Amity College of Commerce and Finance

Module 3: Performance-linked Compensation

• Concept, Process and Techniques of Performance

appraisal
• Pay for Performance Plans
• Competency Mapping and Developing Performance Matrix
Performance Management
Amity College of Commerce and Finance
Amity College of Commerce and Finance
Amity College of Commerce and Finance
Amity College of Commerce and Finance
 Amity College of Commerce and Finance

Methods of Performance Measurement

Traditional Modern
---Unstructured appraisal
---Ranking Method
Methods
---Forced Distribution --MBO
---Factor Rating Scales --BARS
---Check Lists --360 degree appraisal
---Critical Incident Method
 Unstructured Appraisal Amity College of Commerce and Finance

• Appraiser is required to write down his impression about the

person being appraised in unstructured way. In some
Organisations, comments are required to be grouped under
specific headings such as Quality of job performance, reasons
for specific job behaviours, personality traits and development
needs.

• This system is highly subjective but simple to perform

 Ranking Method Amity College of Commerce and Finance

• The ranking system requires the rater to rank his subordinates on overall
performance. This consists in simply putting a man in a rank order. Under
this method, the ranking of an employee in a work group is done against
that of another employee. The relative position of each employee is tested
in terms of his numerical rank. It may also be done by ranking a person on
his job performance against another member of the competitive group.
 Ranking Method Amity College of Commerce and Finance

• Advantages of Ranking Method

• Employees are ranked according to their performance levels.
• It is easier to rank the best and the worst employee.

• Limitations of Ranking Method

• The “whole man” is compared with another “whole man” in this method. In
practice, it is very difficult to compare individuals possessing various
individual traits.
• This method speaks only of the position where an employee stands in his
group. It does not test anything about how much better or how much worse
an employee is when compared to another employee.
• When a large number of employees are working, ranking of individuals
become a difficult issue.
• There is no systematic procedure for ranking individuals in the
 Forced Distribution Amity College of Commerce and Finance

• This is a ranking technique where raters are required to allocate a certain

percentage of rates to certain categories (eg: superior, above average,
average) or percentiles (eg: top 10 percent, bottom 20 percent etc). Both
the number of categories and percentage of employees to be allotted to
each category are a function of performance appraisal design and format.
The workers of outstanding merit may be placed at top 10 percent of the
scale, the rest may be placed as 20 % good, 40 % outstanding, 20 % fair
and 10 % fair.
 Forced Distribution Amity College of Commerce and Finance

• Advantages of Forced Distribution

• This method tends to eliminate raters bias
• By forcing the distribution according to pre-determined percentages, the
problem of making use of different raters with different scales is avoided.

• Limitations of Forced Distribution

• The limitation of using this method in salary administration, however, is that
it may lead low morale, low productivity and high absenteeism.
• Employees who feel that they are productive, but find themselves in lower
grade(than expected) feel frustrated and exhibit over a period of time
reluctance to work.
Factor Rating Scale
Amity College of Commerce and Finance
Check list Method
Amity College of Commerce and Finance
 Critical Incident Method Amity College of Commerce and Finance

• Under this method, the manager prepares lists of statements of very

effective and ineffective behaviour of an employee. These critical incidents
or events represent the outstanding or poor behaviour of employees or the
job.

• The manager maintains logs of each employee, whereby he periodically

records critical incidents of the workers behaviour. At the end of the rating
period, these recorded critical incidents are used in the evaluation of the
worker’s performance.

• Example of a good critical incident of a Customer Relations Officer is :

March 12 - The Officer patiently attended to a customers complaint. He
was very polite and prompt in attending the customers problem.
 Critical Incident Method Amity College of Commerce and Finance

• Advantages of Critical Incident techniques

• This method provides an objective basis for conducting a thorough

discussion of an employees performance.
• This method avoids recency bias (most recent incidents are too much
emphasized)

• Limitations of Critical Incident techniques

• Negative incidents may be more noticeable than positive incidents.

• The supervisors have a tendency to unload a series of complaints about
the incidents during an annual performance review sessions.
• It results in very close supervision which may not be liked by an employee.
 Criticism of traditional methods
Amity College of Commerce and Finance

• Halo Effect
• Recency Effect
• Spill Over Effect
• Leniency or strictness effect
• Central Tendency Error
• Stereotypes
 Pay for Performance Plans Amity College of Commerce and Finance

• The term “pay-for-performance compensation” refers to performance-based

pay programs where an employee is incentivized and rewarded for achieving
goals or objectives. Pay-for-performance plans are extremely popular –
according to our recent Pay Practices and Compensation Strategy survey,
75% of organizations currently leverage pay-for-performance compensation as
part of their overall compensation plan.

• Financial Incentives
• Non- Financial Incentives
 Merit Pay/ Individual Performance
AmityRelated Pay and Finance
College of Commerce

It is a method of recognizing and rewarding differential

performance
• Determination of Result oriented merit rating
procedures
• Identification of Job Factors and their importance
• Formulation of a scale
• Communication of the basis of monetary reward
 Merit Pay/ Individual Performance
AmityRelated Pay and Finance
College of Commerce

For example: Job factors of salesman can be sales promotion,

good will calls, after sales service, investigation of complaints etc.
These task will differ in their degree of importance. (assign weight
values).
Suppose you intend to give incentive opportunity of 20%. Let
there be 20 performance points each point constituting 1% of
basic wage. If a sales person scores 15 points for all four tasks,
he may be provided with 15% of basic wage as incentive.
 Skill based Pay/ CompetenceAmity
related pay
College of Commerce and Finance

Skill-based pay is a salary system that determines an employee’s pay based

on his or her knowledge, experience, education or specialized training.
Depending on the company, the employee might also receive a higher salary
for earning formal certification in his or her industry. Skill based pay links to
the acquisition and application of additional skills by the persons carrying out
the job.
Skills are more likely to be defined in terms of
1. Competition of training course
2. Satisfactory performance in a test leading to company accreditation

In Competency based pay, the behaviour and attributes of an individual has

to be used to perform a role effectively in addition to only the skills
 Shop Floor Incentive and Bonus Schemes
Amity College of Commerce and Finance

• This method relate to the pay or part of the pay

received by the employee to the no. of items they
produce or processes, the time they take to do a
certain amount of work or some other aspects of
performance. They are also referred to as payment by
result schemes. Such schemes are of following types:
• Individual Piecework
• Work Measure schemes- Job or its component task is timed and incentive payment is related to performance
above the standard time allowed.

• Measure Day work- Pay of employees is fixed on the understanding that they will maintain a specified level of performance,
but pay does not fluctuate in short term with their performance. To define the required level of performance and to monitor the actual level
 Team Rewards Amity College of Commerce and Finance

• Team-based rewards are commonly defined as any formal incentives provided to a work

team or at least one of its individual team members. Rewards may be based on
organizational, team, or team member performance or other outcomes (e.g., sales,
customer satisfaction, and profit).

• Rewards provided to teams can be categorized as monetary or nonmonetary. Monetary

team-based rewards include one-time cash bonuses, permanently increased base salary,
and variable pay (i.e., earning a specified percentage of base salary). Nonmonetary
team-based rewards include achievement awards, time off work, and special dinners.
Team-based rewards can be distributed equally across team members, so that all
members receive the same reward (e.g., amount of money, recognition award), or
nonequally, either based on individual performance within the team (i.e., equitably) or in
proportion to individual base salary.
 Distributing Team Incentives:
Amity College of Commerce and Finance

• Same Size reward for each team member

• Different size rewards for each member
• Timing of team incentives
• Decision Making About team incentives Amounts
(either the leader or voting)
 Team based Rewards Amity College of Commerce and Finance

• Team Gain sharing

• Profit sharing
• Goal Sharing
• Annual Bonuses- Payment of Bonus Act