analysis

The objectives of market analysis include:
Obtaining current information on pay and benefit levels for a range of positions inside the company
that is relevant, accurate, and representative;
Based on this data, determine the market (going) rate or market range for a position, taking into
consideration the nature and scope of the role as well as factors such firm size, industry, and location;
Maintain a competitive pay and benefit position relative to the market, allowing the company to
draw in and keep talent of the calibre it requires;
Inform judgments about pay scales or brackets for pay structure grades, as well as pay levels for
specific jobs;
Offer direction on any adjustments to general or individual pay levels that may be necessary for
pay review decisions;
Support a market pricing approach to job valuation; this is crucial if the company chooses that its
pay levels should be “market-driven”;
Provide direction on internal differences using the differences in the external labour market.
Challenges In Defining The Market Rate

Finding out about “market rates,” or the pay rates or “going rates” paid by employers in local or national
labour markets for specific job categories, is the main goal of the market analysis method. The idea of a
market rate, however, is tricky. It is not as easy as it may seem, and determining the going rate for a job
may require more judgement than knowledge.

56 Chapter 4
It is common for far too many managers, senior executives, and even many employees to think that
Notes
it is not only conceivable but also rather simple to determine the “right” wage for any given job, in any
sector, in any location, for any age or experience level, preferably to the closest pound. But according to
a report from the online survey database CubikSurvey. According to Com (1), precise market rate data
may be hard to get by:
The belief is that reward specialists, through the surveys they offer, may wave a magic wand and
produce the one and only correct response. This somewhat underplays the intricacy of compensation-
related issues. Even within the same sector and region, it is uncommon for two businesses to be man-
aged in precisely the same way. various corporate values
The compensation provided to persons in ostensibly comparable roles is affected by perceptions of
how each job contributes to the efficiency of the company, as well as by the experience and performance
of the people holding those positions.
These variations ultimately show up in the market. Rate options are available at all times. Despite
what some surveyors claim, no study can determine the exact “correct” rate of compensation for each
position or range of positions. This is due to the fact that various organisations have varying poli-
cies regarding what they must pay. According to their skill level, aptitude, and degree of uniqueness,
employees effectively have their own market rate. This individual “market worth” varies greatly and
frequently depends more on perception than it does on objective criteria. The goal is to compare like
with like when comparing internal and external rates for employment. However, finding exact matches
between employment within the firm and jobs elsewhere may be challenging or even impossible. There
might not be any “like” employment. The difference between the greatest and lowest levels of income
for a job as determined by a single survey can be as much as 50% or more because the comparisons may
be approximations. Depending on the sample of businesses covered, the calibre of matching, and the
time of the survey, different surveys will yield different results.
A procedure based on intuition, judgement, and compromise is used to translate salary market data
into competitive pay levels for individuals or into a workable business pay structure. It entails balanc-
ing the conflicting advantages of the various data sources and determining what might be referred to
as a “derived market rate.” However, the conclusions will be more accurate if they are supported by a
methodical study of accurate and trustworthy data either from respectable published surveys or care-
fully designed surveys carried out by the organisation.
Market rate data’s validity and reliability

Based on three things, this
Job matching: the degree to which effective job matching has occurred.
Sample Frame: The degree to which the sample of businesses from which the data were gathered is
entirely representative of the businesses with which comparisons must be made in terms of the industry,
technology or company type, size, and location.
Timing: It refers to how current or reliably updateable the information is. The data in published surveys,
which many people rely on, can quickly become outdated due to their very nature. In fact, surveys are
outdated as soon as they are published since salary levels may have changed and persons may have
changed. Have either moved in or out since the survey was conducted. Surveys that attempt to have
as little time as possible between data collection and the publication of results are likely to be more
useful than those with longer lead times, even if it is impossible to totally avoid this since data must
be gathered and evaluated. Though they can be made, estimates of likely changes since the survey are
largely conjecture.
Job Matching
One of the main reasons market analysis’ data is inaccurate is because of poor job matching. The goal
is to match internal and external jobs (the comparators) as closely as possible so that like can be com-
pared with like. Avoiding simplistic and deceptive comparisons based solely on job titles or nebulous
job content descriptions is crucial. First, it’s important to make sure that the company and the sorts of
companies utilised as comparators are broadly matched in terms of sector, industry classification, size,
and location.

The following step is to match employment within the relevant organisations. The several approaches
Notes
are listed in order of increasing accuracy:
Job title: This may not be accurate. Job titles by themselves do not indicate the scope of responsibilities
or level of authority, and they are occasionally used to confer additional status on employees or clients
that has nothing to do with the actual amount of work performed.
Brief description of duties and level or zone of responsibility: A two- or three-line summary of duties
and an indication of levels of responsibility in descending order are typically the only information
included in national surveys’ job-matching definitions. In the latter, each level or zone of a hierarchy is
frequently defined in a single line. This method lowers significant gaps by offering some assistance on
job matching, but it still leaves a lot of room for discretion and can only offer generalised comparisons.
Capsule job descriptions: They are widely used in club or specialised “bespoke” surveys to define the
key obligations and responsibilities in between 100 and 200 words. Modifying statements that point
out where duties are above or below the norm can be used to further refine comparisons. As long as
they are based on a detailed examination of real tasks and contain modifying statements, capsule job
descriptions significantly improve the accuracy of comparisons. However, even when modifiers are
employed, comparisons of levels of responsibility may not always be accurate due to their inability to
handle specialised tasks.
Full role profiles: When comparing positions inside various organisations, comprehensive role profiles,
including a factor analysis of the levels of responsibility involved, may be employed in special surveys.
On a one-for-one basis, they can be more accurate, but their use is constrained due to the time and labour
required to prepare them. Another drawback is that the comparator organisations could not have their
own complete position profiles available for comparison or may not be willing to make them so.
Job Evaluation A job evaluation can be used to support a brief work description or a role profile and
provide a more precise indicator of the relative size of the job. There needs to be a standardised evalua-
tion process. Accordingly, market intelligence sources in the UK are developed by consultants like Hay
and Watson Wyatt. This strategy will improve comparison accuracy even more, but the level of accuracy
will rely on how well the job appraisal procedure was done.
THE MARKET Rate Analysis Process

The subsequent steps, which are detailed in the remaining sections of this chapter, make up the market
rate analysis process:
1. Make the decision that market rate information must be gathered through surveys for a certain
reason or objectives, such as those mentioned above.
2. Select the positions for which market rate information will be gathered.
3. Determine potential sources of market rate information and pick the best ones.
4. Gather data about the jobs that will be surveyed.
5. Interpret and analyse the data from the different sources.
6. Include actionable recommendations with the analysis’s findings.
Initial DECISION TO CONDUCT MARKET RATE ANALYSIS

The initial choice is made after evaluating the need for a market survey and defining its goals, such as
ensuring pay is competitive, offering advice on market pricing, assisting with the design of a pay struc-
ture, or addressing particular attraction and retention issues. It is necessary to assign responsibility for
carrying out the survey and to take the employment of experts into consideration.
SELECT BENCHMARK POSITIONS

The survey should aim to gather information on a representative sample of benchmark jobs that will be
used as a basis for market pricing or as advise on the creation of a pay structure (see Chapter 18). The

58 Chapter 4
jobs chosen should be ones for which market data is probably going to be accessible. The majority of
Notes
tasks are usually distinct to the firm and impossible to compare. It is crucial to assess where these jobs
should be located within the structure when undertaking a market pricing exercise by comparing them
to the benchmark positions. If accessible, a point-factor evaluation scheme might improve the accuracy
of these comparisons.
SOURCES FOR OBTAINING MARKET DATA

The potential sources must be determined after it has been determined that market data are required. It is
advisable to choose multiple sources to guarantee that a range of information is gathered because there
are many sources available, all of variable quality. Primary sources include:
pay data online;
generic nationwide polls published in print;
broad local polls;
industry and sector studies;
professional polls;
databases for management consultants, including online services;
specialised surveys carried out by the organisation;
paying clubs;
journal-published data;
reputable sources;
recruiting firms and consultants;
analysis of hiring information;
advertisement for jobs.
Below is a description and evaluation of each of these sources.
Pay data online

Online pay data availability has significantly increased in recent years. Compared to paper publications
and searches, this is more expedient, less expensive, and frequently more current.
Facilities are frequently accessible. Survey results can be specifically adjusted to the needs of the
company rather than being ordered as pre-designed, standard analysis supplied in a static survey format.
Users can infer wage ranges for various employment roles and modify them for factors like industry,
region, and company size (turnover). They can select the market segments to be used, delve deeper,
examine the original data sources, and produce reports. Data entry is simpler. To complete the next sur-
vey, all that needs to be done is enter the organization’s data online. As an alternative, information from
the HR system can be retrieved and submitted offline using Excel files.
Published Surveys
You can purchase general published surveys from companies like Monks, Remuneration Economics
(PricewaterhouseCoopers), and Croner Reward. Market rate information is also made available to cli-
ents who use Hay Group’s job evaluation system, which matches survey respondents with jobs through
an uniform rating process.
The surveys include information on a wide range of vocations (sometimes limited to management
and professional positions), typically for the entire United Kingdom, and frequently broken down by
regions. They may be created as paper-based documents, but as was already said, electronic formats like
PDF documents or common computer spreadsheet presentations are progressively taking their place.
These formats can also be published on and downloaded from websites.
The data includes information on base salary, total earnings, and the availability of employee benefits
at a specific date. There may also be pay movements. The information is shown according to job title
and function. There is typically some indication of the employment level and maybe a brief outline of

typical duties. The information will generally be analysed in terms of location, industrial sector, and
Notes
organisation size (e.g., number of employees or sales turnover).
Expert providers perform general surveys that cover a wide range of pay scales in the national and
regional labour markets. Except for the Hay survey, however, their significance is diminished by the
issues with job matching. This challenge and variations in sampling account for why statistics on osten-
sibly similar employment may fluctuate greatly between surveys. Variations are also brought on by the
possibility that the surveys were carried out on various days.
General local surveys published

Some businesses, including locally based management consultants and recruitment firms, perform and
publish studies of the local labour market that cover administrative and professional positions in addi-
tion to office and physical labour.
Such surveys can be helpful in supplying pertinent data for the market where a firm does the major-
ity of its hiring. To achieve an appropriate degree of job matching, it is vital to make sure the survey
includes information from a sufficient number of firms (at least 20). It should also have been completed
professionally and with some care.
Industry surveys
Sector surveys can provide useful information on a sector, such as the electronics business, the insur-
ance industry, or the nonprofit sector, where pay levels and jobs may differ from those in other sectors.
Various organisations, including specialised wage survey companies, management consultants, employ-
ers, and trade associations, perform these. Many of the major companies that provide general surveys
also release specialised polls. They have the same drawbacks as any published poll, but their advantage
is that they give information about pertinent labour markets.
Occupational polls
Information on the remuneration of people in professions including accountants, HR professionals, IT
employees, sales staff, and office staff is available via occupational surveys undertaken by consultants or
professional institutes. They may be limited to salary in relation to age, qualifications, and membership
status rather than jobs, but they can provide useful information on overall levels of pay for professionals.
Databases used by management consultants

The most established management consulting firms, particularly those that focus on pay, maintain their
own database of salary ranges. Although matching may be challenging, they can offer important infor-
mation on average pay scales for managers and professional personnel.
Customized surveys
An organisation has the option of conducting its own unique survey or hiring management consultants
to do so. This study could be focused on the local labour market or it could be a national, regional, or
sector study. It could cover a variety of professions or concentrate on a few.
Such studies may be as complex as those carried out by the companies that produce general surveys,
or they may be rather straightforward. They benefit from being able to focus on the tasks that the com-
panies are most interested in. They can also ask businesses that compete on the same local or national
labour market for information. These businesses may be open to sharing information if they believe the
added value of the additional data they receive in exchange will outweigh the time and effort required
to respond to a survey. However, they do need a lot of work, and sometimes it might be difficult to per-
suade others to cooperate and deliver the information on schedule. The necessary actions are detailed
below:
1. Make a list of the involved companies. Making a list of the organisations that will participate is
the first stage in conducting a special pay survey. Those who are invited to participate should be
selected based on their sector, size, and type of employment compatibility. Estimates of the likeli-

60 Chapter 4
hood of the organisations deciding to join will also be used to determine the selection process. Of
Notes
course, it is better to start with entities and people the survey’s creator is already familiar with. The
companies chosen should ideally have HR or pay specialists on staff who can gather and deliver
the necessary information. A local market analysis is typically simpler to carry out since strong
networks are more likely to exist.
(a) Depending on the amount of time available and whether the survey will be conducted in-
person or via mail, the number of organisations invited will change. The best way to do this is
through personal visits, but these take time, and the participating organisations might prefer
to deal with a return swiftly rather than having to host a visitor. The more sources of informa-
tion available, the better. The objective should be to get at least 20 participants, though in a
niche field, it might be essential to settle for less
(b) A smaller amount. Experience has taught us that, unless the inviting company is lucky, at
least one-third of the invited companies will decline on the grounds that they do not disclose
pay data, that they will not benefit from participating, that they have already contributed to
enough surveys, or some combination of these three reasons. By taking a remarkably profes-
sional stance, the percentage of refusals can be reduced, but some are unavoidable and should
be taken into account while compiling the list of organisations.
2. Select the information that should be included with the invitation to participate, the data that
should be provided, and the format in which they should be made available. The requested
information will include base rates and wages for the specified jobs, as well as specifics on the pro-
vision of any necessary benefits. The format often asks for data on the median rate for certain jobs
as well as a measure of dispersion, such as the upper and lower quartile rates. To entice comparators
to take part, the survey’s structure should be as straightforward as possible. Figure 15.1 illustrates a
survey form that only collects information related to payments. To acquire information on benefits,
allowances, and terms and conditions such pension plans, life insurance, corporate cars, location
allowances, holidays, and work hours, additional columns could be added as needed. It is necessary
to define the terminology that are utilised, such as base rates, total earnings, median, and quartiles.
There should be short job descriptions available.
3. Approach comparators. It is best to deal with known contacts when approaching potential com-
parator organisations, but a direct approach must frequently be made out of the blue. There are
many benefits to approaching someone via email, possibly followed by a phone call. Email can
lead to the employment of electronic tools for data collection and analysis, which is far superior
to the conventional paper survey from the standpoints of both the participant and the survey’s cre-
ator. Three messages should be conveyed when asking a stranger to participate in a survey: 1) that
the survey is being conducted responsibly and will be done competently; 2) that the respondent
organisation will receive pertinent and useful information in return in the form of a summary of the
survey results; and 3) that they won’t be put through too much trouble. It should also be specified
by what date it is hoped that responses will be made available. It is recommended to limit the period
to three or four weeks because people often finish these documents at the last minute.
4. Collect, analyse and distribute data: Reminding respondents to provide the information may be
necessary. In case of emergency, an attempt may be made to gather the information over the phone.
A summary should be made anonymously available to participants once there is enough data.
Figure 4.2 Example of a pay and benefits survey form
Job title No. in job Base rates Rs Total earnings Rs
Lower Median Upper Lower Median Upper

quartile quartile quartile quartile

Pay clubs Notes

Members of pay clubs often communicate with one another about the salary and benefits offered for a
certain spectrum of occupations. The procedures followed in the production and analysis of the data, as
well as the structure of the capsule descriptions, are identical to those that are employed in the above-
mentioned special surveys. Such clubs have been established by employers in a particular industry, a
section of an industry, and in locales or industries in significant numbers. Their benefit is that more
precise task matching may be accomplished and the data is regularly obtained in a uniform format.
Pay clubs should have at least 10 members in order to ensure that a wide variety of information is
gathered. They may be established by a current network, whose members are already exchanging infor-
mation informally and who wish to gather comparative data in a more organised manner. A business
may choose to create a club if such a network is lacking.
Invite interested participants to a meeting so that decisions may be made about the jobs to be cov-
ered, the data to be gathered for those jobs, the creation of job summaries, the approach to analysis and
presentation, and the operation of the club. The initial survey and the creation of capsule job descrip-
tions may be handled by the originating company. The goal is to pique club members’ attention, though,
so that they will volunteer to do the survey alternately. They might consent to make a contribution
toward hiring a management consultant to carry it out.
Due to oversubscription, many active paid clubs will not welcome new members.
Published Journal Data

You may get the most recent corporate and national pay information from:
Incomes Data Services and the Employment Review’s Pay and Benefits Section, which keep track of
pay settlements and make agreement data available. There is additional information on pay structures
and trends in specific companies, but there is little to no data on the pay rates of particular jobs.
The government’s Annual Survey of Hours and Wages and Labour Force Survey, which detail earn-
ings levels by industry, occupation, region, age group, and number of hours worked. Although this
is easily accessible, statistics are frequently too general and do not allow for precise benchmarking
because they are based on broad occupational groups.
The Financial Times and other reputable newspapers’ business sections, which provide general data
on pay trends.
Agencies and consultants for hiring

Recruitment specialists and agencies must to have a solid “feel” for the wage scales at the positions
they are assisting in filling. Both applications and employers provide them with data. Particularly aware
about compensation scales in the senior management job market are executive search consultants. They
occasionally conduct their own surveys, which can yield valuable data.
Manpower Consultants
By analysing data from recruitment drives, it is occasionally able to gain more information on pay scales.
Although the information presented in CVs may be questionable, determining how much money is nec-
essary to draw a particular type and level of applicant will give some indication of what the going rate is.
Many workers, particularly line managers, rely on job postings in the national, local, or specialised
press. Although advertisements can give some insight into wage scales, they should always be used with
extreme caution, especially when it comes to managerial and professional positions that are marketed
nationally. Even under the same job title, there can be significant variations in the amount of respon-
sibility and job scope, and pay rates reflect these differences. The job summaries are frequently overly
dramatic and could be deceptive. The pay ranges mentioned could be deceiving. This issue is
For the clerical, sales, and manual workers who are advertised for in local papers, the situation is
less critical.
Nevertheless, advertising offer a second source of information that cannot be disregarded, especially
for managerial and professional positions. Additionally, workers will be examining them and making
their own judgments about their market value.

62 Chapter 4
Other market information

Informal contacts or networks can be used to gather data about market rates. Exchanges of information
on pay rates for particular positions, pay level increments, performance or merit pay increases, and data
from independent market rate studies can all be valuable. It can be highly beneficial to establish and
maintain an informal or semi-formal network, especially if it includes companies or people managers
who are concerned about the local labour market.
Selecting sources of data

It is advisable to gather information from multiple sources because it is doubtful that precise job match-
ing, a perfect sample, and coincidental timing would be attained. In the end, a determination about
market pay levels must be made, and this will be aided by the availability of a variety of data that allows
an internal determination of what should be considered “the market rate.” If it comes from a variety of
sources, it will sound more credible. Additionally, it will offer a rationale for any market premiums that
can result in unequal remuneration.
To support individual or group surveys, published surveys that are easily accessible and based on a
sizable sample can be used. Better still if the information can be found online. However, it must be per-
tinent to the organization’s requirements, and special attention should always be paid to the variety of
data and the standard of job matching. Specialist surveys that focus on certain jobs can enhance general
market statistics. If the calibre of the job matching is crucial, an individual survey can be carried out or,
if space is available, a pay club can be joined.
Market intelligence, published data from journals and related sources, and information on current rates
and trends should always be used as backup materials. They may be a tremendous resource for updating.
It is unwise to rely solely on the study of job advertisements, even though it can be utilised as addi-
tional support or to provide a quick overview of current rates.
Published surveys can be somewhat expensive and have a wide range of content, presentation, and
quality. Use the following guidelines when choosing a published survey:
Does it cover relevant positions held by businesses like mine?
Does it offer the necessary pay and benefits information?
Are there sufficient numbers of participants to offer reliable comparisons?
Is the survey, to the best of our ability, conducted properly in terms of sample methods and the
calibre of job matching?
Is the survey essentially current?
Are the results presented clearly?
Is it a good value for the money?
Start by looking at the regular evaluations provided in materials from Incomes Data Services and IRS
to find a pertinent survey. Pay analyzers Incomes Data Services also provide a directory that compiles
details on practically every salary and benefits survey conducted in the UK, offering a one-of-a-kind
guidance to data sources. It currently lists about 290 salary and benefit surveys from 76 UK survey
producers, including national, local, benefit, and international surveys. Each survey is listed along with
information about the employee groups and jobs it covers, the sample size, the date the data was col-
lected, the length of the report, and the price. Subscribers to the directory can now access it online and
do data searches by occupation, benefit type, industry, geographic region (UK or abroad), or sector. Visit
www.salarysurveys.com. info.
Table 1 analyses the primary sources, their benefits, and their drawbacks.
Analyse Data
The following statistical terms, which are necessary to learn in order to conduct market analysis, are listed.
Measures of central tendency, or the location where a group of related values cluster, include:
The sum of the values of the items in the set divided by the number of distinct things in the set yields
the arithmetic mean or average (A). Extreme values on either side of the middle, however, have the
potential to skew the average.

The Median: The middle item in the distribution of individual items is called the median (M), and 50%
Notes
of the sample lies above it and 50% below it. As long as there are enough individual items, this is unaf-
fected by extremes and is often favoured to the arithmetical mean (the median of a sample much less
than 10 is suspect). Because there are typically more high values at the top of the range in arithmetic
means, medians are frequently lower than arithmetic means.
Measure of Dispersion: The range of values in the set, which serves as a measure of dispersion and
offers insight into the changes in the distribution of values of items around the median, includes the
following measures:
The upper quartile (UQ)The figure above which one-quarter of the individual values fall is known
as the upper quartile (UQ) (this term is sometimes used incorrectly to indicate the range of values
above the upper quartile).
The lower quartile (LQ)The figure below which one-quarter of each individual value falls is
known as the lower quartile (LQ) (also sometimes used incorrectly as in the case of the upper
quartile).
The inter-quartile range: The 50% gap between the top and lower quartile values, or the inter-
quartile range, is a useful indicator of dispersion.
Upper and lower deciles: The numbers above and below which 10% of the individual values fall
are known as the upper and lower deciles. Although it is less frequently used, this allows for a more
precise analysis of distribution.
Total range is the range of values, from highest to lowest. Except in cases where the sample size is
extremely small, this is less frequently used than the inter-quartile range and can be misleading if
there are extreme values at either end.
Make Data About The Positions To Be Surveyed

As shown in Figure 2, the data may be produced through role analysis that results in the creation of brief
job descriptions.
Additionally, details regarding current wages, earnings, and benefit rates will be needed.
Publicly Present Data By Interpreting Market

Figure 4.3 Example of a capsule job description
CAPSULE JOB DESCRIPTION

Retail marketing analyst
1. Provide annual and monthly forecasts of retail sales on the basis of given assumptions to
assist in generating retail one- and three-year plans.
2. Maintain database of information on sales, retail prices and customer discounts. 3 Provide
information on products to the trade and other interested parties.
3. Deal with queries on products and prices from customers.
4. Provide general support to marketing and sales managers in analysing retail salesdata.
5. Undertake special investigations and ad hoc exercises as required to support marketing and
sales planning activities.
Example of a brief job description in Figure 4.3.

These will also need to be interpreted in order to derive a market rate that will be used as a bench-
mark for comparison from a variety of sources. However, a quantitative technique of analysing and
interpreting data from multiple sources can be applied, as illustrated in a condensed manner in Figure
15.3. Although this method commits the statistical sin of averaging averages, it at least offers some sup-
port for the conclusion.

64 Chapter 4
Graphs, which can highlight important data and comparisons, can sometimes be used in conjunction
Notes
with tables to further highlight the significance of information, as in the case of Figure 4.
Figure 5 demonstrates how the results of a pay survey using job evaluation scores can be represented
graphically and contrasted with the company’s practise line representing real salaries and the policy
line outlining where the organisation would like its pay levels to be. This example demonstrates how
pay policy lags pay practise and how market rates are higher in the upper part of the scale even though
market rates are higher in the lower part of the scale.
Figure 4.4 Examines how survey results and real salaries compare.
Source Assessment of source: Lower quartile Median Upper quartile

reliability, relevance, Rs Rs Rs
sample size, quality of
job matching:
3 = excellent
2 = good
1 = acceptable
A 3 19,000 20,000 21,000
B 2 20,000 21,000 22,000
C 2 21,000 22,000 23,000
D 2 19,000 20,000 21,000
Derived market rate – 19,600 20,600 21,600

average weighted by
assessment
Based on the position in the market that the company wants to take, or its “market posture.” This refer-
ence point will be established using current and updated pay data as well as indicators of earnings and
cost of living changes that are likely to have an impact on the lifespan of the entire structure. The middle
of the grade is frequently chosen as the reference point. This point (of a significant population) will fre-
quently be between the median and the top quartile for firms that need to stay ahead of the competition.
Others might find that a tighter alignment with the median is sufficient. Market rate information can
help a job family structure’s market groups evolve.
Figure 4.5 Comparison of survey data and actual salaries
Marketing Director Survey data LQ M UQ
Actual pay X
UK Sales Director Survey data LQ M UQ
Actual pay X
Marketing Executive Survey data LQ M UQ
Actual pay XXX
Annual pay 35K 40K 50K 55K 60K 65K

The market rate data can also be used to calculate spot rates (i.e., pay rates for certain jobs not included
Notes
in a typical grade and pay structure) and the market rate. The placement of jobs within a broad-banded
structure when the design of such a structure is mostly dictated by the market.
Figure 4.6 Comparison of survey data and actual salaries
Marketing Director Survey data
LQ M UQ
Actual pay X
UK Sales Director Survey data LQ M UQ
Actual pay X
Marketing Executive Survey data LQ M UQ
Actual pay X X X
Annual pay 35K 40K 50K 55K 60K 65K
Grade level based on the place in the market the company wishes to occupy, ie its ‘market stance’. The
establishment of this reference point will be based not only on assessment of current and updated pay
data, but also on indications of movements inearnings and the cost of living that are likely to affect the life
of the whole structure. The reference point is commonly placed at the mid-point of the grade. For orga-
nizations needing to stay ahead of the market, this point will often be between the median andthe upper
quartile (of a significant population). For others, closer alignment with the median may be sufficient.
Once the series of reference points in relation to the markethas been established and assessed, the prin-
ciples of grade and pay structure design construction set out in the next chapter can be applied. Market
rate data can contribute to the development of market groups in a job family structure.
The market rate data can also be used to determine spot rates (ie rates of pay for specific jobs not
incorporated into a conventional grade and pay structure) and the
In order to maintain competitive pay rates for any category of employees for whom specific actions
need to be made to ensure that they join and remain with the company, guidance from market rate data
will be accessible. Market rate supplements—also known as recruiting premiums when its primary
purpose is to recruit employees—are extra payments provided on top of the going wage for the posi-
tion. They are periodically examined, and if market conditions no longer support them, they may be
eliminated. However, if this occurs, it will be necessary to safeguard the salary of current employees. To
allow any market disparities to be objectively justified in an equal pay case, the justification for supple-
ments must be documented.
The data should be put into a database that can be updated often.
BROADBANDING
The evolution of broadbanding
Reasons for using broadbanding have changed
BROADBANDING REPRESENTS A SIGNIFICANT DEPARTURE

From traditional compensation structures. It is important therefore that human resources professionals
have ongoing, accurate, and comprehensive information about how broad banding approaches are being
developed and supported and about their impact on organizations. Such information is critical in helping

66 Chapter 4
companies understand broad banding design and assess the desirability and feasibility of moving to
Notes
such a compensation structure.A formal longitudinal study of “early adaptor” companies—those using
broadbands for compensation and career management—was conducted from 1994to 2004.
BROADBANDING DEFINED
Broad banding refers to a human resources strategy that collapses salary grades into a few wide “bands”
for the purposes of managing career growth and administering pay. By eliminating much of the hierarchy
associated with a traditional pay structure, broadbands support today’s flatter, leaner, more customer-
focused organization. The following are characteristics of a broad banding approach:
Each band includes a broad grouping of jobs
Career growth is defined in terms of increased responsibilities, rather than only upward advancement
Individuals may perform several different jobs that fall within the same band
Managers and their direct reports may be in the same band
While commonly considered as “just” a compensation approach, more advanced models of broad banding
are more sweeping in scope, encompassing career management and skill mobility
THE EVOLUTION OF BROADBANDING

When the first companies started what became known as broad banding in the late 1980s, their purpose
was to deemphasize the convention of traditional Compensa tion design and to encourage greater skill
development and job mobility. During the 1990s, broad banding continued to evolve as a way to support
organizational changes from internal focus to external focus, to encourage employees toward lateral
(versus upward) career growth, and to allow more flexibility in job design and staffing. Broad banding’s
continued evolution in the 2000s is moving toward a very strong market focus, in which the ability to
respond to the external market quickly and economically is the driving force.
The earliest research established two distinct sets of philosophy and designbeing applied as broad
banding: broad grades and career bands. Broad grades are an approach using few, relatively wide pay
levels, but retaining many of the controls found in more conventional salary administration systems
(e.g., ranges, midpoints). Career bands is an approach that departs more radically from conventional
compensation practice by using relatively few bands and significantly wide salary ranges. While both
broad grades and career bands are implemented to streamline administration and encourage career
development, thecareer band approach places greater emphasis on skill and competency acquisition.The
latest research has uncovered a further step in the evolutionary process of broad banding that can be
described as pure market. This approach is currently used by relatively few organizations. Companies
with pure market have no defined bands, but instead use individual market rates for each job within the
organization.
Jobs are generally compensated based on market-based guidelines, which are allowed to vary
depending on the current market value for the particular job.
REASONS FOR USING BROADBANDING HAVE CHANGED

One fascinating aspect of broadbanding has been its adaptability. Those leading the way in broadband-
ing implementation in the early 1990s were faced with an environment of downsizing and reengineering
and the aftermath of a recession. In the late 1990s, companies were in the midst of an economic boom
period and could not hire talent quickly enough to keep up with the demand for products and services.
In the middle of the first decade of the twenty-first century, political uncertainty, cost containment, and
lack of job creation have been key environmental factors for organizations. In spite of this volatility in
external conditions, organizations have stayed with their broadbanding systems and most have required
only minor modifications to their programs for them to remain viable.
The reason most often cited for using a broadbanding approach has not changed since the 1990s—
companies use banding to create organizational flexibility. Yet, while flexibility continues to be the top
reason for using bands, other reasons have evolved. For example, in the early 1990s, companies were

internally focused—making structural and organizational changes to the company culture. Then, in the
Notes
late 1990s, companies turned their focus to employees—encouraging them to develop multiple skills,
to be flexible, and to develop their careers in nontraditional (nonhierarchical) ways.
Now, in the 2000s, companies’ top reasons for using bands are more externally focused—toward the
outside marketplace. Today, the most important reasons for using broadbands are to be able to respond
to the marketplace quickly andeconomically.
BAND DESIGN AND COMMUNICATION

Design. Over the course of 10 years, the design and communication of broadbanding programs have
changed little. Overall, broadbanding does not seem to be going deeper into the company, but
instead, is being deployed more widely (including globally). Broadbanding programs are still used
mainly for executives and exempt employees.
Communication. Most companies provide little to no communication about their broadbanding pro-
grams (only about one-third communicate much at all, while about 10 percent provide no communi-
cation about their programs). This is probably due to the fact that most of these companies have had
broadbands in place for some time. Organizations living with broadbands for 9 years indicate that lack
of communication is a problem. The most common response to the question “What is the one thing
you would do differently?” has been “We would communicate more. And better.” This is not surprising,
as most compensation professionals (and perhaps human resources professionals) are inherently more
comfortable with plan design and implementation, not communication.
One organization reviewing their experience with broadbands summed it up this way: Communication
is the key for a successful experience with broadbanding. You cannot over communicate. Share the facts
with managers and employees. Explain the program/system to them—what is it, why we have it, how it
works, and how it impacts people. Companies thinking about going to broadbanding should know that
about 50 percent of their efforts need to be focused on communication.
Communication methods (when used) have changed greatly over time. In the past, in-person com-
munication (via supervisors or department meetings) was most prevalent, followed by printed mate-
rial (a print brochure or booklet).
Today personal communication approaches are still used, however printed material has been replaced
by electronic means (internal or database sites and e-mail).
MYTHS AND REALITIES

From its inception in the late 1980s, the concept of broadbanding has raised concerns with some human
resource professionals.
Broadbanding is Effective
As a whole, broadbanding is viewed as effective by a substantial number of companies who have lived
under bands. Only a minority of organizations indicates that broadbanding is “ineffective” and no
organizations with broadbanding for a decade or more indicate that it has been “very ineffective”.
In addition to broadbanding being effective, virtually all companies said that their organizations are
better off for having implemented broadbands than if they had not. Broad banding’s effectiveness was
rated highest in the following five areas:
1. It is flexible
2. It is fair
3. It is simple
4. It is understandable
5. It enhances employees’ earning potential
After living with broadbands for a decade, a reasonable question to ask is how well broadbanding is
satisfying the objectives that led to introducing it in the first place.

68 Chapter 4
Notes COMPANIES WOULD DO IT AGAIN

Broadbands are part of the outgrowth of companies’ needs to better manage their business in an increas-
ingly fast and global marketplace full of challenging economic conditions. Companies need their
employees to constantly adapt in ways that contribute to business success. This is a significant change
from the past employment relationship, which was characterized by employees’ reliance on job security,
steady promotions, and lifetime company loyalty. For these reasons, the use of broadbanding in all its
different forms has grown rapidly in the first decade of its existence.
Perhaps the ultimate test of effectiveness might be whether companies wouldimplement broadband-
ing again or recommend that others implement it. When asked, if they had to do it all over again, would
they recommend that their compa nies implement broadbands, the vast majority of companies said that
they would.
“Broadbanding has been well accepted and is viewed as consistent with our business strategies,”
according to one company. An HR professional says:
It is meeting the goals for success and expectations. Broadbanding has introduced the needed flexibility
in the workforce, and has greatly streamlined the amount of time spent analyzing and classifying jobs.
Broadbanding nicely pulls in market rates for pay levels, and has, to a noticeable degree, reduced hiring
new people from the outside at salary range minimums. This results in more market-focused pricing
thereby increasing the caliber of new hires.
SUMMARY
We conclude with three summary lessons drawn that employees will greet changes with interest
from our experience and research. and appreciation rather than resistance.
The design of the system is important, but the All aspects of market analysis involve
quality of the infrastructure needed to support it judgement and negotiation. When choosing
(certification, training, ability to move employees sources of data and analysing data, judgement
among jobs, communication of the pay plan, etc.) must be used. It is impossible for any study to
is a stronger predictor of success than the elegance provide the exact market rate for a job, hence
of the design. derived market prices must be produced from a
All things being equal, simpler is better. One variety of facts. This necessitates compromise.
of the major problems with SKC pay plans is that It is important therefore that human resources
they tend to become unnecessarily complex, and professionals have ongoing, accurate, and
sometimes are abandoned because management comprehensive information about how broad
comes to feel that the administrative hassle banding approaches are being developed and
outweighs any benefit. supported and about their impact on organizations.
Communication is even more important than for Such information is critical in helping companies
job-based pay systems. SKC systems are inevitably understand broad banding design and assess the
unfamiliar to most employees, they are complex desirability and feasibility of moving to such a
compared to job-based pay, and they are dependent compensation structure. A formal longitudinal
on employee understanding of certification and study of “early adaptor” companies—those
training requirements that add complexity. using broadbands for compensation and career
Any SKC pay plan will change over time or it management—was conducted from 1994to 2004.
will be abandoned because of its inflexibility and Broad banding refers to a human resources
lack of fit with changing conditions. A complete strategy that collapses salary grades into a few
design includes provisions for periodically wide “bands” for the purposes of managing career
revisiting the design and its infrastructure, and growth and administering pay. Broadbanding has
making revisions as necessary. Such a provision been well accepted and is viewed as consistent
should be very explicit, to increase the chances with our business strategies,”.

Case Study Notes
Breaking The Bargaining Pattern

Gilson steel is a local fabricating and supply firm. Situated in open country, far from the large steel
making centers. The firm has been in business many years.
About the third of employees have worked in the organization for more than ten years. Top
management would like to get away from the current practice in which negotiations on wage
matters and fringes follow the pattern.
The firm’s president feels that industry—wide bargaining tends to divorce employees from
the firm. He thinks they feel that their employer is a combination of U.S steel and Bethlem steel
instead of Gilson. He argues that the local firm which has prospered, can do better by employees
than is possible in national pattern. He says that the local conditions should be taken into account.
his basic objection to current practice, however, is his conviction that it tends to divorce its
employees from local employer. The labour relations manager has been urged to try negotiating
terms at variance with the national pattern.
Answer the following questions:

1. What theory and policy do you read into the president’s suggestion?
2. How will his ideas fit into the existing pattern of public union policy?
3. Can you suggest a promising innovative approach

1. You are the CEO of a ABC group of hotel. selecting employees with multiskilling capa-
Operating cost has been increasing and you bilities. Design a model where in you can
have been advised to reduce the cost by attract and retain the employees.

70 Chapter 4
4-1. Compensation can be _____ benefits. (c) incentives

(a) Monetary (d) fringe benefits
(b) Non-monetary 4-4. Incentives depends upon
(c) Both ‘a’ and ‘b’ (a) productivity
(d) None of the above (b) sales
4-2. Wages represents _____ rates of pay. (c) profits
(a) Hourly (d) All of the above
(b) Daily 4-5. The following is paid only at the time of employees
(c) Weekly exit after serving more than five years
(d) Monthly (a) Perquisites
4-3. _______ are also called ‘payments by results’. (b) Claims
(a) allowances (c) Gratuity
(b) claims (d) Allowances
Answer Keys:
4-1. (c) 4-2. (a) 4-3. (c) 4-4. (d) 4-5. (c)

chapter 5
Compensation & Wage Theories
Learning Objectives
To comprehend wages in greater detail As well as creating a wage structure
To comprehend various wage theories Should be aware of the variables affecting
To understand how labour and pay are related pay and salary structure
Wage Determination Process To comprehend the Salary Administration Principles
Wage Survey Concept
In the current global scenario, organizations are looking forward to reducing their operating costs.
North Star hotels based in Virginia USA had hotels across the East Coast. After inviting a consultant to
study the productive workload of the employees in a few areas like front office and maintenance, it was
observed that the productive workload was minimal as the breakdowns were very rare. Further, all the
major work was done by consultants. Their job was to handle emergency situations. For this, employing
3 employees in 3 shifts was considered non-productive, an additional expense and they were also not
doing any activity. Finally, it was decided to hire employees with multiple skills and reward them
accordingly. It was also observed that in the front office for a hotel with 150 rooms, only 1 staff was
needed. Justification given was - all the guests won’t check in at the same time. If at all there were more
than 3 guests, help could be taken from the sales team/back-office team. Hence, having 3 employees
for maintenance in a shift – carpenter, plumber and electrician was increasing the operating cost. On
the other hand, it was also observed that in the hotel, check in and check out happens only at a certain
time and that to not all the customers would check in or check out at the same time, hence having 2-3
employees was again found to be increasing the operating cost. If you are invited as a consultant, how
would you go about it? Apply multi-skilling approach and fix the wages.
Wages
In its broadest definition, the term “wages” refers to any financial remuneration that an employer makes
to his employees in exchange for the services they provide. Therefore, wages also include other perks
like financial support, family allowance, and relief pay.
However, in a more restricted sense, wages only refer to performance wages or wages proper and are
the cost of the labour used in the manufacturing process. The base wage and various allowances make
up both of them.
The basic wage refers to the compensation provided to an employee under the terms of his employ-
ment contract for the job performed by him, including basic salary and benefits.
Contrarily, allowances are paid in addition to the minimum wage in order to preserve the value of the
minimum wage over time.

72 Chapter 5
These perks include money for holidays, overtime, bonuses, and social security. Typically, these are
Notes
excluded from the concept of wages.
In India, however, several Acts contain various items under the term wages, notwithstanding the fact
that all Acts include the basic pay and dearness allowance. For instance, “wages for vacation period,
holiday pay, overtime pay, bonus, attendance bonus, and good conduct bonus” are considered to be
wages under the Workmen’s Compensation Act of 1923, Section 2(m).
Any award of settlement and production bonus, if paid, “constitutes wages,” according to Section 2
(VI) of the Payment of Wages Act of 1936.
Retrenchment compensation, payment in lieu of notice, and gratuity payable upon discharge, how-
ever, are considered wages under the Payment of Wages Act of 1948.
If received, the following compensation does not qualify as wages under any of the Acts
(i) Bonuses or other payments made as part of a profit-sharing plan that are not included in the
employment contract
(ii) Value of any housing accommodations, light and water supplies, medical services, travel
reimbursement, or payment in lieu of such services or any other concession.
(iii) Any amount provided to cover specific costs brought on by the nature of a worker’s employ-
ment.
(iv) Any payment made toward a pension, a provident fund, or a programme for social security
or other benefits.
(v) Any other amenity or service that is specifically or generally prohibited from being factored
into compensation by the relevant regulatory authority.
A pay level is the average of the rates paid for occupations within a company, establishment, labour
market, sector, geographic area, or country. A wage structure is a list of positions in a certain order to
which pay rates have been applied.
Employment and Pay

In modern society, it matters a great deal what one works on and how much money they are paid. Status
is correlated with wealth and job type. Both status and riches are significant to Americans, even though
one’s line of work may be more essential than the other.
In the past, we classified workers using different terms. The sort of occupation was referred to as blue
collar or white-collar employees.
Manual workers in blue collar jobs
White-collar – police officers
Pink Collar – Positions often held by women, such as secretarial and nursing. This phrase is no longer
used since it is quite sexist.
These days, we divide our job roles into three groups known as labour grades. These are descriptions
of the se labour grades:
Expert Labor
These employees have the necessary training to do their tasks. They may or may not need to be licenced
or certified by the state because they have developed and perfected a unique skill.
Carpenters, plumbers, electricians, company leaders and managers, craftsmen, accountants, engi-
neers, police, mechanics, etc. are a few examples of skilled labour. These could be white- or blue-collar
employees.
Low-Skilled Work
These are employees who lack specialised training and possess limited specialised abilities. The mem-
bers of this group have acquired an expanding number of talents as our society has evolved into one that
is more technologically advanced. A mechanic, for instance, was once seen as unskilled work.

Compensation & Wage Theories 73
That is not the situation today. To work with the sophisticated engines of today, mechanics need
Notes
extensive knowledge and training.
Unskilled labourers include, but are not limited to, manufacturing assembly line employees, painters,
sanitation and cleaning staff, and construction workers. These people have blue collar jobs.
Professionals
These employees, who require a graduate degree to perform their tasks, are perhaps the top echelons
of the labour force. Doctors, attorneys, and teachers make up the three main professions. These people
hold white collar jobs.
Because employees rarely shift between grades and do not compete with one another in terms of
pay, these labour grades are frequently referred to as non-competitive labour grades. They avoid one
another’s company for a variety of reasons.
The price of education and training could be a major barrier. They might not have the chance to take
such action, and they might not have the initiative either.
Wages Theory
There are two main ideas that explain why salaries in a certain field are what they are. They are as follows:
1. Traditional Theories for Calculating Wages

According to this hypothesis, salaries are determined by supply and demand. Programmers are in high
demand and limited supply today, therefore they should expect to earn more money.
The same is true for professionals like doctors and lawyers, whose specialised knowledge is in high
demand. You might tell my electrician is in demand if you glanced at the bill he handed me!
2. Theory of wage negotiations

This notion applies to workers who are members of unions where the union bargains salaries on behalf
of all workers. As a teacher, my pay is determined by collective bargaining with my union. It wouldn’t
matter if I were the best teacher in the world, sought after by many pupils and their parents.
However, diverse ways of paying wages are used in many businesses and nations. Payment options
include piece rates, payment based on results, and payment based on time.
The major ways that wages are set are by individual or group negotiation, public or state control, or
individual negotiating. Various wage theories have discussed how wages are determined. These theo-
ries’ key components can be summed up as follows:
Following is a description of the wage theory:
1. Survival theory
2. Payroll fund theory
3. The wage surplus value theory
4. Theory of residual claimants
5. Theory of marginal productivity
6. The wage-bargaining theory
7. Psychological theories
Let’s now delve more into the wage’s theory:
1. Theorem of subsistence or Survival Theory:

This idea, commonly referred to as the “Iron Law of Wages,” was put forth by David Ricardo (1772-1823).
“The employees are paid to enable them to subsist and propagate the race without increase or decline,”
according to this theory (1817).
According to the hypothesis, if workers were paid more than the minimum wage, their numbers
would grow as more people would procreate, which would result in a decrease in the wage rate.

74 Chapter 5
As more people perish from hunger, malnutrition, illness, cold, etc. and fewer people marry, the
Notes
number of employees would decline if wages fell below the subsistence level. When this happened,
wage rates would rise.
According to the subsistence theory of wages in economics, salaries will typically tend to the bare
minimum required to keep workers alive over time. According to the hypothesis, when wages are higher,
more workers will be generated, and when wages are lower, some employees will pass away, bringing
supply back to an equilibrium at a certain level of subsistence in each scenario.
In Marxist economics, the subsistence theory of wages—generally credited to David Ricardo—plays
a significant role. The hypothesis is rejected by the majority of contemporary economists, who contend
that marginal productivity determines wages in a market economy.
2. Payroll fund theory

Adam Smith created this notion (1723-1790). His fundamental premise was that salaries are paid from
a pre-determined pool of income that is left over among wealthy people as a result of savings.
This fund might be used to pay labourers to do work. Pay would be high if the fund was substantial;
if it were tiny, pay would be at the subsistence level. The amount of the fund impacted the demand for
labour and the wages that might be offered to them.
3. The wage surplus value theory

Marx is responsible for the development of this theory (1818-1883). In accordance with this view,
labour was a commodity that could be acquired for a “subsistence price.”
The amount of labour required to produce a thing determines its price. The wage for the labourer was
far less than the amount of time put in, and the extra money was used to cover other expenses.
Marx saw his theory of surplus value as having made the most significant contribution to the devel-
opment of economic analysis (Marx, letter to Engels of 24 August 1867).
Through this theory, he is simultaneously able to situate the capitalist mode of production in its his-
torical context, as well as to identify the origin of its internal economic contradictions and its laws of
motion, in the particular relations of production on which it is built.
4. Theory of residual claimants

This notion was put forth by Francis A. Walker (1840–1997). He asserted that land, labour, capital, and
entrepreneurialism were the four main components of production and economic activity.
After all of these production-related expenses have been covered, wages are the amount of value that
was added to the product. Labor is the residual claimant, in other terms.
5. Theory of marginal productivity

John Bates Clark and Phillips Henry Wicksteed from England created this theory (USA). This idea
states that salaries are determined by an entrepreneur’s prediction of the value that the final or marginal
product would likely produce worker. In other words, it makes the assumption that salaries are influ-
enced by both the supply and demand for labour.
As a result, wages are determined by their economic value. As a result, the employer keeps a larger
portion of the earnings as the non-marginal employees are not required to be paid. It pays for the com-
pany to keep recruiting as long as each additional employee adds more value than the cost of labour; if
this becomes uneconomic, the employer may turn to more advanced technology.
6. The wage-bargaining theory

It was proposed by John Davidson. According to this view, salaries are determined by the employers’
and workers’ respective bargaining strength. The relative power of the organisation and the union tends
to dictate basic salaries, fringe benefits, job differentials, and individual variances when a trade union
is involved.

7. Psychological theories Notes

On the basis of their research investigations and action plans, a number of behavioural scientists,
most notably industrial psychologists and sociologists like Marsh and Simon, Robert Dubin, and Eliot
Jacques, have expressed their opinions on wages and pay.
These theories are, in brief,
Acceptance of a Wage Level by the Employee

This way of thinking considers the elements that might persuade a worker to stay with a business. The
employee’s salaries and benefits in relation to his or her contribution, the size and reputation of the
company, the strength of the union, and other factors all have an effect.
The Internal Pay System

The internal wage structure of an organisation is influenced by social norms, traditions, customs, psy-
chological pressures on management, the social status associated with particular jobs, the need to main-
tain internal consistency in wages at the higher levels, the ratio of the maximum and minimum wage
differentials, the norms of span of control, and the demand for specialised labour.
Pay, Salaries, and Motivation

Money is frequently seen as a way to meet man’s most fundamental wants. Through the purchasing
power provided by monetary revenue—wages and salaries—elements such as food, clothing, shelter,
transportation, insurance, pension plans, education, and other physical maintenance and security
factors are made accessible.
Genuine motivators include merit raises, performance-based bonuses, and other types of monetary
appreciation for accomplishment. Basic pay, rises in the cost of living, and other compensation increases
that are unrelated to an individual’s personal productivity, on the other hand, frequently fall under the
maintenance category.
WAGE DETERMINATION PROCESS

Process for determining wages
Offering equitable pay and a salary structure is one of the most crucial parts of employer-employee
interactions. Each worker must:
1. Get wages that are set in accordance with government standards, allowing the employee and their
dependents to live comfortably, in order to have excellent labour relations.
2. The employee should have the impression that everyone in the organisation is compensated fairly
and according to their effort.
Wage and pay administration’s main objective is to make sure that every employee is fairly compen-
sated for the services they render to the business, taking into account elements like the nature of the
position, its market value, and its effectiveness.
The job’s requirements
The current value of that kind of work
The efficiency with which the person carries out their duties.
Process of determining wage rates are as follows:
1. Doing job analysis,
2. Wage surveys,
3. Analysis of relevant organizational problems forming wage structure,
4. Framing rules of wage administration,
5. Assigning grades and
6. Price to each job and paying the guaranteed wage on the basis of city living price index.

76 Chapter 5
Figure 5.1 Procedures Used to Calculate Wage Rate

Notes
Job Analysis Wage
Legislation
Wage
Job Description Job Wage Survey Structure
& Specification Evaluation & Analysis
of Relevant
Organisational Rules of
Problems Administration
Performance
Standards Differential
Employee
Appraisal
Wage Payments
The Job Analysis Process

It is a thorough investigation of one particular viewpoint. A questionnaire is used to conduct the study,
which is then followed by an interview and an observation of the person in that position at work. We
would then be able to describe the nature of the work and the skill sets required to carry out that specific
task.
It makes an effort to document and analyse specifics relating to the education, abilities, required
work, qualifications, experience, and duties anticipated of an employee. The process of grading, rating,
or evaluating the project is complete once the job specification has been established. A job’s value is
assessed in relation to all other jobs in the organisation that are also up for evaluation. The next step is
to assign a cost to the job. This entails translating the job classes into rate ranges or the relative work
values into precise monetary values.
Wage Surveys
The amount to be paid must be calculated using a market analysis in the area in issue because the
city living price index changes following the job evaluation that determines the relative worth of the
employment.
Such studies aim to provide information on issues like what are other companies paying?
How are they handling social insurance?
What rate of salary are other companies offering for jobs that are similar? etc. by compiling data on
“benchmark jobs,” which are typically regarded as reliable indicators.
Numerous techniques can be used to conduct such a survey. The majority of firms either conduct salary
surveys and acquire copies of the results, use the findings of “packaged surveys” offered by research
organisations, employer associations, government labour bureaus, etc., or do their own research.
Other managers and personnel agencies may be contacted via phone, mail, or in-person interviews for
these surveys.
A wage survey to be useful, must satisfy these points
a. Frequency
Affected by how quickly current and forthcoming developments are occurring. It usually happens once a year.
b. Scope (number of enterprises)
Influenced by the area that attracts workers, the number of businesses competing for this labour, the
demand for accuracy, and the willingness of businesses to share information

c. Accuracy
Notes
It is astounding how many different job titles and responsibilities there are. The necessity for meticulous
description and specification increases when the level of accuracy and detail is increased. The surveyor
prefers for in-person interviews over sending mailed questionnaires.
Such salary surveys offer a variety of helpful information about the variances in pay scales for spe-
cific career types. This may have a significant impact on a company’s compensation strategy.
Relevant Organizational Problems

When determining compensation structure, various other factors must be taken into account in addition
to the findings of job analyses and wage surveys.
For instance, whether the organisation would hire new workers after changing the wage structure;
whether industry or community rates were changing in a way that wasn’t consistent with the findings
of the job evaluation; and whether there were any well-established and generally accepted connections
between specific jobs that might have an impact on the job evaluation.
What will happen if the rate of compensation is reduced or increased? How should the pay structure
and the structure of the fringe benefits interact? 108 factors that may affect wage structures and levels
of compensation have been listed by Belcher.
Preparation of Wage Structure

The structure of the pay scale must be determined next. For this, a number of choices must be made,
including:
(a) The organization’s readiness or capacity to pay sums above, below, or equal to the average
for the sector or the neighbourhood;
(b) Whether pay ranges should be single rates or incorporate merit raises.
(c) The number, size, and degree of overlap between “pay grades.”
(d) Which positions should be assigned to each pay grade; and
(e) The agreed-upon actual monetary value among the various pay grades
WAGE LINE
WAGE RATES
Job plotting on a curve (some places are much below the salary line)
(f) Differences in salary between pay schemes.
(g) After these decisions have been made, decide how to handle salaries that are out of line.
The two-dimensional graph, on which the job evaluation points for significant positions are plotted
against the actual pay received or against the desired levels, is a common way for making such decisions
despite the lack of specific rules.
The jobs that appear to be being paid unfairly in relation to the important jobs and to one another are
next revealed by plotting the remaining jobs.
Pay grades (in points) are depicted along the horizontal axis of the above image, while wage rates
are displayed on the vertical axis.
(i) The relationship between the “value” of the work and
(ii) The “average compensation rates” for certain grades is depicted by the “wage curve” (or jobs).

78 Chapter 5
Notes Drawing a pay curve involves the following stages.

1. Learning the average pay rate for each pay grade is important because each pay grade may include
a number of jobs, and it’s likely that each of these positions is being paid differently.
2. Calculating and plotting the pay rate for each pay grade.
3. Plotted sites are connected by “Wage Lines.” These lines can be straight or curved; a straight line
is typically used if the pay grade consists of a single work cluster.
4. Job pricing: Target wages or compensation rates for the positions in each pay grade are referred to as the
“wage line.” There is a chance that some of the plotted points will stray from the expected path. Given
the pay rates for other grades, this will indicate that the average for that grade is either too high or too low.
For employment at this pay grade, raises may be necessary if the plot deviates from the line. A raise of
this kind may be awarded immediately or in one or more steps. 7 If the plot exceeds the wage line, rates
are excessive, and the overpaid workers are frequently referred to as “red circle,” “flagged,” or “over-
rates.” This calls for one of the following:
(i) To freeze the rate paid until general wage rises bring the other jobs into line with it;
(ii) To promote or transfer the employee to a job where he can lawfully be paid his present rate; or
(iii) To cut to the maximum in the pay grade.
Establishing “pay grades,” “equal width,” or “point spreads,” where each grade might contain all posi-
tions ranging between 50 and 100 points, 100 and 150 points, 150 and 200 points, and so forth, is a
common practise. It is vital to decide how many grades there should be because each grade is the same
breadth. The number might range from five to thirty depending on the industry.
When determining the number of grades, two factors must be taken into account. Here are several
examples:
1. The size of the organisation; for example, more “pay grades” will be required where there are more
positions, such as 1,000, than where there are fewer employment, such as 100.
2. How varied the grades are. For example, the maximum individual pay grades for hourly workers
may range from 10 to 20% over the minimums, whereas the maximum individual pay grades for
salaried workers may range from 15 to 75% above the minimum.
According to certain sources, each organisation should have a single comprehensive “pay grade.” How-
ever, having a variety of pay grades and ranges is probably more realistic. There are several compensa-
tion structures created, one for each job category or “work cluster.” There may be some job clusters that
are more closely tied to some than to others. In this regard, it’s possible that administrative rates as a
whole are more closely tied to one another than to management or manufacturing rates.
While determining pay ranges the following Consideration should be

Attended to
1. Whether they are paid under the same pay plan or under different ones, it is crucial to remember
that there is a sufficient differential between superiors and subordinates.
2. The pay level of the other group shall get the same consideration when the pay range of one group
is modified.
3. Handling upward changes in wage-structure requires a lot of attention due to the ongoing rise in
wage and salary levels, a rise brought on by a number of environmental constraints.
After a short time, wage increases are negotiated, some companies offer general percentage or “across
the board” pay increases. Others award raises based on performance or years of service. Making general
salary structure modifications in accordance with the price index number is a good idea.
4. The current wage structure has to be periodically evaluated and updated. Employees will be more
willing to participate in job evaluation programmes as a result.
5. Regional salary disparities should always be preserved. Low mobility, lower skill jobs, significant
regional differences in cost of living, additional sources of income or features (rural versus urban or
industrial), and seasonal versus stable employment are all factors that favour regional inequalities.

However, a number of factors work to balance these disparities. High mobility between areas and/or
Notes
between employees, availability to timely, accurate information, and widespread unionisation attempts
(typically along industry/occupational lines) are factors that favour wage consistency.
Rate Ranges
There are several techniques to establish “rate ranges.” The “Wage Curve” is the method that is most
frequently used. It is possible to arbitrarily choose a maximum and minimum rate for each grade, such
as 15% over and below the pay line. The highest and lowest
Setting of Rate Ranges

“Lines” can then be drawn on the curve, and the higher the pay grade, the larger the “range” can
be made. The higher demands (and performance variability) seen in employment at these grades are
reflected in this. The majority of businesses configure their rate range to slightly overlap. Therefore, in
the next higher pay grade, a person with more experience and a longer tenure on the job may earn more
than a new hire.
Developing a pay range for each job or grade of occupations is the main method by which businesses
permit elements other than the work to affect a person’s salary.
A rate range is a salary range that the company has decided is suitable for anyone who has a given
position.
A rate range has three pay levels: the starting hire rate, the market or work rate, and the top pay level
(the highest rate the organisation is willing to pay for the job).
Let’s now examine single-rate wage systems in more detail, as well as the justification for rate
ranges, the two different types of rate ranges, how pay rates are determined for people who fall within
a range, and the size of range rates.
Single-Rate Wage Systems

We should first explore situations in which there is no range before analysing various characteristics of
rate ranges. There, the job is paid at a single rate, and the worker only receives that rate. This pay rate is
the going wage and can be applied to either a pay grade or a particular job.
If a job rate is utilised, it is provided by the wage line. The worker is compensated according to the
number of points the job received from the job assessment system, the competitive value found in a
review, a pay survey, or the competitive value offered by a research analysis product.
The person gets paid in accordance with the grade level allocated to the job in cases where the grade
rate prevails.
Where performance variance and/or other personal qualities are non-existent or irrelevant, this kind
of system is helpful. Not all jobs permit a noticeably different level of performance.
Dimensions of Ranges
There are numerous rate ranges and pay grades in every salary structure. The organization’s policy may
apply to this figure. Little overlap between pay grades, a small number of pay grades, broad pay ranges,
a lot of movement within pay grades, and few promotions to higher grades are typical features of small
firms. Some businesses have multiple grades, which tends to produce a different set of traits.
Three factors, including the breadth of the rate range, the number of pay grades, and the overlap, can
be used to analyse pay ranges and estimate the overall compensation structure (see figure 16-2). The
third feature can be calculated if one knows the bottom and top of the pay structure, the slope of the pay
line, and any two of the previously mentioned three factors.
Range Breadth
The distance between the top and bottom of the range a to b in figure 16-2 represents the breadth of the
rate range. It is the range’s vertical dimension. The breadth can be expressed as a percentage or as a cash
figure. The latter will be employed because it is more typical. The conditions for movement within the
range should influence the range’s width.

80 Chapter 5
The breadth would represent the potential for performance variations in the job, presuming that
Notes
performance is the criterion. It is assumed that performance disparities are narrow where ranges are
narrow and vice versa. In reality, salaries for hourly work often range from 10% to 20%, for office
occupations from 15% to 35%, and for management jobs from 25% to 100%.
Figure 5.2 Parts of a wage structure

6.00
5.50
5.00 Maximum
Rate Wage Curve
4.50
Wage Rates (in Rupees) or Line
4.00
3.50
Minimum
3.00
Rate
2.50
2.00
1.50
1.00
0.50
00
0 50 100 150 200 250 300
Evaluated Points for Jobs
Range breadth could also be impacted by variables other than potential performance disparities. Since
students do not typically stay within one grade for very long, organisations that purposefully promote
rapid encourage small ranges. If changes need to be significant for employees to notice them, a wide
range is advised.
For this reason, higher grade levels typically have wider ranges. Broad ranges can accommodate a
large range of jobs as well as positions with different starting salaries. These wide variations show that
the method of figuring out the market rate is not an exact one.
Range maximum definition is very challenging. Regardless of how well a project is done, there is a logi-
cal maximum value. When this stage is attained, the person is ideally promoted, either to a new position
or by enhancing the responsibilities of their current position.
Unfortunately, it’s probable that this won’t be feasible at the right moment. Realistically, the individual
should be informed that the rate range is at its maximum level and that any future compensation adjust-
ments will result from general increases.
Some businesses offer steps that go beyond the range’s maximum. This is typically justified by seniority
and recruiting. Sometimes longevity increments exceeding the range are given to long-term employees
who will never be promoted and whose performance remains good.
After five or ten years at the top of the grade, they typically occur. Starting these people quite a ways
up the pay scale can help with the difficulty of hiring and keeping professional and managerial staff;
nevertheless, in order to keep them, the company must go above and beyond the limit by offering any
major grade changes.
Number of Grades
Other computations (mostly range breadth and overlap) or a deliberate choice that compels the other
two variables to adapt can determine the total number of pay grades in the wage structure.
The figure’s horizontal dimension reflects the number of pay grades (a to c). A structure with a single
pay grade would, at one extreme, have a minimum and maximum that would encompass the entire wage
structure and would include all employment. On the other hand, each horizontal axis job assessment
point would represent a distinct pay grade.
The latter scenario requires a very exact job evaluation plan since two jobs could only have the same
pay grade if they had identical job evaluation scores.
Numerous promotions and various job classifications are possible in an organisation when there are
several pay grades within a limited range. Because there are fewer pay grades, it is possible to allocate
workers to a variety of jobs without changing their pay grade.

It should come as no surprise that the number of pay grades and the size and quantity of organisational
Notes
levels are correlated. Furthermore, it seems sense that businesses with a flexible, organic structure would
have fewer pay grades, whereas those with a more formal, bureaucratic structure would have more.
It is obvious that there is no ideal number of pay grades for any given employment structure. In actu-
ality, there might be anywhere from 4 and 60 pay grades. However, it seems that 10 to 16 is the most
typical range. Since there aren’t many grades, each grade has a lot of professions, and the gaps between
them are fairly wide. The opposing traits are present when there are multiple grades.
The ideal number of grades is determined by a number of factors. One is the size of the organisation: the
more pay grades, the bigger the organisation. The breadth of the work structure is the second factor. A structure
that deals with the entire organisation as opposed to just one job cluster would typically have multiple pay
grades. Third, the nature of the roles inside a structure matters. Production positions with relatively flat pay
policy lines will typically have fewer pay grades than managerial positions with a steep slope.
The organization’s pay-increase and promotion programme make up the final factor. Numerous promo-
tions are possible with a big number of pay grades, however this comes with limited ranges and job classifi-
cations. It was once considered unrealistic to have a few pay grades with vast ranges because salary admin-
istration costs would no longer be under control. This theory was seriously challenged in the late 1980s.
Overlap
The degree of overlap between any pay grade and the subsequent grade serves as the final factor in
determining pay ranges (c to d in figure 16-2). People in lower pay grades can get pay that is equal to or
higher than that of individuals in higher grades thanks to overlap.
The explanation for this phenomenon is that an employee at a lower pay grade with excellent perfor-
mance is more valuable to the company than a new employee at a higher pay grade who is not yet per-
forming well. This justification seems to hold water because concerns regarding overlap are infrequent.
The overlap variable, like the number of grades, can either be the determined variable or a determin-
ing factor. Where there are numerous, diverse pay grades, overlap will be effective. One of the other two
variables will be decreased by choosing to keep overlap to a minimum (such as 50%).
Although some overlap is preferred, there are issues. The primary one results from promotions. If
someone at the top of a rate range is promoted, they may begin in the new, higher rate range than the
new grade’s job rate. But failing to increase the upgraded employee’s wage hardly counts as promotion.
Organizations typically have a rule that any promotion must be accompanied with a minimum raise
of a certain amount, like one step in the new rate range or a certain %. In certain firms, the next job in
the series is more than one pay grade above the current one, which solves this difficulty.
Moving Employees Through Rate Ranges

Different pay rates for people in the same job and/or grade level are made possible by rate ranges. Oper-
ating these ranges requires a system that allows for staff differentiation. Such a technique must offer a
framework for choosing where to place each individual within the range.
Open rate ranges make it easier to determine each person’s compensation based on their perfor-
mance. The focus of the current part will be on progression through grades in a step system.
Rate Ranges and Recruitment

We have thought up to this point that the company has been hiring individuals who are only qualified
and promoting them as they gain experience. What if, however, it immediately employs a qualified
candidate for the position?
It is obvious that this person should be employed at the going rate (the midpoint). Therefore, depend-
ing on their qualifications, individuals are actually likely to be hired anywhere up to the midpoint of the
range. As a result, a system that terminates at the market rate has a flat fee for recruiting workers who
are completely qualified.
When there aren’t enough applications, the labour market may make the rate range more complicated.
Raising the starting pay to whatever level is required to attract candidates is one way businesses adapt
when hiring is difficult. As a result, hiring rates may be near the top of the rate range or even higher.
The person finds it extremely difficult or impossible to advance in grade as a result of this extreme
circumstance. Those who are thereafter anticipated to remain in the grade for three or more years before
being promoted can only anticipate general raises

82 Chapter 5
Notes WAGE AND SALARY STRUCTURE
What variables affect pay and salary structures?

The salary policies of various organizations differ to some extent. Marginal units must offer the mini-
mum wage in order to recruit the requisite quantity and quality of labour. These businesses frequently
hire marginal labour and pay merely the minimum wage rates mandated by labour laws.
In the other hand, some units pay far more than what is typical on the job market. They do this in
order to draw in and keep the best talent on the labour market. They do this in order to draw in and keep
the best possible workforce. Some managers are proponents of the higher pay economy.
They believe that by offering competitive pay, they will be able to hire superior people who will push
us harder than the typical industry employee. Greater output per man-hour is the result of the higher
production per employee.
As a result, labour expenses might be less than they are in businesses that use marginal labour. A
combination of favorable product market demand, better ability to pay, and the bargaining power of a
trade union results in some units paying high wages.
However, many of them attempt to be competitive in their pay plans, paying for the various types of
labour they employ at or close to the going rate on the labour market.
Most units place more emphasis on two wage criteria: the requirements of the job and the going wage
rates in the labour market. Other elements including changes in the cost of living, the availability and
demand for labour, and financial stability are given less weight.
The short-term impact of the economy on the ability to pay is essentially nothing. No of their profits
or losses, all companies are required to pay at least as much as their rivals and no more if they want to
recruit and retain employees. The capacity to pay is crucial in the long run.
Employers pay high wages during prosperous times in order to maintain lucrative operations and
because of their enhanced ability to pay. However, earnings are reduced during a slump since there
aren’t enough resources. Due to low or no profit, marginal businesses and non-profit organizations (such
as hospitals and educational institutions) tend to pay comparatively modest wages.
The cost to acquire a skill will increase if there is a strong demand for it and a limited supply of it.
These labor-market forces are likely to “reclassify hard-to-fill occupations at a higher level” than what
the job evaluation suggests when they are prolonged and severe in most businesses.
The other option is to pay higher salaries when there is a shortage of labour and lower wages when
there is an abundance of it. Similar to this, when there is a high demand for labour knowledge, wages
increase; nevertheless, when there is a low demand for labour expertise, salaries are low. The prevail-
ing pay, comparable wage, and on-going wage ideas are all intimately tied to the supply and demand
compensation criterion since, in essence, all of these compensation standards are established by current
market forces and conditions. It is done for a number of reasons.
First, since there is competition, all parties must maintain the same relative wage level;
Second, the implementation of consistent wage rates is a desirable idea due to many governmental
legislation and legal rulings;
Third, trade unions support this approach to ensure that their members receive equal compensation for
equal effort and to reduce geographic disparities;
Fourth, companies within the same industry that are functionally connected need people who are es-
sentially the same in terms of quality, knowledge, and experience. Consequently, there is a significant
homogeneity in wage and salary rates;
Finally, the organisation will not be able to recruit and retain a sufficient number and quality of man-
power if the employees are not paid the same or about the same general rates of compensation as are paid
to the employees by the organization’s rivals.
According to Belcher and Atchison, “Some companies pay on the high side of the market to gain goodwill
or to ensure an adequate supply of labour, whereas other organisations pay lower wages because they must
do so economically or because they can maintain adequate staffing levels by lowering hiring requirements.”

Figure 5.3 Criteria for Wage Fixation

Notes
Abi
lity
ing to
Liv age Pay
W
(8) (1)
Go te
livin of
Ra
g
ing
t
Cos
(2)
(7)
Wage &
Salary
Criteria
(6)
(3)
De tor
Sup and
&
Fac
ply
tiv uc-
Pr
m
(5) (3)
ity
od
P
nts Ba owe
me ire- rga r
q u Un inin
Re b ion g
Jo
1. The organization’s ability to pay;

2. Supply and demand of labour;
3. The prevailing market rate;
4. The cost of living;
5. Living wage;
6. Productivity;
7. Trade union’s Bargaining power
8. Job requirements;
9. Managerial attitudes; and
10. Psychological and sociological factors
11. Levels of skills available in the market.
Description in Detail
1. The Organization’s Ability to Pay
A balancing of the aforementioned factors is represented by organisational decisions on job and pay
structures. However, the impact of these pressures varies depending on the type of organisation and the
job clusters inside that organisation.
Wage structures at companies with a substantial percentage of craft union members are nearly
entirely set by the union. Examples of industries with union-focused wage structures include those in
construction, printing and publishing, the railroads, long shore and maritime labour, and entertainment.
What might be referred to as market-oriented wage structures are found in organisations whose
members primarily come from a well-organized and competitive labour market but are not unionized.
Organizations of this sort have few options since tasks are straightforward to identify and are very
homogeneous across the market.
Organizations with largely market-oriented pay systems include banks, insurance businesses, depart-
ment stores, and restaurants. Professionals are a class of workers whose positions have been primarily
shaped by their educational experiences. As a result, professional job designs are similar across firms.
Organizations with a high concentration of specialized employment, labour markets that are too cha-
otic to allow for effective grading and pricing, and a lack of unionization tend to have wage structures
that are mostly established internally.

84 Chapter 5
Such wage structures might be influenced by product markets, but only if labour costs are high in
Notes
relation to overall costs. Management decisions lead to internally defined wage structures, which can
range from highly rational systems deriving from work evaluation to a system of personal rates.
Examples can be found in organisations in tiny towns, remote areas, or non-union communities, as
well as in distinctive groups in bigger cities and government employment.
The majority of sizable, unionised companies have what could be referred to as union-and-product-
oriented pay structures. Wage structures in these firms indicate management choices influenced and con-
strained by technological advancements, labour unions, cost-price connections, and the product market.
In companies that use similar manufacturing lines, technology helps to standardise employment
structures. Unions establish some important jobs and work clusters and give the entire organisation a
boost by insisting on conventional ties.
The company must oppose this upward drive and adjust jobs and job relationships in accordance with
this resistance due to cost-price relationships and the product market. However, low labour cost to total
cost ratios and inflexible product demand lessens the competitive constraints on businesses.
Organizations with union- and product-focused wage structures include those in many industrial
divisions, the mining sector, and several service industries.
Such pay structures can eventually put businesses at a competitive disadvantage.
Organizations with internal or union-and-product-market-determined wage structures delegate man-
agement significant decision-making authority over wage structures. These organisations strongly adhere
to Dunlop’s notion of important jobs, job clusters, and wage contours when determining wage structures.
The labour, product, and comparison markets—often aided by unions—are where important jobs
gain their stature. Technologies and employee skill groups produce job clusters. Wage contours are
derived from conventional comparisons with other organisations, which are again frequently supported
by unions. All three are heavily influenced by custom.
Organizations can be categorised as having pay structures that are primarily oriented in one of the
four directions that were just mentioned, but any organisation of any size has job clusters that more
comfortably fit into one or more of the other categories.
Unless they are industrial union members, businesses that employ artisans are typically compelled to
create a pay structure that is union-oriented. Workers in the administrative support sector are employed
by all types of businesses, and their compensation is generally market-based.
Regardless of the primary activity of the firm, professional staff (such as engineers and scientists)
have wage structures that blend market direction and internal determination. Without respect to the type
of organisation, manager wage structures are primarily established internally, with the exception of
particularly tight labour markets.
As a result, the typical company develops and manages at least four or five of the following dis-
tinct wage structures: shop, clerical, craftsmen and technicians, administrators, engineers and scientists,
sales, supervision, and executives.
Although there will undoubtedly be linkages between these various compensation systems, the
strength of these relationships changes with time and by organisation.
Increases in pay should be offered by companies that can afford them. Companies with strong sales
and large profits typically pay greater wages than those that are losing money or making poor profits due
to high manufacturing costs or weak sales.
The short-term impact of the economy on the ability to pay is essentially nothing. No of their profits
or losses, all companies are required to pay at least as much as their rivals and no more if they want to
recruit and retain employees. The capacity to pay is crucial in the long run.
Employers pay high wages during prosperous times in order to maintain lucrative operations and
because of their enhanced ability to pay. However, earnings are reduced during a slump since there
aren’t enough resources. Due to minimal or no revenues, marginal businesses and non-profit organisa-
tions (such as hospitals and educational institutions) tend to pay comparatively modest wages.
Concept of Minimum, Fair and Living Wage

Learning Intentions
To be familiar with the idea of the Statutory, Bare, or Basic Minimum Wage
To comprehend the Fair Wage

To comprehend the Living Wage

Notes
The Minimum Wage Based on Need
There are number of concepts, including wage rates, straight time average hourly earnings, gross aver-
age hourly earnings, weekly earnings; weekly take home pay, and annual earnings, may all be referred
to as wages. Wages are the sums of money paid to employees. The compensation given to employees in
exchange for putting their talent and effort at the employer’s disposal is known as a wage. The employer
decides how to use that talent and effort, and the amount of payment is determined by the conditions
outlined in a service agreement.
Wages, salary, compensation, and earnings are some of the other phrases that are currently used in
the payment system.
Legal Minimum Wage

It is the wage determined using the procedure described in the pertinent provisions of the Minimum
Wages Act, 1948. Regardless of his financial status, the employer is obligated to pay these salaries once
the rates are fixed. Such salaries must be fixed in occupations where “sweated” labour is typical or
where there is a greater risk of labour exploitation.
Basic Minimum Wage, or Bare

According to the decisions and judgements of labour courts, national tribunals, and industrial tribunals,
the salary must be decided. Employers must adhere to them.
The terms minimum wage, fair wage, and living wage are used in the Report of the Committee on
Fair Pay, which was established by the Government in 1948 to describe the principles on which fair
salaries should be founded and to make recommendations as to how these principles might be applied.
This Committee believes that the minimum wage should be the lowest reasonable wage. The living
wage is the highest level of the fair wage, which is the next higher level.
An hourly wage
The Committee has described it as “the salary, which must provide not only for the bare maintenance
of life but for the preservation of the worker’s efficiency.” The minimum wage must in some way cover
necessities like amenities, education, and healthcare for this reason.
In other words, a minimum salary should cover the worker’s family’s needs, his productivity, his
family’s education, their medical care, and some extras.
For several reasons, figuring out the minimum wage is a highly challenging issue. The working envi-
ronment varies from location to location, industry to industry, and worker to worker. It is impossible to
determine the standard of life with accuracy.
So, what should the minimum wage be in terms of money?
What size family should it be able to support?
Who gets to make these decisions?
These decisions are quite difficult to make. Additionally, as the cost of living fluctuates with the level of
prices, this index must be reviewed and modified on a regular basis.
The key idea is that minimum wages should cover not just the essentials of life but also the mainte-
nance of workers’ productivity through access to amenities like education, healthcare, and other ameni-
ties. The Minimum Wages Act of 1948 included the guidelines the government had created for estab-
lishing minimum wages.
A statutory minimum wage is distinct from a wage that is barely enough to cover basic expenses.
The former is a salary that must be sufficient to cover a worker’s and his family’s most fundamental
physical necessities; if a business is unable to pay its staff at least the legal minimum wage, it is permit-
ted to operate. The statutory minimum wage is the minimum wage that is mandated by law, even if it
could be more than the minimal subsistence or minimum wage. The needs of an industrial worker were
prioritised by the courts and tribunals, independent of the industry or his employer’s financial capacity.
For instance, the Supreme Court determined in Hindustan Times Limited Vs. Their Workmen that any
employer of industrial labour must pay the minimum basic wage in order to continue running a business.

86 Chapter 5
Minimum Wage
The Committee suggested this rate as the ultimate objective of a wage policy and as a fair wage. “One
which should enable the earner to provide for himself and his family not only the bare necessities of
food, clothing, and shelter but also a measure of frugal comfort, including education for his children,
protection against ill-health, requirements of essential social needs, and a measure of insurance against
the more important misfortunes, including old age,” is how the Living Wage is defined in the article.
In other words, a living wage was meant to ensure a standard of living that would protect the work-
er’s and his family’s health, as well as a certain degree of decency, comfort, education, and security from
disaster. Without a doubt, this indicated a high quality of living.
An industry’s ability to compensate its workers and the national income were taken into consider-
ation when determining this salary. Although the Committee believed that the guarantee of a living the
ultimate goal should be a liveable wage, but at the current level of national revenue, this is not possible
given the living standards in more developed nations.
The goal was to reach a liveable wage over the course of three phases. Setting and stabilising the
compensation that would be paid to the entire working class was the first stage. In the second stage, fair
compensation was to be established in the community-cum-industry. In the third stage, a livable wage
was to be paid to the working class.
Depending on the strength of labour’s negotiating position, the financial stability of the industry, the
level of national income, the overall impact of wage increases on neighbouring industries, labour pro-
ductivity, the industry’s position in the country’s economy, and the wages paid for the same or similar
jobs in nearby localities, the living wage may fall between the lowest level of the minimum wage and
the highest limit of the living wage.
Fair Wages
It is the wage that is above the minimum wage but below the living wage, according to the Committee
on Fair Wages. The minimum wage is plainly the lower limit of a fair salary, and the upper limit is
determined by the “capacity of the industry to pay.” The committee believes that while the minimum
wage must undoubtedly serve as the top limit of the fair wage, the higher limit will also be determined
by what can be loosely referred to as the industry’s capacity to pay. This will depend on the industry’s
potential going forward as well as its current economic situation.
The actual wages should be determined after taking into account things like:
(a) The labour force’s productivity;
(b) The going rates of pay in the same or nearby communities;
(c) The size and distribution of the national income; and
(d) The role of industry in national economics.
The committee noted that it was impossible to assign the work factors any specific weights in the actual
calculation of the fair wage and suggested that the mechanism for fixing wages should relate a fair wage
to a fair load of work and a standard family’s needs, which include the needs of three consumption units,
including the earners. When determining the ability to pay, it is important to take into account the capac-
ity of a particular business in a particular area. This can be done by acquiring a representative sample of
that industry. The fact that the country’s existing revenue level prevents the payment of a living wage
in accordance with standards seen in more industrialised countries was acknowledged. Additionally, it
was stated that minimum wages should be established at a level that society can sustain, regardless of
the level of the country’s GDP. However, society cannot support minimum wages set at a level that will
lower the level of employment overall and the country’s GDP as a result.
In comparison to the need-based minimum pay, a fair compensation is higher than the minimum
wage and is sufficient to cover the fundamental needs of the typical employee who is respected as a
human being in a civilised society.
The Minimum Wage Based on Need

The Indian Labour Conference proposed that minimum wage determination should be need-based and
should cover the essential necessities of an industrial worker at its 15th session in July 1957.

The Minimum Wage Committee, Wage Boards, and adjudicators should all abide by the following
Notes
standards when determining the minimum wage, according to the Conference’s recommendation:
(i) The average working-class household should be assumed to have three consumption units for
the wage earner, with the earnings of women, children, and teenagers being ignored.
(ii) The minimal calorie requirements should be estimated using Dr. Akroyd’s recommendation
of a net consumption of 2,700 calories for an average Indian adult participating in moderate
activity.
(iii) The amount of clothes needed should be calculated at 18 yards per person per year, which
equates to a total of 72 yards for a family of four employed on average;
(iv) The minimum rent that the government will charge in every location for homes provided
under the Subsidized Housing Scheme should be followed by income groups when it comes
to housing standards; and
(v) The overall cost of the minimum wage should include 20% for fuel, lights, and other incidentals.
Although it only falls within the lowest reaches of the fair wage, the need-based minimum wage is also a
level of fair wage and reflects a wage higher than the minimum currently being obtained in many indus-
tries. We contend that the ability to pay must be considered when determining the need-based minimum.
Wages in Real Money

Employee wages are typically expressed in terms of money. Wages have two components. The term
“money wage” refers to one, while “real wage” refers to the other. Workers who earn money have
control over goods and services. The actual commodities and services that can be exchanged for
pay make up their true value. Because of this, an increase or reduction in nominal earnings does not
always translate into an equivalent rise or fall in real wages. In short, money wages can be described
as a dollar figure, whereas real wages are the things and services that an employee can purchase with
that money.
The most relevant comparison for changes in money salaries is with changes in the average price
of a “market basket” of goods and services that wage earners commonly buy. By connecting changes
in money wages to variations in the consumer price index, real wages are determined. Real wages,
as opposed to money wages, are dependent on output. It offers the genuine test of whether or not the
worker is improving his financial situation. It also functions as an index for tracking long-term changes
in the financial well-being of workers.
Minimum Wage–Global Perspective
Research minimum wage laws

On the value of minimum wage regulation, there is a constant discussion almost everywhere in the
globe. Since structural adjustment programmes were introduced to many developing countries in the
1980s, minimum wage regulation has come under fire for a number of reasons. Supporters of the struc-
tural adjustment programme argued that minimum wage regulation did not help the poorest of the poor
workers, i.e., those in the informal sector, because the regulation covered only formal sector workers;
in addition, if a minimum wage is set at an unreasonably high level, it would have a negative impact on
the economy.
Minimum wage legislation is viewed as a potential roadblock to more investment, particularly
when the process of globalisation is forcing nation states to compete with one another for foreign
investment.
It is helpful to take a quick glance at the definition, goal, and background of minimum wage regula-
tion before examining the current discussion on minimum wage legislation.
A minimum wage is a level of compensation for labour performed that is required by law. Its goal is
to safeguard low-wage workers who are vulnerable from being exploited. It is a salary that is time-based
and typically applies to unskilled persons starting their first job. A minimum wage is enforceable by law
because it is established by one.

88 Chapter 5
A minimum wage system’s primary societal objective is to combat poverty and worker exploi-
Notes
tation. This indicates that the minimum wage should have enough purchasing power to allow an
employee to maintain a minimal quality of living. The minimum wage may also be set to encourage
workers, give them access to the advantages of economic growth, and encourage their participation
in the economy.
Most people agree that minimum wage laws were first established in New Zealand (1896), then
Australia (1899), and later Britain (1909). The elimination of “sweating,” or the payment of incredibly
low wages, was the primary goal of minimum wage legislation, therefore its application was typi-
cally limited to a small number of particularly low-paying sectors or to certain types of workers, such
as domestic workers. Women, children, indigenous employees, and those who work from home are
thought to be particularly vulnerable.
A few developing nations have also experimented with minimum wage laws to safeguard groups
of workers seen to be especially vulnerable. For instance, Argentina passed the Home Work Act in
1918 with the intention of safeguarding low-paid home workers, whereas Sri Lanka promulgated its
Minimum Wage Ordinance in 1927. Prior to the Second World War, minimum wage fixing was only
occasionally employed and was only utilised in a small number of industrialised and emerging nations,
with the exception of a few.
After the Second World War and around the conclusion of the Great Depression, an increasing
number of nations adopted minimum wage laws. Additionally, there was a tendency to expand
pay protection to more and more employee groupings, and in many situations, it became more
widespread.
A number of International Labor Organization (ILO) conventions on minimum wage regulation,
including the Minimum Wage Fixing Machinery Convention (No. 26) 1928, the Minimum Wage
Fixing Machinery (Agriculture) Convention (No. 99) 1951, and the Minimum Wage Fixing Convention
(No. 131) 1970, well capture the early development of minimum wage regulation and its subsequent
expansion since the 1920s.
However, it should be noted that, similar to industrial relations, the precise nature and the scope of
minimum wage protection reflect the unique historical and institutional development of the country
in question. This is true despite the impressive development of the minimum wage system in many
countries.
While South Korea and Vietnam have a single national minimum wage, other Asian nations includ-
ing Thailand, Indonesia, China, and Japan have decentralised minimum wage regimes. Cambodia only
has equipment for setting minimum wages in the garment and textile industries.
As was said above, minimum wage regulation has become a major social policy tool used by an
increasing number of industrialised and developing nations to safeguard low-skilled workers by estab-
lishing a minimum wage floor below which no payment should be given.
However, policymakers and economists are increasingly debating the value of a minimum wage as
both developing and wealthy nations have experienced a severe underemployment and unemployment
crises since the 1980s.
The common defence of the minimum wage system was founded on the idea that raising the mini-
mum wage above a particular point would lead to unemployment and unintentionally contribute to the
spread of poverty. In the particular instance of a minimum wage regime in the official sector was held
responsible for informalization in developing economies by driving formal sector jobs into the informal
sector.
However, newly conducted empirical [= real-world, as opposed to theoretical] study did not dem-
onstrate a detrimental impact of moderate minimum wage hikes on employment. Additionally, the ILO
has conducted a statistical examination of multiple countries to determine how minimum wages affect
employment, employment opportunities, and informality in developing nations.
According to the analysis, there is no discernible relationship between minimum wage levels and
employment levels when all other factors are held constant. After examining economic data from Latin
American nations, the study came to the further conclusion that changes in the ratio between the mini-
mum wage and the average salary have no bearing on the share of the informal economy in South and
Central America.

This finding supports the idea that the informalization of Latin American economies is not primarily
Notes
caused by rigidity in the labour market, and more specifically low pay rigidity.
According to an ILO analysis on the subject, for a certain level of GDP per capita and manufacturing
average wage in a given locality, a higher minimum wage is linked to a lower level of poverty nationally.
In conclusion, the research results substantially support the notion that raising the minimum wage
could help reduce poverty by enhancing the living conditions for both employees and their families
while having no adverse effects on employment. Additionally, there was no indication that the growth
of the informal economy in Latin America was influenced by the minimum wage’s level in relation to
the average wage.
According to the findings mentioned above, the argument against a minimum wage regime in emerg-
ing nations based on employment and poverty is unpersuasive.
Let’s look at yet another crucial defence of minimum wage regulation, one that is frequently made
in the context of globalisation and competitiveness. A high minimum wage is sometimes blamed for
reducing industries’ ability to compete.
But is it actually accurate?
Consider Thailand as an example. There was a contentious discussion about the role of the minimum
wage in Thailand during the height of the Asian financial crisis in 1997–1998. One point of view said
that the minimum wage was one of the causes of the Thai industries’ declining competitiveness, which
led to the crisis. The ILO performed study to look into how wages and other economic factors relate
to one another. The ILO’s research showed that other macroeconomic factors, including as a stable
exchange rate and declining productivity of Thai industries, were more important than the minimum
wage level in causing declining competitiveness and ultimately the economic crisis.
It should be emphasised, however, that without creating a good enterprise wage structure that sup-
ports a cycle of skill improvement and productivity enhancement, there could be a minimum wage
“trap” for both companies and employees.
In Thailand’s non-metropolitan areas, the ratio of the minimum wage to the average pay was unusu-
ally high prior to the financial crisis (around 70 percent). Thai trade union representatives stated that as a
result, workers, many of whom had years of experience and expertise, were “trapped” on the minimum
wage.
The evidence that was at hand supported this. The minimum wage had so strayed from its typical
purpose, which was to provide a wage floor for unskilled, new entrants to the labour market, for these
workers.
However, there are additional potential effects. One of the effects of weakening the connection
between pay and performance is that it interferes with the wage’s ability to motivate. While raising the
minimum wage may be regarded as “rewarding” workers with experience, it is nevertheless possible
that the incentive of the salary is disturbed when, after years on the job, there is no clear correlation
between compensation and performance.
On the other hand, bigger rises in the minimum wage than in average pay can lessen the motivation
for workers to advance their abilities. If either is true, it might affect labour productivity. Thai employ-
ers, on the other hand, made the exact opposite argument, claiming that hefty rises in the minimum wage
had robbed them of the power to manage their own wage structures and to create compensation policies
that were appropriate for the business.
This opinion is supported by some facts, as employers frequently rely on the government’s annual
announcement of the minimum wage adjustment before making their own pay decisions. Attempts to
more closely connect wages to business performance failed.
Thailand serves as an excellent illustration of the value of creating a sound enterprise wage structure
through enterprise pay negotiations and an effective human resource management policy, which should
start a cycle of pay increases, increased motivation, skill development, and higher productivity. Actu-
ally, there is a real risk that a legal minimum salary will become an effective maximum wage when
employees lack enterprise-level bargaining leverage.
For instance, the majority of garment and textile workers in Cambodia only make the federally man-
dated minimum pay of US$45 per month. The splintered trade union movement frequently focuses its
efforts on raising the minimum wage through tripartite negotiations with the National Labour Council

90 Chapter 5
because trade unions are so weak at the firm level. For a young trade union movement with shaky work-
Notes
place roots, it might seem an obvious, logical choice.
To secure settlements above the level of minimum salaries, unions must put tremendous effort into
enhancing pay negotiation capacity at the firm level.
Otherwise, there is a serious risk that the minimum pay would really become the maximum wage,
making it harder for union organisations to enlist rank-and-file employees and persuade them of the
benefits of union membership.
This circumstance might imply that the best use of a minimum wage is to set a clear floor for the
wage structure and act as a “safety net” for the lowest income groups.
Because of this, an ILO article contends that the ideal economic impact of minimum wages should
be limited to a small upward pressure at the lowest end of the pay structure and negligible impact on
average earnings and inflation.
Of course, the reverse is also true. For instance, in Korea, the minimum wage only amounts for about
30% of the average salary, covering less than 2% of the whole labour force. We could conclude that the
minimum wage system has fallen short of its basic objective of protecting low-paid unskilled workers
at this low minimum wage level relative to average salary.
If minimum wages are set too low, the goal of reducing poverty won’t be accomplished. Because
they have no other option, people will continue to labour, but the result is a society of “working
poor.”
Consequently, determining the minimum wage is a complicated matter which needs to be understood
in the broader perspective of the interaction between market pressures and various levels of collective
bargaining power not in isolation from other forces at play, of economies.
This is because the minimum wage is set by tripartite debate, whether through negotiation or consul-
tation, is typical in many nations and is crucial. This presents an in the wage-setting process, there is a
negotiating component involving the government, employees, and employers. where goodness is tripar-
tite deliberation could provide a mutually beneficial solution if the parties have high-quality information
and really want a common-interest result advantageous compromise
However, there are a number of issues that trade unions and other consultation participants encounter
in many developing nations.
As demonstrated above, national trade union centres frequently focus disproportionate effort in
nations where trade unions at the workplace have relatively little bargaining strength. Unwittingly con-
tributing to the continued deterioration of trade union organisations and collective bargaining workplace
negotiations.
Another frequent issue in the least developed nations is that economic elements that should be con-
sidered when setting and adjusting the minimum wage sometimes lack trustworthy data. Even trade
unions frequently lack the data on economic conditions if there is any ability to analyse them and par-
ticipate in fruitful group conversations.
There is a pressing need in many nations to increase the strength and capabilities of trade unions both
locally and nationally. The minimum wage legislation has been criticised for years as having a harmful
impact on low-paying jobs, but it appears to be coming back in favour of it as a way to give low-skilled
workers adequate living conditions.
The minimum wage has recently attracted fresh interest as a tool for market policy, which can be
attributed to a number of factors.
First, a number of studies conducted in the 1990s revealed that the minimum wage had little to no
impact on the rate of joblessness. The right to decent employment is the centrepiece of a new human
rights strategy, which is the second. In underdeveloped nations, Policymakers aren’t just worried about
the effects of the minimum wage affects employment as well as the degree of poverty.
However, the globalisation process and capital mobility place significant downward pressure on
working conditions, and in particular, minimum pay systems, therefore trade unions in many Asian
nations have an uphill battle to obtain a minimum wage system. This is a fight that will go on for good
employment for all working men and women.

SUMMARY Notes
A minimum wage is a level of compensation and the amount of payment is determined by the
for labour performed that is required by law. Its conditions outlined in a service agreement.
goal is to safeguard low-wage workers who are Wages, salary, compensation, and earnings are
vulnerable from being exploited. It is a salary that some of the other phrases that are currently used
is time-based and typically applies to unskilled in the payment system.
persons starting their first job. A minimum wage
is enforceable by law because it is established by
Lets Discuss:
one.
A minimum wage system’s primary societal 1. Discuss the factors affecting wage determina-
objective is to combat poverty and worker exploi- tion
tation. This indicates that the minimum wage 2. Explain wage determination process in detail
should have enough purchasing power to allow an 3. What do you understand by rate range? Dis-
employee to maintain a minimal quality of living. cuss the types of rate ranges
The minimum wage may also be set to encourage
4. Discuss the importance of wage administra-
workers, give them access to the advantages of
tion rules in organizations
economic growth, and encourage their participa-
tion in the economy. 5. Describe the significance of the wage theory.
Wages are the sums of money paid to employ- 6. Describe the differences between employees
ees. The compensation given to employees in with blue collars, white collars, and pink
exchange for putting their talent and effort at the collars.
employer’s disposal is known as a wage. The 7. What other forms of wage theories are there?
employer decides how to use that talent and effort, Give more information.
Case Study
Breaking the Cycle of Negotiation

Local supply and fabrication company Gilson Steel. located in a rural area, a long way from the
major steel manufacturing hubs. The company has a long history of operation.
A third of the workforce has been with the company more than ten years. The top management
wants to stop the pattern of pay and fringe benefit negotiations that now occurs.
Industry-wide bargaining, according to the company president, tends to alienate workers
from the business. He believes that rather than Gilson, they perceive their employer to be a
hybrid of U.S. Steel and Bethlem Steel. He contends that a successful local business can treat its
employees better than a national model can. He asserts that the regional circumstances should
be considered. However, his fundamental criticism of present practise stems from his opinion that
it tends to isolate employees from their local business. The manager of labour relations has been
advised to try negotiating conditions that are different from the general trend.
Questions:
1. What theory and strategy do you interpret in the president’s proposal?
2. What role would you play to overcome this issues?
3. Can you provide a promising strategy?

92 Chapter 5
Notes Case Study
Nature’s Dilemma
“Sriram Industries” is a mechanical engineering establishment situated in Bombay. It has 15,000
workmen employed in first shift between 8-16 hours. This is a major shift and known as general
shift. The workmen of Sriram Industries report for work from distance places such as Pune, Virar
and also Karjat, which are miles away from the place of work. The workers travel by Central
Railway, Western Railway (Suburban Services) and by BEST buses (BEST is the local Municipal
bus transport organisation). Some also travel by petrol driven vehicles or their own bicycle. A
small number staying in surrounding areas of the factory, report for duty on foot.
On 27 June 1990, there was a very heavy downpour, which is not uncommon in Bombay. Vast
areas were submerged under water. Central and western sub urban railway services, therefore,
were completely dislocated. As a result of the heavy rains, train services were suspended between
7 – 8 am. BEST buses were less frequently run and, in some areas, there was no bus service at
all. A few timekeepers who somehow managed to attend took attendance. It was found that out
of the total complement, 4000 attended in time, 2600 attended two hours late, 4800 attended four
hours late and the remaining 3600 did not attend.
As was obvious, neither the management nor the workmen was responsible for the aforesaid
happening and the trade union, operating in the establishment requested the management to
deal sympathetically with the employees. They requested that since it was beyond the control of
workmen, even those who could not attend should not be marked absent. The union leader had
produced a certificate from Railway authorities and also BEST authorities about the complete
dislocation between 7-8.30 am and a partial dislocation till 2.30 pm. As will be seen from the case,
4000 employees worked for the whole day, 2600 worked for six hours, 4800 worked for four hours
only and 3600 did not report for duty at all. The issue as how to adjust the wages for the day. The
General Manager called a meeting of the officers to discuss the issue. It was found that a good
number of officers who stayed in long distance suburbs or were staying in remote areas could not
also attend to work. Some of the officers who participated in the meeting, opined that ‘no work no
pay’ should be the only principle and at best the only thing that the management should do is not
to take any disciplinary action as such. Others expressed different views and there was no near-
consensus even in the meeting. The General Manager adjourned the meeting without coming to
any decision. Relation between the management and the three unions operating in the company
were gene rally satisfactory. Only one of the three unions that had mainly white coloured staff as
members had a legalistic approach in all matters and was not easily satisfied.
Questions:
1. How can this issue be sorted out?

1. Being an HR head is a nightmare at times. You all levels compared to your company. Design
competitor who happens to be a startup com- a model where in you are able to motivate and
pany pays a high salary to the employees at retain them as well as gain their trust

5-1. ‘A behaviour which has rewarding experience is 5-4. Which of the following factor influence(s) employee
likely to be repeated’ is postulated by compensation?
(a) Reinforcement and expectancy theory (a) Labour market
(b) Equity theory (b) Cost of living
(c) Agency theory (c) Labour unions
(d) None of the above (d) All of the above
5-2. ‘A fair day work for fair day pay’ denotes a sense of 5-5. Match the following
_______ felt by employees. Business strategy Compensation strategy
(a) Responsibility
A. Invest to grow 1. Stress on cost control
(b) Equity
B. Manage earnings – 2. Stimulate
(c) Happiness protect markets entrepreneurialism
(d) Respect
C. Harvest earnings – 3. Reward management
5-3. The remuneration system needs to meet the follow- reinvest elsewhere skills
ing type(s) of equity
The correct answer is
(a) Internal
(a) A-1, B-2, C-3
(b) External
(b) A-2, B-1, C-3
(c) Individual
(c) A-2, B-3, C-1
(d) All of the above
(d) A-3, B-1, C-2
Answer Keys:
5-1. (a) 5-2. (b) 5-3. (d) 5-4. (d) 5-5. (c)

chapter 6
An overview of Wage Policy & Legislation
Learning Objectives
Workmen Compensation Act – 1923 Payment of Bonus Act – 1965
Employee Provident Fund Act – 1952 Gratuity Act
Min Wages Act – 1948 Employee State Insurance
Payment of Wages Act – 1936 The National Pension Plan
Equal Remuneration Act 1976
Wester is a sheet metal company into manufacturing of office equipment based in Chennai. They
have nearly 900 employees. The process of the plant activity is as follows: Steel roll comes and is
cut into shapes as per the requirement. Then it goes to punching and bending bay. Once this is over,
spot welding is done and the material is put into the conveyor for painting. All the materials are given
powder coat painting. The process is supervised by a supervisor and two assistants. If there is any
point not painted through the automatic paint gun, it is done manually. During this process, the three
employees will be inside the paint bay cabin. Even though they wear masks, still minute particles of
paint dust are inhaled by them. Wester provides, as per the Factories Act, all the facilities - safety and
food. Employees are highly dedicated. Technically, when observed their counterparts of the same level
working in more comfortable scenarios also get the same wages with no occupational hazards. If you
are the consultant advised to give a solution to motivate them, how would you go about, especially
from the wage angle?
WORKMEN’S COMPENSATION ACT, 1923

The principle of Workmen’s Compensation was formally adopted in India in 1923, it makes the employer
liable to pay compensation for personal injury caused by accident in course of employment. There were
various amendments in this Act and finally came into force on July 1, 1923.
The provisions of the Workmen’s Compensation Act, are following:
It is the first social security measure undertaken in India which ensures relief for workmen and
their dependants in case of accidents in course of employment aid resulting in death or disablement of
workmen.
Claims under the Workmen’s Compensation Act fall. Under the following categories:
(a) Accidents result in temporary disablement.
(b) Accidents results in permanent, partial or total disablement.
(c) Fatal accidents.

96 Chapter 6
Compensation for, permanent total disablement and permanent partial disablement is on the
Notes
scale prescribed. All claims for permanent disability must be recorded by act of agreement
with the
The Commissioner for Workmen’s compensation must be notified of accident the death of an
employer within 7 days of the date of accident. If the death of the was caused by an accident aris-
ing out of and in the course of his occupation or employment, compensation is payable and the
amount of compensation must be deposited with the Commissioner within 30 days after receiving
the notice of demand from the Commissioner.
As amended, December 1972, this Act is applicable all over India to factories, mines, pl transport
establishments, construction works, railway and other hazardous occupation.
The amount of compensation is equal to 40a of the monthly wages of the deceased, multiplied
by the relevant factor, or an amount of ` 20,000/- whichever is more, were death results from
injury.
At the time of total disablement an amount equal to 50a of the monthly wages deceased workman
multiplied by the relevant factor or an amount of ` 24,000/- whichever is more, on the basis of
enhanced rates, the minimum and maximum compensation payable in case of death is ` 20,000 and
90,000 and in case of disablement is ` 24,000 and 11,400 respectively depending on the wages and
age of the workman and the time of his death and disablement.
Whether temporary disablement, whether total or partial, results from the injury, they will receive a
half monthly payment equivalent to 25% of his monthly wages. Monthly payment is payable from
the date of disablement where such disablement a period of 28 days or more.
Where permanent partial disablement result from the injury, compensation payable percentage of
the compensation payable in the case of permanent total disablement proportionate to the loss of
earning capacity caused by the injury.
If. the employer does not pay the compensation within one month from the date it fell due, the
Commissioner may order recovery of not only the amount of arrears but also an interest at the rate
of six percent per annum on the amount due. If there is no justification for the delay in the opinion
of the Commissioner, an additional sum not exceeding 50 percent such amount may be recovered
from the employer by way of penalty.
Breach or violation of the provisions of the Act, is punishable.
Returns, notices and statements to Commissioner must be sent correctly.
EMPLOYEE’S PROVIDENT FUND ACT, 1952

The Act was passed in 1952, with the objective of making some provisions for the future of the itrial
worker after he retires, for the dependants in cam of his early death and to cultivate a spirit of saving
among the workers. It prescribes the obligation of the employers and employees and the authorities for
the implementation of its provisions.
This Act applies to alt factories and other establishments falling under any notified industry employ-
ing 20 or more workers. Once the Act is applied, it does not cease to be applicable even if number
of employees falls below 20. In regard to employees, this Act is applicable to all person who
are employed directly or indirectly through contractor in any kind of work, manual or otherwise.
Employee’s Provident fund scheme formulated under this Act covers all employers with monthly
up to ` 3500/-.
Worker’s in: establishments employing 20-50. Persons pay 6.25 percent of their earnings those with
a larger strength pay 8 percent. Employers make an equal contribution.
The Provident fund is refunded with interest in the event of death, permanent disability, super-
annuation, retrenchment, migration or on leaving service. On retirement, or after 15 years of
service, a worker receives his own share and the employer’s contribution according to the length
of service.
A member can withdraw to a certain extent from the fond account for any of the following purposes:
 To pay insurance premium

An overview of Wage Policy & Legislation 97
 To purchase or construct a property or house

Notes
 To repay loans
 To repair or make improvements or alterations of the house
 To meet the expenses in case of illness, marriage of daughter, higher education children, damage
to property dire to any natural calamity, unemployment on ac layoff or lockout.
LAW OF MINIMUM WAGES ACT, 1948

It is an Act to provide fixing minimum rates of wages in certain employments. It is meant, to workmen
to strike of fair bargain with their employers and ensure fair wages for them.
This Act purports to achieve the prevention of exploitation of labour and for that purpose autho-
rize the appropriate government to take steps to prescribe minimum rates of wages in scheduled
industries.
The Act contemplates that minimum wages rate must ensure not the mere physical the worker
which could keep him just only but also consider the following norms,
The Norms for fixation of minimum wage are:
(i) The standard working-class Family should be taken to consist of three consists units for the
one earner, the earnings of women. children and adolescents should be disregarded.
(ii) The minimum food requirement should be calculated on the basis of net intakes of 27O0
calories for an average Indian adult of moderate activity.
(iii) Clothing requirements ’should be estimated at capital consumption of 18 yards per annum
which would for the average workers family of four, a total of 72 yards.
(iv) In respect of housing, the rent corresponding to the minimum area provided for under
ground. Industrial Housing Scheme should be taken into consideration in fixing the mini-
mum wage.
(v) Fuel, lighting and other miscellaneous items of expenditure should constitute 20% of the
total minimum wages. Keying in view, the socio-economic aspect of the wages structure, the
Supreme Court added the following additional components as need for fixing the minimum
wage in the. industry:
(vi) Children education, medical requirement, minimum recreation including festivals, ceremo-
nies and provision for old age, marriages etc., should further constitute 25% of the total
minimum wages.
The employees are entitled to the minimum wage at all times and under all times and under all cir-
cumstances. An employer who cannot pay the minimum wage has rim right to engage labour and
no justification to run the industry.
The Act extends to the whole of India and applies to all establishments employing one or more
persons in scheduled employment.
PAYMENT OF WAGES ACT, 1936

This is an Act to regulate the payment of wages, imposition of fines and deduction from wages to Ans’
employed in industry, drawing less than ` 1,600/- per month. The main objections of this Act
(i) To pay the wages to the employees.
(ii) To pay the wages at proper time as specified in the Act.
(iii) To prevent unauthorized deductions,
The Act is applicable to persons employed in any factory, railway and to such other establishments
to which the State Government may, by notification extend the provisions of the Act after giving
three months’ notice to that effect.

98 Chapter 6
The responsibility for the payment of wages under Sec. (3) of the Act is that of the employer or his
Notes
representative. In the absence of an employees, a person who employs the labourers and with whom
they enter into a contract of employment will be regarded as an employer.
No wage period shall exceed one month in any case. The main purpose of this provision is to ensure
that immediate delay is not caused in the payment of wages and a long time does not elapse before
wages are paid for which an employee has worked. Moreover, the Act is concerned merely with the
fixation of wage periods and not with the fixation of wages.
Where less than 1,000 persons arc employed, wages shall be paid before the expiry of the 7th day
and in other cases before the expiry of the. 10” day, after the lant day of the wage period.
In case lire employee terminates the services of an employee. he is entitled to receive wage earned
by him before the expiry of the 2nd working day from the day on which employment is terminated
Sec.5 (2).
Wages are to be paid to the employed person without deductions of any kind except authorized by
or under the Act, withho1‹iing of increment or promotion, reduction to a port or time scale or to a
lower stage or time scale and suspension, are not to be d be deductions from wages.
Any contract or agreement whereby an employed person relinquishes any right conferred by this
Act shall be null and void.
EQUAL REMUNERATION ACT, 1976.

The Act provides for payment of equal remuneration to men and women workers for same work or work
of a similar nature and for prevention of discrimination on ground of sex against women in matter of
employment.
The Act prohibits an employer from reducing the rate of remuneration of any worker for the pur-
pose of employing with the above provision relating to payment of equal remuneration to men and
women workers for the same work or work of a similar nature.
While making recruitment for the same work or work of a similar nature or in any condition of
service subsequent to recruitment such as promotion, training or transfer, the employer prohibited
from making any discrimination against women except where the employment of women in such
work is prohibited or restricted by or under any law in force. These provisions are effective on and
from the commencement of the Act.
For the purpose of providing increasing employment opportunities for women, the Central and
State and Governments are required to constitute one or more Advisory committees to advise them
with regard to the extent to which women may be employed in such establish employments, as
specified by the Central Government.
The provision of the Act relating to requirement of equal treatment for men and woman not
apply, if:
(a) the terms and conditions of a woman’s employment are, in any respect, affected compliances
with the 1aw regulating the employment of women.
(b) any special treatment is accorded to women in connection with the birth, or ex birth of a
child. In these cases, the requirement of equal treatment. of men and wo does not apply.
According to the Bonus Act of 1965, “salary” refers to all compensation, except compensation for
overtime work, that may be stated in monetary terms and includes Dearness Allowance but excludes
the following:
Whatever additional compensation to which the employee is currently eligible

Any allowance for trip;
Any contributions made by the employer to pension or provident funds or for the benefit of their
employees that are required by currently enacted laws;
The cost of any housing arrangement, provision of light, water, medical care, or other facilities, or
any service, as well as any discounted supply of food or other items;

Every commission
Notes
Any compensation for layoffs, gratuities, other retirement benefits, or ex-gratia payments.
In addition to the employee’s base income or salary, the business may also offer bonuses to employees.
Employers might provide it
To recognise their accomplishments, senior leaders as well as entry-level workers,
To increase productivity, inspiration, and morale among employees
To show appreciation for workers or a team that accomplishes important objectives,
To express gratitude to staff members who have stayed with the company for a long time,
or To persuade prospective employees to work for the company.
Bonus Act – 1965

Bonus payments are made to people working in specified establishments, as outlined by the Payment of
Bonus Act, 1965. The notion of Bonus is formally recognised by this Act.
Do all employers fall under the Act’s purview?

The Act is relevant to:
any “establishment” with 20 people or more
any “factory” that, at any time during the accounting year, has ten or more employees.
The aforementioned total also includes part-time workers.
After then, even if the organisation has fewer employees than allowed, it will still be subject to Act
rules.
Employee in this context refers to any person (other than an apprentice) engaged in any industry on
a salary or wage of not more than ` 21,000 per month to perform manual labour, whether skilled or
unskilled, for pay or reward, whether the terms of employment are express or implied.
However, the factory or establishment should have been open for at least five years.
What does an accounting year mean for bonuses?

During an accounting year,
1. The fiscal year that ends on the day on which a corporation’s books and accounts are required to
be closed and balanced;
2. Whether it is a year or not, a company’s profit and loss statement that is presented to the annual
general meeting of shareholders for that period is considered;
3. Whatever the case,
 The calendar year that begins on April 1; or

 The year concluding on the day on which its accounts are so closed and balanced, if the accounts
of a business kept by its employer are closed and balanced on any day other than the 31st day
of March.
Act’s non-applicability
The Act is not applicable to:
Organizations that are not for profit
Institutions like LICs and hospitals (excluded under section 32 of the Act)
Facilities exempted by the relevant government, such as sick units
Establishments where staff have signed a contract with the company stating they don’t desire
bonuses

100 Chapter 6
Notes Do all employees fall under the Act’s jurisdiction?

Employees who meet all of the cumulative requirements given below (i.e., all two requirements) are
covered:
earning no more than ` 21,000 a month in pay
has spent at least thirty working days working there throughout that year.
Note: Up until 2015, the pay cap was 10,000 rupees. Following the modification, it is Rupees 21,000
Maximum allowed under Bonus

The upper limit of ` 21,000 is solely there to determine whether the employee is eligible to get coverage
under payment mandated by law. However, as was previously said, the Salary is used to calculate the
Bonus instead of that.
The higher of the following is the ceiling limit for the amount of pay to be taken into account for
calculating Bonus:
` 7,000
The applicable government’s set minimum pays for regular employment.
Bonus Minimum and Maximum

The minimum bonus for the accounting year is 8.33% of the wage.
20% of the salary for the accounting year is the maximum bonus.
Salary > 21000
Yes No
No Bonus
Bonus =
specified under
'Salary for bonus' * B%
the Act
Where,
• ‘Salary for Bonus’ = Employees’ Salary
Note: B can be between (both inclusive) i.e., Basis + DA (restricted to ceiling limit)
– Minimum prescribed bonus – 8.33% • Ceiling limit = 7000 or. Min. Wages prescribed
– Maximum prescribed bonus – 20%
Higher of

Determining Bonus Notes

Example 1:
The employee’s salary (basic plus DA) is ` 4000.
The government’s minimum wage is ` 6000.
Solution:
The upper limit is equal to the greater of ` 7000 or ` 6,000.
Bonus calculation (minimum): 8.33% of base salary plus deferred compensation, with a maximum of
` 7000.
= ` 4000 × 8.33% = ` 333.2
Example 2:
Solution:
The upper limit is equal to the greater of ` 7000 or ` 6,000.
` 7000.
= ` 7000 × 8.33% = ` 583.1
Example 3:
Solution:
The upper limit is equal to the greater of ` 7000 or ` 9000.
` 9000.
= ` 8000 × 8.33% = ` 666.4
Example 4:
The employee’s salary (basic plus DA) is ` 100,000.
The government’s minimum wage is ` 90,000.
Solution:
The upper limit is equal to the greater of ` 7000 or ` 9000.
` 9000.
= ` 9000 × 8.33% = ` 749.7
Example 5:
The employee’s salary (basic plus DA) is ` 31,000,
And the government’s minimum wage is ` 90,000.
Solution:
Since the employee’s compensation exceeds ` 21,000, the company is exempt from the Act’s requirement
that they pay the minimum bonus amount.

102 Chapter 6
Notes When will the bonus be paid out?

The bonus must be paid by the employer within eight months after the establishment’s accounting year’s
end.
Bonus Disqualification
According to the Payment of Bonus Act of 1965, if an organisation terminates an employee’s employ-
ment for any of the following reasons:
Fraud
Aggressive or riotous behaviour while on the establishment’s property
Theft, appropriation, or sabotage of any establishment property
Ex Gratia
Ex Gratia is a Latin phrase that means “through favour.” Ex Gratia is the Latin term for voluntary,
benevolent, or gracious action. It’s an act of kindness. It is deemed voluntary when the payer makes the
payment without being required by law to reimburse the recipient.
As we already saw, the 1965 Payment of Bonus Act set a cap on bonuses at 20% of salaries paid
during the accounting year. This does not imply that an employer cannot give a bonus that is greater
than 20%.
Employees who are covered by the Act are legally entitled to receive a maximum of 20% of their
wage in incentive payments from the employer if no bonus payments are made by the employer. In other
words, if the employer pays more than what is required by law or gives a bonus to someone who is not
eligible for one under the law, that portion of the bonus is paid as Ex Gratia.
According to the Income Tax Act of 1961, all forms of Ex Gratia are fully taxable.
Additional Bonuses
Recruiting Bonus
When an employee enters the company, the employer offers incentives. Joining bonuses typically come
in the form of set sums of money, relocation assistance, travel vouchers, or other forms of remuneration
that enhance the appeal of the job offer.
Referral fee
Many businesses offer referral bonuses to loyal employees who recommend job candidates. In these
programmes, the current employee is rewarded if the individual they recommended is employed and
remains with the business for a predetermined amount of time.
Performance reward
Employees receive performance bonuses for going above and beyond the call of duty. Typically, they
are made available following the conclusion of a project or at the end of the fiscal year. Performance
incentives can be given by an employer to specific people, groups, departments, or the entire business.
Different elements may serve as the base for bonuses:
(a) Personal performance Employees are evaluated according to how well they individually
fulfil or surpass management’s goals. This boost may also honour soft abilities that have an
impact on performance of an organisation, including leadership, effective communication,
and problem-solving skills.
(b) Company performance: An employee’s bonus is determined by how well the business as a
whole has done. The person wouldn’t get the bonus if they had a great year, but the business
overall does poorly. However, the bonus can be bigger than usual if the company surpasses
its objectives.

Retention incentive Notes

Employee retention may be rewarded when a business is going through a particularly trying time or a
big organisational transition. Many businesses with high attrition rates provide retention bonuses. When
senior managerial personnel from the company want to leave the organisation, some companies pay this
compensation.
In lieu of a hike, a Bonus

In certain businesses, bonuses are taking the place of salary increases. Employers can limit wage rises by
promising to cover pay shortfalls with bonuses, but they are not required to do so every year. Employers
may keep their personnel costs low by withholding bonuses during years with lower profitability or
recessionary periods because bonuses are paid on a discretionary basis.
Contracts for bonuses

Contracts with senior executives may stipulate that the business must give bonuses. These bonuses are
frequently contingent upon the corporation reaching particular revenue goals. It may depend on a vari-
ety of factors, like sales, personnel retention, or attaining growth objectives. In this case, if the require-
ments are met, a contractual duty to pay a bonus exists.
Holiday bonus
India, a country rich in cultural diversity, celebrates festivals all year round. Organizations often pay
incentives during the holiday season to encourage staff to stay in the festive mood, rather than waiting
until the calendar or financial year comes to a close. The Deepavali bonus practise has persisted for
a while and been embraced by numerous organisations from various industries. (Deepavali also falls
within the timeframe of the requirement that bonuses be paid out within eight months of the conclusion
of the accounting year.)
Taxes on Bonuses
According to the Income Tax Act of 1961, all bonuses are fully taxed.
Payment of Gratuity Act–1972

Gratuity
An employer may voluntarily pay an employee a gratuity as a way of showing their appreciation for the
work they have done.
The notion of gratuity is formally recognised by the Payment of Gratuity Act, 1972. In other words,
this Act contains laws relating to the payment of Gratuity. It serves as the constitution.
Are all employers covered by the Act’s purview?
All organisations and divisions that come under the following are protected

104 Chapter 6
Notes Gratuity
Local
Central State governing
Government Government Defence bodies
01 02 03 04
Every shop or establishment (as defined by any State law) in the private sector that employs 10 or
more people is subject to the Act and is responsible for paying gratuities. Once there are ten or more
employees at any moment within the previous 12 months, the law will apply. After then, the organisation
will continue be subject to the Act’s restrictions even if it has less than 10 employees.
Do all employees fall under the Act’s jurisdiction?

Once an organisation is covered by the Act, all of its employees are also protected. There isn’t any dis-
tinction made depending on the class of employees or actual salary caps.
The individual must, however, serve the organisation for a minimum of five years in a row. If an
employee passes away, becomes disabled, or becomes incapable of performing their job, this condition
is loosened.
In other words, a worker can only collect a gratuity if they have worked for a company for a mini-
mum of five years in a row. If an employee passes away, becomes disabled, etc., the employer may pay
it before the five-year mark.
Five years of continuous service in this case means:

For businesses that involve underground labour (such as mines), one year is equivalent to 190
working days.
For other businesses: Think of a year as 240 working days.
Further,
If a person has worked continuously for a given amount of time, then they are considered to have been
in service during that time.
However, such uninterrupted service term also includes work that may be stopped without the
employee’s fault owing to illness, an accident, leave, absence from duty without leave, layoff, strike,
lockout, or suspension of employment.
When an individual hasn’t worked continuously for a year or six months, depending on the situation,
they are considered to have worked continuously if:
For a one-year period, the employee must have really worked for the employer for at least the previ-
ous twelve calendar months, as measured by the day when the calculation is to be done.
190 days (in the case of employees engaged in mines underground; or in enterprises working for
less than six days in a week) (in the case of employees employed in mines underground; or in estab-
lishments working for less than six days in a week)
240 days (workers of other organisations) (employees of other organizations)

Based on criteria for six months (explained in calculations later): If the employee actually worked for
Notes
the company for at least six calendar months in the six months prior to the date the computation is to
be made, then
95 days (in the event of employees engaged in mines underground; or in enterprises working for
less than six days in a week) (in the case of employees employed in mines underground; or in
establishments working for less than six days in a week)
120 days (workers of other organisations) (employees of other organizations)
If a person who works in a seasonal establishment has actually worked for at least 75% of the days the
establishment was open during that time period, the employee will be considered to have been in con-
tinuous service for one year or six months.
Continuous uninterrupted service includes:
Disruptions brought on by a strike, a lockout, an accident, or a layoff
Paid vacation time (earned in the previous year)
In the event of a female employee, maternity leave (total period of such maternity leave not exceeding
twelve weeks)
Absent because to a temporary disability brought on by an accident that happened while they were
working.
Estimating the gratuity

Gratuity is often calculated using two primary factors:
years of employment with the organisation
Salary last withdrawn by employee
Additionally, the computation varies for:
Workers protected by the Act
workers who are not covered by the Act
Calculating gratuities for workers protected by the Act:

Gratuity is calculated as (15 × Last Drawn Salary × Years Served Completed)/26.
Here,
Basic pay and Dearness allowance make up the last drawn wage. No other source of income will be
taken into account for calculating salary.
All years in which an employee worked for longer than six months are considered completed years
of service. This is,
 10 years 5 months are equivalent to 10 years.
Example: Employee1 has been employed by the company for six years and nine months, and their most
recent salary was ` 50,000. Payment of a gratuity will be:
(15 × 50,000 × 7) / 26 = ` 2,01,923.
Calculating gratuities for workers not protected by the Act:
(This formula is merely an example. Employers are free to use any calculation method they like. Gratuity
is calculated as (15 × the average monthly wage divided by the number of years of service) / 30.
Here,
The last received salary consists of Basic Pay, Dearness Allowance, and Commission Determined
by Turnover. No other source of income will be taken into account for calculating salary.

106 Chapter 6
Only completed years are included in the number of service years. This is,
Notes
Example: Employee 2 has been employed by the company for 6 years, 9 months, and has made an
average pay of ` 50,000 during the past 10 months. Payment of a gratuity will be:
(15 × 50,000 × 6) / 30 = ` 1,50,000.
Gratuity taxation
Exemptions with regard to gratuities are provided by Section 10(10) of the Income Tax Act of 1961:
A. While still working, or throughout the course of employment: Both government and non-govern-
ment employees are subject to full taxation.
B. Whether it was gotten before or after retirement:
1. Retirement benefits received under the Defence Service members’ applicable Pension Code
Regulations are completely tax-exempt.
2. Employees of the Central Government, Civil Servants, and Local Authorities: Section 10(10)
of the Income Tax Act exempts all death-cumulative-retirement gratuities in full from tax (i).
3. Other Workers:
Workers protected by the 1972 Payment of Gratuity Act:

Gratuity received - Amount excluded under Section 10 = Taxable Gratuity (10). The least amount
excluded under Section 10(10) is:
(i) 5/26 × Monthly Salary × Years of Service Completed
(ii) Actual payment made
(iii) Limit of ` 20 lakh.
Employees exempt from the 1972 Payment of Gratuity Act:

Gratuity received - Amount excluded under Section 10 = Taxable Gratuity (10). The least amount
excluded under Section 10(10) is:
(i) 1/2 × Average Monthly Salary × Total Years of Service.
(ii) Actual payment made
(iii) Limit of ` 20 lakh.
What time is gratuity due?

Regarding tenure, an employee is qualified for a gratuity after providing the organisation with at least
five years of continuous service. However, a worker is also qualified to receive a gratuity upon:
Death
Retirement
Resignation
Scheme for Voluntary Retirement
Disability brought on by a sickness or accident
Due to retrenchment, get laid off
Incapacitation of an employee to be able to render services
Termination for an offence not committed by the employee
Within 30 days of the date the gratuity becomes payable, an employee who qualifies may submit
an application.

Simply because the claimant did not submit their application within the allotted period does not
Notes
render their claim for gratuity invalid.
Within 15 days of receiving the application, the employer must state the gratuity amount.
Within 30 days after obtaining the application form, the employer is required to pay the gratuity
amount.
If the payment is not made by the deadline, gratuity and simple interest will be due.
Giving up of Gratuity
Employers are not required to pay an employee’s gratuity if they have fired them for one of the follow-
ing reasons:
Being guilty of a crime with moral turpitude
Rioting, unruly behaviour, or any other violent behaviour
Where the employee’s fault resulted in the termination
Additional Suggestions
Any gratuity you receive while you are working is completely taxable.
The total amount of gratuities that are free from tax cannot exceed ` 20,000 if the employee receives
gratuities from two or more employers in the same year.
The ceiling of ` 20,00,000 shall be decreased by the amount of gratuity that was exempt earlier in
cases where gratuity was received from a former employer in any prior year and then again from
another employer in a subsequent year.
Even if the widow, children, or other dependents of a deceased employee receive the gratuity, the
exemption with regard to gratuities would still be in effect.
Gratuities paid to employees are not restricted by law. The employer may decide to pay more than
that amount or may apply a computation method based on a formula.
Even if the employer goes bankrupt, the eligible employee is still entitled to their due gratuity.
Employee State Insurance (ESI)

Employee State Insurance
A self-financing contributory fund programme called Employees’ State Insurance was created with the
goal of providing social safety for workers and their dependents. It is a need-based social insurance
programme that would defend the interests of employees in situations like sickness, pregnancy, tempo-
rary or permanent physical impairment, and death as a result of an occupational injury that results in a
loss of earnings or earning ability. One of the most well-liked insurance programmes among employees
is ESI. The programme offers both financial and medical benefits. Additionally, the Act’s benefits for
employees are compliant with international labour standards.
Act governing
The Employees’ State Insurance Corporation (ESIC) was established by the Central Government to
oversee the Scheme after the Employees’ State Insurance Act of 1948 was enacted. Additionally, the
Act released employers from their responsibilities under the Workmen’s Compensation Act of 1923 and
the Maternity Benefit Act of 1961.
Do all employers fall under the Act’s purview?

Entities that come under Covered Units are subject to the Act.
When ten or more persons are engaged, a unit is considered to be covered under the Factories Act or
the Shops and Establishments Act. (Regardless of their monthly income)

108 Chapter 6
Notes Do all employees fall under the Act’s jurisdiction?

The benefits offered by the Scheme are available to all employees whose monthly income is not
exceeding ` 21,000 per month.
Employees are free from ESIC contributions if their daily average pay is less than ` 176. Employers
will, nevertheless, make their fair share of contributions for these workers
These monthly earnings do not include overtime pay, bonuses, or paid time off
Contributions
Employer and employee contributions, each at a set rate, make up the contribution due to the corpora-
tion on behalf of an employee. The prices are occasionally changed.
Currently,
Employees contribute 0.75% of their salaries.
The employer’s share of each pay period’s wages paid or payable to employees is 3.25 percent.
Employees earning up to ` 176 per day in average pay are free from paying a contribution. (Employ-
ers will, nevertheless, pay their fair part with regard to these employees.)
Provisional contributions
All the Employers are supposed to pay in advance for a period of six months in the Manpower sup-
pliers, Security agencies, Contractors, or Government contractors following the generation of the
Registration code number.
This is how it works:
= Total number of workers (earning up to ` 21,000 per month) × Minimum Wage × 6 Months × 6.5%
Employers must make the advance payment online.
Calculating Salary for ESI

Calculate the employee’s and employer’s ESI contributions based on the employee’s gross monthly pay.
Gross Salary is as follows:

Base salary
Dearness compensation
Housing Assistance (HRA)
Reward systems (including sales commissions)
City restitution payment
Meal stipend
Consistent allowance
Payments for attendance and overtime
Any additional unique allowances.
Nonetheless, excludes
Health protection
Allowance for fuel
Entertainment budget
Payment provided at the time of dismissal on the basis of unused leave
Reduction in force benefits
Redeeming vacation time and gratuities
Adult bonus (Deepavali bonus etc).
Any additional compensation that is to be considered a component of the gross salary must be paid out
in increments no longer than two months.

Calculating the contribution to the ESI Fund Notes

A proportion of the gross salaries paid to employees is used to compute ESI.
Particulars Employee Employer
Net Salary 17000
Percent of the gross salary 0.75% 3.25%
Contribution 17000 × 0.75% =127.5 17000 × 3.25% = 552.5
Contribution Overall 127.5 + 552.5 = 680
Place ESI Salary/Wages in Employee’s Hands 17000 – 127.5 = 16872.5
Example 1: A ` 21,000 gross pay
Net Salary 21000
Contribution 17000 × 0.75% = 157.5 17000 × 3.25% = 682.5
Contribution Overall 157.5 + 682.5 = 840
Place ESI Salary/Wages in Employee’s Hands 21000 – 157.5 = 20842.5
Example 2: ` 25,000 in gross pay
Net Salary 25000
Contribution 25000 × 0.75% = 187.5 17000 × 3.25% = 812.5
Contribution Overall Need not contribute as pay is above 21000
Place ESI Salary/Wages in Employee’s Hands 25000 – 0 = 25000
Periods of Contribution and Benefit

Keeping with the aforementioned points, we understand how to calculate ESI regardless of whether the
salary is 21,000 or 25,000 rupees at the start of the contribution period. How should ESI be calculated if
a wage change occurs in the middle of the Contribution period? Should the contributions halt right away?
ESI has the concept of a Contribution Period, during which the ESI contributions must continue, to
deal with this. (Even though the salary is greater than the maximum allowed)

110 Chapter 6
There are two six-month contribution periods and two equivalent six-month benefit periods.
Contribution Timeframe Period of Cash Benefits
1st April to 30th September 1st January of the following year to 30th June
1st Oct to 31th March of the year following 1st July to 31st December
Consequently, deposits into the ESI fund must be made during the Contribution Period. The Benefit
Period, on the other hand, is the time during which the employee will continue to be covered by the ESI
system and be eligible to use its services.
Example 3: On April 1st, the gross pay is ` 21000. increased to ` 23000 from June.
Throughout the whole Contribution period, deposits will be made into ESI. However, it will depend on
the actual pay received (for the period from April to September).
Net Salary 25000 and 23000
Contribution (21000 × 0.75% × 2m) + (21000 × 0.75% × 2m) +

(23000 × 0.75% × 4m) = 1005 (23000 × 0.75% × 4m) = 1005
Contribution Overall 1005 + 4355 = 5360
Place ESI Salary/Wages in Employee’s Hands 134000 – 1005 = 132995
Example 4: On April 1st, the gross pay is ` 23000.

Depositing money into the fund is not necessary because pay was over $21,000 at the start of the con-
tribution period.
Example 5: Continuing with Ex. 3, gross pay is Rs. 23,000 as of June.
Deposit into the fund is not required because pay is greater than Rs. 21000 as of October 1st, the start
of the Contribution period (October-March).
Date of payment due

By the 15th of the month after the month of deduction, contributions must be deposited. (Contribution
for April is due on or before May 15th, etc.)
Contribution Gathering
Employers are required to pay into the ESI fund by withholding employee contributions from earnings
and combining them with employee payments.
Within 15 days of the calendar month’s end, an employer must deposit all of the contributions. That
indicates that the employer must deposit April’s contributions before May 15th.
Employers have the option of making the payments online, in authorised State Bank of India
branches, or at other specified banks.

Case Compensation for Loss of Wages Notes
is paid under ESI Scheme
1 2 3 4
Temporary Maternity Unemployment

Sick Leave
disablement Leave Allowance
For 12 weeks
Till the spell of 50% for 1st year
For 91 days @ (under revision
sickness lasts @ and 25% for 2nd
70% of wages to 26 weeks) @
90% of wages year
100% of wages
Benefits under the ESI programme

1. Medical benefit: Beginning the day an insured person starts working for an insurable employer,
they and their family members receive complete medical treatment. The cost of an insured person’s
or his family member’s treatment is not capped. On payment of a nominal annual fee of ` 120,
medical care is also offered to retired and permanently disabled covered individuals and their
spouses.
2. Sickness Benefit (SB): During periods of certified sickness for a maximum of 91 days per year,
covered workers are entitled to receive Sickness Benefit in the form of monetary compensation at a
rate of 70% of wages. The covered worker must pay into the system for 78 days within a 6-month
period in order to be eligible for sickness benefits.
2.1 Extended Sickness Benefit (ESB): In the event of 34 malignant and chronic diseases, the SB
is prolonged for up to two years at an enhanced rate of 80% of salaries under the Extended
Sickness Benefit (ESB).
2.2 Enhanced Sickness Benefit: For male and female employees, respectively, Enhanced
Sickness Benefit equal to full wage is payable to covered individuals undergoing sterilisation
for 7 or 14 days.
3. Maternity Benefit (MB): Maternity Benefit for confinement or pregnancy is payable for twenty-
six (26) weeks, which may be extended by one (1) month on medical advice at the rate of one’s
full wage, provided one has contributed for seventy (70) days over the course of the two preceding
contribution periods.
4. Disability Compensation
4.1 Temporary Disablement Benefit (TDB): In the event of an employment injury, beginning
on the first day of the insured job and regardless of whether any contributions have been
made. If the disability persists, temporary disability benefits at the rate of 90% of wage are
payable.
4.1 Permanent Disablement Benefit (PDB): Depending on the degree of loss of earning ability
as determined by a Medical Board, the benefit is paid at a rate of 90% of wage in the form of
a monthly payment.

112 Chapter 6
5. Dependants Benefit (DB): DB is paid to dependents of a deceased insured person at a rate of 90%
Notes
of wage in the form of a monthly payment (in cases where death occurs due to employment injury
or occupational hazards).
6. Other Advantages
6.1 Funeral Costs: From the first day of beginning an insurable job, ` 15000 is due to the
dependents or to the person who conducts the final rites.
6.1 Confinement Expenses: An insured woman or an IP (in regard to his wife) in the event that
confinement takes place in a location without the required medical facilities under the ESI
Scheme.
6.1 Vocational Rehabilitation: To render an insured person permanently incapacitated as a
result of completing VR training at VRS.
6.1 Physical Rehabilitation: Should an occupational injury leave you physically disabled.
6.1 Old Age Medical Care: For Insured Persons Retiring Upon Attaining the Age of Superannuation
or Under VRS or ERS, Persons Having To Resign From Service Due To Permanent Disability;
and To The Spouse On Payment of ` 120 Per Annum.
Scheme for ESIC Covid-19 Relief

In the tragic event that an employee covered by the ESI Act passes away as a result of Covid-19,
90% of the worker’s average monthly pay will be divided among the deceased employee’s family
members and deposited straight into their bank accounts each month.
The deceased person’s spouse is also entitled to medical care with a little annual contribution of
` 120.
The programme also pays for Covid-19 deaths that happen within 30 days of the virus’ recovery.
Conditions:
The employee who dies from Covid-19 sickness must have registered with the ESIC online site at
least three months before the date of diagnosis.
must be employed as of the diagnosis date,
and during the maximum one-year period immediately before the diagnosis of Covid-19, at least
70 days’ contribution should have been paid or payable for him.
You can submit a claim for relief to the Branch Manager of any ESIC Branch Office together with the
Covid-19 positive report and the worker’s death certificate. 15 days after the completed claim is submit-
ted, ESIC will settle the claim.
Payback for Wage Loss Caused by COVID-19

A worker covered by the ESI Act may get a sick benefit under the Act at a daily rate of 70% of their
normal daily income to make up for lost wages incurred when absent from work owing to Covid-
19, as determined by a medical professional.
The maximum number of sick days that can be received in a calendar year is 91.
A minimum of 78 days must have passed during the corresponding half-yearly contribution period
for the worker’s payment to be considered paid or payable.
Once the claim for sickness benefit and a medical or fitness certificate provided by a doctor are
presented to the authorised ESI Branch office, claims will be resolved in 7 days.
Payment of costs associated with the worker’s last rites

In the tragic event that an employee covered by the ESI Act passes away, a sum of ` 15,000 is either
provided to the oldest living member or to the person who actually administers the final rites.

The worker who passed away should have been an insured person at the time of death.
Notes
You can submit the claim to the nearby ESI Branch office. It’ll be resolved in seven days.
Grievance Resolution
On the official website www.esic.nic.in, information on the Public Grievance Redressal Officer of each
state is provided. There will be a 15-day response to the complaint.
ABVKYANA, Atal Beemit Vyakti Kalyan Yojana (ABVKY)

This programme is a welfare benefit for workers who are covered by Section 2(9) of the ESI Act of
1948. It provides a one-time, 90-day relief payment.
The programme was initially launched as a two-year experimental programme beginning on July 1, 2018.
The programme was further extended for an additional year, from July 1, 2020, to June 30, 2021.
It also relaxed the eligibility requirements while increasing the rate of unemployment aid under the
programme from 25% to 50% of salaries.
Conditions:
Prior to become unemployed, the insured person should have been employed for at least two years
in an insurable position.
He ought to have made contributions for at least 78 days in the period of time just before unemployment
and a minimum of 78 days in one of the final three periods of contributions during the two years
preceding unemployment.
Relief will be significantly relaxed such that payment is only due after 30 days from the start of unem-
ployment. The employee may submit the claim directly to the specified ESIC Branch Office.
The improved benefit and more flexible terms are valid from 24 March 2020 to 31 December 2020.
Online claims for relief can be made at www.esic.in, and physical claims can be sent by mail or delivered
in person to the specified ESIC Branch Office accompanied with an affidavit, a copy of the Aadhaar
card, and bank account information.
Yojana Rajiv Gandhi Shramik Kalyan

This Unemployment Allowance programme was started on April 1, 2005. When an insured person loses
their job after three or more years of coverage due to the closing of a factory or other business, layoffs,
or permanent disability, they are entitled to the following benefits:
50% of your salary as an unemployment benefit for a maximum of two years.
medical treatment from ESI hospitals or pharmacies for the patient and their family while they are
receiving unemployment benefits.
Vocational training offered to update skills—expense on a charge or travel reimbursement covered
by ESIC.
Advantages for Employers

The following advantages are provided by the programme to employers who fall inside the ESI Act’s
1948 jurisdiction:
Regarding workers covered by the ESI Scheme, employers are exempt from the application of the
Employees’ Compensation Act.
Unless it is a contractual obligation, employers are exempt from all obligations to provide medical
services to employees and their dependents in kind or in the form of a fixed cash allowance, reim-
bursement for actual expenses, lump-sum grant, or selection of any other limited-scope medical
insurance policy.
According to the Income Tax Act of 1961, any amount paid as a contribution under the ESI Act may
be deducted when calculating “Business Income” (provided the contributions are made within the
respective due dates).

114 Chapter 6
In cases of physical discomfort for employees, such as sickness, work-related injury, or physical
Notes
disability resulting in lost wages, employers are released from all liability because the Corporation
is now responsible for paying cash benefits for covered employees.
Employers may choose from a productive, secure staff, which is a necessary component for higher
productivity.
Employers in the private sector are encouraged to hire people with

disabilities on a regular basis.
The programme covers people with disabilities who started working on or after January 1, 2008 and
make up to Rs. 25,000 a month.
The Central Government pays the Employer’s Share of Contribution for a period of three years.
(The Ministry of Labour and Employment’s Gazette Notification No. S-38025/2/2008-SS.I, dated
March 31, 2008, was published in the Extraordinary Part II, Section 3 Sub Section (1) of the Gazette of
India, and the plan became effective on April 1, 2008)
Important Employer Recommendations

To guarantee the efficient delivery of ESI benefits to covered employees:
The employer must register their factory or enterprise under the Act as soon as possible (if applicable).
Employers can register their employees’ units by:
 the ESIC website
 Portal Shram Suvidha
 Newly incorporated businesses can do so via the Ministry of Corporate Affairs Portal.
In all ESIC forms, documents, and correspondence with different ESIC offices, use Employers’
code no.
Employers must create a six-month advance contribution challan through the ESIC online portal
and deposit it in the bank in the case of labour or manpower supply agencies.
Also,
1. Employees must be properly and promptly registered online with all pertinent data upon appoint-
ment.
2. Employees can immediately receive a printout of their Temporary Identification Certificate (e
Pehchan Card) in order to start using their ESI benefits as soon as they start working.
3. A “Certificate of Employment” in Form 86 may be given to a newly insured person to make it
easier for them to get the medical benefit under the programme in the absence of an identity cer-
tificate or identity card. This certificate, which was provided by the employer, has a three-month
expiration date but may be renewed for an additional three-month term.
4. The employer may provide a “Certificate of Re-Employment” or “Continuing Employment” to
such a person in Form ESIC 37 upon their return to insurable employment or in the event that they
were previously ineligible for medical benefits due to non-generation of Return of Contribution.
From the date of its issuance, this certificate will make it possible for the insured person to receive
medical benefits.
5. The employer may select a different dispensary from the drop-down list on the ESIC web portal if
an insured employee has to change dispensaries for any legitimate reasons
6. An Insured Person may receive a certificate in Form ESIC 105 whenever he leaves the station
whether on duty or on leave. If available at such outstation sites, this will allow him and his family
to access medical care in ESI Dispensaries or hospitals elsewhere.
7. Employers may help or advise specific employees to claim any legitimate benefit under the ESI
Scheme and appropriately inform them of their rights and obligations under the Scheme.

8. It is possible to explain to the workers the value of the ESI Scheme in the case of an unfortunate
Notes
incident that results in the loss of pay or earning ability.
9. It is advisable to contact an ESIC officer if you have any questions about your rights and obliga-
tions under the ESI Act.
Benefits & Conditions for Contribution

An intriguing aspect of the ESI Scheme is that while social security benefits are given to workers
according to their individual needs without distinction, contributions are based on their ability to pay as
a fixed percentage of their wages. Subject to certain contributing requirements, the Corporation distrib-
utes Cash Benefits through its Branch Offices (BOs) or Pay Offices (POs).
The National Pension Plan (NPS)

The National Pension Plan
The National Pension Scheme (NPS) is a retirement savings and investment programme established by
the Government of India to offer citizens of India old age security. It offers a tempting long-term saving
option to help you efficiently plan your retirement through safe and regulated market-based returns. In
January 2004, this programme was made available to government workers. The government expanded
its opening to all areas in 2009.
The programme encourages participants to make periodic contributions to a pension account while
they are still employed. Following retirement, they are permitted to take a set part of the corpus as a
lump payment, with the balance being paid out as a monthly pension. Anyone who wishes to plan for
their retirement early yet with exposure should look at the NPS.
07
01
NPS Account
Eiligibility
Can be opened online
Resident Indian
at NSDL or Karvy
(18–60 age)
Website
National Pension 06
02 System (NPS) Cost
Lock-in Period Low cost,
Matures at 60 Fund management
Fee Capped at 0.01%
04
05
03 Asset Classes
Investment Choice
Partial Withdrawal Equity (E), Government
Active (Subscriber
Upto 25% after 3 years Bond (G), Corporate
allocates), Auto (As per
of account opening Bond (C), Alternative
life cycle fund)
Investment (A)

116 Chapter 6
Notes Controlling Body

This Scheme is governed by the Pension Fund Regulatory and Development Authority (PFRDA). The
PFRDA-created National Pension System Trust (NPST) is the official owner of all NPS assets.
Who may enrol in NPS?

Anyone who is an Indian citizen and is between the ages of 18 and 65 (as of the application submission
date) is eligible to join NPS. The person may be a resident or a non-resident (NRI). The applicant must
adhere to Know Your Customer (KYC) standards.
(Contributions made by NRIs are subject to the regulations that are periodically mandated by RBI
and FEMA. However, HUFs and holders of OCI (Overseas Citizens of India) and PIO (Person of Indian
Origin) cards are not permitted to register NPS accounts.)
The NPS Program

Complete the subscriber registration form and send it in with identification, address, and birthdate
documentation.
A member card is given out after a successful enrolment and has a 12-digit Permanent Retirement
Account Number (PRAN) assigned to it.
After the PRAN is generated, NSDL-CRA sends an email alert and an SMS alert to the subscriber’s
registered email address and mobile number (Central Record Keeping Agency).
Throughout their working careers, subscribers make regular, recurring contributions to NPS in
order to build a retirement corpus.
The subscriber receives access to the corpus upon retirement or scheme exit, with the requirement
that a portion of the corpus be invested in an annuity to pay a monthly stipend after retirement or
during scheme exit.
NPS Account Types

Accounts in Tier I
Accounts in Tier II
Accounts in Tier-I are required, while those in Tier-II are optional. When money invested in them is
withdrawn, the two differ from one another. Up to retirement, no full withdrawals from the Tier-I account
are permitted. There are limitations on withdrawals from the Tier-I account, even after retirement. The
subscriber may, however, remove all of the funds from the Tier-II account.
Particulars Account Tier-I Account Tier-II
Status Default Voluntary
Initial investment requirement ` 500 ` 1,000
Minimum contribution to NPS Per contribution, ` 500 (` 1,000 per FY) ` 250 for each contribution
NPS contribution cap There is no restriction There is no restriction
A waiver of taxes Up to ` 2 lakh annually 150,000 for government workers

(Under 80C and 80CCD) No additional staff
Withdrawals Not permitted Allowed

Contributions Notes
A percentage of the employer’s PF contribution goes into the Pension fund, as we saw in the Provident
Fund chapter.
The 13% employer contribution is divided as follows:
Into the Employees’ Provident Fund Scheme, or 3.67% (EPF)
8.33% goes to the Employees’ Pension Plan (EPS)
Employees’ Deposit Linked Insurance Scheme, 0.5% (EDLIS)
Regarding EPF administrative costs, 0.5 percent
In addition, the employee has the option to make a voluntary contribution to the pension fund by
submitting a correctly completed NCIS (NPS Contribution Instruction Slip) to any POP-SP or by going
to the eNPS website.
The three ways to participate in NPS are as follows:
Complete the contribution slip, then hand it into any POP-SP.
Visit “Find your nearest POP-SP” under “Important Links” on the home page of the eNPS website
(https://enps.nsdl.com) to locate the closest POP-SP.
To receive an OTP on your mobile to make an online donation via Net Banking, a Debit Card, or a
Credit Card, submit PRAN & DOB.
Install the NPS mobile app to make contributions whenever you want, wherever you are (For
Android and IOS users)
NPS taxation
Tax Benefits for Individuals:
Any NPS subscriber may claim a tax benefit under Section 80CCD(1) up to a maximum of Rs. 1.5 lac
under Section 80CCE.
All NPS subscribers receive a special tax benefit under Section 80CCD(1B):
Only NPS subscribers are eligible for an extra deduction for investments up to Rs. 50,000 in NPS (Tier
I accounts) under section 80CCD (1B). This deduction is in addition to the 1.5 lakh rupee deduction
allowed by section 80C of the Income Tax Act of 1961.
Benefits from taxes for corporations:

(a) Business Subscriber:
Subscribers are eligible for an additional tax break under Section 80CCD for the Corporate Sector.
2 of the Income Tax Act. Employer NPS contributions are tax deductible from taxable income up to
a maximum of 10% of gross wages (Basic + DA), without any upper dollar limit.
(b) Corporate
The employer’s contribution may be written off from their profit and loss statement as a “Business
Expense.” The lowest of the following will serve as the maximum amount allowable for deduction:
Employer’s actual NPS contribution
10% of Basic Plus DA
Total Gross Income
How to invest in order to receive tax benefits

If you are already a subscriber, you can go to any POP-SP or, alternatively, you can go to the eNPS
website (https://enps.nsdl.com) to add more money to your Tier I account.
Note: Only investments made in Tier I accounts are eligible for tax benefits.

118 Chapter 6
Notes Other Tax Advantages

The following list includes additional tax benefits available under NPS in addition to those offered
under 80CCD:
Tax advantages for a partial withdrawal
Before turning 60, subscribers may make limited withdrawals from their NPS tier I accounts. The
amount withdrawn up to 25% of subscriber payment is tax-exempt, under the 2017 Budget.
Tax benefit for purchasing an annuity:
Investment money used to buy an annuity is completely tax-free. The annuity income you
receive in the succeeding years will, however, be taxable.
Tax advantage for withdrawals in lump sums:
Up to 40% of the total corpus that is taken in a lump amount after the subscriber turns 60 is
tax-free.
Example: If the depositor has a total corpus of ten lakhs at the age of sixty, he or she may withdraw
four lakhs of that amount tax-free. Therefore, no tax is due for the lump sum withdrawal if 40% of the
NPS corpus is utilised for the withdrawal and the remaining 60% is used to purchase annuities in retire-
ment. The only annuity income that will be taxed is the income that is received in the following years.
NPS withdrawal
A pension product is NPS. You must therefore continue investing until you reach retirement. At age 60,
you must spend at least 40% of the corpus to purchase an annuity income from an insurance firm that is
listed on the PFRDA. You can choose to tax-free remove 40% of the corpus. The remaining 60% of the
corpus can be withdrawn (taxed according to the applicable income tax bracket) or used to purchase an
annuity. Delaying the lump-sum withdrawal from the NPS until you turn 70 is another option.
You must continue investing as a pension plan up until the age of 60. Nevertheless, if you have been
investing for at least three years, you may withdraw up to 25% for particular purposes, such as the pur-
chase or construction of a home, the children’s further education or their wedding, or medical treatment
for oneself or family. Three withdrawals are permitted during the entire duration. These withdrawals
must have a minimum five-year gap between them.
Lets Discuss:
1. Is gratuity payable on the basis of Basic wage only?

Case Study Notes
Raj has been working as a turner for the last 15 years in a chemical industry employing about
1200 employees. The wages are distributed on the 7th of each month in this company. Last month
Raj was on a privilege leave from 4th to 11th and reported for duty in second shift at 3.00 pm on 12th
. Next day being the date for payment of unpaid wages, Raj went to the cash counter to collect
his wages. The cashier noted his ticket number and searched for his wage packet and he found
that the said wage packet was already issued. The cashier told Raj that he had already been paid
his wages. But Raj was surprised to learn this and told the cahier that he had yet to collect his
wages. On this the cashier showed him that wage slip bearing his signature as a proof of payment
of wages to him. After some time the cashier asked for the identity card from Raj to check up the
validity of the signature on the wage slip. Raj said he had lost his identity card but added that
signature on the wage slip was not his.
Raj approached the HR manager with the grievance that he was not getting his wages to which
he was legitimately entitled. Raju and Mohan, union representatives who accompanied Raj to the
HR manager pressed for early release of Raj’s wages.
Questions:
1. How would you handle this situation? On that particular day CCTV was not functioning.

1. Giving bonus is a regular practice across India Employees are looking forward for the bonus.
especially during regional festival time. This How would you design a package where in
year because of pandemic organization was you are able to satisfy both management and
not able to make the desired level of profit. employees ?

120 Chapter 6
6-1. Any compensation plan must be (c) Sex

(a) Understandable, workable, acceptable (d) All of the above
(b) Reasonable, workable, acceptable 6-4. The following is not a concept of wage
(c) Understandable, feasible, acceptable (a) Daily wages
(d) Understandable, workable, compensable (b) Minimum wages
6-2. In organized industrial establishments pay review (c) Fair wages
takes place once in ____ years. (d) Living wages
(a) Three 6-5. _______ can be fixed by comparison with an accepted
(b) Seven standard wage
(c) Ten (a) Minimum wages
(d) Fifteen (b) Fair wages
6-3. Equal remuneration Act 1976, prohibits discrimina- (c) Living wages
tion in matters relating to remuneration on the basis of (d) All of the above
(a) Religion
(b) Region
Answer Keys:
6-1. (a) 6-2. (a) 6-3. (d) 6-4. (a) 6-5. (b)

chapter 7
Linking Variable Pay & Team Based

Incentive to Achieve Organization Goal
Learning Objectives
Variable pay Bonus affiliated with team performance
Design Elements of a Variable Pay Plan Identifying team incentives
Team based incentives How to improve the success of team-based pay
Global was an IT company based in Chennai employing nearly 4000 employees from different verticals.
They had projects from retail and banking sectors with clients from Europe and USA. Their clients were
very specific about quality and meeting deadlines. As we know, no one can independently do a project,
it’s always teamwork and team effort. In such a scenario, employees must work as a team wherein
all have to be synchronised and work together. Many a times, gaps arise among the team members,
especially when it comes to appraisal. Global was expanding but all employees would not be elevated to
next higher position. They ensured the pyramid shape of the structure is maintained. Employees had to
perform and prove their efficiency. Non-performers would be given two chances and then told to resign.
Concept of caring and sharing cannot be applied. All the employees will be looking to save their position
in the company. Issues in such a scenario for management to enhance the productivity and performance
won’t work with sweet words but by designing a comprehensive salary model. In such a scenario, how
do we apply variable pay scheme to increase team performance and efficiency?
For strategies to make sure that workers are assisting in the success of the company and that the
appropriate individuals are in the appropriate positions performing the appropriate duties. They are
always considering potential additions to their incentive toolkits in order to assist this. When utilised
properly, each a reward, whether it be a benefit programme, a remuneration plan, or another approach
to acknowledge employee effort, aids in some manner in the accomplishment of an employer’s business
goal.
Variable compensation is one of the more adaptable reward strategies used in business. Variable pay
is nothing new, particularly among the senior ranks, but it has recently gained much more traction as
businesses have come to understand the effects it may have on workers across an organisation and how
they carry out their duties.
Variable pay as a tool for attraction

Variable pay can have an impact even before an employee joins a company, especially if it is a part
of a carefully thought-out compensation strategy derived from a more comprehensive human-capital
approach that outlines the kind of employee the company considers necessary to achieve its business
goals. This talent profile may have been created for the entire workforce of the organisation or only for
a specific group of employees. However, it’s usually because leadership has decided that employees

122 Chapter 7
who meet the desired profile would find value in the programme and be encouraged to realise the full
Notes
potential of the additional rewards available to them that the company incorporates variable pay in its
mix of awards. The programme then contributes to the hiring process by luring workers who value this
specific kind of reward.
Variable pay can reveal a lot to an employee about the type of organisation he or she is joining,
depending on the program’s structure. Is it a business that publicly shares its financial gains with its
staff? Does the business value both individual and team efforts? If so, does it do it in a way that the
potential employee finds valuable?
All forms of ongoing monetary compensation received by employees during their employment that
are not base pay are collectively referred to as “variable pay.” As will be discussed later in this chapter,
these programmes come in a variety of shapes.
The ongoing variable-pay schemes that are accessible to employees can also play a crucial role in
attracting talent in a highly competitive market by making the compensation package more competitive
compared to that of other possible employers. Variable pay has long been a significant part of top man-
agement and executive personnel’ compensation, as was previously indicated, but the majority of firms
today use it to reward employees across the board.
Each year, Mercer conducts research about the number of Americans eligible for variable
compensation has considerably increased. It is important to note that the significant increase in the
prevalence of variable pay coincided with the first significant decrease in base pay increase budgets
that the United States had seen in more than ten years when compared to base pay increase trend
data for the same period. Many people at the time were tempted to blame this trend on the country’s
ongoing economic crisis. A closer examination of the data reveals that companies were starting
to experience considerable annual increases in the costs of their health care coverage, which may
partially account for the pattern. Employers were actually being prompted by these two variables to
assess the cost of all reward programmes and look for ways to make sure that their expenditure was
sustainable in each area.
Variable-pay programmes stand out as one of the most manageable expenses when looking for strate-
gies to better regulate reward spending. By tying employees’ compensation to business performance,
variable pay schemes, unlike many other alternative reward initiatives, can contribute to corporate per-
formance and profitability.
The things that were required of them. These are some of the main explanations for why variable-pay
programmes have proliferated since 2001.
Employees have noticed and started to place more weight on their availability as variable-pay
eligibility rises and additional cash compensation opportunities gain popularity. Due to its perceived
capacity to offer extremely competitive and alluring total-cash remuneration to employees who have
faith in their ability to perform, variable pay has thus become an increasingly powerful recruitment
tool.
What kind of opportunity with variable compensation is therefore deemed competitive? Accord-
ing to Mercer’s research, if variable-pay systems are in place, each employee’s projected individual
award, or objective, should be at least the equivalent of one month’s pay, or 8.3 percent of their yearly
salary.
A Tool To Motivate Employees - Variable Pay

Variable pay opportunities must be taken seriously in order to be appealing to potential employees, just
as they must be in order to motivate new personnel once they start working. The requirements that an
employee must meet in order to be eligible for the awards must also be seen as reasonable and doable.
Employees will work harder to earn the additional benefits that are offered to them if they consider the
performance expectations as acceptable and the payoff for such effort as material.
What exactly is deemed “material”? In general, it is thought that if you want to get an employee’s
attention, you need to give him at least one month’s worth of wages. This is typically the lowest target
award level for employees who are eligible for variable pay, which may not be a coincidence.
Managers and human resource specialists frequently struggle to find ways to retain competitiveness in
their pay programmes while still giving employees meaningful rewards for desired accomplishments
through yearly base pay increments, which typically range from 3 to 4 percent of base pay. The cus-
tomary annual wage adjustment sometimes seems too far in the future to adequately inspire workers.

Linking Variable Pay & Team Based Incentive to Achieve Organization Goal 123
The impact of overall monetary rewards, however, can be significantly increased when annual base pay
Notes
changes and variable compensation can be combined.
In general, compensation experts believe that you will get the behaviours and results you reward.
As a result, it’s crucial that a variable-pay plan is carefully created in order to reinforce the company’s
priorities and inspire the right behaviour. A variable-pay programme can let employees concentrate on
business drivers that are within their control if it is correctly constructed. The way the plan is created
and distributed to employees will determine how effective the programme is.
Bonus Plan Vs. Variable Pay Plan

Most people think of “bonus” schemes when they think of variable pay. Bonus programmes, how-
ever, come in a variety of formats. In reality, there are others who limit the use of the word “bonus” to
solely discretionary awards unrelated to performance. “Incentive plans” are widely used to describe
variable-pay arrangements that are unmistakably performance-based. It is important to keep in mind
that although incentive pay promotes performance according to predetermined goals, bonuses typically
reward performance that is evaluated after the fact.
Design Elements of a Variable Pay Plan

The ultimate bonus or incentive plan’s design elements define what form it will take. A variable-pay
plan has seven essential components.
Eligibility. One of the first factors to take into consideration when establishing the incentive compensa-
tion plan is eligibility once the choice to adopt an incentive-compensation plan has been made and the
objectives of the plan have been clearly outlined. which personnel will take part in the strategy? Includ-
ing everyone in the plan who helps achieve the goals that have been established as the plan’s objectives
is a typical approach. This might, in many situations, apply to every employee. In other cases, the goals
of the plan can indicate that only a subset of employees, such as those with a certain level of administra-
tive responsibility or those working in a certain function or department, should be eligible.
Timing and frequency of pay-outs. When and how often will prizes be paid? Numerous factors,
such as how frequently the performance rewarded by the plan can be measured and how frequently
such performance should be reinforced through rewards, might affect the frequency of the awards
(e.g., monthly, quarterly, annually). The time of the award pay-out will also be determined by these
factors.
Funding. An essential design element is funding incentive awards because it defines the overall sum that
can be paid to qualified personnel. Will the incentive awards be budgeted using an assumed performance
level that may be either financial or nonfinancial, or will they be funded using a specified financial
formula (i.e., self-funding)? Alternately, at the conclusion of the performance period, the “pool” used to
support incentive awards may be chosen at the sole discretion of the decision-maker. One strategy may
be more successful than the others depending on the goals established for the incentive scheme.
Performance Measurement. The goals of the incentive-compensation plan will determine eligibility
and reward timing, and they will also determine how “success” or performance evaluation will be
determined based on the expected results. Will performance be assessed at the corporate level (e.g.,
year-over-year revenue growth, profitability, etc.), the department level (e.g., realising a specific amount
of cost savings, concluding a significant project, etc.), or the individual level? Individual level (e.g.,
achieving particular performance goals, concluding a specific volume of transactions, etc.)? In order
to ensure that the incentive plan is in line with corporate goals, encourage the right behaviours, and,
ultimately, yield the maximum return on the variable-pay investment, it is essential to choose the
appropriate performance indicators.
Performance Mix. The standard at which performance is evaluated—and rewarded—can reveal

much about the values and culture of a business. Many businesses utilise incentive compensation to
reinforce various forms of performance by giving different performance measurements different
amounts of weight. The percentage each metric contributes to the variable-pay award is determined

124 Chapter 7
by the performance mix. For instance, corporate performance criteria might account for 50% of the
Notes
award while departmental and individual targets might each make up 25%. The degree to which the
eligible employee may influence each performance metric often determines the best combination of
performance measures to utilise to decide the reward. Staff employees may receive incentives based
primarily on their individual activities as they are among those who are the furthest from the achievement
of overall corporate objectives, whereas senior executives, who are held accountable for the company’s
performance, may receive incentives entirely based on corporate results.
Award Grades. The reward chance that each plan member will have is specified by the award levels
allowed for in the incentive-plan design. As we’ve already established, an individual award should
typically be aimed to be at least 8% of the employee’s annual base pay, or roughly one month’s pay, in
order to be considered relevant and to motivate behaviour.
But as accountability levels rise, so should the impact of the award, which is typically why variable
compensation is more significant and award “targets” are higher for more senior posts. The incentive
plan should also take into account the amount of variable pay that is justified in situations where objec-
tives are only partially met but are still deserving of reward (also known as “threshold” performance)
and in situations where objectives are significantly exceeded (also known as “superior” performance).
These considerations should be made in addition to establishing target award levels. Or, how much of
the targeted award should be subtracted in the event of threshold performance? In the event of outstand-
ing achievement, what is the maximum amount warranted?
Allocation. Allocation, or how the incentive-award pool will be dispersed to specific participants once
the pool’s size has been established or funding has taken place, is the last component of an incentive
scheme. Usually, the allocation strategy and performance mix go hand in hand. Individual grants,
however, might not be decided using a specific formula depending on the funding strategy described in
the plan. Instead, a more flexible or subjective method that takes into consideration targeted outcomes
and individual performance may be necessary award scales. For instance, and depending on the terms
of the plan, the incentive-award pool may be disproportionately distributed across other organisations
(such as divisions, business units, etc.). In such cases, the plan should additionally specify whether
managers are to distribute the funds using a formula that accounts for the factors affecting the size of the
pool supplied for their group, or whether the monies are to be distributed in another manner.
Different Variable Pay Plan Types

Because there are so many different design alternatives, a plan that works for one company might not
work for another. The properties of various methods to variable pay frequently make them ideal for very
varied situations.
Profit Splitting For instance, the profit-sharing incentive is one type of variable pay plan that stresses
profitability as a success metric. Profitability is an overall firm performance indicator. A profit-sharing
bonus plan often stipulates a common reward level, either a fixed sum or a percentage of base pay, that
will be paid to all qualified employees after a specific level of profitability is reached. Profit-sharing
bonus schemes are among the easiest to manage because of its fundamental structure.
Many businesses across a wide range of industries implement profit-sharing plans, which are
frequently credited with helping to keep employee turnover low. There are some differences among
profit-sharing programmes, even though they tend to reward the same kinds of success and prioritise
the same metrics. One high-tech company, for instance, offers profit-sharing bonuses that are paid out
twice annually as a percentage of net income or pretax margin, whichever is higher. Another significant
manufacturer refers to its profit-sharing programme as a “wage dividend” programme. Throughout a
five-year period, this plan purportedly offered pay-outs that varied from 2 to 8 percent of an employee’s
annual wages.
By nature, these compensation systems also frequently convey a significant preference for organisa-
tional accomplishment above individual performance. Because they have a less direct line of sight to
results, profit-sharing incentive schemes are seen to be less effective than other types of variable pay
at driving particular individual behaviours. Other types of variable pay have grown in acceptance as a
result in recent years.

Gainsharing. The gainsharing plan is another type of variable pay arrangement that places an emphasis
Notes
on organisational or group success. Gainsharing plans, as their name suggests, are designed to share
financial gains made above a predetermined threshold or benchmark level with employees who helped
make those gains possible. Gainsharing programmes are truly self-funded in that the bonus pool is made
up of a portion of any incremental operational or financial gains over a predetermined minimum level.
Gainsharing programmes can help to support the attainment of goals of operational effectiveness and
in involving staff in cost-controlling initiatives. In a typical gainsharing setting, each employee is under
pressure to do everything in their power to maintain high levels of productivity, control spending, and
otherwise identify process improvements.
Gainsharing programmes are used to similarly compensate all employees in a group for meeting
set benchmarks and are most frequently employed in production- or production-oriented organisations
(such as logistics, manufacturing, contact centres, etc.). For instance, a top automaker stated in 2007
that it will reward its salaried and hourly staff in the US and Canada with bonuses as a consequence of
quality and cost-cutting gains made in 2006. Bonuses for nonmanagerial staff reportedly ranged from
$300 to $800 per person.
A gainsharing bonus scheme may be used by other industries, like retail, to motivate warehouse
workers to meet certain productivity goals. The weekly pay of workers may rise by 5–10% when pro-
ductivity goals are met.
Gain-sharing schemes might start to lose their motivational impact as incremental improvements
over previous performance periods start to wane, despite the fact that some might believe there is always
space for more efficiency. In reality, continuing to make financially beneficial improvements might have
unintended consequences, such as skipping critical equipment maintenance or sacrificing quality as
workers seek out additional cost savings. As a result, true gainsharing schemes frequently work best
when they are seen as a short-term incentive tool. When the highest levels of productivity and efficiency
have been reached, it may be time to switch to a different type of variable pay that can better motivate
workers to uphold the gains made under the gainsharing model. Gainsharing, however, continues to be
a helpful variable-pay instrument when technology, processes, and new production techniques are put
into use.
Individual or group incentives. Traditional incentive plans can be either group (or team) rewards or
individual incentives, depending on their specific design parameters. If variable compensation should
reward the performance of groups or teams inside the business or people rather than rewarding overall
organisational success, this will depend on the funding mechanism, performance mix, and allocation
model of the plan.
Group incentives and individual incentives have gained popularity as businesses look to strengthen
the connection between employee actions and cash rewards. Additionally, the chance to win the award
becomes a more powerful motivator when it is based on factors that employees believe they have some
control over, either as an individual contributor or as a part of a work group.
The programme put in place by a sizable aerospace company in 2001, which links performance to
team goals, is an illustration of a group incentive programme. Teams in this illustration can have any-
where from 60 and 900 members. Each group’s
Performance is determined by meeting a team’s “score-card” rating and overall profit goal, however
each unit has different scorecard criteria. If company profit goals aren’t reached, the team’s score on the
scorecard may determine a portion of the reward. The annual incentive pay-outs can reach $1,500, with
a preliminary mid-year pay-out of up to $500 if the team is doing well.
Individual incentive plans are extensively used nowadays, and the majority of them include clauses
that cover both corporate and group goals. However, the fact that the actual rewards given to employees
fluctuate based on personal performance standards is what distinguishes them as really individual incen-
tive plans. For instance, the “Performance Award Program” of a large chemical firm aims to communi-
cate the business’s financial performance to its staff. Individual employee awards, however, are based
on a combination of the performance of the employee in relation to predetermined performance goals,
as well as that of her team, department, or business, and the firm.
Similar to this, a worldwide financial services company’s “Annual Incentive Award” programme
for management staff is determined by both individual and organisational performance as well as the
successful completion of particular objectives. An individual’s incentive pay-out is based on their indi-
vidual performance ratings, which show how much they met or exceeded performance goals. At other

126 Chapter 7
companies, the individual-incentive compensation scheme compensates staff members for their indi-
Notes
vidual performance in support of the achievement of the company’s goals in departments like market-
ing, sales, and finance.
The spot reward is another type of personal monetary incentive award. Spot awards are one-time
financial incentives that can be given at any time as opposed to at the end of a predetermined perfor-
mance period. Typically, a budget set aside for acknowledging employee efforts throughout the budget
year is used to pay spot-award programmes. Among the main advantages
The benefit of such an approach is that rewards can be given right away after the action or event that
is being recognised, strengthening the association between the reward and the activity. The value of the
activity will determine the range of such awards as well as their dollar values.
Multiple Incentive Plans Can Be Applied

There are several advantages and disadvantages to the various kinds of variable-pay programmes now
in use. Some people may consider the advantages of each strategy and see some benefits in each one. It
is therefore typical to find various incentive plan types being employed within a single firm. The degree
to which employee behaviours and company goals are aligned can really be improved by adjusting
the incentive approach to the particular needs of different workforce segments. As an illustration, the
profit-sharing bonus plan of a major U.S. bank only covers personnel in specific roles earning less than
$100,000 annually and not otherwise covered by commission or other variable pay schemes.
On the other hand, it is possible for employees to take part in several incentive plans where multiple
objectives are thought to be vital to emphasise. An employee may participate in an individual incentive
plan, for instance, if an employer wants them to concentrate their efforts on the few tasks, they can influ-
ence that are thought to have an impact on the performance of the firm. Employees may also take part in
a profit-sharing scheme in an effort to emphasise to them the necessity for teamwork in achieving their
own goals or the goals of the company.
When each incentive-award opportunity is viewed as meaningful in and of itself, a layered strategy
like the one shown above can aid in concentrating the employee on several interconnected goals. How-
ever, it’s crucial to avoid dispersing an employee’s attention so much that their various performance tar-
gets become overwhelming. The maximum number of goals that an employee should have to complete,
including both personal and organisational goals, is five.
Other Variable Pay Elements

Ample planning is needed around conveying the plans to employees and evaluating their efficacy over
time, in addition to the design and administration concerns that must be properly taken into account
to guarantee that variable pay supports an organization’s attractiveness and motivation objectives.
Experience has shown us that in order for an incentive compensation programme to properly influence
employee behaviour, it is essential that staff members comprehend both (1) how their actions affect the
organization’s success and (2) how their performance will affect their incentives. As a result, the com-
munication plan is a crucial component of a variable pay program’s success.
For instance, it was said that the incentive pay-outs are based on a combination of meeting financial
goals and team scorecard goals in the aforementioned example displaying a firm’s group incentive plan.
The corporation provides information indicating progress toward attaining the performance targets in
each work area for all employees to observe in order to keep employee focus on these criteria. The team
scorecards can also be found on the company intranet.
The effect the variable-pay plan is having on the operation and culture of the company must also be
regularly assessed. Does it produce the desired outcomes? Has the increased staff attention on particular
measures resulted in any objectives being overly affected or even neglected? And has the focus on
particular criteria had unforeseen negative effects in other areas that are thought to be crucial to the
business? It will be easier to make sure the programme is providing the required return on the money
invested in the plan by conducting periodic evaluations of the variable-pay plan and the outcomes to
which it is contributing.

TEAM-BASED REWARDS Notes
A GROWING NUMBER OF CORPORATIONS are abandoning the long-held notion that success
and achievement for an individual should be encouraged and reinforced, frequently through ruthless
rivalry with co-workers. Instead, there is a growing focus on creating a more cooperative environ-
ment where staff members may learn talents and information with one another through cooperating
on projects as a team. Some of the major factors frequently mentioned for this trend include increased
foreign competition, higher employee education levels, high employee turnover and absenteeism,
the effects of the social revolution in the 1960s and 1970s, and a decline in management roles in the
1980s and 1990s.
Using a team approach to redesign work gives the business the freedom to combine individuals
with different backgrounds and talents to take on common tasks or difficulties. Additionally, it gives
employees more autonomy, freedom, and the chance to develop skills and utilise abilities that might
not have been utilised in a role with a limited scope. Several studies have been done since the early
2000s show that the use of teams significantly increases worker productivity;1 encourages employees
to set ambitious and impromptu group goals;2 facilitates communication across organisational barri-
ers;3 improves financial performance for the typical firm;4 and creates a social climate that encour-
ages the exchange and combination of new knowledge, leading to the creation of new products and
services.
To support the idea of teams, several businesses also offer team rewards. Among them are Unisys,
Hallmark Cards, Blue Cross-Blue Shields, Rockwell, Motorola, Signicast Corporation, and Smithkline
Beecham, among other well-known businesses from a range of industries. There are many different
formulas and approaches used to link incentives to team performance. A 2003 meta-analysis of 45
studies using team incentives found that overall, the use of incentives tied to the accomplishment of
group goals resulted in a 22 percent gain in performance. This research was based on a survey of 2,500
corporations conducted by William Mercer Inc. in the late 1990s. According to the study’s authors,
Individually-directed rewards had a much less impact on performance than team-directed incentives.
The study’s setting (business, government, or educational institution), the incentive system’s competi-
tive structure (programmes where only the top performers receive incentives versus programmes where
everyone who improves performance receives incentives), the study’s design (lab experiment vs. field
study), or the performance outcome had no bearing on this effect (quality, quantity, or both). In these
experiments, it was discovered that monetary rewards—such as cash and travel—produced greater per-
formance benefits than non-financial, material incentives.
According to our observations and conversations with managers, the following are the top justifica-
tions for grouping tasks into teams:
The most successful way to increase quality, as opposed to the conventional quality control methods,
is through quality—teams.
Greater knowledge applied to a specific issue—facilitating innovation by removing barriers between

employees and enhancing the flow of knowledge inside the company
Greater flexibility as a result of the organization’s decreasing reliance on specific personnel; this
creates a mechanism to absorb turnover and downsizing because other people can “step in” as
needed.
People from various backgrounds sharing their perspectives and experiences leads to more idea
cross-fertilization, and this mix of diverse talent can encourage creativity.
Greater independence, discretion, “empowerment,” and “emerging leadership” are fostered within
the company when there is less reliance on managers or formal hierarchies.
If workers are involved in decision-making, they are more dedicated to the company.
Employees are given a corporate or organisational perspective so they may understand how various
departments or components of the business work together.
Better justification for the budget for the rewards programme thanks to the more direct connection
to specific performance objectives, as is the case with many plans, which gives the ROI information
required to offer incentives to workers who were previously excluded from such programmes.

128 Chapter 7
Like any other people programme, team-based management approaches require the assistance of other
Notes
human-resources systems in order to be successful. Compensation can play a key part in demonstrating
the organization’s commitment to the team concept by putting money where your mouth is. The use of
incentives linked to the accomplishment of group goals, as noted in a recent study by Professor Chris-
tina Harbring, can foster communication and cooperation within teams more effectively than anything
else9. As a result, in addition to the institutional mechanisms by which team-based pay programmes are
coordinated with other compensation methods, the way group rewards are linked to performance will be
crucial in creating and maintaining effective team arrangements.
ADVANTAGES AND DIS ADVANTAGES OF USING TEAM

BASED INCENTIVES
The implementation of team incentives is not a magic bullet, like any other human resource manage-
ment programme. The benefits of team-based incentives are generally acknowledged in the literature
to outweigh any potential drawbacks; however, it is crucial to be aware of any potential pitfalls so that
they can be avoided.
To sum up, team-based incentives offer the following essential benefits, all of which lead to higher
performance:
Fostering group norms of cooperation and collegiality

assisting in the removal of obstacles due to disciplinary and background diversity in cross-func-
tional work teams
assisting teams in concentrating on achieving project goals and objectives
enabling businesses to pay teams and groups differently based on their strategic importance
On the other hand, there are some possible drawbacks to using team-based incentives. These must
be controlled to make sure that the
The benefits mentioned above will come. The following are possible drawbacks with the adoption of
team-based incentives:
Free riding, or the possibility of some team members receiving the reward while having made
little or no effort to the accomplishment of group objectives This could happen as a result of a lack
of effort or because some team members are much less skilled or capable than the rest of the team.
Using peer ratings to evaluate the contributions of specific team members is one solution to this
possible issue.
The most skilled members of the team may come up with superior answers to problems facing
the team, even though team decisions are more widely accepted by the team and result in more
dedication to the accomplishment of group goals. Team members need to be instructed to carefully
examine each team member’s opinion and prevent a rush to judgement in order to address this
potential issue.
Interdependence makes it challenging to separate distinct groups for reward reasons. Team-based
incentives may provide issues if a group’s performance is dependent on the performance of other groups
because it is impossible to separate and reward the performance of each group. One solution to this
problem is to increase the size of the team receiving the prize, possibly encompassing all teams that are
dependent on one another.
Different cultural values. The United States is a fairly individualistic culture, as will be mentioned
later, thus going too far with team-based incentives may cause resentment among workers who feel
they should only be recognised for their own unique contributions. Offering both individual and team-
based prizes while asking team members for their input on the best blend is one way to address this
problem.
If group incentives are taken too far, entrepreneurship may suffer. Entrepreneurs are frequently loners
with unique quirks. They are frequently motivated by their own inner need to succeed and by others’
praise of their accomplishments. These people frequently struggle to function in teams despite playing
a crucial role in many enterprises. Therefore, it is necessary to make room for employees that show a
strong entrepreneurial orientation even when team-based incentives are in place.

BONUS AFFILIATED WITH TEAM PERFORMANCE Notes

The concept of pay-for-performance or pay for knowledge, abilities, and/or experience can be used as
the foundation for team incentives. The more popular model is pay-for-performance where the results of
a team’s work serve as the pay-out standard Cost savings, the quantity of goods produced, meeting dead-
lines, parts rejected, or the team’s success in creating a new product design and obtaining a patent are
examples of objectively measurable effects. The team as a whole can be motivated by having the goals,
methods of measurement, and bonus amount decided in advance and communicated to group members.
Cash, corporate stock, or non-cash rewards like trips, time off, or luxuries can all be used as bonus pay-
ments. Payment may be given to each team member equally or differently in an effort to recognise those
who contributed more to the team’s goals. The company must use a technique for measuring individual-
based performance if awards are to be given based on how each employee helped the team achieve its
objectives. Team members can grade each other’s performance and decide on awards based on the group’s
consensus rather than assigning a lead or supervisor the duty of assessing individual contributions.
The competitiveness between team members sneaks into the team concept when team rewards are
given to individuals differently. The processes of allocating bonus money to individual members can
then get tainted with the myriad of mistakes noted in conventional pay-for-performance systems. Team
bonuses can easily devolve into simple just another kind of merit compensation. When employing peer
assessments, the additional challenge is to distinguish between real performance and the outcomes of a
popularity contest.
Another strategy is team-based remuneration for knowledge and/or skill. This must be distinguished
from other pay-for-skill programmes that reward individual performance. Manufacturing facilities
are experimenting with skill-based compensation systems where employees get paid more when they
learn new abilities and can master new duties at the facility, typically as a consequence of intensive
cross-training within their team. Despite the fact that they might work in teams, each member raises
their salary by honing their particular skills. This type of knowledge-based pay emphasises individual
accomplishments rather than team-based ones and encourages self-improvement in the same way that
merit pay does.
On the other hand, skill-based remuneration at the team level recognises group members who improve
their capacity to collaborate. Collaboration with other teams could be a key factor in determining com-
pensation, along with the capacity to collaborate well on problem-solving tasks. The crucial distinction
is that as the team’s collective talents, not just the skills of certain individuals, develop, the entire team
benefits. This kind of incentive may be helpful to corporations having issues with team cooperation by
reducing competition among the teams.
The team can be rewarded using the same strategy as each member develops new talents. Instead of
rewarding one person for mastering a new skill,
When all team members are successfully cross-trained, the entire team may be compensated, or the
team’s evaluation may hinge on its capacity to bring each member up to speed. This gives the more
skilled workers incentives to help the less skilled workers. Additionally, it spurs team members to con-
duct more candid and transparent performance reviews of one another. A poorly performing employee
is likely to be swiftly identified and dealt with by team members since they are aware that one person’s
non-performance might hamper the rewards to all members.
IDENTIFYING TEAM INCENTIVES

The ability of the company to recruit, retain, and motivate personnel will be impacted by team perfor-
mance rewards, which will also shape the corporate culture. Plans for team remuneration should be
chosen when they are in line with the nature of the work and the team’s and organization’s goals.
Nature of Work
To achieve desired results, such as improved quality, increased quantity, improved communication, and
cheaper costs, recent efforts to redesign occupations have concentrated on developing cooperative work
relationships among people. Sales agents, field engineers, and inventory staff must communicate con-
stantly in manufacturing processes like just-in-time inventories. Due to the collaborative nature of a lot

130 Chapter 7
of today’s work, incentive programmes that recognise the accomplishments of the team give employees
Notes
feedback that will support the organization’s objectives and tactics.
M defined a collaborative work environment. Deutsch as one in which the goals of many employees
are mixed together in such a way that there is a favourable correlation between the achievement of the
group members’ goals. In other words, no one person can succeed alone; it takes a team effort to produce
the desired performance result. Compensation plans for this kind of labour must prioritise collective
rather than individual success.
Economic theories suggest that individual contracts between employees and the business are created
in a working relationship, which is where the idea of individual pay schemes comes from. The corpora-
tion is thus made up of the total of all individual employment contracts. Due to the intercorrelated nature
of the majority of work, this idea has a number of associated issues. It is inefficient for a team of workers
to work individually on different goals and objectives when the organisation only has one overarching
goal that calls for teamwork from all of the workers.
Traditional sales-commission plans are an often used illustration of how this idea fails. Typically, the
salesman is compensated only for units sold, resulting in a unique contract between the salesperson and
the customer employer. Unfortunately, the contract only specifies the amount of money the sales person
will be paid based on how many things are sold, not how well the consumer is informed. This could
lead to a serious customer service issue that is not noticed until after the sale. Due to the salesperson’s
lack of interest and incapacity to communicate information to the consumer or to headquarters offices,
customer service representatives and field personnel are frequently quite frustrated. Only units sold
are specified in the employment agreement between the salesperson and the company. As a result, the
contractor is not worried about working together with the home office, field agents, or customer service
team. The businesses’ objective of efficient sales and service is not achieved by strictly defining the
occupations. As a result, there is misunderstanding within the company and a negative impression is
given to the customer. Since this kind of work is inherently collaborative, team incentives could help the
firm achieve its true objectives in terms of quantity and quality.
SETTING OF GOALS
There is a tonne of research that suggests setting goals improves performance.15 The majority of these
studies have concentrated on setting goals for individuals and tracking individual performance; how-
ever, very few studies have taken into account setting goals for groups and tracking group performance.
The goals should be challenging enough to present a challenge to the team members but not unachiev-
able17. It has also been suggested that group goal-setting processes persuade team members who have
not accepted the team’s goals to personalise the group’s goals18. In general, it appears that group goal
setting does result in improved group performance when the goals are accepted by the group members.
When combined with consequences, such as rewards, it appears that goal setting has a long-term
effect on the team’s performance.20 Compensation programmes provide an essential feedback link
for the goal-setting process. Research has also shown that linking group rewards to the achievement
of group goals has a positive effect on team performance. Pay that is linked to the team’s goals dem-
onstrates the organization’s commitment to the programme, and feedback given about the team gives
employees encouragement to keep working toward the goals they have set for themselves.
SELF-MANAGED WORK TEAMS AND RESEARCH AND

DEVELOPMENT TEAMS ARE TWO EXAMPLES.
New organisational structures are being introduced as the old corporate hierarchy continues to change
towards an egalitarian structure with a focus on participative management.
Manufacturing and non-manufacturing businesses now use self-managed work teams after discover-
ing that the conventional type of supervisor, lead, and Ineffective at encouraging independent judgement
and high levels of cooperation.
Self-managed work teams are made up of several employees, typically all of equal position within
the hierarchy, who collaborate to set goals and objectives, address issues, and meet performance goals.
The team may be in charge of team member hiring, disciplining, reviewing, rewarding, and terminations
as well as other personnel-related decisions. These teams are currently in use in many manufacturing

companies where employees must work closely together to complete tasks. A flat organisational struc-
Notes
ture with an emphasis on operators’ contributions to their team’s tasks was developed and was comple-
mented by an open-plan design that gave employees access to all phases of the production process. The
Sherwin-Williams Co. is one example of a company that prioritised work teams in an effort to allow
employees to more effectively handle the numerous product changes required in their plant while also
maintaining high quality standards.
It improves the climate of close cooperation and enables employees to contribute more effectively
to task completion when teams are managed as opposed to individuals reporting to a supervisor. As
opposed to traditional systems where people compete against one another, collective goals are more
closely held by employees. The use of compensation mechanisms that reward the team for achieving
team objectives, whether these are performance-based, such as meeting a stated output target, or pro-
cess-based, such as developing management skills, has significantly increased the effectiveness of these
teams. The compensation structure that pays team members for achieving team goals sends a crucial
message to employees that management encourages team performance and values team goals highly.
D. and Luis Gomez-Mejia Research and development teams benefited more from collective awards than
from individual ones, according to Balkin’s study of 175 scientists and engineers. The nature of research
and development work necessitates teamwork and cooperation from scientists and engineers, who fre-
quently have conflicting personal goals as a result of their scientific education and interest in pursuing
strictly research-oriented activities as opposed to customer-oriented projects. Their personal goal can
be brought into sync with the needs of the corporation with the use of aggregate incentive systems. The
lack of sufficient individual performance measurements for these experts, according to these writers, is
another factor in the success of team incentives. Research and development teams advance suddenly
rather than gradually, and it is challenging to gauge how much a single person contributed to the team’s
success while undertaking projects like designing a novel product or developing a novel technology. It
was also discovered that team-based bonus schemes gave the organisation more latitude in coordinating
the timing of the incentive with team achievements.
Gomez-Mejia and Balkin discovered two key benefits of implementing team incentives for research
and development activities as opposed to individual-based programmes or organization-wide strategies
like profit sharing. Initially, compensation is more directly correlated with the productivity of the team
members who manage the amount and calibre of their research output. Gomez- Mejia, Balkin, and
Milkovich describe the case of a high-technology company in the Boston area that allows engineers to
earn up to 25% of their salary as a result of successful team performance. This practise can be used to
put pressure on people to perform to the best of their abilities in alignment with the team’s goals. Each
research and development team is obliged to provide a written report outlining how their efforts contrib-
uted to significant cost savings or other advantages for the company as part of the program’s competitive
administration. A committee of managers and supervisors, both technical and nontechnical, analyses the
proposals and may or may not award bonuses.
The team approach can also be utilised to encourage the research and development and marketing
departments to collaborate more closely. Research & development is interested in researching technol-
ogy, whereas marketing focuses on selling items based on consumer requirements and perceptions. As a
result of their respective responsibilities and training, these two divisions have historically been at odds
with one another. Pay structures can be utilised to assemble teams of marketing and technical profes-
sionals, even if these two objectives are not necessarily compatible. Products that are both technologi-
cally sophisticated and commercially viable may be the outcome.
Beersma et al.24 identify two significant factors that should be taken into consideration when design-
ing team incentives in a research of 75 four-person teams participating in a simulated interactive task
in which reward structure was altered. The first is that there is often a trade-off between speed and
accuracy when performing complex activities (as would be the case with R&D teams). According to
their research, “competitive rewards promote speed, whereas cooperative rewards promote accuracy.
The second key finding of their research is that team members’ personalities influence how they respond
to incentives. Managers may not be able to jointly maximise both aspects of task performance via a
single reward structure, so they should think about which aspect of a task they want to prioritise before
designing the reward structure. In particular, they draw the conclusion that “our data demonstrate that a
cooperative reward system is a particularly effective choice when teams are formed of extroverted and
pleasant members.”

132 Chapter 7
Notes INTEGRATION
Team incentives can be added to compensation schemes for individuals, business units, and organisa-
tions. Integrating all of these compensation strategies so that they support the organization’s strategy is
essential for success. Each distinct method of payment can compete with one another or the corporate
objectives if they are not established to be consistent with the business strategy, sending extremely con-
flicting messages to employees. Individuals continue to have personal goals in addition to their incor-
porated team goals when team incentives are used. The incentives system can be useful in ensuring that
team goals and individual goals are mutually supportive rather than conflicting.
Reward schemes are crucial for maintaining or growing hierarchical or egalitarian organisational
structures. The struggle for high achievement among team members to ensure that their performance is
acknowledged by top management will continue if the company is largely hierarchical and if individual
employees realise that success comes only after rising through supervisory and management levels.
Promotional opportunities and incentives should both be thoughtfully designed to anticipate the require-
ments of people who want successful advancement within the firm. Individual rewards are compatible
with tall, hierarchical systems. As a result, companies that want flat organisations must alter their com-
pensation strategies to align with the desired structural objectives.
Organizations must also take into account the relationships that teams should have. Teams can either
work in a competitive setting where they compete with one another for performance results and consequent
rewards, or they can cooperate to achieve shared goals. The environment will reflect the culture and aims
of the company. Members of a department can cross beyond their traditional boundaries to join teams
that are multidisciplinary, or team membership can be set up so that only employees from that department
work together on a team. Once more, the team’s structure will rely on the company’s objectives.
The Value of Individualism in Culture

Although many firms are adopting the team idea, the characteristics of the American worker in a team
environment—which are alien to the fundamental culture from which the employee has emerged—have
received relatively little attention.
In a thorough analysis using a database with more than 116,000 survey responses, Hofstede dis-
covered that the United States ranked first in a construct he called individuality. Countries with a high
level of individualism are those where the individual is valued more highly than the group. Each person
is expected to take care of himself; the organisation is not committed to providing long-term care for
people. Individual performance is typically emphasised more in these nations’ pay schemes than group
performance.
The accumulation of prizes for performance, such as income, company cars, job title, number of
subordinates, and other rewards seen in traditional compensation schemes, is evidence of an employee’s
capacity to show others his successful individual achievements. One must wonder how the individual-
istic mindset that characterises the American worker can survive in this environment as team concepts
are used. One instrument for meeting the demands of both individuals and groups is the compensation
scheme. In a culture that values individual achievement, awards for exceptional performance cannot be
disregarded; nonetheless, they must be thoughtfully implemented into organisational culture. Environ-
ment where teamwork is more important than individual effort for survival. When a company switches
from individual to team programmes, turnover should be closely watched. This will give feedback on
the kinds of employees who struggle with the team concept and those who are dissatisfied with the
workplace culture. Future recruitment attempts, succession planning, and programme evaluation will
all require the use of this data.
Organizations are increasingly placing a high priority on creative compensation management, which
tailors pay to the demands of the business, the nature of the work, and employee traits. Due to the suc-
cesses several firms have had after implementing such programmes, the team concept is quickly gain-
ing favour. When a company wants to improve the performance of the team as a whole, not just the
performance of each individual employee within the team, team-based criteria for compensation should
be employed rather than individual criteria. Organizations must work hard to be innovative in the imple-
mentation of effective team-incentive programmes that convey to the worker that group performance,
rather than individual performance, is crucial to success in a culture where individual aims and ambi-
tions are so prevalent.

INNOVATION: USING THE ROI SHARE PLAN TO COMBINE TEAM Notes

INCENTIVES AND EMPLOYEE SURVEYS
Technology has made it possible to collect data in a variety of ways that can be used to calculate bonus
amounts. Additionally, there is growing interest in conducting employee surveys (such as satisfaction,
pulse, or engagement surveys) to find out not just what employees’ views are, but also what suggestions
they may have for enhancing performance within their own teams or throughout the entire firm. The
quick retrieval of information from surveys creates new possibilities for fusing traditional concepts of
remuneration with technology and expanding our understanding of the usage of team-based incentives.
One such programme, which is now being included in a technology platform25, serves as an illustra-
tion of such a project. An alternative to various sorts of team- or group-based incentives, ROI sharing26
combines a technology suite that includes pulse surveys and online action planning for managers. Tra-
ditional gainsharing plans are where ROI sharing got its start.
Gainsharing systems typically involve the implementation of two main elements at the business unit
level: a money sharing or incentive system and an idea programme. Gainsharing is justified by the con-
cept that innovative ideas lead to improvements in financial results that are purely within the control of
the workforce. These financial results are monitored, and after the “gain” has been divided between the
workforce and the company, bonuses are awarded to the workers. Gainsharing principles’ fairness and
the idea that bonuses should only be given for substantial gains are quite appealing. The recommenda-
tion systems, however, are frequently onerous. ROI sharing offers a substitute.
That might be effective for organisations that want to simultaneously focus on the objectives of the
team and the overall business unit. Here is an illustration of how ROI sharing operates:
The company sets up a pulse polling method, asking staff to offer suggestions, details on obstacles
to productivity, and more on a regular basis (suggest bi-weekly or monthly).
The pulse surveys are kept brief (three to five questions); if they are too complicated, staff members
and supervisors won’t be interested in participating.
When the survey is finished, the technology must give management rapid access to the data. For
managers to be able to participate in the actions required for the ROI share plan to succeed, data
must be sent quickly.
The pulse survey process should also include an online manager action planning tool, allowing
managers to log issues raised by the surveys and subsequently document their subsequent actions
and ROI.
Actions result from continual data gathering and communication between management and staff.
Actions produce results, some of which can be measured using a ROI calculation and some of
which have an intrinsic ROI (nonquantifiable).
How are bonuses calculated?

Incentive plan floor: Prior to any sharing, the data gathering, reporting, and action planning system
must achieve an acceptable ROI. If technology must be purchased, this affects the expenses as well as
any necessary training and installation steps before the programme can be launched. Let’s say senior
management decides that a 300 percent return on investment is required before the incentive scheme
becomes active.
When a program’s expenditures (or investment) have increased by 300 percent, a bonus pool for staff
begins to gain value. The actions managers take in response to data received through the pulse survey
system will serve as the criteria for this incentive system. Therefore, managers promote change for the
benefit of their employee groups while operating in continuous improvement mode.
The authors’ action planning tool distinguishes between actions that are “owned” by specific man-
agers and those that are not managed by the manager (or that are shared with others; owned by other
departments or managers). As a result, managers now have the chance to profit from both their indi-
vidual and group efforts. When two managers collaborate on an action that generates a ROI, the ROI is
distributed among the staff in both managers’ departments. With the help of technology, it is possible to
keep track of where ideas come from, which manager takes action, who is collaborating on activities,
and how much ROI is realised.

134 Chapter 7
In our own experience, managers’ report ROI in one of two ways: qualitatively, which is less easily
Notes
verified, or quantitatively, which is well-documented. We propose two distinct bonus pools, one for each
type of ROI. Although some may contend that qualitative ROI—also known as nonquantifiable ROI—
has no place in a bonus system, our experience shows that this is untrue. Although it can be difficult to
demonstrate a short-term return on investment (ROI), numerous studies have shown that over the long
term, employee morale and other “soft” outcomes predict customer service, quality, and other business
criteria crucial for maintaining competitive position. Additionally, we discover that some of the most
intangible returns produce a high level of pride when we use these types of ROI “stories” with CEOs. In
the ROI share plan, both narratives and numerical data are valuable.
Bonus pool 1: Non-financial rewards may be incorporated into a bonus pool using qualitative categories
of ROI. These kinds of ROI are typically sources of pride, less quantitative but crucial for storytelling
and communicating. Therefore, we advocate allowing managers to submit their ROI for review by
senior executives.
Bonus pool 2: A second bonus pool receives quantified ROI for management assessment. The employee
team that works for the manager who submitted the concept will receive a part of the savings if the ROI
calculations are confirmed. Unless there is a corporate directive to the contrary, this bonus is split evenly
between managers and employees. The firm’s financial status and the nature of the work determine the
split. It might be split 50/50, with 10% going to the company and 90% to the employee pool.
The financial split is dispersed as a proportion of the employees’ salaries once the bonus pool has
been established.
This formula shares many components with gainsharing schemes. The program’s focus on the man-
aging team at the team level of analysis makes it special. Technology is also used in the procedure. The
idea development and action process within teams and between teams are led by individual managers,
who are also responsible for leading the ROI share process. Since each manager has her own data, it is
the manager’s job to keep the programme running. Managers may delegate to staff or collaborate with
peers or their own managers to execute. While committees oversee suggestions in gainsharing, it is the
manager’s responsibility to involve their teams in ROI sharing.
HOW TO IMPROVE THE SUCCESS OF TEAM-BASED PAY

As this chapter’s discussion of team-based work designs demonstrates, compensation is crucial to their
effectiveness. When tying pay to team success, a checklist of “best practises” and important points to
think about is provided in Table 7.1. We came up with this.
Table 7.1: Best Practices adopted while designing team based incentives
Important considerations and recommendations for creating team-based rewards
You receive what you measure and reward, so remember that!
The best method for lowering free-riding is group pressure.
Cohesion strengthens group pressure.
By offering group incentives, cohesion is increased.
Rewards should go to the whole team rather than being specific to one person, such as “Walter’s shop.”
The evaluation process must account for the assignment’s difficulty and likelihood of failure. If they
are punished for taking on challenging jobs and there are simpler methods to be recognised, people
won’t take chances.
Space awards should be connected to various project stages in order to promote short-term suc-
cesses while keeping long-term goals in mind, such as from important intermediate landmarks
through patenting of ideas through commercialization of project.
Use all available data to evaluate team performance and distribute awards if an employee works for
numerous teams.
Determine the “internal and external customers” for each group and assess their opinions of the
teams.

Reduce the use of hierarchies (such as Technician I, II, II, etc.) when promoting or rewarding
Notes
employees. Because of this, status and power differences become dysfunctional in a team setting.
Use “broadbanding” as a flexible method of rewarding employees without building outsized career/
grade hierarchies.
Pay the team a lump sum in recognition of significant achievements. These stand out more and are
less tainted by other factors, such the expense of living.
Identify and recognise key contributors through group nomination, evaluating nominees in cross-
functional groups.
Be inventive when offering non-cash incentives that foster a sense of community, such as outings,
team photos for company publications, company events, etc.
Utilize peer evaluations with the supervisor to compile and integrate this feedback so that it is given
to the employee in an effective way.
Based on the literature and our own consulting experience. Effective pay design is only one factor that
contributes to increased team performance, and this is a crucial caveat. The company must also take into
account other crucial issues concurrently. Table 7.2 shows additional procedures combined with team-
based rewards that can improve team performance.
Table 7.2: The internal structure of the team

Make sure each team has a skilled facilitator.
Each team member should have a broadly defined role, therefore the team’s composition must be
carefully planned, taking both personality traits and technical considerations into account.
Recognize the biggest obstacle to innovation: working well with others and technical knowledge
sometimes conflict. “Mavericks” must be safeguarded because innovation depends on them.
SUMMARY
As seen in the many incentive-plan examples dis- under their direct control and compensating them
cussed in this chapter, each plan has unique com- for the appropriate actions and outcomes. They
ponents or features that have an impact on how will work harder to get the additional incentives at
well it supports corporate goals by luring in the hand if they believe their employer’s performance
right people and inspiring employee behaviour. standards are reasonable and doable, furthering
An organisation should take its compensation organisational goals.
philosophy and strategy into consideration when Before wrapping up this chapter, it is important
deciding on the kind of variable-pay plan that is to note that variable compensation, in addition to
acceptable. What use does variable pay serve? being a frequently used instrument for incentive
What kind of programme is ideal for your com- and attractiveness, may support the reinforcement
pany? Different strategies will aid in the success of virtually everything that the employer consid-
of an organization’s efforts to draw in and inspire ers significant, including the desired corporate
talent in various ways. culture. It can convey specific information.
Variable compensation can help ensure the the importance given to team or individual per-
competitiveness of the benefits a firm can provide formance, for example, are examples of the orga-
to potential employees as a recruitment strategy. nization’s priorities. By giving bigger rewards to
By allowing for higher compensation to make the individuals who most exhibit the required behav-
employment proposition more alluring than that of iours or make substantial contributions to the
the usual employer, it can help attract high-quality company’s performance, variable pay can also
people. Additionally, offering flexible pay might help with the retention of highly valued person-
help recruit workers whose values align with those nel. Last but not least, variable pay can efficiently
of the firm. exploit a company’s spending on benefits, gen-
Variable pay, used as a motivational tool, can erating higher rewards when business results are
aid in the accomplishment of organisational goals stronger and lower awards when business results
by directing employees toward business drivers fall short of expectations.

136 Chapter 7
Notes Let’s discuss

1. What are the issues and challenges in select- 2. Design a cafeteria model of rewards system
ing variable for variable pay for an IT company.

1. You are working with an IT company and Design a variable pay to overcome this
the most of the time project gets delayed issue without effecting the morale of the
for reasons like team delay or coordination. employees.

7-1. A ______ must be fixed considering the general eco- (c) c) to improve the performance
nomic conditions of the country. (d) d) to reward for job performance
(a) Minimum wages 7-4. _________ refers to monetary bebefits offered and
(b) Fair wages prvided to employee in return of the services they
(c) Living wages provide to the organization
(d) All of the above (a) a) direct compensation
7-2. Compensation is a systematic approach to provind (b) b) indirect compensation
monetary value to employees in exchange for (c) c) performance compensation
(a) a) skills (d) d) non of the above
(b) b) knowledge 7-5. Compensation is a____ approach to providing mon-
(c) c) work performed etary value to employees in exchange for work
(d) d) damages held performed
7-3. Among the given points which is not an objective of (a) Traditional
compensation (b) Modern
(a) a) to increase or maintain morale (c) Classic
(b) b) to determine basic wage & salary (d) Systematic
Answer Keys:
7-1. (c) 7-2. (c) 7-3. (c) 7-4. (a) 7-5. (d)

chapter 8
Designing Compensation For Sales Team
Learning Objectives
Aligning the business strategy and sales compensation Plan design “ground rules” established
Having a dedicated sales team is imperative for any organization irrespective of its size. DA Cements,
the fourth-largest cement maker in 2023, plans on increasing its cement production capacity to 46.4
MTPA from the current 35.9 MTPA. The organization has a dedicated sales team and is now on an
aggressive move to enhance sales and increase the market share. Positive attitude and approach of the
team played a crucial role in making DA Cements the fourth top player in the industry. The organization
motivates its employees in all possible ways. Despite all this, employees are getting exhausted, or some
feel that they are doing a routine monotonous task. As a consultant, how would you overcome this?
Which new variable can be induced where sales team feel motivated and charged?
For the majority of businesses, the ability to draw in and keep consumers is the key to corporate
success. The sales force holds the key to company growth and profitability since it serves as an essential
conduit between a firm and its clients. A properly managed, motivated, and compensated sales team will
significantly aid in achieving these commercial measures. One of the company’s largest investments in its
sales organisation and one of the most effective instruments at management’s disposal for achieving the
highest levels of sales force motivation and performance is the sales compensation plan. Top managers
in many businesses nowadays are particularly concerned about sales remuneration.
This is the case for three reasons. First, according to our research, the budget for selling expenses is
made up of between 30 and 70 percent sales remuneration, depending on the business. Regardless of
the cyclical business cycle, the size of this expense makes senior managers concerned about getting the
right return on their investment in compensation. The sales compensation plan is a potent “signalling
system” to the sales force about what is crucial to concentrate on, according to a recent research study
in which 86 percent of participating organisations stated that this topic is their top priority.1 A well-
thought-out plan compensates a sales team for achieving top management-desired business objectives.
The results, however, can be equally terrible when the plan is out of sync with corporate objectives as
they might be when it is “in sync.” The business press has claimed that CA’s (previously Top managers
should be strongly motivated to pay attention to the behaviour and performance that their company
plan generates in light of Computer Associates’ (also known as Computer Associates) well publicised
poor experience with sales compensation.2 Three things happened. First, in fiscal year 2006, additional
commission charges of $70 million were incurred as a result of the absence of internal controls and the
payment of many sales representatives for the same sales. The former head of sales was then sentenced
to seven years in jail after pleading guilty to the charge of backdating sales contracts to meet quarterly
revenue objectives. Last but not least, CA’s former CEO received a 12-year prison term for his part in
inventing a “35-day month” to record additional revenue after a quarter finished.

140 Chapter 8
Last but not least, sales compensation programmes do get dated with time. Plan obsolescence is
Notes
largely a result of changes in client purchase behaviour or expectations for how the purchasing process
will go. New buying habits affect the demands placed on sales roles, yet remuneration schemes often
don’t change or change too late to take into account the new standards for successfully selling to and
connecting with clients. Media advertising, retail automobile, residential real estate, and stock trading
are just a few examples of the industries that have been significantly impacted by the Internet and have
had to fundamentally rethink how they compensate for sales success.
These issues with sales compensation present an opportunity for HR professionals to improve their
engagement with plan creation, implementation, and ongoing management, which can have a signifi-
cant impact on a company’s business performance3, according to recent research. The main goal of this
chapter is to examine how HR professionals may benefit from and meet the need for their knowledge in
this crucial area of pay within their organisations. Attracting, acquiring, and retaining sales talent is cur-
rently the top concern for businesses throughout the world, therefore we think HR practitioners should
be prepared to make big and meaningful contributions in this area of compensation. The proper people
in the right sales positions are what separate successful businesses from unsuccessful ones. Therefore,
ensuring that sales remuneration plays a crucial part in luring and keeping the appropriate skilled people
is probably the greatest contribution HR can make to a company.
THE NEED FOR INSPIRED HR PARTICIPATION

We have recently questioned top managers to find out what tasks HR specialists may perform that would
be rewarded while they are working on sales compensation. The four most common answers were:
Clarify the corporate goals that the plan should uphold

Provide comparison information on pay scales and procedures
Obtain market intelligence about change, including who, what, and why adjustments are being
made to plans.
Conduct analysis and offer interpretation of the efficacy of the plan, focusing on pay versus perfor-
mance outcomes.
Figure 1 includes comments from representatives of major organisations that give context to these
common responses and illustrate top management’s expectations of HR participation with sales
compensation.
For three reasons, we think that HR is now much more involved in sales compensation than it was
in earlier years.
1. Sales ability: In the majority of businesses, top management turns to the compensation plan to aid
in luring in and keeping individuals of the calibre necessary to effectively sell to and engage with
clients. The most significant difficulty facing businesses globally, according to a recent Manpower
poll, is finding and keeping top-tier sales talent.
Commentary on FIGURE 1
Top executives can understand where our company sits on a Total Cash basis in relation to our competi-
tors for talent through benchmarking, which helps them cut through the noise about having to pay more
for this or that position.
Top executives find the in-depth understanding and application of Best Practices invaluable because
it enables them to confidently communicate the company’s key drivers for the coming year while having
faith that the Sales Compensation team will create a plan around those drivers that will maximise their
return on investment.
D&B, Short Hills, New Jersey, Steve Long, Leader—Sales Policy and Planning
The CEO, Compensation Committee, and our sales executives anticipate that HR will collaborate with
our sales compensation consultants to create plans that are tuned to the business and influence our sales-
people’s conduct in a way that advances the company’s strategic and operational goals.

Designing Compensation For Sales Team 141
They also expect us to provide them with clear information about how our procedures stack up
Notes
against those of other businesses in the same industry. Our ability to understand how to recruit and keep
people, as well as to ensure proper management controls and oversight of our compensation practises,
depends on timely, accurate market intelligence.
Sunnyvale, California-based Vice President of Human Resources Mike Major
Clear decision-making guidelines are provided by concise analytical data in two areas:
1. How much do we pay and how do we offer it? Competitive intelligence on market pays and plan
design practises.
2. Actual selling conduct vs. potential diagnosis. What aspects of the plan show them the money, or
what is the lan intent?
Senior Manager of Compensation for Philips Medical Systems in Bothell, Washington, Pete Gardner
37,000 employers in 27 nations. 41 percent of the businesses said they were having trouble filling posi-
tions, and the sales representative role ranked as the hardest to fill. Because having a strong sales force
gives a company a significant competitive advantage, especially in markets where product commod-
itization is taking place, HR can significantly impact a company’s bottom line by working with sales
leadership to create compensation plans that will draw and keep talented individuals in sales positions.
By doing this, sales leadership will be able to overcome one of the biggest obstacles to company
expansion: finding skilled, seasoned, and qualified personnel who can effectively interact with consumers.
2. Cost: Top management have expressed concern that the sales incentive plan may be “too wealthy”
in the last couple of years, particularly in North America where the rate of growth has been slower
than elsewhere in the globe in many businesses. For instance, the structure of the compensation was
largely to blame for a financial services company’s discovery that its sales compensation expen-
ditures were increasing at a rate four times faster than revenue. Instead of the sales jobs that were
chartered to sell new business that supported ambitious revenue growth goals, pay levels were
established at the 75th percentile for all sales jobs. Mix and leverage ratios were also the same for
all sales roles in the name of “fairness.” The company’s cost-productivity issue was further exacer-
bated by sales crediting procedures that let many sales and sales support positions to be “credited”
for the same dollars of sales. Fortunately, in that organisation, the HR team had the knowledge and
experience to step in and create a change management effort to bring sales compensation costs in
line with future financial requirements when asked to do so by sales leadership. All HR profes-
sionals associated with sales compensation must be able to perform what the HR professionals at
that organisation did. An HR professional should be able to help sales leadership with a thorough
review and evaluation of:
(i) Level, mix, and leverage of pay
(ii) The threshold, quota, and excellence levels of performance
(iii) Performance against quotas, in particular the proportion of the sales force that meets or
exceeds it
(iv) Overachievement incentive pay, or the ratio to goal incentive pay and the share of salespeople
who receive it
(v) The number of sales representatives and their managers who are given credit for a single dol-
lar of sales is known as sales crediting.
3. Auditing and conformity: Sarbanes-Oxley Act was passed by Congress in 2002 in reaction to
financial and accounting problems that affected large, publicly traded companies held businesses.
In essence, the act aims to safeguard investors by enhancing the veracity and dependability of
company disclosures. Despite the fact that sales compensation is not directly addressed by the
provisions of that act, there has still been a “trickle-down” impact as businesses and their boards
have grown more concerned with all types of compensation and the effectiveness of measures to
oversee it. In light of this context, we note that top management requires annual audits of sales
compensation plans for compliance with particular regulations and requirements. One illustration
of this is the classification of sales compensation decision-making as either localised or centralised

142 Chapter 8
by a major international software company. Roles and job eligibility, performance metrics, some
Notes
formula mechanisms (such as the use of bonuses versus commission), quota-setting procedures,
crediting guidelines, and important employee status policies are all decided centrally or corpo-
rately. Pay levels, salary and incentive ratios, leverage ratios, some formula mechanics (such as
how to arrange the pay for performance relationship inside the desired incentive plan), individual
quotas, and pay frequency are all decisions that are decided locally or at the national level. In this
kind of setup, HR is in charge of ensuring that the distribution of accountabilities is carried out as
specified, generally working closely with finance.
SKILLS AND KNOWLEDGE NEEDED

FOR INCREASED INVOLVEMENT
Each organisation has a different level of HR practitioner involvement with a sales compensation plan.
In certain businesses, the top sales executive actively seeks out and promotes HR’s engagement. In
other businesses, HR is not involved. We periodically conduct surveys of businesses across a variety of
industries to better understand the incidence and forms of HR involvement with sales compensation. As
shown in Figure 2, HR’s involvement varies across the board in around two thirds of the businesses we
studied, from extensive involvement throughout the whole design and administration process to mini-
mal involvement during the final plan review and approval.
Because it makes use of their experience in crucial people management areas, we have discovered
that HR practitioners are being expected to take a more active part in plan creation and implementa-
tion in recent years. Making sure a company’s sales compensation plan is made to attract and keep the
correct kind of salespeople as well as recognise and reward those who achieve the desired business
objectives is one of them. Therefore, it is obvious that a company should use the knowledge of its HR
professionals when creating and implementing a pay plan that aids in achieving those goals.
An HR professional must persuade sales leaders that they have the expertise and experience necessary
to contribute to the sales compensation plan of the organisation. Therefore, a human resource professional
should gain the trust of the sales leadership group. Displaying an understanding of how the sales organisa-
tion runs is a suitable technique to do it. This comprehension comprises the following information:
Customer marketplaces and the offered goods and services
jobs in sales channels
Business goals for the current year, sales tactics, and financial targets for sales
Various sales management systems in relation to centralised vs. decentralised sales management
approaches
Competition in the industry, including wage rates and incentive plan procedures
Building productive working connections with senior sales leaders and other important staff managers
in sales operations, sales finance, and IT has helped HR professionals who have effectively created this
understanding. They specifically do the following things:
Attend sales leadership meetings pertaining to future company planning to obtain understanding of
the effects of changing sales remuneration.
Regularly “work with” sellers and sales managers to comprehend the sales procedures utilised to
conduct business with customers and the criteria for success in those sales positions.
Join and take part in professional networking organisations to learn about the difficulties faced by
others in the field and their experiences in critical practise areas.
If you are registered in industry market surveys, take part in “job matching” sessions to learn about
the similarities and contrasts in jobs at other companies.
Attend industry trade exhibitions or gatherings with sales executives or personnel to obtain knowl-
edge of the current business difficulties and prospects.
Meaningful involvement is more likely to occur in a business when the HR professional has estab-
lished successful working relationships with key sales leaders across the sales organisation and has
gained a complete understanding of how the sales organisation functions. Additionally, HR profes-
sionals need to obtain exposure to other firms’ methods, which is best accomplished through active
networking, in order to develop and continuously enhance their understanding of sales compensation

concepts, practises, and approaches. Every HR professional participating in sales compensation should
Notes
periodically consider how they may broaden their knowledge of and proficiency with the instruments
and methods relevant to creative approaches to sales compensation.
ALIGNING THE BUSINESS STRATEGY

AND SALES COMPENSATION
The company’s business strategy must be supported by the sales compensation plan. Company objec-
tives (such as financial objectives such as growth, profit, and shareholder return), marketing strategy
(such as offerings, value proposition, markets targeted, and channels used), and sales strategy are three
of the more crucial components of business strategy (e.g., the plan of action that defines how to sell
to and interact with customers). A sequence of decision-making procedures that, when properly com-
pleted, ensure that the plan is aligned with corporate strategy should be used in the design of the sales
compensation plan.
The process of creating a sales compensation plan is derivative. In other words, the proper plan’s
design is based on the specific conditions and goals of that organisation. The HR professional is being
asked more frequently to participate in the plan creation process. That role could be anything from a team
member to a subject matter expert to a process leader, depending on the company’s traditions. Regardless
of the precise position that the HR practitioner plays, we have discovered over the years that understand-
ing precisely how to combine strategy, roles, performance measurements, goals, and pay together into an
ideal plan is the biggest problem faced by businesses during the design process. As a result, this calls for
the HR professional to enable a process using tools that aid those involved in sales compensation design
in precisely defining the kind of selling that will be carried out by the sales force.
The Sales Strategy MatrixSM has proven to be a useful tool for us in defining sales roles and match-
ing those roles to the company’s business goals. There are two variables: buyers and items, as shown in
Figure 3 There are two types of buyers: prospects and customers. Additionally, products can be divided
into two categories: current and new or forthcoming. The types of selling possibilities that a corporation
will encounter in each of the matrix’s two by two quadrants are defined by this matrix.
The following are the four selling chances:
1. Selling to existing customers in order to get them to place repeat orders is known as retention sell-
ing. Retaining such customers’ money stream is the salesperson’s responsibility.
2. Selling through penetration entails enhancing customer relationships by increasing sales to existing
customers or expanding sales to customers who already have an established account.
3. Conversion selling’s goal is to persuade clients of rival companies to switch to the company’s goods.
4. The goal of new market selling, which is perhaps the hardest kind of selling, is to bring in new
clients for the business by promoting new products.
Even if each circumstance is unique, one of the main benefits of the Sales Strategy MatrixSM is that it
offers a structure for defining and deploying a company’s sales jobs. A possible set of sales roles that a
business might use to recruit, keep, and grow its customer base is shown in Figure 8.1.
The four occupations represented in this diagram are:
1. Account manager: According to our research, an established business typically generates 60 to 80
percent of its revenue by marketing related products to current clients. When a business wants to
grow by selling more products or developing new markets while also keeping its current clientele,
promoting goods to customers within the existing clientele—an account manager The job is in
place. The percentage of income obtained through client retention can be significant and profitable
when account managers are deployed in a variety of ways, including by assigned territory, assigned
industry, and assigned accounts serviced over the phone.
2. Business developer: Numerous businesses have learned that the sales cycle varies depending on
the consumer type. For instance, it typically takes three to four times longer to gain business with
a new customer than it does to expand relationships with an existing one. So, some businesses cre-
ate the position of “business development”. The main objective of that position is to bring in new
clients for a business by promoting either new or existing products.

144 Chapter 8
FIGURE 8.1 Mix of sales strategies

Notes
Matrix of Sales Strategy
MatrixSM
Conversion New Concept

Selling Selling
“Grow Base” “Develop Markets”
Prospects
3 4
Buyers
Retention Penetration Selling
Selling
“Penetrate Accounts”
“Protect Base”
Customers 1 2
Existing New/Additional
In-Line Products
3. Product sales specialist: Businesses with a single, sizable sales force that represent the goods of
numerous business divisions frequently discover that it is not feasible for their sales representatives
to be “experts” in the use of all of their products. The profession of a product sales expert is one
type of sales specialisation that is employed. The focus of this position is comprehending a buyer’s
particular requirements of the (current or potential) customer, and then customising the solution
with the ideal combination of the company’s goods and services. Product sales professionals fre-
quently cover a wide range of the market, but it is not uncommon for them to focus on a specific
group of clients or to actively seek out new accounts.
4. Channel or Segment sales Manager: As a company develops and grows, management begins to
understand that the only way to meet the variety of sales opportunities present in the markets in
which it competes is to think about new channels of consumer contact. A company can frequently
reach customers more effectively and efficiently by using a nondirect sales force channel.
Top managers’ expectations for the company’s development and profitability have a significant impact
on the number and type of sales jobs (and sales channels) that result from applying the Sales Strategy
MatrixSM to a specific business. However, our study reveals that the top three factors considered by
businesses when assessing the performance of their sales compensation are:
(i) increase sales output
(ii) Increasing sales to present clients
(iii) increase total profitable sales
Thus, in order to accomplish these goals, we see that the businesses with the best sales compensation
plans begin by reviewing and delineating the different kinds of sales jobs that are employed when con-
ducting business with clients.
PLAN DESIGN “GROUND RULES” ESTABLISHED

It is crucial to define the rationale for decisions about the components of a sales compensation plan before
beginning the actual plan design process. The company’s compensation philosophy and the guidelines or

rules that set expectations for the programme are the two main areas that need management’s attention.
Notes
The direction and leadership of the HR practitioner will be advantageous in each of these areas.
Pay philosophy. The design of a sales compensation plan should be in line with the organization’s com-
pensation philosophy in order to be successful. This philosophy is frequently informal, unwritten down,
or both. Therefore, we advise that plan designers review the company’s pay philosophy with manage-
ment and then formalise it using the following set of essential criteria:
(a) Objectives: Verification of the strategic intent behind compensation and its constituent parts
(b) Comparing the labour markets: locating pertinent businesses and matching candidates
with jobs
(c) Competitive positioning: salary level percentile standing
(d) Salary/variable compensation ratio: based on the business’s risk-versus-reward mindset,
competitive practise, and the impact of the eligible job(s) on obtaining and retaining
customers’ business
(e) Base pay determination: variables and procedures to be used in determining and modifying
base salaries
(f) Short-term rewards: who qualifies and whose incentives are deemed suitable
(g) Long-term rewards: who qualifies and what incentives are regarded suitable
(h) Roles and responsibilities in communication
The first step in making sure the sales compensation plan is created to be compatible with other com-
pensation plans in the company is to confirm this information.
Compensation Principles. Typically, the compensation philosophy and procedures employed through-
out a company have an impact on the creation of a sales compensation plan. In fact, because employees
are moved in and out of the sales organisation as part of a company-wide career development initia-
tive, top managers in many companies ask human resources or the compensation function to ensure
that the sales compensation plan is in alignment with the enterprise’s programmes. Given this context,
sales compensation plans should be based on fundamental ideas that are in line with the principles that
govern a company’s overall compensation and reward structure. The following succinctly outlines key
considerations that a sales compensation plan designer should bear in mind. While numerous publica-
tions—including this Handbook—provide details about the principles of effective and appropriate com-
pensation, the following list is not exhaustive.
(a) To accomplish its goals, the compensation philosophy must actively support the company’s
strategy and vision.
(b) Compensation plans must adhere to all applicable laws and regulations.
(c) Compensation should be in line with the organization’s administrative capacity and budgetary
needs.
(d) To, keep, and inspire brilliant workers, compensation must be in line with both internal
equality and external criteria.
(e) The specifics of the compensation plan must be based on the roles that each job plays in the
buying and selling process.
A company’s needs-specific “ground rules” should be established in addition to these fundamental ideas.
The following issues need to be taken into account:
(i) What business goals are most important for this year? What goals must the strategy
support?
(ii) What are the marketing and sales strategy for the company?
(iii) Job definition: Which positions are necessary to carry out the business’s strategies?
(iv) What criteria should be used to establish and monitor performance over time? How are
performance goals to be set? What degree of success is reasonable to anticipate? What
performance levels can be incorporated into the design of a sales compensation plan?

146 Chapter 8
(v) Who should be involved in the formulation of the compensation plan? What techniques are
Notes
best for managing and inspiring the sales jobs?
(vi) Administration: When should we give credit for performance in terms of incentives? What
is our method of communication? Who should participate?
SIX ESSENTIAL PLAN DESIGN ELEMENTS

The fundamental elements of sales compensation are six. The relationship between these elements and
the business management factors taken into account before the plan’s design is illustrated in Figure .5.
The optimum decision-making sequence is part of the design process, which is a derivative process. In
other words, the creation of a strong foundation supplied by business management decisions for the plan
year serves as the basis for an effective and acceptable plan.
Companies typically appoint a “design team,” or a defined group of individuals, to address the goals
and strategy of complex business environments.
Cross-functional resources that provide the required knowledge and attention to the process Assembling
the team and overseeing the design process are increasingly being seen as critical responsibilities that
are either delegated to or shared with HR. On this kind of team, marketing, sales management, human
resources, finance, sales administration, and information systems are typically represented. A team-based
approach to plan creation results in a plan that is more closely connected with numerous goals and more
people buying into the new sales compensation programme. It also allows important leaders to influence
decisions earlier in the process. The design process must take six important factors into account.
Verify employment and eligibility in Step 1

The key idea is to base incentive eligibility on the degree of influence on the purchasing decision and
involvement in the process of discovering, persuading, and meeting client demands.
These are often the positions that initiate, persuade, and complete the client coverage process; line
managers for these positions are qualified to take part in the sales compensation programme. A major
factor in determining eligibility to take part in a sales compensation programme is corporate philoso-
phy. Team members might, for instance, only be qualified for sales remuneration if they are a part of a
customer team.
Establish Pay Levels and Mix in Step 2

The main idea is to make sure that salaries are fair and competitive both internally and externally, taking
into account the duties and obligations of the position.
The cash compensation (base salary and variable incentive compensation included) that is available
for attaining desired goals is known as the total target cash compensation. A benchmark for determining
the amount of compensation the firm is willing to offer for each job is created through the use of market
data and the application of the company’s pay philosophy. Each job’s overall target cash compensation
level must be sufficient to reward performance and encourage employees in order to produce desired
business outcomes.
Making judgments about leverage (the amount of “upside” opportunity that exceptional performers
are projected to receive above total target compensation) and mix (the ratio of base salary to incentive
opportunity as percentages of the total target compensation) are based on the pay levels for each job.
The mix is decided by predetermined factors, such as the type of sale, the length of the sales cycle, the
number of transactions each year, and the degree to which the job affects the decision to purchase. The
sales compensation plan should offer upside potential (leverage) that is appropriate for the position,
the employer’s pay philosophy, and labour market conditions. Excellent performers should generally
be compensated exceptionally (i.e., the plan should provide increased dollars on the upside after target
performance is achieved).
Determine Performance Measures in Step 3

You get what you pay for is a key idea. Based on the organization’s major objectives and the job’s key
accountabilities, three or fewer measures should be employed.

FIGURE 8.2
Notes
Business Objectives
The Compensation Plan
Design Process
Marketing Strategy
1. Determine Eligibility
Sales Strategy 2. Establish Levels and Mix
3. I dentify Performance
Sales Channels Measures
and Jobs
4. Establish Goals
Sales Performance
andMeasurement
5. Develop Mechanics
Sales Compensation
PlanDesign
6. Cost Model
Sales Compensation
Plan Administration
This is possibly the most important design element to adequately handle. The following choices
must be made to guarantee that the performance measurements chosen are in line with the business
and the job:
1. Verify the business objectives that the job will affect (s). Examples include expansion, profitability,
increased productivity, cost savings, client retention and loyalty, or some combination of these five.
2. Choose the metrics that are linked to the accomplishment of those goals. Make sure that measure-
ment systems or procedures are in place. It is necessary to identify and consider feasible alterna-
tives if a key indicator cannot be consistently tracked and achievement measured.
3. Make sure the procedures are appropriate for the task. The sales compensation plan’s metrics
should be influenced by reasonable effort and conduct. The ability of the salesman to influence
results and job functions must be the basis for measuring success.
4. Identify the measuring level. For the purposes of determining sales pay, the unit of aggregation
of results (territory, accounts, team, etc.) should be determined by the degree to which outcomes
are impacted by the job and the degree to which corporate systems can precisely track, credit, and
report results.
5. Verify each measure’s proportional importance. The strategic significance of each metric to the
accomplishment of corporate goals determines the “weight” of each measure in the strategy. Addi-
tionally, the sales force is better able to allocate its time based on the plan message and its align-
ment with management requirements thanks to the relative weighting of the various metrics.
The maximisation of top-line performance is essentially the responsibility of the sales function. There-
fore, the first factor in any sales job is usually a measure of total volume. The best way to assess the
entire volume that can be linked to a salesperson’s performance is decided at the design phase. This
could refer to overall revenue, revenue produced from volume, revenue from new business and recurring
sales dollar volume from frequent client ordering (a measure of retention), or number of units sold. Most
plans should include a volume measure that rewards growth as one of the metrics.
The volume measure should be complemented by other criteria that explain the ideal type of volume,
where the volume should originate from, or how it should be produced. Profitability (financial mea-

148 Chapter 8
sures), sales productivity (which may include both financial and non-financial measures), and strategic
Notes
planning are additional categories to take into account (generally nonfinancial measures).
Set goals in Step 4

The key idea is to establish expectations for important performance indicators based on job influence
and a standardised procedure.
Numerous businesses set goals for the sales force for some or all of the chosen performance measures
after the measures have been chosen. These objectives are frequently referred to as a quota, particularly
for volume- or profitability-focused criteria. In the past, corporations mainly used monetary success
indicators in their sales compensation plans, and maybe half of all businesses had quotas in place. Based
on the growth goals for the plan year, many companies simply applied a uniform percentage or dollar
increase to the entire sales force.
Many more businesses are setting performance expectations for both financial and non-financial
measures in today’s competitive environment. The method used to establish goals varies greatly
between sectors, businesses, and different sorts of metrics. Regardless of procedures, many businesses
express unhappiness with the quota-setting process and its results. However, focusing properly on
goal-setting is crucial to the sales compensation plan’s success. Setting up goals correctly offers the
chance to manage for results, permits maximum flexibility, and visibly aligns the efficiency of field
resources with that of corporate resources.
As soon as goals are set, it is important to pay attention to the “performance standards” or the per-
formance range that will determine the amount of incentive payments. Depending on a person’s per-
formance, there are different pay-out levels under the sales compensation plan. No reward should take
place if performance falls below a specific threshold. To express minimum performance norms, a thresh-
old level of performance is employed. Many businesses offer bigger sums after performance reaches a
particular point. An “uncapped” plan is preferable in general, yet a ceiling or “cap” may be employed
when it is impractical or impossible to specify realistic ranges. Earnings above a “excellence” level,
however, need to be harder to get. On an ideal performance distribution, several statistical “rules of
thumb” for the performance range are based (e.g., 90 percent achieve threshold, 60–70 percent achieve
or exceed goal, 10–15 percent reach or exceed excellence).
Develop Incentive Mechanics in Step 5

The key idea is to choose the plan mechanics according to the desired pay-performance ratio.
In its broadest definition, “sales compensation” refers to all aspects of pay for jobs in sales and
sales management. While base-salary only plans are suitable for non-persuasive selling situations,
many businesses are moving toward placing some or all of the pay of employees in “at risk” posi-
tions, including those who work in customer coverage groups and do not engage in selling. Therefore,
through the plan mechanics associated with the final component of plan design, all earlier components
are aligned. Element of total cash pay that is an incentive (or variable). The term “mechanics” refers
to the type of plan, the formula for the plan, and the interactions between incentive components that
determine payment.
Types of Plans: There are two main types of plans: bonus plans and commission plans. Either one or
both may be used in addition to the base salary. A quota or goal may also be used with either a bonus or
a commission; however, bonus plans always include some kind of goal, whereas commissions may or
may not include a quota or goal as one of the factors in the calculation.
A commission plan offers a share in percentage or money based on gross sales, product unit sales,
or gross profit money. Absolute measurement systems are supported by commission programmes; the
more of a good or service is sold, the higher the reward. This kind of plan is most frequently employed
in new-market selling scenarios where individual persuasion skills and quick sales cycles are key dif-
ferentiators. By explicitly tying remuneration to sales performance, commission programmes are used
by businesses to recognise employee effort and promote success. With specialist sales forces, commis-
sions have historically been utilised in several industries to promote new products and increase market
share.

Bonuses are given for achieving goals and can be in the form of a fixed dollar amount or a percentage
Notes
of base pay. They are always “goal-based,” regardless of whether the goal is financial (volume, profit-
ability, or productivity), and are most effectively applied in more complex sales environments. These
systems support a relative measuring system where rewards are based on accomplishment of specific
objectives. A salary plus bonus plan controls the amount of incentive pay-out to a preferred market rate
while allowing for goal-based measurement. They may be “capped” or “uncapped.”
Detailed plans: An “unlinked” formula is one that consists of a series of additive pay-outs. Plan formulas
can be “linked” or “unlinked.” In a “linked” formula, one measure’s pay-out is contingent upon the success
of another. By “linking” the measures in the formula, it is ensured that the salesperson will clearly under-
stand that two performance measures require their attention. Three methods exist for establishing a linkage:
The minimal performance thresholds a salesperson must meet in one component of the plan to
qualify for variable pay in another component are known as gates (or hurdles).
Depending on how well the salesperson performs in another measure, multipliers or modifiers
increase or decrease the salesperson’s earnings in that plan component.
When a salesman must perform against two competing performance measures, the matrix design is
employed. The salesperson is responsible for balancing performance across two metrics.
Sixth step: Cost model

The results of both aggregate costing (effect on the company) and individual plan modelling are used to
determine the final design (effect on individuals).
Finance and HR may complete this step while working with sales or sales operations. To finalise such
plan components as the performance range (threshold and excellence), the upside possible at excellence,
and the proportionate weight of each metric, the outcomes are crucial. This step must be finished before
the plan can be deemed “final.”
The best-laid plans will fall flat if they are not carried out properly. A successful implementation will
put the new strategy to the test, win the organization’s support, inform the business, and reduce transi-
tional inefficiencies. A new sales compensation plan can be installed and communicated with success-
fully and efficiently using a variety of adult learning techniques. The HR professional should ensure that
the following four crucial learning components are covered as the implementation plan is being created:
Motivation. Adults are goal-oriented and seek to understand the purpose behind what is being taught,
such as how to succeed under the plan, in order to do so.
Reinforcement. The message that the organisation wants to express should be continuously and favour-
ably repeated through media and procedures.
Retention. Adults need to understand why what is being communicated is being done. To make sure
that the participants have first-hand knowledge with how the plan operates and how they might effect
the pay-out, the materials and media should include “practise” sessions.
Transference. The participant must translate the knowledge that the media and materials present into
constructive action. The person should be enthusiastic and eager to apply the knowledge to improve
their current circumstance.
For the majority of salespeople, the idea of changes to any component of sales pay is overwhelming.
Understanding potential problems is necessary for effective change management projects in order to
foresee the kinds of challenges that could appear when something is new or implemented for the first
time with the sales compensation plan. HR professionals frequently have knowledge and expertise in
how to plan and implement change. Therefore, it is wise to employ a structured change management
approach to direct planning and decision-making activities associated with the implementation of a
fresh sales incentive scheme. As it relates to implementing a new sales compensation plan, the goals of
a change process are to:
Specify the changes and responsibilities.
Justify the need for change in the present.

150 Chapter 8
Establish a plan to direct the change process.

Notes
Check to see if the expected results and improvements are coming about.
Feedback on change outcomes should be given to co-workers who need to stay informed
We’ve discovered that for these aims to be implemented successfully, a three-step approach is necessary.
The following are the steps in the procedure, in brief:
1. The company’s compensation philosophy, the guiding concepts that helped establish the plan, its
advantages, and the ways in which participants can succeed under the plan should all be clearly
understood by field managers who oversee the programme and the headquarters personnel who
administer it. Additionally, every component of administration needs to be well-documented and
understood. A particular training programme will be crucial to the success of the plan for these
people. Managers have access to electronic “incentive calculators,” plan announcement pamphlets,
Q&As, and official documents to execute and maintain the sales compensation plan. The involve-
ment of the human resources specialist is crucial to ensuring that the materials are understandable,
practical, and compliant with the needs of the business and the law.
2. The programme needs to be introduced to the sales organisation after field management and head-
quarters resources have received training. Both a group presentation conducted by executive man-
agement and one-on-one follow-up meetings to address particular queries are necessary. The keys
to successful implementation are open communication and thorough descriptions of the reports
that will be made available to plan participants. Keep in mind that the sales department should not
be in charge of calculating the incentive payment. Reports should be precise and timely because
calculations are dependent on data from numerous systems. If salespeople believe they must con-
stantly “check-up” on the correctness of these reports, even the best-designed plan may be seen
as a failure.
3. At least once every year, a formal assessment process should be finished. To assess how well
the plan is promoting the desired behaviours and producing the desired outcomes, an interim
evaluation may be carried out after one or two pay-out periods. The style team, or a designated
team member, should review the evaluation’s findings and determine whether changes are
necessary.
Summary
HR’s engagement in the sales compensation plan, design and implementation process requires this
whether as an internal consultant or as a policy understanding. The involvement of experienced
gatekeeper, is crucial to company success. The HR professionals in sales compensation creates
likelihood of meaningful involvement increases the opportunity for new perspectives and
when the HR professional has a solid grasp of how insights on how to improve plan effectiveness
sales functions and has established productive because these professionals are familiar with
working relationships with key sales leaders. human motivation and know how to tap into the
Additionally, HR professionals need to expand workforce to identify the underlying causes of job
and strengthen their understanding of the theories, dissatisfaction. The outcome of that involvement
methods, and practises of sales compensation. will benefit the corporation as a whole as well as
Making a significant contribution to the plan the sales department.

Case Study Notes
ABC DISTRIBUTION
The case
ABC Distribution distributes food products, mainly to major retailers. The critical success factors
for the organization, as spelt out by its Managing Director and the Director of Finance, are its
ability to meet its profit targets and to grow the business substantially on a consistent basis by
developing a reputation for providing added value services, developing business with existing
customers, winning new customers, and acquisitions. The company has doubled in size in the last
four years. Underpinning the development of the company is the need to grow the infrastructure,
to develop management and leadership and to extend quality and safety programmes.
The Managing Director agreed that in a sense their business strategy evolved in a semi-formal way,
but this evolution took place: by the key people understanding what the total business was trying to
do, and their part in it; then they went away and put their bits together; then we pulled all of it together.
The Managing Director described their approach to developing the HR strategy as follows:
Our HR strategy has to respond to our business needs. The challenge for HR is to look at
all the areas it encompasses and make sure they are integrated into the main plan. One of the
problems this company used to have up to a few years ago was that HR strategy was seen as
something completely separate from corporate strategy. What we have tried to do in the past few
years is to make them one and the same thing. So we start with a business plan; we know we
are going to grow at a certain rate. We have to increase the market share, which can be done
only if we are able to come with products as per the need and choice. Our sales team should be
motivated to perform with more energy and should feel engaged with the organization.
Questions:
1. Design variable pay for sales team
2. If you are heading the HR how would you go about?

1. You are HR Head of India cements. Being gets more aggressive. In such a scenario
an old company the sale’s have been good. design sales teams incentive package to
Management wants to increase the market motivate and increase the sales.
share. This is possible only if the sales team

152 Chapter 8
8-1. The basic compensations given to employee as sala- (c) Group based pay plans
ries or wages are called (d) Organization wide base pay
(a) Base pay 8-4. The amount of compensation which is linked to
(b) Waves teams, individual and organizational performance is
(c) Variable pay classified as
(d) Salaries (a) non exempted pay
8-2. The payments made to employee for the amount of (b) variable pay
time in which the employee worked are classified as (c) exempted pay
(a) Variable pay (d) based pay
(b) Salaries 8-5. The safety awards, attendance bonuses, sales com-
(c) Base pay mission and piece rate are classfided as techniques of
(d) Wages (a) individual pay plans
8-3. The employee stock options deferred compensation’s (b) group based pay plans
and executive stock options are classified as tech- (c) organization wide pay plans
niques of (d) organization wide base pay
(a) Individual pay plans
(b) Organization wide pay plans
Answer Keys:
8-1. (a) 8-2. (d) 8-3. (d) 8-4. (b) 8-5. (a)

chapter 9
Enhancing Work Force Productivity

Through Compensation
Learning Objectives
Exploring the drivers of productivity Using variable compensation to drive productivity
Using fixed compensation to drive productivity
Meryl Manufacturing Company is a sheet metal company based in Chennai and is into manufacturing
office furniture. Meryl had nearly 400 employees working in three shifts. During an audit, it was
observed that the company was running in profit by selling their scrap than finished products. This
was viewed very seriously by the top management who invited a consultant to identify the problem.
It was learnt that the employees were not happy with the salary structure and other benefits they were
receiving. As they were not confirmed of their probation, they were missing a lot of allowances. Because
of these reasons, employees never felt attached to the organization. Their commitment level was low.
No one felt motivated as they were not sure of their career in Meryl. If you are a consultant, how would
you go about it ? Can you overcome the problem of increasing commitment and productivity through
compensation? If so, how?
Over the long term, productivity is the only different iating factor that defines the wealth of
organizations. Writing in The Handbook of Industrial and Organizational Psychology, Robert Pritchard
explains that, if the productivity of a firm is higher than that of its competitors, that firm has a better
chance of surviving because it is more competitive. Productivity is the primary driver of long-term
growth and profitability. Just as there is no single way to define productivity, there is no single way to
measure it. The definition of productivity and the metrics used to support it vary by business model,
nature of work, and employee segment. Essentially, however, productivity is how well a system
uses its resources to achieve its goals. One important and often underutilized driver of productivity
is compensation, a substantial resource in any organization. Fixed compensation can reinforce the
demonstration of the key capabilities that are critical for driving productivity. Variable compensation can
motivate and reinforce the achievement of productivity-based results.
Highly productive organizations have a culture of productivity and recognize it as the foundation of
value creation. Developing a culture of productivity requires taking a systemic view of the organization’s
drivers of productivity and finding the right mix of investments that can be applied in an integrated and
consistent manner over a sustained period. Regardless of what an organization produces—a service,
a product, a piece of information, or a unit of wealth—the level of productivity of the organization
ultimately determines the degree to which it can create value for its customers and stakeholders over the
long term. In today’s knowledge economy, where labor investment typically exceeds capital investment,
labor—or employee—productivity is the most critical ingredient.

154 Chapter 9
To build a culture of productivity, an organization must understand and definethe nature of productiv-
Notes
ity. Start by considering the following questions:
How does the organization define value creation for its customers and otherstakeholders?
How does the organization define productivity today? How does it measureproductivity?
To what extent are productivity metrics used in managing the performanceof the enterprise?
What are the organization’s beliefs and hypotheses regarding its productivity?
What is the organization’s productivity growth strategy? What are the drivers of real productivity
improvement?
How do the organization’s investments in people, including compensation, benefits, and develop-
ment, drive productivity?
EXPLORING THE DRIVERS OF PRODUCTIVITY

Creating and sustaining a culture of productivity requires a comprehensive understanding of the mix of
ingredients that drives productivity over the long term. Although this mix will vary by organization, the
key drivers are relatively straightforward and constant. They are:
Process—the business processes used to carry out the work of theorganization
Capability—the skills and knowledge needed to execute processes
Structure—the design and organization of roles and jobs, functions,and units
Technology—the tools, equipment, and technologies used to get work done
Rewards—the strategies used to motivate and reinforce the achievement ofresults
To drive productivity, an organization needs to examine all these categories and their interrelationships
to find the optimal mix of investments in one or more of the drivers, given its business model.
Consider the following question: If an organization has defined what productivity is, has identified
the metrics to measure it, and wants to improve it by 10 percent, what investments should it make in one
or more of the key drivers to achieve that increase?
Although each organization would answer this question differently, one of thekey drivers—rewards—
is often overlooked or ignored. There are many reasons organizations stumble when it comes to design-
ing reward programs that drive real productivity gains. Some place too much emphasis on the process
and technology drivers—almost every company has done a form of business process redesign and/or
installed a large-scale information system. Another common problem is that rewards are unfocused and
are tied to many other things: revenue, profit, management by objectives, quality, etc. A third reason
is that some organizations simply do not believe in using compensation as an active driver of business
results—it is not part of their philosophy or culture.
What forms of compensation offer the greatest opportunity? Many types of financial rewards, from
gift certificates to stock grants, can be used to reinforce productivity. The balance of this chapter will
focus on the two most prominent: fixed and variable compensation. Both represent significant invest-
ments for just about any organization and typically are underutilized in driving productivity.
USING FIXED COMPENSATION TO DRIVE PRODUCTIVITY

Most organizations view fixed pay (i.e., base salary compensation) as a cost of doing business with-
out understanding what it returns beyond keeping bodies in chairs or on the line. Moreover, most
employees and managers also think merit pay—the primary vehicle used to deliver an employee’s
annual pay increase—is a highly ineffective motivator. Nevertheless, there are ways to improve
dramatically the effectiveness of merit pay by linking compensation opportunities to the drivers of
productivity.
The first step is to define the role of fixed pay relative to other forms of compensation and rewards.
Organizations that have done this are able to distinguish paying for what gets done from paying
for how it gets done. Since fixed compensation is an investment—a base salary increase provides

Enhancing Work Force Productivity Through Compensation 155
compensation going forward into the future—it should reinforce how it gets done: the behaviors and
Notes
capabilities that will drive productivity gains in the long term. This is critical in creating a culture of
productivity because it clearly links compensation opportunities with the potential to contribute to
productivity improvement. Over the years, we have done substantial research into what differentiates
highly productive organizations. That and our own experiences in working with client organizations
have revealed that highly productive organizations typically possess several of the following core
capabilities:
Customer focus—constant emphasis on creating value for the client

Execution—rigor, discipline, accountability, and follow-through in gettingthings done
Communication—clarity and transparency in how information is shared
Process orientation—effective, efficient, and consistent processes
Simplification—breaking down structure, complexity, and other obstacles toproductivity
Continuous improvement—relentlessly upgrading how work and processesare carried out
Long-term focus—viewing results through short-term actions that accumulateover time
Agility—real-time adaptation to the changing competitive landscape
Flexibility—the ability to shift focus and change tasks based on changing operational needs
Attention to detail—the discipline of focusing on many variables at once but not over-engineering
through structure or complexity
While these categories provide a good start in defining the behaviors and capabilities that will drive
productivity in the organization, once again, each organization will have its own nuances in how it
defines and measures productivity and its drivers. Therefore, it is important to beware of generic “off-
the-shelf ” competency models. Although defining capabilities through behavioral descriptors is the
most important and difficult step, it forces the organization to examine how people can and should
affect the drivers of productivity. Once these specific behaviors are defined, fixed compensation can
be used to reward people for their development and demonstration of those behaviors.
USING VARIABLE COMPENSATION TO DRIVE

PRODUCTIVITY
As opposed to fixed compensation, which is an investment in the future, variable compensation is a
reward for the achievement of results—what gets done. Effective variable pay programs have clear
goals and metrics along with well- defined mechanics for basing rewards on performance. Despite what
some critics suggest, we know empirically that incentives can and do have an impact on behavior and
performance. For example, in The Effects of Feedback, Goal Setting, and Incentives on Productivity,
Robert Pritchard found that group incentives increased productivity an average of 75 percent over the
baseline. Nevertheless, this study stands out as one of the few that focus on productivity, and while we
know a lot about what makes incentive compensation effective, there is limited information about how
variable pay can reinforce productivity improvement.
Research on the effectiveness of variable pay, and, in particular, group-based incentives, yields
insights into how compensation can best drive productivity. An effective incentive program that drives
productivity improvement has the followingcharacteristics:
A balanced set of metrics with one to two measures focused on productivityor productivity drivers
(for more on this subject, see “A Balanced Set of Metrics” at end of chapter )
A unit-based tier of one to two shared metrics and goals that reflect an interdependent group’s
contribution to productivity
A funding mechanism that directly relates award opportunity to financial gains for productivity
improvement while also delivering a significant and measurable return on investment to the
enterprise
Finding the right measures of productivity is a challenging but worthwhile endeavor. It first requires a
good definition of productivity that is specific to the organization. Once that is developed, the organization

156 Chapter 9
can define the metrics and the drivers. Avoid developing yet another list of variable pay metrics; there
Notes
is more value in identifying good measures of productivity and exploring their implications for variable
compensation program design. Major categories of productivity- oriented metrics are:
Output vs input—units produced per some investment variable
Return on investment—revenue and/or profit per compensation dollar or peremployee
Value creation—the growth in what the enterprise is worth vs some baselineor expectation
Cycle time—the speed to produce an output or a deliverable or make a decision
Customer satisfaction—the level of service and satisfaction delivered toclients
Process control—the degree to which business procedures are consistentlyand effectively executed
Employee ratios—various internal ratios such as span of control, strategic jobs vs nonstrategic jobs, etc.
Defining the metrics that will reflect productivity improvement is just as important as defining the
behaviors and capabilities that drive productivity in the organization. Once an organization defines
these metrics, it can examine how people should affect the drivers of productivity and can start to
design a variable compensation program that will reward those who achieve and/or surpass the metric-
based goals.
Summary
Productivity is one of the most critical drivers of not the same thing as performance. Productivity
the long-term success of an enter- price. Although should almost always be defined in some way
some organizations make the mistake of thinking relative to inputs, whereas performance is often
that technologyis the only tool that can be used to defined relative to expectations. Achieving perfor-
improve productivity, others have created a culture mance goals may or may not affect the productiv-
that reflects a more optimal mix of ingredients that ity of an individual, a group, or an organization.
contribute to constant productivity improvement. With this in mind, using compensation to
One important and often underutilized ingredient, unleash greater productivity requires a clear and
or driver, is compensation. Fixed compensation specific definition of productivity, the understand-
can reinforce the demonstration of the key capa- ing of the organizational capabilities that drive
bilities that are critical for driving productivity. it, and the definition of metrics that reinforce it.
Variable compensation can motivate and reinforce Moreover, the effort to build a productive cul-
the achievement of productivity-based results. ture takes time, commitment, and consistency of
In using compensation to drive productivity, approach, but the return on investment will make
it is important to understand that productivity is it worthwhile.

Enhancing Work Force Productivity Through Compensation 157
Case Study Notes
Max Photo Film Manuracturing Company

Recently Max Photo Film manufacturing Company has done well. The marketing department
has been receiving a flood of orders for its photo films from customers, scattered throughout
the country. To meet the demand the production department has expanded its operations
considerably. The company has sufficient funds to meet every eventuality. Raw materials were
available in abundance. Meanwhile the personnel department kept itself busy in administering
various kinds of tests before selecting people to man various positions in the organizations.
It is all part of history now. Nowadays things have changed dramatically, affecting the
performance of all branches in the organizations seriously. Raw materials have disappeared
from the market. Resource constraints have cropped up overnight. The company had to crumble
under the weight of these scarcities. It has to cut down its sales inevitably. To add to its woes,
Government had instructed all the companies to follows the reservations policy strictly while hiring
new employee. As a result, the personnel department had to bury its programmes concerning
selection tests in files.
The Chief Executive is in a fix. He wants to come out of this. The need for a effective programmes
of organizational development is acutely felt over. Uncertainties have perplexed employee brains
for a painfully long time. They are now in a state of turmoil. Interdepartmental and inter – personal
conflicts have soared. Cracks have appeared in every area of organizational performance. In
order to cement the loopholes and improve its prospects, the company is seriously thinking of
introducing an ambitious OD program linking with compensation plan.
1. If you are entrusted with the responsibility of designing an organizational development programme,
what kind of programme would you advocate?
2. What problems and prospects do you foresee in the implementation of such a programme?
3. Discuss the different phases of Ford’s employee separation plan

1. You are the HR head of a branded leather com- faced is high attrition rate. When enquired it
pany. It has outlets in all leading malls in India was because of social loafing. How can you
and abroad. One of the main problem being over this issue through incentive mode.

158 Chapter 9
9-1. The cost reduction, quality improvement and gain (c) Organization wide pay plans
sharing are classified as technique of (d) Organization wide base pay
(a) Organization wide pay plans 9-4. In pice rate system, the method in which number of
(b) Organization side base pay units produced are multiplied by piece rate per unit
(c) Individual pay plans is classified as
(d) Group based pay plans (a) Fixed profit piece rate system
9-4. The amount of compensation which is linked to (b) Fixed cost piece rate system
team, individual and organizational performance is (c) Straight piece rate system
classified as (d) Differential piece rate system
(a) Non exempted pay 9-5. The payment which is made to employee for only
(b) Exempted pay one time and is not part of base pay is classified as
(c) Variable pay (a) Incentives
(d) Base pay (b) Primacy reward
9-4. The employee stock options, deferred compensations (c) Bonuses
and executive stock options are classified as tecniques (d) Decency reward
of
(a) Individual pay plans
(b) Group based pay plans
Answer Keys:
9-1. (d) 9-2. (c) 9-3. (c) 9-4. (c) 9-5. (c)

chapter 10
Compensation—A tool for Organizational

Transformation & Talent Management
Learning Objectives
Workforce management Using fixed compensation to drive productivity
The alignment model Using variable compensation to drive productivity
Exploring the drivers of productivity
HI Array is a company based in Madurai manufacturing oil seals with nearly 200 employees. The
company performed its operations in traditional ways and there was no recognition for employees
whatever they performed. As far as career growth was concerned, it was almost nil. After a while,
the company started sinking. HI Array was taken over by an IIM-C retired graduate and the entire
scenario changed. The new MD explained the issues being faced by the company and the immediate
consequences to its employees. When employees understood the issues, they were willing to abide
by the new norms. He promised every employee opportunity for growth and development. In a span
of 4 years, the company expanded in an exponential manner and established 2 more plants with
employee strength increasing to 1200. If you are given the responsibility for expansion, how would
you go about it? What are the new policies you would adopt to motivate the employees and retain
the talent?
Louis Pasteur stated, “Change favors only the prepared mind.” Compensation professionals have
to proactively sift through best practices as well as current theories to incorporate into their collective
body of knowledge the processes that will result in favorable results. The collective body of truthful
knowledge is critical because it is the basis upon which we make important decisions that support the
continual, sometimes rapid, transformation of organizations.
This material provides a conceptual framework or decision-making tool that incorporates the
experiences of my colleagues and I, our research, focus groups, and interviews, as well as information
garnered from existing compensation literature, including this book. It is not an elixir guaranteeing
results, but with appropriate modifications, the framework can be a productive starting point in the
creation of a compensation program.
WORKFORCE MANAGEMENT
In my experience, compensation programs are complex financial distribution systems serving a multi-
tude of overlapping, conflicting, and frequently unclear purposes. Chapters in this book describe how
compensation programs are used to attract, retain, motivate, and reward employees. Certainly these
goals are worthy and justifiably have remained part of our psyche for decades. I have found, however,
that the real purpose and use of compensation programs, under which the previous rubrics are subsumed,
is workforce management. This goal is not effectively met because organizations are frequently clumsy

160 Chapter 10
and sometimes disingenuous in their application of both selective pay distribution and the support sys-
Notes
tems necessary to effect this activity.
My definition of workforce management is the planned, selective attraction and retention of specific
individuals and classes of employees, derived from a human resources strategy, based on an organization
blueprint or success model. Apay premium is assigned to an individual, or group of individuals, because
of their performance, potential future organizational contribution, special talent group, or some other
value-differentiating characteristic. A workforce assessment process must be conducted to determine
premium individual and talent classes in order to effectively implement a viable compensation system.
Such an assessment system clearly identifies high-potential and high-performing employees as well as
critical replacements and “hot” talent markets.
When pay practices are ambiguous, inconsistent, or arbitrary, or perceived as such by employees,
dysfunctional performance, unwanted turnover, and/or morale problems are triggered. Historically,
organization compensation programs sought internally to minimize differences in external pay markets,
choosing to establish asmall number of salary structures favoring internal equity over market conditions.
Typically, organizations selected the strongest pay markets as their reference points, or benchmarks.
My experience indicates that in these situations more employees were overpaid than underpaid, and
this overpayment was a major contributor to unaffordable payrolls. The overpay practices coupled with
higher unemployment rates concealed the emerging pay gaps in certain talent markets and increased the
likelihood of losing top talent and retaining mediocre performers.
The “peanut butter” approach of spreading dollars evenly over the workforce was destined for obso-
lescence as all sizes and types of U.S. businesses began to realign their strategies, operations, and human
resources to effectively compete in a global economy. This natural alignment process, combined with a
growing economy and changing workforce demography, led us to reaffirm what we already knew: there
is no single approach to employee pay that works in all situations, and whichever approach is used will
most likely require adaptation as an organization’s business situation changes in a rapidly evolving busi-
ness environment. Additionally, it is likely that one pay system will not work for all employee groups, let
alone premium subclasses of these groups. The time, cost, and long-range credibility of an implementa-
tion plan must be carefully considered because it could become obsolete before it is completed and it
may not be applicable to all covered employees.
Organizations are always transforming themselves. Most of the transformational changes are small
but have large cumulative effects over time. Sometransformations are major, and these are becoming
more frequent. Given the transformational nature of organizations, and specifically the continual
need for managing workforce transformation, the question of how to structure transformational
compensation systems must be addressed. My experience and research confirm that the answer is
found in the reconciliation of business phases (stage of growth), multiple external talent (pay) market
demands, and pay techniques. Successfully reconciling these forces requires not only a high level of
technical expertise but also a certain boldness and willingness to embrace change.What is transforma-
tion? It is a situation that is created when an organization anticipates and responds to changes in its
customer base, competitive environment, or internal capacity to deliver a service or product. Based
on both external forces and internal capacity for adaptability, the magnitude and speed of change will
vary within organizations. Internal change readiness is related to the alignment of a organization’s
strategy, operations, culture, and reward systems. Any perceptible change in one or more of the first
three elements in any organizational unit should trigger a reassessment of compensation systems. When
a change trigger destabilizes an organization, a snapshot of the organization’s alignment of compen-
sation with its existing strategy, operations, and culture should be taken and its targeted alignment or
blueprint must be developed. The gap between current and future compensation becomes the basis
for developing a transformational plan.
Both the snapshot and blueprint should contain the following elements of paystrategy: identification
of pay aspects of each talent market based on sources of recruitment and turnover activities; mix of
compensation (base salary, annual, andlong-term incentives, benefits, and work–life factors); and com-
petitive level. Within its total level of affordability, an organization will manage a portfolio of pay strate-
gies that will allocate compensation to individuals and classes of employees based on their premium
value to the organization. The goal is not to lose anyone that the organization cannot afford to lose, while
encouraging turnoveramong individuals and employee groups that are not as essential to the long-range
business and human resources plan.

Compensation—A tool for Organizational Transformation &Talent Management 161
Transformational compensation activities involve realigning one or more of the pay components that
Notes
include external pay market, competitive level, mix, or pay technique (delivery system). Transforma-
tional compensation necessitates a willingness to alter programs when change occurs and to focus on
greater customization of pay packages. To this end, this chapter presents a series of tools that may help
practitioners better formulate their options for compensation decisions.
THE ALIGNMENT MODEL

In order to have all key elements of an organization operating in harmony with each other, an alignment
model should be developed. Organizations experiencing sustained success practice a version of align-
ment that transcends functions and units. Their concept of alignment is a multidimensional approach
that includes the following:
Clear vision, mission, values, and goals
A well-set deployment of process to help achieve the goals
Key methods of measuring progress (and alignment), including process, results, and customer
satisfaction
Commitment within and throughout the organization on what the critical goals are, how the goals
will be reached, and how employees will be involved, appraised, and rewarded
Recognition of the outside world, including customers, suppliers, competitors, and benchmark
performers
Organizations must not only be in alignment but must be able to maintain the alignment in the face of
rapid change. Thus the organization that carries the concept of alignment to its broadest potential is the
organization that maintains it while managing corporate transformation. Achieving successful transfor-
mation iscontingent on the following:
Current, accurate, and “customer-driven” data
A well-conceived plan that is communicated throughout the organization
A strategy to follow up, measure, and reinforce performance
Adequate resources and training
Leadership and accountability
Recognition for those who perform well
The most difficult transformations occur when an organization rapidly shifts to a different phase of
growth and its internal alignment is no longer appropri ate. This is evident in the radical adaptations made
by organizations through downsizing, mergers, and acquisitions. It is also true when smaller organizations
experience a deceleration in their growth rate and organizations of all sizes expe rience sudden
growth. The alignment model suggests that radical and sudden change requires a different culture
and, in turn, a different reward system.Regrettably, an existing culture may not support the new business
scenario.Additionally, an organization may not be le to adjust its pay packages in accor dance with the
implications of customization in Figure 2. The success of therealignment of internal change elements
(strategy, operations, human resources, and compensation) will determine the survival and effective-
ness of the business.The following tools were developed to assist in making an informed choice when
change triggers affect internal alignment. The tools are intended to be illus trative and not exhaustive.
For details of the various discussed techniques, see chapters throughout the book.
The tools are organized into three sections. The sections are as follows:
Business situations and pay techniques (see Figure 3)—this chart relates nine different business
situations to 16 separate pay techniques. Each cell contains Xs reflecting the effectiveness of
the technique associated with the business situation. For example, group, team, and opportunity
sharing incentives are very effective in times of financial difficulty, and broadbanding is effective
when there are current or expected frequent changes in job content.
Pay techniques, descriptive matrix (Figure 43.4)—this chart summarizes fourimportant characteristics
associated with the pay techniques identified in Figure 43.3. For example, key contributor programs

162 Chapter 10
must be supported by a credible process for identifying must-keep employees, and profit sharing
Notes
requires a communication process focusing on a common fate for all employees.
Culture and pay techniques (Figure 43.5)—these charts summarize eight culture considerations
involved in pay techniques. For example, profit sharing could add to employee dissatisfaction if
trust in management were low.
Under the most successful scenario, a business should plan a compensation transformation before it is
destabilized by market, competitive, or internal change triggers. An organization’s potential for sur-
vival is increased by fast response and quick adaptation. The following simplified steps can be helpful
during the transformation process:
1. Determine the direction of the transformation, that is, the acceleration or deceleration of growth.
In general, the amount of leverage (percentage variable pay) will increase or decrease with the
projected rate of business growthwith the specific amount varying by individual, organization level,
and work unit. There may be problems with employee cultures that are risk-averse or risk-oriented
and that may not therefore fit a business shift. Poor culture fit may delay the complete and timely
introduction of a new pay plan.
2. Determine the amount affordable by the business unit over a two- to three-year period. Annual
increases must be distributed selectively to critical employees or classes of employees to avoid a
crippling turnover.
3. Identify the characteristics of each discrete pay market in which the organization competes for
talent. Remember that these competitors may not be business competitors. The list can be found
in recruitment sources, turnover analyses, and internal promotion data. Initially each pay market
should be discretely segmented, although they may converge or remain separate and then change
over time.
4. Within each pay market and within the organization as a whole, assess the competitive level of total
human resources cost (include base salary, variable pay, benefits, training, education, work-life,
and other relevant programs) of the workforce. This will help further set the limits of affordability
and the allocation of pay since the costs of some employee groups may be too high or low in rela-
tionship to their value-creating contribution.
5. With each pay market, determine the difficulty of recruitment, time to recruit, turnover rate, skill
levels required, and training necessary. Difficulties in recruitment when combined with long
recruitment times, high turnover rates, strong skill requirements, and high internal training costs
Figure 10.1 Customizing a compensation system
Availability of Talent
Low Medium High
High Highly and Widely

Personalized
Growth of Moderately Flexible

Industry Medium Packages
Low Selective Highly Standardized

Personalization Packages

will require a greater allocation of pay than is required for talent groups and individuals scoring
Notes
low on these dimensions.
6. Assess affordability based on the feasibility of basing more pay on incremen-tal profits. An organi-
zation can afford to pay a higher competitive level if variable pay is funded by incremental profit.
However, the risk factor of greater leverage may not suit the business culture, and its introduction
mightfurther destabilize a workforce in transition.
7. Assess change readiness. If the culture will not support the requirements of business, organization,
and human resources alignment, then the compensation transformation might have to be geared
to the rate of actual culture transformation, or perhaps slightly leading it, to communicate a new
business paradigm.
8. Identify pay techniques relevant to each pay market. Once preliminary competitive levels and
degree of leverage are established for each market, consideration for specific pay techniques can
follow. The outlined approachis as follows:
(a) identify pay techniques associated with your particular business situation(Figure 3)
(b) assess the nature of business techniques using Figure 4
(c) refine the assessment of pay techniques using the culture factorsdescribed in Figure 5
(d) use the final list of options to develop a more detailed understanding ofimplementation mech-
anisms using chapters in this book and other literature as appropriate.
9. Utilize succession and workforce assessment to customize compensation programs for must-keep
employees.
10. Develop customized pay strategies, administrative processes, performance management, and
career management processes for each talent pay market by combining those with similar charac-
teristics and segmenting others thatdo not fit together.
11. Communicate new programs. Describe the basis of each employee’s compensation clearly and
honestly to your workforce.

164 Chapter 10
Figure 10.2 Business situations and pay techniques
Business
Situation/ Simulate Frequent
Pay High Emerging Financial Inflated Controlling Down- Culture Entrepre- Job Content
Techniques Cyclicality Business Difficulty Wages Turnover sizing Change eurship Shifts
Profit Sharing
XXXXX XX XXX XXXXX XX
Subjective Perf.
Bonus XXXXX XXX XX
Opportunity/
Gain Sharing XXXXX XXXXX XXXXX XXX
Group/Team Cancel Any

Incentive XXXXX Existing XXXXX XXX
Individual Cancel Any

Incentive XXX XXX Existing XXXXX XXXXX
Key Contribu-
tor Programs XX XXXXX XXXXX XXXXX XX XXX
Competency,
Knowledge or XXXXX XXX XXXXX
Skill-Based Pay
Broadbanding XXX XXX XXXX XXXXX XXXX
Long-Term
Plans XX XXXXX XXXXX XXXXX XXXXX
Pay Cuts XXXXX XXXXX XXX
Pay Freeze XXXXX XXXXX XXXXX
Two-Tiered Pay
System * XXXXX XXXXX
Lump Sum
in Lieu of XXXXX XXXXX
Increase
Extended
Pay Review XXXXX XXXXX
Intervals
Work-Life XXXXX XXXXX XXXXX
Non-Monetary XXX XXX XXX XXXX XXXXX XXXX
Xs indicate the effectiveness of the technique

* New employee at lower rate than current employees

Figure 10.3 Pay techniques: descriptive matrix
What business situations lead

companies to consider this What conditions are important What are the risks of using
Pay Technique How does this technique work? technique? for this technique to succeed? this technique?
● ● ● ●
Profit Sharing Share the profit once-a-year. Underachieving financial Sense of common fate. Profitable years are rare.
● ●
● performance. Management credibility/trust. Employees view plan as a
Profit can be taken as:
●
■
Need to lower relative labor ● Employee involvement/ benefit.
Cash/stock
M10 Compensation and Benefits 50296 CH10.indd 165

■
costs. participation. ● Link between individual payout
Deferred for retirement ● Desire to create sense of ●
■
Open communications. and organization performance is
Split between options above
common fate. ● “Accurate” financial statements. weak.
●
Promotes employee involvement ● Shift from entitlement mentality ● Expectations are not met.
in improving profits. to performance. ● Management uses the plan as a
● Quality orientation. low pay supplement.
●
Application is forced.
● Employees focus on short-term
results.
● Uncontrollable factors exist
(adversely impact profits).
● ● ●
Subjective Performance Unexpected bonuses. Rapid change. Credible performance. Weak selection.
● ● ●
Bonus Intent is to “present” behavioral Trust, support, and commitment Credible management judges. Poor communications.
models to the organization. on everyone’s part. Sound communication system. ● Inequity of awards.
● Good communications ● Does not inspire most
● Use of reinforcement in addition employees.
to other alternative rewards.
● ● ● ●
Opportunity/Gain A group of highly interdependent Need to work in groups. Group must be able to Group unable to influence end
workers is selected. ●
Sharing (Small Group, Highly interdependent collaborate and work together. result.
●
Rucker, Scanlon, Piece rate or measured day, employees. ● Measures must be group not ● Payouts may not relate to
Improshare, Team) standard hours, sales, R&D, ● Group can influence its own individual. corporate performance.
technical milestones or unit work. ●
All awards paid on group results. ● Groups sometimes act to destroy
measures can be used. ● Employees trust management. another group.

● Group identity. ● Manipulation of standards.
● ● ● ●
Group/Team Incentive Rewards quality, production, Need to improve productivity and Management credibility/trust. People can’t work together.
project milestones or other quality. ● ●
Employee opportunity to impact/ Lack of top management
financial or operational ● Shrinking margins. improve. commitment.
objectives. ● Focus on information sharing, ● Sufficient demand/market ● Use as a “Band-Aid”.
● “Shares” profit according to employee commitment/ potential. ● Inadequate information sharing/
predetermined formula. involvement and teamwork. ● Workforce interdependence. employee involvement.
● Targeted incentive awards vary ● Adequate support systems. ● Inadequate design, administration,
based on organization level, total ● Management acceptance of and follow-through.
targeted compensation. employee work. ● Lack of understanding of risks.
Compensation—A tool for Organizational Transformation &Talent Management
● Commitment to change. ● Payouts for gains are not a result

● Strong measures. of employee efforts.
● Weak measures.
165
(Continued)
18/01/23 2:49 PM
Figure 10.3 (Continued)
What business situations lead

166
companies to consider this What conditions are important What are the risks of using
Pay Technique How does this technique work? technique? for this technique to succeed? this technique?
● ● ● ●
Targeted Individual Once a year: Performance focus. Risk accepting or Organization doesn’t define
●
Chapter 10
■
Incentives Develop a pool or fund based Affordability entrepreneurial culture. performance measures.
on affordability, performance, ● Goals/measures focus. ● Measurable results and good ● Entitlement culture resists risk
and pay. follow-up. based pay.
■
Distribute to employees. ● Attainable goals. ● Decisions are not under

● There is a threshold before a ● Individuals influence results. executive control.
payout can be made. ● Organization unable to
● Typical focus on financial objectively judge performance.
measures resulting from
cascading goals.
● Formula for payout ties to
corporate goals and measures.
● Total value of pool ties to total
compensation levels.
● Allocate funds on the basis of
individuals or groups.
● ● ● ●
Targeted Individual Pay individuals for each unit Need to motivate employees in Simple, repetitive manufacturing Employees create counter -
Incentives – Piece Rate produced with predetermined de-skilled environment. process. productive behavior trying to
amounts of money for each ● Results of the work are easy to “beat the system”.
unit (typically sole performance measure. ● High costs to maintain the
measure). ● Minimum amount of incentive system because every
● Differentiate base rate on levels interdependence. time a technological change
of production. ● Minimum need for cooperation. is made or a new product is
● Create a clear link between pay ● Trust introduced, new rates need to
and performance. ● Job security. be considered.
● ● ● ●
Targeted Individual Fixed pay assuming employees Inappropriate condition for piece Total commitment of Worker ingenuity has lowered
Incentives – Measured maintain specified level of rate. management/employees. the standard (used to create

Day performance. ● Long job cycles. ● Effective work measurement/ measured day work rate).
● Guaranteed incentive payment control system. ● Relieves pressure to perform.
in advance. ● Logical pay structure. ● Escalates labor cost (additions
● Pay does not fluctuate in the to staff).
short-term.
Key Contributor ● Individuals with historical high ● Strong need for innovation ● Able to clearly identify “must ● Selection of recipients not
Programs performance are priced in plan culture. keep” employees. credible.
(usually in technical or R&D). ● Retention is imperative for ● Environment must provide for ● Non-recipients may be
● Special compensation in certain employees. individual contribution. discouraged.
addition to traditional pay is ● Business is in growth stage. ● Employee has resources and
given (stock/cash). ● Special pay market conditions. can influence resources.
● There is usually a waiting period
to receive the award.
18/01/23 2:49 PM
● ● ● ●
Competency, Determine pay progression Large skilled, technical or Well-defined position Weaken the pay-for-
Knowledge or Skill- based on competencies professional workforce and/or competencies. performance link.
Based Pay (skills, behaviors, knowledge) presence of career ladders. ● Value person, not job. ● Majority of employees with
associated with superior ● Focus on work teams and need ● Well-developed training and limited growth opportunities.
performance. for workforce flexibility. assessment programs. ● Unaffordable labor cost.
● Slower growth rates/fewer ● Willingness to pay for unused ● Investment on faith.
opportunities. capacity.
● Linkage to broadbanding.
● ● ●
Broadbanding Pay structures which consoli- Reengineering. Current program is not credible. ● Lack of trust in management.
● ●

date large numbers of grades Downsizing. Company has commitment, ● Poor understanding of
and ranges into a smaller ● Organization restructuring. money, and time for major change. broadbanding.
number of “bands” (ranges) with ● Fewer upward job prospects. ● High level of trust between ● Poor implementation.
wide salary spreads between ● Need for multi-skilled management and supervisors/ ● Loss of control over compensation.
minimum and maximum. employees. managers. ● Cultural resistance.
● Focus on career development. ● Viable/credible performance and “Old wine in a new bottle.”
career development systems are ● Inadequate support systems
in place. (performance/management).
● Workforce is change ready and ● Low sense of urgency by
a crisis is perceived. management/employees.
● ● ● ●
Long-Term Plans Employees are provided with Need to focus on strategic Measures must be correctly Options “under water”.
special forms of pay based on issues and measures. established. ● Limited participation in plan.
results over a 3 to 5 year period. ● Attraction of key talent. ● Employees must be willing to ● Windfalls can produce
● Stock options give employees the ● Retention of key talent. take risks. exaggerated payouts.
right to purchase shares at a fixed ● Need to create sense of com- ● Management/employee trust. ● Poor measures of
price over a time period, creating mon fate. competitiveness.
a long-term financial interest; alter- ● Need to align more closely with ● Overly complex stock and
native stock plans can be used. shareholders. surrogate programs.
● Some long-term plans use cash ● Encourage entrepreneurship,
instead of stock. particularly in start-ups.

● ● ● ●
Work-Life Package of benefits designed Recruiting in tight market. Accurate determination of Inability of supervisors and
to help balance conflicting ● Meet specific needs of workforce needs (survey). managers to implement
demands of family, personal life, workforce. ● High levels of communication. program.
and work. ● Strategy is to become “employer ● Cost/benefit analysis. ● Pay levels not competitive.

● Provide childcare, paid time off, of choice.” ● Employee/management trust. ● Low employee perception of
family services, flexible work ● Employees wanting to make ● Ongoing monitoring. value of benefits.
arrangements, eldercare, conve- culture statement. ● Pay at or above market. ● Insufficient management
nience services. commitment.
● ● ● ●
Non-Monetary Awards Recognition of outstanding perfor- Supplement to sound cash Recognized employee behaviors Rewarding wrong behaviors.
mance using non-cash awards. programs. must be credible to organization. ● Rewarding weak or wrong
● Focuses on creating awareness ● Retention of key people in tough ● Award “judges” must be results.
of successful behaviors market. credible. ● Using non-cash in place of cash
exhibited by recognized ● Helpful when goals change ● Communications system program.
employees (role models). frequently. explaining program before and
● Awards include: merchandise, ● Can apply across most after awards must be in place.
travel, time-off, symbolic employee populations.

(trophy), praise.
● Awards can be individual, group
167
or team.
18/01/23 2:49 PM
Figure 10.4 Culture and pay techniques
168
Pay Technique Role of Employee / Achievement Orientation Capacity to Measure Current Compensation Issues
Management Trust Performance
Profit Sharing Could add to dissatisfaction if Culture must be performance Can be used where accounting Consider total compensation
trust is low. oriented. data is all that is available. effect.
Chapter 10
Subjective Performance Trust level varies with May be counter-productive in risk Successful plans have good
Bonus individual’s relationship with adverse organization. measurement.
management.

Opportunity/ Gain Sharing Most need neutral to positive Requires good cost of goods
level. Standards are an issue. and labor data.
Group Incentive Should be positive. Standards Varies with degree and focus An additive built on sound base
are an issue. desired. salary, not a substitute.
Targeted Individual Perceived attainability of goal is Works best with high Objectives must be measurable. Consider total compensation
Incentive critical. achievement individuals. effect.
Largely dependent on culture.
Key Contributor Programs If negative, participant backlash Able to identify key contributors. An additive built on sound base
could be a problem. salary, not a substitute.
Competency, Knowledge or Must be able to assess level of Can be expensive.
Skill-Based Pay knowledge or skill. Must be justified by impact on
productivity.
Broadbanding Aspects of application requires Lack of quality performance Must have solid linkages Can disrupt and distract
high levels of trust at all management system and between corporate strategy and organization or improve morale,
organization levels or could be performance culture will negate performance measures down to performance, and organization
perceived as arbitrary. approach. individual and/or strength when compared
team level. to existing system
Long-Term Plans Trust in equitable assignment Achievement orientation must be Must be able to select Predicting long-term stock
and appropriateness of focused over a longer term. appropriate payouts can be a source of

measures is critical. measures which satisfy all conflict.
stakeholders.
Work-Life Benefits Employees must believe Compensation levels must at
management is sincere and least
supportive. equal and preferably exceed pay
market.
Non-Cash Potential for arbitrary decisions Does not require organization There should be clear measures Compensation levels should
makes it wide achievement orientation. of behaviors and results. approximate pay markets.
important to make basis of Awards are taxable.
reward explicit.
18/01/23 2:49 PM
Potential Impact
on Employee Culture Organizational Pressure
Pay Technique Power of the Technique Compensation Organizational Issues Characteristics For Performance
Profit Sharing Diffuse unless backed by Can be demoralizing if no A good option where Most compatible with a Can reinforce and help
culture. profit to share. measurement capability is group-oriented culture. raise level of demand.
limited.
Subjective Performance Arouses desire to do Unpredictable. Often found where Focuses on individual Can be successful if
Bonus well, but does not focus direction is unclear. accountability. clearly defined.

employee in advance.
Opportunity/ Gain Sharing Powerful if done right. Upside 5% - 15%. Fits a group-oriented Supports emphasis on
Effective at focusing Downside varies by plan culture best. performance.
efforts. type. Adds peer pressure.
Group Incentive Strongest with small Upside potential controlled Clear goal-setting needed. Requires a group-oriented Fits medium to high
cohesive group. by group output. culture. demand.
Targeted Individual Incentive Strongest if achievable Opportunity must be at Clear goal-setting needed. Totally focused on Good for high demand
cash award. least 10 % – 15% to have individual accountability. situations.
an impact.
Key Contributor Programs Powerful for retention. Must be sizable and not Must be limited to “truly Will culture accept Aimed at retaining proven
Recognition can be very variable. key” contributors. “individual deals?” performers.
motivational.
Competency, Knowledge Objective is workforce Should be large enough to Most useful as part of a
or Skill-Based Pay flexibility, not incentive. make acquiring skills broader productivity effort.
worthwhile.
Broadbanding Relieves employee Some redistribution of Organization commitment Tolerance of ambiguity Better for medium
frustration over perceived pay based on perceived to implement and support. necessary or bands will demand. Unproven in
loss of career opportunities individual actual/potential Strong rationale is rapid be structured similar to creating high performance
and pay growth. Focuses contribution. Need for organizational change. grades. High commitment demand.
on performance when adequate assessment to communications.
support systems are in tools.

place.
Long-Term Plans Driven by significant Maximize or minimize Executives must be High performance
capital accumulation. competitiveness of total able to collaborate and pressures optimize
compensation. sacrifice unit for company success.
performance.
Work-Life Benefits Works best as loyalty and Reduces employee out-of- Communications, Works best in IT, R&D and Fits all situations.
morale builder. pocket expenses. supporting policies and related cultures and in
Helps recruitment and procedures, orientation of younger workforce.
retention. supervisors is key.
Non-Cash Role modeling and public Should make no impact. Good option when goals Highly collaborative cultures Fits all situations
recognition can be an are unclear or changing might resist individual or (individual, group, or
incentive for future behavior. frequently. group recognition. team).
169
18/01/23 2:49 PM
170 Chapter 10
Notes Summary
Productivity is one of the most critical drivers of definition of metrics that reinforce it. Moreover,
the long-term success of an enter- price. Although the effort to build a productive culture takes time,
some organizations make the mistake of thinking commitment, and consistency of approach, but the
that technologyis the only tool that can be used to return on investment will make it worthwhile.
improve productivity, others have created a culture This section summarized some key compensation
that reflects a more optimal mix of ingredients that elements that have become part of our collective
contribute to constant productivity improvement. wisdom. The goal is to provide a prototypical
One important and often underutilized ingredient, framework and set of tools for compensation
or driver, is compensation. Fixed compensation practitioners as a basis for developing their
can reinforce the demonstration of the key programs. The empirical basis is my experience
capabilities that are critical for driving productivity. and my colleagues’ experiences, a study of
Variable compensation can motivate and reinforce 350 organizations of various sizes representing
the achievement of productivity-based results. different industries and stages of development,
In using compensation to drive productivity, it is focus groups, literature, and interviews. The only
important to understand thatproductivity is not the conclusion that can be drawn from our review is
same thing as performance. Productivity should that different approaches will work under different
almost always be defined in some way relative circumstances, in different times, and in different
to inputs, whereas performance is often defined places.
relative to expectations. Achieving performance Compensation practitioners involved in
goals may or may not affect the productivity of an organization transformation should be mindful
individual, a group, or an organization. of the words of Machiavelli, the great human
With this in mind, using compensation to unleash resources professional, “It must be considered
greater productivity requires a clear and specific that there is nothing more difficult to carry out nor
definition of productivity, the understanding of the more doubtful of success nor more dangerous
organizational capabilities that drive it, and the to handle than to initiate a new orderof things.”

1. You are working as a HR Head in a IT and attract the best talent so that market share
company and want to introduce a model where can be increased. Design a model.
by you are able to transform the organization

10-1. The work team results and gain sharing are tech- (b) Employee stock ownership plan
niques to incentive the (c) Profit ownership plan
(a) Individual (d) Recruitment ownership plan
(b) Group or team 10-3. In piece rate system, the method in which the same
(c) Chief executive officer only amount is paid for standard output and higher
(d) Middle managers only amount is paid for units is classified as
10-2. The plan in which the employees get some owner- (a) Straight piece rate system
ship in organization for which they are working is (b) Fixed profit piece rate system
classified as (c) Differential piece rate system
(a) Employee stock option plan (d) Fixed cost piece rate system
Answer Keys:
10-1. (a) 10-2. (b) 10-3. (c)

Appendix – 1
Designing Compensation based

Performing Metrics
Learning Objectives
Identifying measures that link to key outcomes employees Designing the Performance Metrics
can influence
The foundation of any successful compensation plan is that it serves to drive the right employee behav-
ior. The metrics or measure upon which compensation is based is the most important part of the system.
Selecting the wrong measures can result in rewarding undesirable behavior and decision making. Fol-
lowing are 10 rules for creating effective performance measures that can then be linked to bonuses or
compensation are discussed.
RULE 1: SELECT MEASURES THAT LINK TO KEY OUTCOMES

EMPLOYEES CAN INFLUENCE
Process is a big word these days. Organizations are implementing approaches like Lean and Six
Sigma to analyze and improve the processes used to get day-to-day work accomplished. Measures
are often created around processes and improvements that are based upon human behavior. A good
scorecard or set of performance measures should include a balance of leading and lagging or process
and outcome measures. However, compensation should be based on outcome metrics, not process
measures. Outcomes like sales, customer referrals, profits, projects completed successfully, and new
products introduced on time are easily measured and important to the overall success of the orga-
nization. The problem with process measures is that they often do not predict success of outcome
measures. This is especially true of processes that include a lot of human behavior. If a process is
highly automated such as manufacturing aluminum, process measures and standards are based on
solid research and directly linked to key product outcome measures. Most processes in today’s orga-
nizations involve a great deal of human behavior and are not as much a science as manufacturing
aluminum. For example, building a relationship with a customer is not a formula, and what works
with one customer may alienate another.
The challenge when defining outcome measures upon which to base compen sation is to ensure that
the employees have the ability to achieve the outcome or at least contribute to it. Achieving most out-
comes in an organization is a joint effort of a number of departments or units. The way to use these
outcomes metrics for compensation is to assign a percentage weight to each group that contributes to the
outcome measure, based on their level of influence. For example, a measure like sales of new products
might be on the scorecard of R&D, sales, marketing, and manufacturing. Each of these four functions
Z01 Compensation and Benefits 50296 Appendix.indd 173 18/01/23 1:02 AM

174 Appendix 1
has some degree of influence over the measure, but some have more control than others. The weights of
Notes
each of these groups might look like the example below:
R&D 50 percent
Marketing 20 percent
Sales 20 percent
Manufacturing 10 percent
Bonuses for R&D personnel might include other measures over which they have greater control, such
as patents, products in the pipeline, or project milestones met, but the heavier weight should be on the
outcome metrics, even thoughthey must work with others to achieve good performance.
RULE 2: AVOID LINKING COMPENSATION

TO OVERALL COMPANY PERFORMANCE
A common practice is to link employee bonuses to overall measures of company performance such as
hitting a sales or profit target, stock price, or other high level financial measures of company success.
While this is a good practice for compensating executives, it is not productive for most employees. The
flawed logic isthat everyone will then work harder to help the company stock price rise, or achieve some
financial goal if their pay is tied to it. The reality is that the vast majority of employees see absolutely
no connection between their own job performance and overall company performance. A sales manager
might have her best year ever and beat her growth target by 15 percent, yet receive no bonus because
the company had a big R&D project fail, eating up all potential profits. An individual employee in a
call center was rated number three in the entire company for her customer service performance, but
sadly receives no bonus because the company did not hit its customer satisfaction targets. Compensation
should belinked to metrics for individual job performance, not company performance. The more control
an individual has over performing well on certain measures, the more powerful the compensation based
on those measures will be in driving desirable behavior.
RULE 3: AVOID BASING COMPENSATION ON

METRICS THAT ARE EASY TO MANIPULATE
It is currently common to link performance-based pay to measures of customer satisfaction. This is a
good idea. The problem with this in many organizations is that there is only one measure of customer
satisfaction—the dreaded survey. Whether it is one question (a recent trend) or 50, survey data is easy
to manipulate. A national real estate company I worked with counted on agents to hand out customer
surveys at the end of a transaction to get buyers and sellers to rate their performance. When the agents
knew that the transaction had not gone well and they were likely to get a bad score, they forgot to hand
out the survey and ended up getting all high ratings. Car dealers are notorious for calling customers
before a survey goes out and offering free detailing or other services in exchange for high ratings. I
recently got a letter from my dealer after leasing a new car suggesting that I call the service manager first
if I planned on marking anything less than thehighest ratings regarding the sales process.
When you start linking pay to performance, people get very creative in coming up with ways of
making the numbers look good without doing the work that the measure was intended to reward. Cheat-
ing on performance measures is not limited to surveys. All kinds of measures and data collection meth-
ods are subject to manipulation. Using an outside company to collect the data helps to ensure integrity
in the data, but even that can be manipulated. A hotel I stayed in recently uses J.D. Power to do their
customer satisfaction surveys. A letter in the room fromthe hotel manager informed me of the upcoming
survey, asking for my feedback, and suggesting that if there was anything I was not 100 percent satis-
fied with, I should call guest services to get it remedied before I checked out.

Designing Compensation based Performing Metrics 175
RULE 4: AVOID OVERLY COMPLICATED COMPENSATION Notes

FORMULAS
In order to avoid driving behavior that is counter-productive by basing compensation on a single
measure of performance such as sales or units produced, some organizations create indices or analyt-
ics that are a summary of several aspects of performance. This makes a lot more sense than trying to
measure a complex dimension of performance with a singular measure. My most recent book (Beyond
the Balanced Scorecard—Improving Business Intelligence with Analytics, Productivity Press, 2007)
presents a number of examples from business and government of some of these index measures. The
idea is that an overall measure of something like R&D might include some leading or process metrics
like new products in the pipeline, patents, and project management metrics like milestones, along with
lagging measures like industry firsts, sales, and profits from new products. Each of the subfactors in
the analytic is assigned a percentage weight based on factors such as its importance, data integrity, and
other factors. The summary gage or analytic then displays performance on typically a 0–100 scale. This
approach allows you to combine unlike units of measurement such as number of patents, percentage of
milestones met, and revenue in sales from new products into a single metric.
While these analytic metrics are an excellent way for senior management to measure various aspects
of performance, these summary analytics or indices are often too complicated to use for determining
compensation for all employees. Employees should be able to track through the year how they are doing
at earninga bonus. If bonuses are paid frequently (e.g., monthly), this is less of a problem, but it is still
important that employees see a connection between their own job performance and the payout they
are going to receive. If employees are mostly in the dark regarding how much bonus they are likely to
receive, or cannot explain the formula used to compute bonuses, you need to modify the metric to make
it easier to understand.
RULE 5: SET REALISTIC AND ACHIEVABLE TARGETS

It is hard enough to come up with valid performance measures that are likely to drive the right behav-
ior from employees. It is even more difficult to set realistic targets or objectives for those metrics.
It becomes very frustrating to be given a target that is linked to your pay that is unrealistically high.
Leaders often think that setting ridiculously high targets will motivate people to stretch and work
as hard as they can to get the payout. What more often happens is that they become disgruntled and
frustrated.
When setting targets for any metric it is important to consider:
past performance averages
best past performance
competitor performance
industry averages or typical performance
customer and/or stakeholder priorities and needs
resource constraints (time, dollar headcount, technical capabilities)
links to other metrics
Targets should be set high enough so that the organization achieves high levels of performance, but
should be realistic as well. A hospital I worked with hada target of 50 percent patient satisfaction, which
sounds like a ridiculously low objective, but not when you consider that past performance was in the
30 percent range, and current performance was 42 percent patient satisfaction. For some metrics it
becomes difficult to set a target that is less than perfection. For example, an airline would not set a target
of 95 percent safe landings. A manufacturing organization would not set a target of only having 10 seri-
ous injuries or accidents this year. Achieving high levels of performance on one metric might result in
poor performance on other related metrics, so that needs to be considered. For example, a corporate law
department I worked with dramatically reduced their cycle time for processing company documents.
However, as a result of rushing through each task, several mistakes were made that cost millions in
lawsuits. Targets and metrics need to be balanced so as to not put too much focus on a single aspect of
performance.

176 Appendix 1
Notes RULE 6: MEASURE PERFORMANCE AS OFTEN AS POSSIBLE

Whatever you decide to measure to assess the performance of your employees, try to select dimen-
sions that can be measured on a daily, weekly, or at least monthly basis. The best scorecard measures
are those that are tracked on a daily basis. With daily feedback, people can monitor and adjust their
performance on an ongoing basis. You would not find any business that only measures financial per-
formance once a year. Even the smallest of businesses tends to measure some aspects of financial
performance daily, and at least once a month look at factors such as costs and profit and loss. Yet, some
of the largest and most sophisticated organizations worldwide measure important things like employee
satisfaction and engagement or relationships with customers via an annual survey. Annual metrics are
close to worthless. If the last data point shows poor performance, you have to wait 11 more months to
get another data point to see if any improvement strategies are working. One of the best compensation
systems I have seen is the piece-rate system still being used in many clothing manufacturing facilities.
Workers get paid a set amount for each good quality component that they produce. Quality inspectors
check each piece or component for errors and return those pieces to workers when rework is needed.
The workers get paid more if they produce more, but only good quality products count, so they must
also focus on quality. The system often creates some tension between the workers and inspectors, but
some organizations put the inspectors on incentive-based pay as well, to encourage a more coopera-
tive approach. The workers like the daily feedback and the compensation system ensures that the best
performers can earn quite a bit more money than their average performing peers. Seniority and experi-
ence are also rewarded because the workers with the highest pay and productivity tend to be the more
experienced ones.
RULE 7: BASE PERFORMANCE-BASED PAY ON INDIVIDUAL

AND TEAM PERFORMANCE
Older compensation plans such as piece rate in the garment industry or commission for salespeo-
ple are based 100 percent on individual performance. The benefit of such approaches is that each
individual has a great deal of influence over their own compensation and does not need to depend
on anyone else. Individual compensation plans like this tend to separate the best performers from
their more mediocre peers. Systems like this work the best in organizations where individual con-
tributors are completely on their own and do not need other employees or departments to achieve
their goals. However, most organizations today are not set up this way. In many jobs, performance
is dependent on peers, bosses, other departments, and contractors or vendors. In a situation like this
100 percent individual performance-based pay systems tend to fail. Another problem with bas-
ing pay solely on individual performance is that these systems often create a culture of unfriendly
competitiveness. The experienced worker will never help train a new worker or share tips for per-
forming better with peers. Everyone is out for himself, and there are no rewards for cooperating
and helping others do well.
A popular alternative compensation approach is not much better. Linking compensation to team
performance sounds like a more valid approach for encouraging teamwork and a spirit of working
together for common goals. What really happens is that some employees bust their butts and others
slack off and everyone gets the same bonus. On any team there are some players who play better than
others. With this team compensation system there is no differentiation in pay for the good vs average or
poor performers. The good performers end up angry because they were better contributors than others
and received the same pay. The poor performers are encouraged to slack off again next month or year
because they are rewarded with a healthy team bonus.
The best compensation systems are a mix of individual and team performance.A good combination is
60 percent individual performance and 40 percent team performance. This rewards the individuals who
perform much better than their peers, but also puts a strong weight on helping their peers to achieve high
levels of team or unit performance.

RULE 8: PROVIDE EMPLOYEES WITH AN EASY WAY TO Notes

TRACK PERFORMANCE THROUGHOUT THE YEAR
A common way to report performance data is to use spreadsheets for reports and PowerPoint presenta-
tions for monthly review meetings. Neither of these methods is very effective for performance feedback.
Spreadsheets are often very hard to read, and make it hard to spot important statistics or problem areas.
I sit next to executives on airplanes often and watch them squint trying to read the hundreds of tiny fig-
ures in their spreadsheet reports. I have sat in countless monthly meetings as well where managers are
droning on with their impossible to read PowerPoint charts that present data in charts and graphs that
are impossible to decipher. A better approach is to give everyone access to scorecard software linked
to important data bases of various types of performance data. An inexpensive tool called Xcelcius (from
Business Objects) allows managers and employees to view performance in color-coded gages that look
like the dashboard of a sports car. The inexpensive software extracts data from Excel Spreadsheets and
coverts it to easy to understand graphics. The disadvantage of the software is that it does not allow any
data analysis; it is strictly a presentation tool. For larger organizations or those in search of something
more sophisticated, the best scorecard software is called PerformanceSoft from Actuate, a San Fran-
cisco company. This software not only has extensive analytical capabilities, but it is also incredibly easy
to use. Training requires about 30 minutes and most users can figure it out without even going through
the training because it is so intuitive. Many of my business and government clients have purchased
this software to automate their scorecards and provide feedback to employees, and I have never heard
any negative feedback about the product or the company. The software sits on top of your existing data
warehouses and systems and can extract data from various sources, or allow you to hand-enter it each
week or month.
The advantage of using software like this to give feedback to employees is that they can track how
they are doing on a daily basis at their own desks, without attending meetings. Controls can be put in
place to control access to sensitive data, and each employee can customize her own “briefing book” to
look at her own performance measures in a format that she most prefers. Software like this also elim-
inates the need to prepare charts for monthly review meetings. Someone brings a laptop to the meeting,
hooks it up to the company database where the software resides, and real-time performance data can be
reviewed and analyzed. Of course, this software costs a bit more than a few hundred dollars, but it can
pay for itself in the first year by no longer having staff work overtime each month preparing charts and
reports for meetings.
RULE 9: BEWARE OF STRATEGY MAPS TO DEFINE METRICS

A popular approach for identifying metrics linked to key outcomes like profits or growth is to create
strategy maps. These diagrams, typically constructed on flipcharts or white boards in small group meet-
ings, are based on sound logic, but they are most often flawed. The idea is to begin by identifying some
important outcome and then work backward by identifying important factors and measures that lead to
that outcome. For example, a company might identify increasing sales by 15 percent as an important
outcome goal (metric = percentage increase in sales from last year). The main strategy for improving
sales is to increase loyalty from the best customers (metric = dollars spent per customer account com-
pared to previous years). In order to get customers to spend more money, account managers need to get
more face time with key players at each customer account (metric = hours spent per month in contact
with customers). The strategy for spending time on the right activities with customers is implementa-
tion of a new customer relationship management (CRM) strategy (metric = milestones met on CRM
implementation plan). The key to making the new CRM system success ful is proper training of account
managers and other sales support personnel (metric = percent of staff who have attended all required
CRM training).
I am sure all of this sounds like it makes sense if you can follow the train of logic. The big problem
with this logic chain and resulting metrics is that the linksare all based upon a string of assumptions and
opinions. Every one of these links need to be evaluated and tested to determine if an improvement in one
factor leadsto a concomitant improvement in the later measure. For example, there might be an inverse

178 Appendix 1
relationship between face time with your account managers and an increase in spending by customers.
Notes
It could be that the more time your account manager spends with a customer the more disgruntled they
become, the more they hate your company, and the more likely they are to switch their business over
to another supplier who does not bother them as much. Another flaw in the logic chain might be that
the new CRM software will actually make account managers more successful at account management.
Most salespeople I know view the CRM software as a time-wasting distraction that encourages sales
managers to second guess all their decisions and micromanage them.
A compensation system that is based upon process or activity measures devel oped using strategy
maps is very dangerous. Unless all of the assumptions in the various links of the strategy map are tested,
you may be paying for employee activity that does nothing to contribute to positive performance. One
guaranteed benefit of strategy maps is that they increase the billable hours of the consultants running the
meetings to create them. Whether or not the circles and arrows allow you to define valid performance
measures is a big risk.
RULE 10: ELIMINATE CHICKEN EFFICIENCY MEASURES

Seventeen years ago when I started my own consulting practice, my second client was a company in the
fast food business that sold fried chicken. At one time, they were one of only a handful of international
chains that had a menu based on fried chicken. Their market share eroded as more and more companies
like Popeye’s, Church’s, and others entered the business. The company asked me to conduct a study of
their best performing restaurants to determine what the managers did to make the restaurants so success-
ful. They were then going to give my findings to the training department to develop a workshop to teach
the best practices to all of their restaurant managers.
After sitting in my first restaurant outside of Knoxville for half a day, I did not have many notes. After
the lunch crowd came and went, I got time to talk with Roy, the manager. I asked him what the secret
to his success was, since the company had identified him as one of the best managers in the country. He
explained: “The secret to success in this business is something we call ‘Chicken Efficiency’.” Roy took
me in the back room to show me his poster-sized graph of chicken efficiency. There was a little chicken
sticker pasted on each day for his performance, which was often 99–100 percent so far that month.
Now I was starting to see why he was selected as a great performer, but I was not sure what chicken
efficiency was. Roy explained: “At the end of every day I calculate my chicken efficiency percentage on
these worksheets they give me, and I peel off one of these chicken stickers and mash it on the chart for
my performance for the day.”
Still confused, I asked him what factors went into calculating chicken efficiency and he explained:
“You take how much chicken you cook, subtract how many pieces you sell, and you get a percentage
which shows you how much chicken you throw away or how much scrap we have. The bean counters
tell me that this number directly links to a store’s profits, so I try to make sure I sell every piece of
chicken I cook. We also have tough quality standards for how long it can sit under the heat lights before
I have to throw it away.”
When I asked Roy how he got nearly perfect performance and sold practically every piece of
chicken he cooked, he explained that he never cooked chicken and put it under the heat lights after
6:30 p.m. Customers who came in after 6:30 had to wait 15–20 minutes for Roy’s staff to custom
cook a bucket of chicken for them. That is a long time to wait with six hungry eight-year-old girls in
the mini- van after a soccer game, so Roy explained that most of the people that came in after 6:30
pm were not willing to wait, and they left. The problem was that the company did not measure that,
but they did measure chicken efficiency every day. They only measured customer satisfaction once a
year, so that did not drive employee performance. Employees get promoted for having good chicken
efficiency scores as well as receiving other forms of recognition. Because of the focus on this per-
formance measure, employees and managers were purposely not cook- ing chicken and subsequently
were making customers angry, in order to make this short-term financial metric look positive.
It may be hard to believe how a major corporation can do something this stupid, but I have seen
chicken efficiency measures in many large businesses and government organizations. In fact, it is
rare to find a scorecard or set of performance measures that does not include a few of these chicken
efficiencies.

SUMMARY Notes
The key to any successful compensation plan is understandable to the employees being judged
that it is based on solid perfor mance metrics. The on them
metrics should be:
In spite of how much care you put into defining
few in number, 1–6 vs 20–30 the right measures that serve as the foundation
linked to individual and team performance of your pay-for-performance plan, you will need
to continually fine tune it. That is good news for
tracked frequently (at least monthly)
performance management consultants. As soon as
balanced to address the needs of key stake- you think you have the ideal systems that drive the
holders like customers, shareholders, employ- right behavior, your situation will change, driving
ees, and partners the need for new metrics and priorities.


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Compensation & Benefits

F01 Compensation and Benefits 50296 Prelims.indd 1 18/01/23 1:39 AM

NMIMS Global Access - School for Continuing Education

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Senior Manager—Product: Varun Goenka

Copyright © 2023 Pearson India Education Services Pvt. Ltd

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Compositor: Satish Kumar Shrivastava

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1. Compensation Management—An Overview: Introduction, Organizational Strategy, Goals

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CHAPTER 1 Compensation Management—An Overview 1

NMIMS Global Access - School for Continuing Education

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Employee Stock Options (ESOPS) 15

CHAPTER 2 Understanding Payroll Operations 21

Job Evaluation—Approaches & Methods

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2. Classification of Jobs or Grading System 38

 esigning Skill, Knowledge &

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CHAPTER 5 Compensation & Wage Theories 71

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CHAPTER 6 An overview of Wage Policy & Legislation 95

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Periods of Contribution and Benefit 109

 inking Variable Pay & Team Based

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CHAPTER 8 Designing Compensation For Sales Team 139

 nhancing Work Force Productivity

CHAPTER 10  ompensation—A tool for Organizational

Appendix 1  esigning Compensation based

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Layer 1: A Winning Business Strategy Begins With a Focused

FIGURE 1.1 A winning business strategy

Layer 2: The HR Strategy Based On The Creation Of The

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FIGURE 1.2 The three dimensions of cultural excellence

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Layer 3: The Organization’s Pay Strategy Is Developed And

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FIGURE 1.3 Three talent management strategies

NMIMS Global Access - School for Continuing Education

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FIGURE 1.4 Pay mix and stage of business growth

Traditional versus Strategic Pay

ORGANIZATIONAL STRATEGY, GOALS AND COMPENSATION

CHAPTER 1 Compensation Management—An Overview 1

CHAPTER 2 Understanding Payroll Operations 21

Job Evaluation—Approaches & Methods

esigning Skill, Knowledge &

CHAPTER 5 Compensation & Wage Theories 71

CHAPTER 6 An overview of Wage Policy & Legislation 95

inking Variable Pay & Team Based

CHAPTER 8 Designing Compensation For Sales Team 139

nhancing Work Force Productivity

CHAPTER 10 ompensation—A tool for Organizational

Appendix 1 esigning Compensation based