You are on page 1of 107

COMPENSATION MANAGEMENT

Unit I
1
INTRODUCTION TO COMPENSATION

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

• to the employee because it is fundamental to his standard of


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

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


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

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


because the two concepts are not antithetic. Efficiency objectives are
reflected in attempts to link a part of wages to productivity or profit,
group or individual performance, acquisition and application of skills
and so on. Arrangements to achieve efficiency may be seen also as

2
being equitable (if they fairly reward performance) or inequitable (if
the reward is viewed as unfair).

A third objective is macro-economic stability through high employment


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

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


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

The need for a Compensation Strategy-

For any / all of the following reasons:

1 To attract and retain the best in the industry


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

GOALS OF A COMPENSATION STRATEGY


1 Capable applicants are attracted towards the Organization and it
helps acquire qualified competent personnel
2 To retain current employees so that they do not quit
 If compensation levels are not competitive, it will result in
higher turnover
3 Motivate employees to perform better
4 Encourage value – added performance
 Reward the desired behaviour

3
5 Control costs
 Through a rational compensation system, employees can
be obtained and retained at a reasonable cost
6 Promoting continuous development through competence –
related and skill – based pay schemes, effective performance
management
7 Promoting teamwork through team pay
8 Promoting flexibility by replacing hierarchical and rigid pay
structures
9 Providing value for money by evaluating the costs as well as
benefits of reward management practices
10 Facilitating easy understanding by all, including employees,
operating managers and HR personnel
11 Providing value for money by evaluating the costs as well as
benefits of reward management practices
12 Easy administration

CHARACTERSTICS OF A SOUND COMPENSATION STRATEGY

1 Be congruent with and support corporate values, beliefs,


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

A COMPENSATION STRUCTURE COMMUNICATES

1 Organization Philosophy / Culture


2 Career Progression
3 Benefits to Employees
4 Individual v/s Team Focus
5 Performance Recognition giving the message to align Total
COMPENSATION with Business Situation, Needs & Goals

4
6 Generate Flexibility / Variability of Costs
7 Focus on Effectiveness of Total Compensation Policy

FACTORS INFLUENCING COMPENSATION POLICY

Philosophy Organization Mission, Vision, Goals & Values –


Inclination towards People Development, Attraction &
Retention of Talent

Parity Inter / Intra Level Relativity, Compa Ratio

Positioning Assess Competitiveness – Current & Targeted


Percentile Positioning

Paying Ability Budget Considerations

FACTORS AFFECTING COMPENSATION POLICY

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

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

INDIVIDUAL RELATED
1. Job – related: job requirements and internal consistency
2. Competition: availability of special competent personnel
3. Flexibility: due to varied levels of competencies and skills of
managers

5
4. Responsibilities: individual productivity and performance /
contribution to output
5. Individual assessment: qualifications and relevant experience

WHAT IS A COMPENSATION SYSTEM

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


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

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


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

NON-COMPENSATION SYSTEM

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


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

8 DIMENSIONS OF COMPENSATION SYSTEM


- PAY FOR WORK & PERFORMANCE
- money provided in short – term (weekly / monthly / annual
bonuses & awards)
- permits employees to pay for goods & services desired
- depends on: job requirements; outputs that meet or exceed
quantity, quality & timeliness standards;
6
innovations leading to improved productivity; dependability;
loyalty
- includes: base pay, premiums & differentials, short – term
bonuses, merit pay, travel expenses, clothing reimbursement etc
- PAY FOR TIME NOT WORKED
- days off with pay for holidays, longer paid vacations, election
official, witness in court, paternity leave, maternity leave,
time off to vote, personal leave, relocation payments, lunch
& rest periods etc
- although they increase labour costs, but they enhance quality –
of – work – life opportunities for most employees
- LOSS-OF-JOB INCOME CONTINUATION
- job security is a prime consideration
- loss of job could be due to any of the following:
* accident
* sickness
* personal performance
* interpersonal dynamics problems
* firm’s decline / end
- unemployment insurance, supplemental unemployment
benefits (subs), severance pay, job contract etc help
unemployed workers subsist until new employment
opportunities arise
- DISABILITY INCOME CONTINUATION
- health or accident disability can lead to non – performance of
normal assignments
- family expenses persist
- social security, workers’ compensation, sick leave, travel
accident insurance, accidental death and dismemberment, short &
long-term disability plans are provided
- DEFERRED INCOME
- providing income after retirement
- includes social security, pension plans, profit sharing (long
term), stock option plans
- funds invested in these draw tax-free interest thus employees
can defer tax obligations
- SPOUSE (FAMILY) INCOME CONTINUATION
- Providing dependents with income when an employee dies or is
unable to work due to total and permanent disability
- life insurance plans, social security, pension plans, workers’
compensation
- HEALTH, ACCIDENT AND LIABILITY PROTECTION
- Income continuation & payment for the expenses incurred
for overcoming the illness / disability
- wide variety of insurance plans available
- medical, hospital, surgical insurance (for self &

7
dependents)
- major medical, dental & vision care. hearing aid, post-
retirement medical plans, prescription drugs, visiting nurse
- liability – related insurance: group legal, group automobile,
group umbrella liability, employee liability
- INCOME EQUIVALENT PAYMENTS
- Perks or perquisites
- tax free: charitable contributions, giving of gift, employee
assistance programs, counseling, child adoption, child /
elderly
care, subsidized food service, discounts on merchandise, fitness
programs, parking, commuting assistance (transportation
to &
from work), fly first class, professional memberships,
professional journals, special relocation & moving allowances,
pay for spouse
on business trips, home entertainment allowance, domestic
staff
allowance, mobile phone, use of assistant for personal services
- Tax favoured: medical expense reimbursement, chauffeur –
driven car, company plane / yacht, company provided facilities,
personal use of credit cards, vacation accommodation, special loan
arrangements, club membership, concierge services

DIMENSIONS OF NON-COMPENSATION SYSTEM


• Enhance dignity and satisfaction from work performed
- Least expensive & most powerful rewards
- Employee recognition leads to self - worth & pride
- Employees should feel that they are needed & their efforts are
being appreciated
• Enhance physiological health, intellectual growth, and
emotional maturity
- Provide a safe working environment: provision of safe
equipment, risk free environment, minimization of noxious
fumes, avoidance of extreme heat, cold & humidity conditions,
elimination of contact with radiation & other disease–related
materials, reduced noise levels, clean workstation,
- stress & technological advancements – affect emotional
well-being of the individual: providing a stable & secure lifestyle,
training & development opportunities to overcome health-related
problems
• Promote constructive social relationships with
coworkers
- an inexpensive & valuable reward is a work environment where
trust, fellowship & loyalty emanate from the top levels of
management, percolating to the grassroots
8
- comradeship of workplace associates
- opportunity to develop productivity – promoting social
relationships
- moving towards team – based operations
• Design jobs that require attention and effort
- restructuring job tasks to make it challenging
- sense of accomplishment from work
- job rotation to increase flexibility
- turning supervisors to mentors
- making jobs more interesting & less repetitive
Organizations increase quality & productivity; reduce employee
turnover, absenteeism, tardiness, waste of physical resources, theft &
malicious damage
• Allocate sufficient resources to perform work assignments
- all necessary human, technical and physical resources should
be made available to support & aid the employee in accomplishing
the assignment
- the organization must enable employees to gain the required
skills & knowledge necessary to perform the assignment
- organization should do everything possible to assist the
employee in completing the assigned work successfully
• Grant sufficient control over job to meet personal demands
− employee participation in decision-making process
− casual dress day
− scheduling work activities
− flexible work schedules: compressed workweeks,
flextime programs, work from home choice
− job sharing (2 part-time employees share 1 full-time
job)
• Offer supportive leadership & management
− employee faith & trust in management
− skill & interest in coaching & counseling of employees
− praise for a job well done
− constructive feedback leading to improvement in job
performance
− sufficiently flexible leadership with policies, rules,
regulations so that an employee can meet job responsibilities
without infringing on rights & opportunities of other employees

TRADITIONAL COMPONENTS OF A COMPENSATION PROGRAM

Fixed cash compensation


- largest component of the total compensation & rewards
package
- monetary remuneration based on ‘time worked’ & not on
9
output / performance
- base wages & salaries – depends on the internal value
(determined by job evaluation) & external value (through
market pay surveys) of employee
- after-tax paycheck
- determines lifestyle of the employees
- leisure activities restricted / defined by the paycheck
- most critical part of the four components

Wage & salary add-ons


- monetary remuneration
- paid over & above the salary
- includes payments for working overtime, shift differentials,
premium pay for working on holidays / weekends
- least critical of the four components

Incentive payments
- pay- for - output system
- performance pay – linked to both the company & the
individual
- difficult to measure in the service industry which employs
70% of the workforce of the total employed people
- in several professions, it is difficult to measure output & pay
incentives

Employee benefits & services


- hidden payroll or fringe benefits
- indirect financial & non-financial payments
- supplementary compensation totally dependent on
organizational philosophy
- includes benefits provided by an employer to his employees &
his family (in some cases)
- benefits for employment security; health protection; old
age & retirement; personnel identification, participation &
stimulation
- two types: mandatory employee benefits: voluntary benefits

MANDATORY EMPLOYEE BENEFITS


• Employer is compelled to provide for certain benefits by the
operation of the law
• Paid holidays – factories act, 1948 a weekly paid holiday
• Paid vacations – one day for every 20 days worked
• Retrenchment compensation – industrial disputes act, 1947

10
(one month notice or one month’s pay) – paid @ 15 days wage
for every completed year of service with a maximum of 45 days
wage in a year
• Lay-off compensation - industrial disputes act, 1947
(@ 50% of the total of the basic wage & da for the period of their
lay-off) – paid upto 45 days in a year
• Workmen’s compensation – workmen’s compensation act,
1923 – payment to meet the contingency of invalidity & death of
a worker due to employment injury or occupational disease
• Health benefits – employee state insurance act, 1948 –
sickness benefit, maternity benefit, disablement benefit,
dependent’s benefit, medical benefit
• Canteen facility – factories act, 1948 – canteen in factories
employing more than 250 workers
• Provident fund – contributions by employer & employee are
8.5% of basic salary – benefit payable on retirement, voluntary
separation or death
• Employee pension scheme – introduced in 1995 –employer
contribution is directed to pension + 1.66% of employee wages
contributed by central govt.
• Entitled to pension @ 1 / 70th of salary for
each year of service
• Gratuity – after 5 years of continuous service – 15 days’
salary per year of service upto a ceiling of INR 3,50,000/-
• Companies with more than 10 employees
• Given in case of separation, superannuation, death
or disablement
• No contribution of employees towards this benefit
• PSU scheme – public sector scheme
• Various pension schemes with accrual rates varying
from 1/100 to 1/60
• Both employer & employee contribute
• Membership is mandatory for all those in PSUs
• Leave encashment scheme – claim encashment of
unutilized leave at the termination of service
• Not-taxable in the hands of the retired employee
• Payable to dependents in case of death of employee
VOLUNTARY EMPLOYEE BENEFITS
• Its is entirely the choice of the employer to provide these
benefits to the employees
• Shift premium – for IInd & IIIrd shifts for the odd hours
• Company housing accommodation – some companies even
pay for the utility bills (electricity / water & society charges)
• Subsidized food & transport

11
• Group mediclaim / personal accident insurance – adequate
coverage for the hospitalization expenses incurred due to illness,
disease or injury sustained in accident / pregnancy (for female)
for employee & immediate family dependents
• Educational facilities – sponsor higher education of
employees & family members
• For certifications / trainings / memberships etc
• co-operative credit societies – for fostering self-help than
going to money lenders
• Legal aid – provide legal assistance & aid through company
lawyers or others as & when required
• Recreational facilities – gyms, clubs, internet café, one film
per week shows etc
• Regular meetings & gatherings – of employees with their
families to express talent, creativity & relieve of work stress
• Loans – at subsidized rates of interests for housing
deposits, vehicle purchase, marriage, illness or death of a close
family member
• Personal health care – extensive health check-up
periodically
• cellular phones / laptop – on basis of business requirement
• Corporate credit card – to take care of official expenses
arising out of business trips
• Gifts – on various occasions like birthday, anniversary,
festivals – to strengthen bond between employer & employee
TOTAL COMPENSATION

12
COMPENSATION STRUCTURE – VARIOUS PERSPECTIVES

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

14.0%

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

Australia China Hong Kong India Japan Korea

1 Average salary hike in 2006 for India at 14%, making it the


highest in Asia Pacific
2 Employees in management staff cadre received average salary
hike of 16% in 2006

PERFORMANCE LINKED AWARDS

13
VARIABLE PAY TREND

1 Employee expectations are on the rise


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

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

NEW COMPENSATION APPROACHES

Changing environmental pressures


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

Organization’s response
 Major changes in organization structure & management systems
 new model: flat, flexible, team-based, participative,
diverse, quality- focused, dynamic, globally-oriented

14
 changes in the job from being specialized & stable
multidimensional
 horizontal growth of employees
 new approaches to compensation & rewards

FOUR NEW APPROACFHES TO COMPENSATION


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

 Advantages to the employees


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

BROADBANDING
 Delayering of pay structure
- a typical pay structure consists of grades & ranges
- a grade is a grouping of jobs falling within a certain range of
evaluation points
- attached to grades are pay ranges – minimum to maximum
spread
* successively higher grades will have higher minimum &
higher maximum pay rates

15
- pay structure typically consists of a tall hierarchy of narrowly
defined grades, each with a relatively limited pay range
* such structures create in employees a strong motivation to
strive towards upward mobility as a means to obtain higher
compensation rewards
 Broadbanding is defined as
- Consolidation of existing pay grades into a small number of
wide bands
- results in broad minimum-maximum pay spread for each
band
- compared to conventional pay structures, broadband
structures have fewer bands & broader pay ranges
- best – suited to the needs of flexible, flatter &
performance-oriented organizations of today
- Allow flexibility in moving employees between jobs
within a band without formal job titles & pay grade changes
- Flat structures place increased emphasis on lateral
career moves & skill development that can be rewarded through
broadbanding
- Greater scope for pay growth through within- band-
pay increases than through promotions to a higher band

Example1 of how broad banding works


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

Example2 of how broad banding works


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

16
 Defined as
- financially measurable reward paid to an individual based on
his overall performance
- a powerful tool that enhances employee productivity &
performance

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

Steps for setting up team rewards


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

VARIABLE PERFORMANCE LINKED PAY (VPLP)


 The corporate buzzword today
 Becoming a more common method for rewarding employees
while linking their performance more closely to the employer’s

17
financial success
 Some companies are allowing all levels of employees to
participate in these programs
 Variable pay is an innovative way to bring wages and salaries in
line with companies’ market performance
 A simple concept that’s based on rewarding employees for
increased sales or efficiency
 rewarding employees who increase productivity or
efficiency provides incentive for other employees who want
to share in the bounty
 rather than rewarding every employee with a pay raise or
bonus, variable pay rewards the individual worker, or a
team of workers, for extraordinary efforts
 Indian companies increasingly adopting VPLP
 more than 85% organizations having VPLP

Objectives / Benefits of VPLP


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

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

18
 Team – based pay
 Normally reward all team members equally based on group
outcomes
 these outcomes may be measured objectively or
subjectively
 the criteria for defining a desirable outcome may be broad
or narrow
 as is less commonly done in individual-based programs,
payments to team members may be made in the form of a
cash bonus or in the form of non-cash awards such as trips,
time off, or luxury items

 Plant – wide / company – based pay


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

Features of VPLP

 Can be in cash or kind


 generally offered in terms of extra perks as soft housing
loans, company cars, junkets abroad, mediclaim policies
 If overall company performance is poor, SBU / team
performance does not warrant VPLP

19
 Largely, it does not exceed 30% of an executive’ s annual
pay

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

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

Money as a motivator
• there is no doubt that money can be a powerful motivator
• however, it isn’t always

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

Implementation

20
• Failure of this motivational technique due to
• inadequate planning
• poor implementation
• poor communication of details of the scheme across the
organization
• undefined evaluation method
• individual objectives are not quantified for variable
pay calculation
Effective implementation by
-well – defined individuals & group targets
-effective communication of the scheme to the employees
-commitment from the top
-effective performance-evaluation mechanism
* simple, measurable performance criteria that is
understood by all
-timely payouts

Employers need to do a better job of mapping individual employee


performance and linking it with compensation

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

EVA (Economic Value Added)


• It is a performance metric that calculates the creation of
shareholder value
• Eva is the calculation of what profits remain after the costs of a
company's capital - both debt and equity – are deducted from
operating profit
• True profit should account for the cost of capital
• Steps to calculate EVA:
 Calculate net operating profit after tax (NOPAT)
 Calculate total invested capital (TC)

21
 Determine a cost of capital (WACC)
 Calculate EVA = NOPAT – WACC% * (TC)
• It is a financial performance method to calculate the true
economic profit of a company
• Used for: setting organizational goals, performance
management, determining bonuses, communication with
shareholders & investors, motivation of managers, capital
budgeting, corporate valuation, analyzing equity securities (the
non-debt securities of a corporation representing an ownership
interest)
• Links employee performance with profits
• It is the net operating profit minus an appropriate charge for the
opportunity cost of all capital invested in an enterprise
• An estimate of true economic profit
• Amount by which earnings exceed or fall short of the required
minimum rate of return that shareholders could get by investing
in other securities of comparable risk
• Calculated by combining 3 factors: net operating profit after
taxes, capital & cost of capital
• Continuous improvement in EVA brings continuous increase in
shareholder’s wealth since a sustained increase in EVA brings
increase in market value of the company
• Incorporates 2 principles of finance into management decision –
making
• Primary objective of any company is to maximize the
wealth of its shareholders
• The value of a company depends on the extent to which
investors expect future profits to exceed or fall short of the
cost of capital
• NIIT, TCS & Godrej have implemented EVA in India
• Across the world, Seimens, Sony, Whirlpool, Johnson & Johnson,
Cadbury, Bausch & Lomb have implemented EVA
• New concept for productivity enhancement, investor’s
confidence & employee motivation
Steps for implementing EVA-
• Measuring of EVA – concept defined & explaining throughout the
company
• Managing through training programmes – oriented to educate
the managers how they would earn in direct proportion to the
wealth that the company would make
• Motivation of employee benefits / rewards through performance
linked remuneration scheme
• Preparing mindset of employees in the long-run, to understand
the impact of EVA on their personal remuneration

22
INCENTIVE PLANS:
Five Types:
Merit Pay
Gainsharing
ProfitSharing
Stock Options
ESOPs

Merit Pay: An incentive plan implemented on an institutional wide


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

A Company shares productivity gains with the workforce. Workers


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

What are the 'Gains' that are measured?

• Increases in production with equal or less effort.

• Equal levels of production with less effort.

What are examples of Gainsharing formulas?

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


expected hours (for the given level of output) equals the gain in
hours.
Advantages Disadvantages
• Helps companies achieve sustained • Adherence to the FLSA requires
increases in productivity. employers to recalculate each
• Employees become more involved worker's "regular rate" of pay. To
the productivity gains made by the overcome this limitation, employers

23
employer. may restrict this type of
• Employees can share in the benefits compensation to exempt
of employee sponsored employees.
improvements. • The formulas and program may be
• Enhances commitment to difficult to understand.
organizational goals. • Requires a shift to a more team
• Leads to improvements in other oriented management style.
measures of company performance,
including: teamwork, product
quality, lower rates of absenteeism,
defects, and "downtime."

When does Gainsharing work best?


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

What is the best way to implement Gainsharing?


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

Profit Sharing: An incentive based compensation program to award


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

24
organizational goals. employees may find difficult to
manage their personal finances.
• Adherence to the FLSA requires
employers to recalculate each
worker's "regular rate" of pay. To
overcome this limitation, employers
may restrict this type of
compensation to exempt
employees.

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

What is the best way to implement Profit sharing? Meet with


executives to develop a clear understanding of profit sharing. Develop
various formulas and models to be used in predicting future gains and
the costs associated with sharing those gains. Prepare rules.

Stock Options: The ‘right’ to purchase stock at a given price at some


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

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


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

How do Stock options work? An option is created that specifies that


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

They provide employees the right, but not the obligation, to purchase
shares of their employer's stock at a certain price for a certain period
of time. Options are usually granted at the current market price of the
stock and last for up to 10 years. To encourage employees to stick
around and help the company grow, options typically carry a four to
five year vesting period, but each company sets its own parameters.
Advantages Disadvantages

25
o Allows a company o In a down market,
to share ownership with because they quickly
the employees. become valueless
o Used to align the o Dilution of
interests of the employees ownership
with those of the company. o Overstatement of
operating income
Nonqualified Stock Options

Grants the option to buy stock at a fixed price for a fixed exercise
period; gains from grant to exercise taxed at income-tax rates
Advantages Disadvantages
o Aligns executive o Dilutes EPS
and shareholder interests. o Executive
o Company receives investment is required
tax deduction. o May incent short-
o No charge to term stock-price
earnings. manipulation
Restricted Stock

Outright grant of shares to executives with restrictions to sale,


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

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


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

26
When do Stock options work best?

-Appropriate for small companies where future growth is expected. -For


publicly owned companies who want to offer some degree of company
ownership to employees.

What are important considerations when implementing Stock


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

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

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

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

27
Features of ESOPs
• It is a qualified, defined contribution employee benefit plan that
invests primarily in the stock of the employer
• A company has to create a trust fund for employees and funds it
by contributions of stock, cash or buy stock or cash to pay back
the ESOP’s loan and to buy back stock in order to set-up a ESOP
system
• Shares held by ESOP trust are distributed to the employees
through an employee option scheme
• Return on an ESOP portfolio is linked to company performance
since investment is through employer’s securities
• All employees except part-time directors are eligible to ESOPs of
the company
• The terms, price & offer of ESOPs is done by compensation
committee of the board of directors
• Options granted to employee are not transferable to any other
person
• ESOP trust provides a warehouse for sponsoring company’s
shares which can be sold or transferred to employees in future
• Reservation up to 5% can be made by the issuer of the company
for employees of his company or promoters of the company

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

28
Types of ESOPs
• One-off, uniform
• An offer plan where the company may decide to include
non-performers, trainees, short-service staff, temps
• A one-time allotment for an equal number of shares,
options or warrants to all at the market value
• SEBI guidelines allow allotment of options below the
market price for shares, subject to the differential being
accounted in the books of the company
• One-off, differential / discretionary
• Also a one-off scheme where company may differentiate
allotments by grades, seniority or market value of special
skills
• Factors like achievements, potential, loyalty, hard work &
contribution to corporate performance if considered, then
the discretionary element will go up considerably
• Ongoing schemes
• Use a combination of uniform, differential & discretionary
allotments dynamically.
• May be warrants, shares or options that can be issued as
“sign-on” bonus on confirmation / promotion /
superannuating / recognition of outstanding contribution
• Given to some or all individuals
• Have a vesting schedule
• Are structured to enable flexibility
• Proxy: stock appreciation rights / phantom shares
• Notional units apportioned to employees
• Are productivity / contribution – linked incentive
programmes rather than stock option plans
• An employee is allotted notional units / shares of the
company based on certain criteria at a set price
• Employee is required to exercise his option within a given
period (say 2 years) – when the share price is high & will be
eligible to draw the differential or the whole in cash on
deduction of tax
• Provision is made to enable employees to decline the
shares & opt for the cash differential between the cost of
exercise & the market price
• It would have the effect of a stock appreciation right /
phantom share
Some definitions
• Phantom stock – a bonus that rewards employees based on the
value of the company’s stock & the dividend performance of the
stock

29
• Discount stock option – stock option with an exercise price which
is less than the fair market value on the sale of the grant
• Indexed stock option – the exercise price is equal to the fair
market value at grant, but the price adjusts upward or downward
depending on an index (in relation to the market / industry / peer
group performance / any other measure)
• Performance accelerated stock option – has a fair market value
exercise price & a service – based vesting schedule (longer than
traditional options which are generally for 10 years), but which
becomes exercisable at an earlier date in case specified
performance goals are achieved
• Performance contingent stock – has a fair market value price,
which becomes exercisable only when performance goals are
achieved. It lapses in case the set goals are not achieved
• Purchased stock option – down payment required to be made (%
of the market price) before the option may be exercised
• Reload/restoration stock option – stock option automatically
granted upon the exercise of a previously granted stock option to
the extent that the optionee uses shares rather than cash to pay
the purchase price of the original option (the exercise price of
the reload option is the fair market value on the date of the grant
& reload option expires on the same date as the original option
• Variable - priced stock option – with an exercise price that
fluctuates upward or downward in relation to stock price
performance (yo-yo stock option or indexed stock option)
Premium stock option – exercise price greater than the fair market
value on the date of the grant

How does ESOP work?

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

 The contributions made by the company are distributed to


individual employee accounts within the trust.

 The amount of stock each individual receives may vary according


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

 The employees may ‘cash out’ after vesting in the program or


when they leave the company. The amount they may cash out may
depend on the vesting requirements.

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


participation in the ESOP reaches age 55, he or she must be given
the option of diversifying his/her ESOP account up to 25% of the
30
value. This option continues until age sixty, at which time the
employee has a one-time option to diversify up to 50% of his/her
account. This requirement is applicable to ESOP shares allocated to
employee's accounts after December 31, 1986.

 Employees receive the vested portion of their accounts at either


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

What is the best way to implement ESOP?


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

31
2. Conduct a feasibility study to determine the value of the
company’s stock and impact of the contributions that must be
made to the trust.

3. An ESOP requires different accounting procedures and a different


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

What are the alternatives to ESOP?

1. Employee stock options.


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

LAWS & REGULATIONS RELATED TO COMPENSATION

PAYMENT OF WAGES ACT, 1936


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

MINIMUM WAGES ACT, 1948


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

EQUAL REMUNERATION ACT, 1976


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

PAYMENT OF BONUS ACT, 1965


Act to provide for the payment of bonus to persons employed in
certain establishments on the basis of profits or on the basis of
production or productivity and for matters connected therewith.

EMPLOYEES' STATE INSURANCE ACT, 1948


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

EMPLOYEES' PROVIDENT FUNDS AND MISC. PROVISIONS ACT,

32
1952
An Act to provide for the institution of provident funds 2*[3*[, family
pension fund and deposit-linked insurance fund]] for employees in
factories and other establishments

THE PAYMENT OF GRATUITY ACT, 1972


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

THE WORKMEN'S COMPENSATION ACT, 1923


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

PROBLEMS & ISSUES


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

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


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

ii. Inappropriate performance appraisal systems in that the


objectives of the appraisal system (e.g. where it is intended to
identify training needs or suitability for promotion) do not match
the objectives of the reward system.

iii. The absence of regular feedback on performance.

33
iv. The reward system is not designed to meet the objectives sought
to be achieved. There could be a variety of objectives e.g. to
satisfy distributive justice, attract and retain capable staff, match
particular levels of pay in the labour market, change
organizational culture (e.g. towards greater customer
satisfaction) or to reinforce it.

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

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


subject to performance criteria. This occurs when the amount
which depends on performance is too small, or it is too large and
therefore the amount placed at risk (when performance is poor)
is not acceptable to employees.
vii. The absence of periodic evaluation of the scheme.

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


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

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


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

The benefits to management and employees are:

34
• where performance/profits increase, higher pay is an incentive to
employees

• where profits reduce, the reduction in the performance-related


pay can cushion employees against redundancies

• employee identification with the success of the business is


enhanced

• variations in pay lead to employees becoming more familiar with


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

ii. positive employment effects could be negated due to opposition


from employees to recruitment as it would dilute their earnings

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


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

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


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

Unit II : WAGE THEORIES & LABOUR MARKET

ECONOMIC THEORIES
CLASSICAL SOCIAL WAGE THEORIES
A. Subsistence Theory
 Propounded by David Ricardo, 1817
 Also known as the "Iron Law of Wages“

35
 Was an alleged law of economics that asserted that real wages in
the long run would tend to the value needed to keep the workers'
population constant
 Ricardo drew a distinction between a natural price and a market
price. For Ricardo, the natural price of labor was the cost of
maintaining the laborer. However, Ricardo believed that the
market price of labour or the actual wages paid could exceed
subsistence level indefinitely due to countervailing economic
tendencies
 Ricardo believed that the market price of labor could long exceed
the subsistence or natural wage
 He also claimed that the natural wage was not what was needed to
physically sustain the laborer, but depended on "habits and
customs
 The labourers are paid to enable them to subsist & perpetuate the
race without increase or diminution
 The theory maintains that wages cluster around the bare
subsistence level of workers. A wage rate much above the
subsistence level causes an increase in the number of workers;
competition will then lead to a depression of wages back towards
the cost of subsistence. Wages that are below subsistence reduce
the size of the working population; in that case competition will
raise wages, but only up to the subsistence level again.
* Subsistence means minimum resources required for existence
* Diminution means change toward something smaller or lower

B. Wage Fund Theory


1 Developed by Adam Smith (18Century)
2 The wage-fund theory is that wages are advanced out of a fixed
fund of capital, from which an excess withdrawal, either through
legislation or through union pressure, will ultimately reduce the
amount available for other workers.
3 Any increase in wages would also have to be taken out of profits,
and their reduction would cause a decline in savings, which
provide the capital from which the wage fund is derived.
4 Basic assumption – wages are paid out of a pre-determined fund
of wealth which lay surplus with wealthy persons – as a result of
savings. This fund could be utilized for employing labourers for
work.
 If the fund was large, the wages would be high; if it was
small, the wages would be reduced to the subsistence level
 The demand for labour & the wages that could be paid
them were determined by the size of the fund
C Residual Claimant Theory
- Propounded by Francis Walker in 19th Century
- There are 4 factors of any business activity:

36
 Land, Labour, Capital, Entrepreneurship
 Wages represent the amount of value created in the
production which remains after payment has been made
for all these factors of production, thus implying that
 The labour is the residual claimant
- After all the factors of production have received their
compensation for their contribution to the process, only then the
labourers’ wages come to the fore
 Theory does not explain how trade unions are able to
increase the wages
 No role of labourers in productivity

D Marxian Theory
- In the surplus-value theory as propounded by Karl Marx, the value
produced by the worker in excess of what is paid in wages is called
surplus value
- The surplus value, exacted from the worker, constitutes the
capitalist's profit
- According to this theory, labour was an article of commerce – could
be purchased on payment of subsistence price
 The price of any product was determined by the labour
time needed for producing it
 The labourer was not paid in proportion to the time spent
on work, but much less
 The surplus went over, to be utilized for paying other
expenses

• JUSTIFICATION THEORIES
A. Marginal Productivity Theory
- Developed by Philips Wicksteed & John Bates
The wages are based upon an entrepreneur’s estimate of the value
that will probably be produced by the last of marginal worker
 It assumes that the wages depend on the demand for, and supply of
labour
 Workers are paid what they are economically worth
 The employer has a larger share in profit as has not to pay for the
non-marginal workers
 As long as each additional worker contributes more to the total
value than the cost in wages, it pays the employer to continue
hiring
 When this process becomes non-viable & uneconomic, the employer
may resort to superior technology
- This theory maintains that employers will only pay a wage that
is, at most, equal to the amount of extra value added to the total
product by one additional worker
B. Bargaining Theory

37
-Propounded by John Davidson
-Wages are determined by the relative bargaining power of the
workers / trade unions & of employers
- When a trade union is involved, basic wages, fringe benefits, job
differentials, and individual differences tend to be determined by
the relative strength of the organization & the trade union
- The bargaining theory modifies the marginal-productivity theory
by:
 Taking into consideration other factors (e.g., laws and
social and political changes) that might affect the
determination of wage levels
 Acknowledging that certain basic assumptions (equal
bargaining power of employer and employee, free
competition between the two, and mobility of labor) that
characterize the marginal-productivity theory do not hold
in our present economic system
C. Supply & Demand Theory
- Inter-relation between wages & employment
- Unemployment were to disappear if workers were to accept a
voluntary cut in wages – have wage flexibility for promoting
employment at a time of depression.
- These wage cuts would bring down costs and thereby fall in
price
- This lowering in prices would cause additional demand which
will increase production
- This will increase employment of workers

D. Competitive Theory
- Employers compete amongst themselves by offering a higher
pay / wage to attract employees while employees compete
with another for jobs by offering their services for a lower
wage
- Competition then, is essentially a disequilibrium process by
which excess demand and excess supply cause changes in
wages

• Behavioral Theories
A. Employee’s acceptance Level
- This theory takes into consideration, the factors which may induce
an employee to stay on with the company –
 Size & reputation of the company
 Power of the union
 Wages and benefits that the employee receives in
proportion to the contribution made by him / her
B. Internal Wage Structure
- Wage Structure affected by –

38
 Social norms / traditions / customs prevalent in the
organization
 Psychological pressures on the management
 Prestige attached to certain jobs in terms of social status
 The need to maintain internal consistency in wages at all
levels
 The ratio of maximum & minimum wage differentials
 Norms of span of control
 Demand for specialized labour
C. Wage & Motivators
- Purchasing power provided by monitory income helps workers to
take care of their basic needs:
 Food / Clothing / Shelter / Transportation / Insurance /
Pension Plans / Education / Other physical maintenance &
security factors
- Monitory income includes:
 Wages / Merit increases / performance – based bonuses

EVOLUTION OF MODERN-DAY WORKFORCE


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

39
enforced from 1991. It was these economic reforms that dictated
the industrial policy from then on. Only after a couple of years of
reforms that negative effects on other sectors of polity came to be
felt, the most affected being the Labour

Need of the Hour


 Ensuring equity as well as accelerating the rate of growth of
economy in the labour market is the need of the hour –
 It is necessary to ensure significant improvements in the quality of
labour, productivity, skill development and working conditions, and
to provide welfare and social security measures particularly, to
those in the unorganized sector
 It is also necessary to ensure that all adult persons looking for work
are employed at levels of productivity and income, which are
necessary to afford them a decent life. A significant proportion of
workers presently earn below the subsistence wages
 Another unfortunate facet of labour markets is the persistence of
child labour which must be eradicated in the shortest possible time

Background
• Modern day professions as we know them had their origin in the
post-industrial age after World War II when most Western nations
saw a long spell of growth
• This era also saw the emergence of modern day consumerism.
To cater to the emerging needs of the market, huge corporations
built gigantic factories to manufacture products and serve the
needs of consumers
•  They also started employing thousands of people to
manufacture, service and market the products
• Sometime during this period (in 1956), William H Whyte wrote
his much acclaimed book titled the Organization Man—a term which
caught the fancy of an entire generation of working professionals.
For Whyte Organization Men are People who only work for the
Organization. They are the ones of our middleclass who have left
home, spiritually as well as physically, to take the vows of
organization life, and it is they who are the mind and soul of our
great self-perpetuating institutions
• For nearly half century after the book appeared, Organization
Man typified the working class. In most parts of the world, huge
corporations—private, public and government-owned—employed
hundreds of thousands of Organization Men
• In the US, Fortune 500 companies created millions of jobs.
Similarly, UK, Europe, the Eastern bloc, and India saw the
emergence of huge government owned corporations and Public
Sector Undertakings (PSUs) that employed millions

40
• In many parts of the world, government service was the career
choice for a generation of the best and the brightest. In India,
joining the Indian Administrative Service (IAS) or Police Service (IPS)
was the dream
• In the US, President Kennedy’s "send a man to the moon" project
captured the imagination of a whole generation of youngsters who
either wanted to become rocket scientists or astronauts for NASA
• A whole generation of the best and brightest from top
universities competed to give their life and souls, and dedicate their
professional lives to mammoth corporations by joining the
burgeoning ranks of Organization Men. In return, they were assured
of a steady paycheck, raises, promotions and a golden watch at
retirement, with a guaranteed pension to boot
• Educated professionals were not the only ones welcomed by
these organizations
 There was a need for everyone—from the mailroom clerk and janitor
to shop floor workers, supervisors and managers; and everyone else
in between
 One common aspect binding all employees was their unrelenting
loyalty to the organization. There was very little individualism and
entrepreneurship shown (or expected) by employees, and most of
the decision-making took place in ivory towers at head offices
 The organizations asked for, and got the unwavering following of its
organization men; in return, it guaranteed employment, almost
taking on a patriarchal role for families of organization men

Transition
 There is little debate over the fact that we are experiencing a
major shift in the job market worldwide
 Changes in the marketplace are leading to a fundamental shift in
careers and professions across the board
 Perhaps the most important shift in the paradigm is the move
from Organization Man to Free Agents or Gold Collar Workers
 Individuals will not remain loyal to one single organization,
just as most organizations have given up on guaranteeing
lifetime employment
 New entrants to the job-market, and even those who have
been working in the corporate world for a while are starting
to realize that we cannot hope to become, or remain,
Organization Men

The New Generation


 This workforce contains the now generation, me
generation, new breed, and new X generation
 These generations have been variously described

41
as having lower overall job satisfaction, less desire to lead (move up
the organizational hierarchy) and to defer to authority; believe that
they are entitled to a good job; have a strong a desire to control
their own destiny; have a low absenteeism threshold
 They have also been described as having a lower
respect for authority, and a greater desire for self-expression,
personal growth, and self-fulfillment
 This group also tends to be more educated than
their predecessors, in most cases, they are more educated than
their supervisors
 Impatience and self-confidence define today's
educated young worker
 In older times, people used to do anything to get a
job - Today everyone thinks they're entitled to a job
 In the old days, such attitudes were unimaginable; they
would have been self-defeating
 Companies are no longer in the driver's seat - Employees
are in control now

Labor Market Discrimination

What is Discrimination?
 The valuation in the market place of personal
characteristics of the worker that are unrelated to worker
productivity.
o These personal characteristics may be sex, race, age,
national origin, religion, education or sexual preference
 Labor market discrimination may take the form of
different wage rates for equally productive workers with different
personal characteristics
 Labor market discrimination may also take the form
of exclusion from jobs on the grounds of social class, union
membership, or political beliefs

Labor Market Discrimination


 Discrimination is a cause of labour market failure and
a source of inequity in the distribution of income and wealth and it
is usually subject to government intervention e.g. through
regulation and legislation
 Discriminatory treatment of minority groups leads to
lower wages and reduced employment opportunities, including less
training and fewer promotions. The result is that groups subject to
discrimination earn less than they would and suffer a fall in relative
living standards

Why does discrimination occur in the labour market?

42
 The 'Taste' Model - Discrimination arises here
because employers and workers have distaste for working with
people from different ethnic backgrounds or final customers dislike
buying goods from salespeople from different races i.e. people
prefer to associate with others from their own group. They are
willing to pay a price to avoid contact with other groups. With
reference to race, this is equivalent to racial prejudice
 Employer ignorance – Discrimination also arises
because employers are unable to directly observe the productive
ability of individuals and therefore easily observable characteristics
such as gender or race may be used as proxies – the employer
through ignorance or prejudice assumes that certain groups of
workers are less productive than others and is therefore less willing
to employ them, or pay them a wage or salary that fairly reflects
their productivity, experience and applicability for a particular job
 Occupational crowding effects – Females and
minorities may be crowded into lower paying occupations. There is
little doubt that a permanent gap exists between average pay rates
for females and males in the labour markets of UK, US, Africa,
Europe & Asia

Quality in Labour Market

Towards Productive Employment


 Country like India has tremendous labor cost
advantage as far as daily or monthly wage rates are concerned. But
there are limitations due to poor quality of training and skills, non-
professional approach, low productivity and too many labor laws.
 The labor market is deregulated & there is increased
mobility of labor in global markets
 Many other low cost countries like china, Mexico,
Turkey, SAARC region neighbors, some north African and Latin
American countries are moving fast on learning curve and will offer
tough competition to Indian exporters in low cost labor advantage
 The real labor cost will rise in countries like India
erasing much of low cost advantage of labor
 Labour market demands are changing with greater
emphasis on the quality of jobs
 Labour market reforms are necessary to cope with
the accelerating economic and social restructuring associated with
globalization, technological processes and the development of an
inclusive knowledge and information society and economy
 In an era of globalization where capital, technology,
high skills and high productivity play a major role in labour markets
 In India, like in many other developing countries, the
growth of labour force is accelerating and will remain high for quite

43
sometime
 It needs rapid economic growth with effective and
efficient utilization of labour by upgrading its skills to ensure
development and employment generation.
 Intervention is required in labour markets to promote
employment and its quality.
 Quality in work — including training, career prospects
and work organization — makes a valuable contribution towards
increasing employment and productivity
 Improvements in the quality of work may increase
the efficiency of production processes by allowing employers to
exploit fully the potential of new technologies
 They are further likely to increase employees’
motivation and job satisfaction
 Upgrading the quality of labour force by pursuing
suitable education and skill development policies
 Low quality of jobs and low productivity is directly
attributable to low level of skills. The latter poses a serious
challenge to integration of the labour force in world economy
 There is overwhelming evidence that whereas
educated and skilled workers are generally able to derive some
benefits of new opportunities as a result of globalization, it is the
uneducated and unskilled workers on whom the burden of re-
structuring falls
 Designing appropriate training systems is, therefore,
an important means to deal with labour market instabilities like
under-employment, skill mismatch and redundancy
 Higher productivity of labour would, apart from
dignity of labour, improve the living standards of workers and also
help the industry in facing international competition
 An increase in overall productivity and skill up-
gradation will lead to progressive absorption of large number of
workers from informal or unorganized sector in the formal or
organized sector and ensure rapid economic growth
 Quality of labour force alone determines their
employability abroad or in institutions of foreign origin including
multinational organization
 Manpower development to provide rising labour force
with skills and training according to the emerging demand pattern is
essential to eliminate the mismatch between the supply of and
demand for labour

UNIT III
Reward Management in TNCs (Transnational
Corporations)

44
Transnational Corporations
Transnational Corporation means a for-profit enterprise marked by two
basic characteristics:
– It engages in enough business activities -- including sales,
distribution, extraction, manufacturing, and research and
development -- outside the country of origin so that it is dependent
financially on operations in two or more countries
– Its management decisions are made based on regional or
global alternatives
– In an era of declining constraints on their mobility and the
attraction of cheaper wages in less-industrialized nations eager to
draw foreign investment, TNCs are eliminating jobs in their home
countries and shifting production abroad
– In less-industrialized regions, the lure for TNCs of fewer
costs and regulations offers little promise to workers of decent
working conditions, sufficient pay, or job security.
– Tax breaks and subsidies governments use as incentives
are no guarantee that the TNCs will not move on after the benefits
have expired, and as cost advantages now found in Singapore
appear in, say, Bangladesh, the countries currently experiencing an
influx of investment may eventually find themselves in the same
position as that of the US and other industrialized nations today.
– TNCs are corporations that operate in more than one
country. Usually, headquarters are in one or more nations and
production or services are in another have become some of the
most powerful economic and political entities in the world today.
– Such companies have a geocentric orientation and attempt
to be responsive to both national markets, while simultaneously
seeking global coordination
– The number of transnational corporations in the world has
jumped from 7,000 in 1970 to 40,000 in 1995

What is the difference between Multi National Corporation and Trans


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

45
Group, Shell Oil etc

Reward Management
- The type and amount of compensation necessary to attract
technically and culturally qualified international managers and
technical professionals to the three nationals or country categories
involved international human resource management activities from
which employees are selected whether the people are:
– PCNs (parent country nationals)
– TCNs (third country nationals) or
– HCNs (host country nationals)
- HR managers focus on their strategic objectives to develop a
comprehensive compensation plan, in terms of considering base
pay, short and long-term incentives, benefits and growth
opportunities
- The objective of this kind of strategy is to ensure that both
TNC/MNCs’ long and short-term objectives coexist in the
compensation system without overlap, which would duplicate a
single pay plan for the same objectives.
- The purpose of the planning is also designed to ensure that
the compensation system attracts and retains the desired
employees and that it motivates them to do those things that
support the business plan
- The type and amount of compensation necessary to attract
technically and culturally qualified international managers and
technical professionals to the three nationals or country categories
involved international human resource management activities from
which employees are selected whether the people are:
– PCNs (parent country nationals)
– TCNs (third country nationals) or
– HCNs (host country nationals)
- HR managers focus on their strategic objectives to develop a
comprehensive compensation plan, in terms of considering base
pay, short and long-term incentives, benefits and growth
opportunities
- The objective of this kind of strategy is to ensure that both
TNC/MNCs’ long and short-term objectives coexist in the
compensation system without overlap, which would duplicate a
single pay plan for the same objectives.
- The purpose of the planning is also designed to ensure that
the compensation system attracts and retains the desired
employees and that it motivates them to do those things that
support the business plan
Global Staffers
An expatriate is an employee working in a country other than their
country of origin. An expatriate may also be referred to as a PCN or

46
parent-country national
- PCNs (Parent Country Nationals)
– Those personnel who are of the same nationality as the contracting
government or personnel from headquarters
– They come from the home country of the operation.
– The policy of using PCNs is usually employed when one or more of
the following situations exists: (1) the host country cannot readily
supply desired managerial personnel, (2) efficient communication
with headquarters is required, and (3) the company adopts a
centralized approach to globalization
- TCNs (Third Country Nationals)
– Those personnel of a separate nationality to both the contracting
government and the area of operations i.e. whose nation of
residence is neither the host country nor the home country
– Such an employee normally is recruited from outside the host
country and
– relocated from the point of recruitment to the host country
- HCNs (Host Country Nationals)
– These are Indigs (Indigenous Personnel) / Nationals / Locals – those
personnel who are indigenous to the area of operations
– Whose basic residence or home is the host nation
– Local colleagues of the expatriate, they are valuable socializing
agents, sources of social support, assistance, and friendship to
expatriates. Expatriates are more likely to adjust when HCNs
engage in this behavior

Reward Management
 The vehicle for “going global” is often an
international strategic alliance creating a world of “stateless
corporations” - a collaboration between two or more TNC/MNCs that
allows them to jointly pursue a common goal
 TNC/MNCs are staffed either by recruiting
expatriates from the regular organizations or by creating an
international cadre of managers, professionals, and workers of very
diverse cultural backgrounds
 Companies like Gillette, Sony are already doing
their own international cadre of managers now
– Recruiting people directly to an international career will assure a
supply of employees who expect and want to go overseas
– Consistency within the growth of international business operations
will require effective international human resource management
(IHRM) -
• Involves moving people around the world
• Helps HR Managers to formulate and implement policies and
activities in the home-office headquarters
• HR Manager’s responsibilities include selecting, training, and

47
transferring PCN abroad, and formulating policies for the firm as a
whole and for its foreign operations
– In staffing international operations, HR managers face a confusing
array of choices in recruiting and selecting from one of three types
of employees of an international firm. The three nationals or country
categories involved in international HRM activities are:
• The host-country where the subsidiary may be located
• The home country where the firm is headquartered
• Other countries that may be the source of labor or finance
– For example, P&G employs Eritrean citizens (HCNs) in its Eritrean
operations, often sends U.S. citizens (PCNs) to the Gulf countries on
assignment, and may send some of its Italian employees on
assignment to its Mexican operations (as TCNs)
– These three types of employee groups have very different cultural
backgrounds. Therefore, TNC/MNCs’ HR managers must coordinate
policies and procedures to manage from the firm’s home country as
well as in subsidiaries around the world in shaping international
compensation and reward systems.
– These policies and practices must effectively balance the needs and
desires of HCNs, PCNs and TCNs as well - Failure to recognize
differences in managing human resources in international
environment frequently results in major difficulties in international
operations

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


success or failure of an TNC/MNC:
TNC/MNC’s HR managers must staff their international business
operations with personnel who are technically competent, culturally
proficient, and cost-effective. In almost all cases, it is generally argued
that it is cheaper to employ HCNs than to send expatriates (PCNs or
TCNs). TNC/MNCs may find expatriates too expensive to employ in
large numbers
The International Compensation Challenge
– Compensation is one of the most complex areas of international
human resource management
– Pay systems must conform to local laws and customs for employee
compensation while also fitting into global MNC policies
– Managers face diverse political systems, laws & regulations,
confront different economic climates, economic development, tax
policies, diverse culture, customs, the role of labor unions, standard
of living
• For example, union influences may play an important role in
determining wage policies in some countries such as Australia
where the Australian Government and unions negotiate pay rates
for workers that apply nationwide.
• In Hong Kong, by contrast, labor unions are extremely weak, and

48
wage rates are determined by the free market
– All these different factors between international communities affect
international compensation systems. Therefore, finding the right
method for TNC/MNCs to determine a compensation package in an
international market is simply becoming a nightmare
– It is also important for MNCs to consider carefully the motivational
use of incentives and rewards among the employees drawn from
three national or country categories
– The traditional function of pay to attract, retain and motivate
employees has not changed - The emphasis has shifted from the
attraction and retention functions to the motivation function.
– TNC/MNCs must ensure that those skilled employees are
compensated for achieving goals that make the international
business operations succeed
– As different countries have different norms for employee
compensation, HR managers should consider carefully the
motivational use of incentives and rewards among international
community:
• For Americans money is likely to be the driving force even
though no financial incentives such as prestige, independence,
and influence may be motivators
• Other cultures are more likely to emphasize respect, family, job
security, a satisfying personal life, social acceptance,
advancement, or power
– Since there are many alternatives to money, the rule is to match
the reward with the values of the culture
– There are wide variations both between countries and among
organizations within countries concerning how to compensate
workers
– The principal problem is salary levels for the same job and the jobs
are different between countries in which an TNC/MNC operates
– Compensation policies can create conflict if local nationals compare
their pay packages to the expatriate’s and conclude that they are
being treated unfairly
• Can create resentment and envy on the part of HCN managers
and lower their morale and productivity

Unique Compensation Issues in International Scenario


– Incentives provided to stimulate movement or expatriation
to a foreign location / host country
– Allowances for repatriation to home country
– Additional tax burdens placed on employees working in a
foreign location
– Labour regulations in home and host country
– Cost-of-living allowances in the host country
– Home country and host country currency fluctuation

49
– Formal and informal compensation practices unique to the
host country
– Determining home country for setting base pay of TCNs

Compensation Strategy for Global Staffers


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

Management challenges concerning International Benefits &


Compensation

 HR managers focus on their strategic objectives to


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

Designing the Compensation Program

 Balance business objectives with the


compensation programs such as base salary, taxes, allowances,
cost-of-living allowances (COLAs), housing and reimbursable

50
expenses.
 The levels of salary and types of fringe benefits
paid to the three primary labor pools of international managers are
well documented. What has not received adequate attention is the
difference among PCNs, HCNs, and TCNs.
– For example, executives, middle managers and supervisors who are
expatriate managers in international assignments, receive a variety
of “package” of benefits
– In addition to salary, taxes and benefits, international managers
also receive different allowances as part of their overall
compensation to accept an overseas position
– The most noticeable differences among the three labor pools of
international managers are
• Overseas premiums –
• The foreign service premium is based on the expatriate’s level in
the company, the family size, and the location
• Another type of premium is the hardship allowance and home
leaves. The U.S. Department of State established a hardship list in
1996 to help organizations providing expatriate managers hardship
allowances as a percentage of their base salary
• Housing allowances –
• Entails substantial additional costs
• TNC/MNCs differ in policies regarding employee contributions to
housing
• Cost-of-living allowances –
• Provided to help PCN or TCN enjoy a standard of living abroad
that is comparable to what they would enjoy in the home country
• Tax equalization –
• PCNs pay no more income tax and no less than if he or she
stayed home
• Repatriation allowances –
• Paid on return of employee to his/her country of origin to live
there permanently
• Performance-based bonuses

Additional Payments and services

– Lifestyle enhancement services


• Provision for employee & family to learn the local language
• Education & training of employee & family on local culture, customs
and social expectations
• Counseling services for employee & family
• Assistance in finding a home at the foreign work site / school &
suitable education programmes for children & dependents
• Company car, driver, domestic staff, child care
• Use of Fitness facilities / subsidized health care services

51
• Assistance in finding suitable & acceptable employment for spouse
• Assistance in joining local civic, social, professional organizations
– Allowances & Premiums
• Foreign service premium & tax equalization allowance
• Temporary living allowance
• Hardship premium
• Currency protection
• Mobility premium
• Home-leave allowance
• Stopover allowance
• Completion of assignment bonus
• Assignment extension bonus
• Emergency loan
• Extended work-week payment

The Expatriate Compensation Balance Sheet: Summary


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

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

UNIT III: CEO Compensation - Compensation of Chief


Executives & other employees

Some quotes
 “CEOs should be compensated 15 times more than the lowest-
paid salary of an employee in a company. I am against mandating a
ratio, but it can be anything from 15 to 25 times the lowest salary.”
-Infosys' Narayana Murthy at CII's leadership conference on the
issue of high CEO compensation.
 "The excessive flab on CEO emoluments should be cut.“
- Anu Aga, Chairman, Thermax.
 "CEOs 25 years ago never got a million dollars; their
compensation was based on common sense. Back then, CEOs were

52
seen as diligent managers who had skill motivating people and just
got promoted up through the ranks."
- Robert Stobaugh, Professor Emeritus, Harvard Business School.

Current Compensation Packages


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

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

Historical Perspective: in India


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

53
– Perks could be drawn equal to annual salary or INR
4,50,000/- pa whichever was less
– Overall limit of INR 10,50,000/- pm including perquisites
was kept
 1990s was a tumultuous period for Executive
compensation
– Salaries were low, stable and predictable
– Legal ceilings existed on remuneration (salary and
commissions) of directors
– Ceilings designed keeping in mind government officials -
Bureaucratic structure- relationship with performance of business
was non-existent
 Post liberalization and globalization, the trend
reversed
 Mega bucks for the chief executives from 1991
onwards
– Inflation
– Demand for competent, talented grew but supply did not
match
– MNCs recruited high quality manpower or their global
operations at comparatively lower rates
– Indian family owned companies had to match the
remuneration offered by MNCs
– Complex compensation structure (allowances, benefits
included) against high tax structure
– Wide differences industry – wise in salary levels due to
demand and supply trends, profitability, growth rate etc
 1980s was boom period for advertising
 Early 1990s – for financial services
 Late 1990s – petrochemical, IT, power, insurance
 2000 – IT and telecom, biotechnology
 Revision of salaries for government officials in 1996
& PSU employees in 1997 had a spiraling effect
 The % increase in chief executive salaries was not
the same as those of the junior level employees

Present Compensation trends


 IT is highest pay master – strategy for employee
retention especially of employees with skill sets not easily available
 Annual increments not related to tenure but only
to performance
 Compensation structure still not appreciated in

54
terms of employee satisfaction and real cost
 Salary increases reduced from 2000 in all sectors
 Entry-level MBAs & engineers packages has come
down
 Highest compensation sectors are:
– FMCG
– IT
– Telecom
– Engineering
– Durables

Components CEO Compensation


 Base Salary
 Short-term performance bonuses
 Variety of Equity (stock ownership) related
components
 Severance packages (golden parachutes)
 Retirement plans
 Wide variety of benefits and perquisites
 Benefits and perquisites include:
• Company-provided car - Medical expense reimbursement
• Parking - College tuition reimbursement for
children
• Chauffeured limousine
• Kidnap and ransom protection
• Counseling service (financial & legal services)
• Attending professional conferences & meetings
• Spouse travel
• Use of company plane and yacht
• Home entertainment allowance
• Special living accommodations
• Club membership
• Special dining rooms
• Season tickets to entertainment events
• Special relocation allowance
• Use of company credit card
• No – and low-interest rate loans

Features of Executive Compensation

 Performance criteria must have approval of

55
shareholders, directors outside the compensation committee, be
formula driven
 Should not be compared to wage & salary
schemes of the other employees
 Chief Executives are not as organized as
Unionized staff
 A level of secrecy needs to be maintained
 Remuneration depends on competence,
experience, length of service, loyalty to founders, excelling areas
like M&A specialist, turnaround specialist etc
 Not based on individual performance but rather
on organizational performance
 Subject to statutory ceilings especially in the
public sector – Ceilings do not apply private sector
 Supposed to be guided by job evaluations, JDs,
salary grades with ranges of pay in each grade & salary survey –
but exorbitant in reality

Problems of Executive Compensation

 Enormous differences between the pay, income and


wealth of the front-line and the top executives – opposed heavily
this disparity
 Increases in compensation received by Chief
Executives are far out of line with those provided to the rest of the
workforce
– While CEO received almost 36% raise, workers received
only 3.9% raise in some cases
 This exorbitant CEO compensation is a direct cause
of the rise in union membership
– Leads to demoralizing other employees
– Unfair to shareholders
– Can even lead to distorted behavior

CEO Compensation
- The high compensation to CEOs had been a debatable issue over
the years among corporates as well as the investors all over the
world. Market analysts and stakeholders had criticized companies
for paying exorbitant compensations to CEOs and argued that this
would widen the gap between the top level and other levels of
management.
- By early 2001, paying high compensation to CEOs became a very
controversial issue due to the global economic slump and poor
performance of corporates. The issue was strongly debated not only
in the US, but also in countries including UK, South Korea and India.

56
- The shareholders were not happy with the fact that CEOs' salaries
continued to rise in spite of the poor performance of the stocks.
They argued that, though the compensation of the CEO was linked to
the company's performance, there were instances where, in spite of
the poor performance of the company, the CEO concerned got a
decent hike in compensation package.

Guidelines for CEO Compensation


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

Corporate Governance: What the ideal situation should be


- At a theoretical level, compensation committees are a must in
companies that weave performance-based and stock-based
variables into the overall salary.
- With an increasing number of companies moving to such
compensation structures, committees, logic dictates, should
become the norm.
- More important, regulations may soon insist on external
representation on these committees.

Company’s Act 1956


- In India the Companies Act is the legislation that primarily
shapes the remuneration of top managerial personnel.
- Until 1993, the Act provided for an upper limit in the amount
of compensation to be paid.
- It had been pointed out that the "regulation of director's
remuneration becomes necessary for several reasons, prominent
among them being the prevention of diversion of corporate funds
for personal use and the impact which an unduly high executive
reward has upon the rest of society."
- However, over the years, with the shift in India's economic
policy towards a market-oriented capitalistic economy, this
particular legislation has been amended to increase the maximum
pay package limits that are payable to the managerial personnel.
While other reforms have taken their time to be incorporated in to
the Act, the maximum pay ceiling for CEOs has been increased

57
systematically and more frequently.
- One of the main reasons put forward for this regular increase
has been the need to attract and retain talent at the senior level.
- Additionally, it has been argued that the risk and
responsibility at the senior level needs to be compensated by a
sufficient increase in the pay packet. Needless to mention the risk
and responsibilities at the CEO's level pertain to the uncertainty
associated in fulfilling organizational objectives. This automatically
indicates a strong relationship between the CEO's compensation
and organizational performance.
- Logically the CEO's job should be at stake if the organizational
objectives are not fulfilled.
- Indian law does not require that the compensation committee
have a charter. The scope of the Company’s remuneration
committee includes determination of the Board’s compensation and
the Company’s policy on specific remuneration packages for
executive directors including pension rights and any other
compensation payments

Managerial remuneration & Companies Act 1956


- The Companies Act, 1956, contemplates five categories of
managerial personnel:
- a) An ordinary director, who is the director simplicities; b) a part-time
paid director, being a director in the part-time employment of the
company; - a whole-time director, being a director in the whole-time
employment of the company; d) a managing director, being a director
entrusted with substantial powers of management; and e) the
manager, having the management of the whole, or substantially the
whole, of the affairs of the company.
- The remuneration payable to a director may take any one or more of
the following forms: Sitting fee for each meeting of the Board, or a
committee thereof, attended by him; monthly, quarterly or annual
payments made to him; or a commission payable to him at specified
percentages of the net profits of the company computed in the manner
referred to in Section 198(1).
- Thus, the Companies Act enlarges the ordinary meaning to the word
`remuneration' to payment in money or otherwise for services
rendered.
- A CEO may be paid remuneration by way of a monthly payment
and/or at a specified percentage of the company's net profits.
- While, some companies prefer not to pay any commission and in lieu
thereof absorb the element of commission into the monthly salary so
as to ensure a steady income for the CEO irrespective of fluctuations in
the net profits of the company from year to year, others go to the
extent of linking the CEO's pay with the share price of the firm by
issuing employee stock options to him/her.

58
- Consider the remuneration paid to Corporate CEOs (that is, Managing
Directors or Chairman in some organizations). Section 198 of the
Companies Act, 1956, limits the overall maximum managerial
remuneration payable by a public company to persons entrusted with
managerial functions to 11 per cent of the company's net profits
(percentage of the net profits as contemplated by Section 198 (1) is to
be computed in the manner laid down in Sections 349, 350 and 351 in
the Companies Act).
- This percentage is exclusive of fees payable to directors for attending
meetings of the Board or committees thereof. The Section is concerned
especially with managerial remuneration payable to managing
directors. On the other hand, Section 309 is concerned with total
remuneration payable to directors; whatever is the nature of such
remuneration, managerial or otherwise.
- Obliging to the frequent demands/representations of the different
industry chambers and with the shifting economic policy, the
Companies Act was amended from time to time. For example, from a
salary limit of Rs 90,000 pa in 1969-74, in 1994, the upper limit for
salary was eliminated (the only limiting factor being Section 198).
- The Guidelines should have logically helped corporations in
substantially raising their managerial remuneration packages.
- It should have also helped remove the stigma attached in paying
large remuneration.
- However, despite these positive incentives regarding pay packages,
one could question its impact on corporate performance - Did such
phenomenal increases in the limits of managerial remuneration help
raise the performance of organizations?
- Were the increases in these limits made to cope up with the
pressures of competition and globalization, or was there something
more to it?

Recommendations

- Companies should have completely independent compensation


committees that decide CEO pay
- In the absence of such committees, there should at least be a
special sub-committee that decides CEO pay
- Whichever form the committee takes, CEO pay should always be
aligned with the performance of the company's stock
- The usage of more sophisticated measures of financial
performance, like Total Shareholder Returns (TSR) or Economic
Value Added (EVA)
- To use a balanced measurement matrix that includes non-
financial parameters like customer satisfaction and employee
engagement
- Some companies could even split the variable pay component

59
into two parts –
• One of these is related to a company's performance in the short-
term (typically sales and profits)
• Another to its performance in the long-term (Market Value Added
or Market Capitalization). The short-term bonus is typically
capped as a percentage of the CEO's salary, while the long-term
reward takes the form of stock options.

New trends expected


- Changes expected-
– Sign-on bonuses
– Golden parachutes
– Severance packages, all mechanisms that insure CEOs
from uncertainties prevalent in today's job market will
become more prevalent
• Additional stock option grants

60
UNIT IV: JOB EVALUATION

JOB ANALYSIS
-The analysis, measurement, control and redesign of a set of activities
– performed on ongoing jobs
-A detailed and systematic study of jobs to know the nature &
characteristics of people to be employed for each job
-Involves identification and description of what is happening on the job
– It is a labor intensive, time consuming job
– Demands a greater understanding of human behaviors, job
requirements, writing skills
– Differentiate compensation provided to employees on basis of
job content, job specifications, working conditions, employee job
performance wrt the required tasks, the knowledge and skills
required to perform them, and the conditions under which they
must be performed
– Helps in establishing a sound compensation system, using
criteria that measures and differentiates job & performance
requirements so that all employees receive fair and just
treatment
- It is conducted in the following situations-
– Employees or union reps demand change in JDs and assignments
of jobs to pay grades, or
– Development of a classification system that reflects more
accurately the work they perform, or
– Reallocation of job activities at the time of organizational
restructuring, or
– Redesigning of the organization & its jobs
- Preliminary considerations for undertaking this costly operation-
– Senior Management support
– Workforce Cooperation & Involvement
• All employees must understand the responsibilities and duties of
their jobs
• Employees and supervisors must be in agreement to these
responsibilities and duties
• All employees must receive fair rewards for the knowledge
necessary to solve work-related problems, make decisions and
accept other responsibilities to perform their jobs successfully
- Steps for conducting this process
– Schedule the necessary and logical work steps
• Developing budget & forecasting financial requirements

61
• Determine the organizational use of job content and other
related data
• Learn about the structure, operations, jobs of the organization
• org. chart, process chart, procedure manuals
• Identify and select methods for collecting job content data
and other related facts
• through interview, questionnaire, observation, diary/log, or
combination of any of these
Uses of Job Analysis
– Employment
– Training
– Organization design and staffing
– Compensation
– Performance review
– Safety and health
– Affirmative action planning during organizational design &
job design
– Employee counseling
– Hiring the handicapped
The analysis of the job-
– Activity / task / function / element / duty / responsibility /
behavior / essential job function / competency

JOB DESCRIPTION
- Statements of fact that describe the job
- An organized factual statement of job contents in the form of
duties & responsibilities of a specific job
- Emphasizes the job requirements
- Contents include
– Job identification - Job title, location, supervisor, grade, pay
range, plant/division & department/section
– Job summary
– Job definition - Responsibilities & Duties
– KSAs (knowledge, skills & ability) & competency
– Machines, tools, equipments, materials
– Relation with other jobs
– Nature of supervision & accountabilities
– Working environment & conditions
- Process of preparation of JDs
– Observation of job being performed
– Discussion with the supervisor of the job
– Getting questionnaire filled up by supervisor
– Discussion with employees
– Getting questionnaire filled up by employees
- Uses of JD
– In planning activities including organization design, staffing

62
levels, career ladders, career paths, job design, pay system
design
– In day-to-day operations including recruitment &
screening, designing selection tests, hiring and placement,
orientation, developing procedures, training and
development
– In exercising Control to ensure compliance with legal
requirements & meeting union demands especially while
setting performance standards, following legislations,
collective bargaining

INTERNAL & EXTERNAL EQUITY

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

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


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

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

Internal Equity

The internal equity method undertakes the job position in the


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

63
External Equity

Here the market pricing analysis is done. Organizations


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

64
The first thing employers should consider when developing
compensation packages is fairness. It is absolutely vital that
businesses maintain internal and external equity. Internal equity refers
to fairness between employees in the same business while external
equity refers to relative wage fairness compared to wages with other
farms or businesses. No matter the compensation level, if either
internal or external equity is violated, a business will most likely
experience employee dissatisfaction and employees with begin to
balance their performance through a variety of ways ranging from
decreased productivity to absenteeism and eventually to leaving the
business.
So, what constitutes a fair wage? One approach to determining a fair
wage is a market survey. These are typically fast and easy ways to
establish compensation guidelines for many businesses. A few phone
calls to other employees in similar businesses can determine the
"market" value for a specific job.

JOB EVALUATION
 Job evaluation can be defined as “a systematic procedure
designed to aid in establishing pay differentials among jobs…”
*Compensation: Milkovich, George T. and Jerry M. Newman; BPI/Irwin, 1990; p. 103.
 Process to determine and compare the demands
which the normal performance of particular jobs makes on normal
workers without taking into account of the individual abilities or
performance of the workers concerned
 Process of analysis & assessment of jobs to ascertain

65
reliably their relative worth using the assessment as a basis for a
balanced wage structure
 Rating of the jobs to determine their position in a job
hierarchy
 Widely used in the establishment of wage rate
structures & elimination of wage inequities
 Applied to jobs rather than the qualities of individuals
on the jobs
 Basic goal is to ascertain the relative worth of each
job through an objective evaluation so that relative remuneration
may be fixed for different jobs.
 A systematic procedure which enables wage
structure to be fair & equitable

Some Principles of Job Evaluation


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

JOB EVALUATION vs. JOB ANALYSIS


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

66
classification of jobs according to their worth

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

67

Preparation of JDs & analysis of job requirements

Comparison of one job with others

Arrangement of jobs in their corrective sequence in terms
of value to the firm
– Relation of the sequence to a money scale
Requirements
– Should be carried out with a high degree of integrity &
fairness; calls for mutual trust between management and
unions; evaluators must have wide knowledge of the jobs;
workers must be informed of the purpose & assurance
must be given that no pay-cuts due to job evaluation will
happen

METHODS FOR CONDUCTING JOB EVALUATION

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

QUANTITATIVE METHODS
1 Factor comparison method
2 Point rating method

RANKING

Ranking simply orders the job descriptions from smallest to largest


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

68
Ranking Methods

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

2. Weighting

3. Paired Comparison

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

JOB CLASSIFICATION

Jobs are classified into an existing grade/category structure or


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

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


jobs. Typically the number of compensable factors is small (4 or 5).
Examples of compensable factors are:

69
1. Skill
2. Responsibilities
3. Effort
4. Working Conditions
Next, benchmark jobs are identified. Benchmark jobs should be
selected as having certain characteristics.
1. equitable pay (not overpaid or underpaid)
2. range of the factors (for each factor, some jobs would be at the
low end of the factor while others would be at the high end of the
factor).
The jobs are then priced and the total pay for each job is divided into
pay for each factor. See example matrix below:
Job Evaluation: Factor Comparison

The hourly rate is divided into pay for each of the following
factors:
Hourly Pay for Pay for Pay for Pay for Working
.
Job Rate Skill Effort Responsibility Conditions
Secretary $9.00 4.50 2.00 2.00 0.50
Admin
$11.00 5.50 2.50 2.50 0.50
Assistant
Supervisor $15.00 6.00 3.50 4.00 1.50
Manager $21.00 9.00 3.50 7.00 1.50

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

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

POINT METHOD
A set of compensable factors are identified as determining the worth of
jobs. Typically the compensable factors include the major categories
of:
1. Skill
2. Responsibilities
3. Effort
4. Working Conditions

70
These factors can then be further defined.
1. Skill
1. Experience
2. Education
3. Ability
2. Responsibilities
1. Fiscal
2. Supervisory
3. Effort
1. Mental
2. Physical
4. Working Conditions
1. Location
2. Hazards
3. Extremes in Environment

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


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

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

Advantages Disadvantages
• The value of the job is expressed in • The pay for each factor is based on
monetary terms. judgments that are subjective.
• Can be applied to a wide range of • The standard used for determining
jobs. the pay for each factor may have
• Can be applied to newly created built-in biases that would affect
jobs. certain groups of employees
(females or minorities).

Job Evaluation - The Future


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

71
COMPETENCY-BASED COMPENSATION SYSTEMS &

SKILL-BASED COMPENSATION SYSTEMS

All of these evaluation methodologies are based on one or a


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

Most evaluation methods compare jobs in the organization to one


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

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

Definitions of the three compensable factors are as follows:

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

72
2. Results
This factor describes the work outcomes and the range and impact of
effects, such as the benefit or harm to citizens, the gain or loss of
resources and the goodwill created.
Impact - the range of people, things, and organizations directly
affected by the employee.
Effect of Services - the extent to which decisions and work products
made by the employee affect the level of service, quality of work,
welfare of constituents, the organization's image and cost of
operations.
Consequence of Error - the potential costs of the employee's mistakes
in terms of financial and human costs, efficiency, morale, physical
maintenance and image.
3. Accountability
This factor describes the employee's responsibility or authority
exercised in terms of guidance given to fellow workers, independence
and autonomy of functioning and finality of decisions made.
Leadership - the level of control the employee has over resources such
as people, functions, facilities and budget.
Judgment and Decision-making - the types and kinds of decisions made
by the employee and the finality of these decisions and actions taken.
Independence of Action - latitude or freedom of action exercised by the
employee.

COMPETENCY-BASED SYSTEM

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

In the 1990s, a new idea gained acceptance in a number of


organizations that more closely aligned human resource practices with
organizational strategies, missions and cultures. A number of
organizations' switched from a traditional job-based structure to a
competency-based structure that emphasized the development and
attainment of behaviors, knowledge and skills compatible with and
aligned to the organization's mission and business strategies.

The focus of competencies is centered on characteristics of the


employee, including behaviors, skills and knowledge that can be
demonstrated and positively affect the organization. Competencies
emphasize the attributes and activities that are required for an

73
organization to be successful. Therefore, human resource practices
using Competency Models tap into the employee capabilities that are
aligned to the organization mission and business need.

Competency Models when implemented in totality can impact all of the


agency's human resource practices including recruitment, selection,
compensation decisions, performance planning, performance
evaluation and career development.

Like other alternative pay and job evaluation systems, a Competency-


based System is fairly labor intensive and requires the agency's
commitment to designate the necessary staff resources during the
development stages. Agencies will also want to consider the financial
and human resources required to administer such a system.
Additionally, Competency-based Systems should not be perceived as a
"one size fits all" approach. It is important that an agency identify the
specific work unit(s) where competencies may be identified that
directly and positively impact the success of employees and the
agency.

What are Competencies?

Competencies are identified behaviors, knowledge, and skills that


directly and positively impact the success of employees and the
organization. Competencies can be objectively measured, enhanced
and improved through coaching and learning opportunities. There are
two types of competencies, Behavioral and Technical. Depending on
the purpose of the Competency Model, one or a combination of these
competency types may be used.

Behavioral Competencies are a set of behaviors, described in


observable and measurable terms that make employees particularly
effective in their work when applied in appropriate situations.
Behavioral Competency Models may be designed to describe common
or "core" behaviors that are applicable to employees throughout an
agency, or may be more narrowly defined to reflect behaviors unique
to an Occupational Family or Career Group.

Technical Competencies are underlying knowledge and skills,


described in observable and measurable terms that are necessary in
order for employees to perform a particular type or level of work
activity. Technical Competencies typically reflect a career-long
experience in an agency.

What is a Competency Model?

A Competency Model is a listing of Competencies that apply to a


particular type of work. Competency Models can include Behavioral

74
Competencies only, Technical Competencies only, or both. An example
of a Competency Model for Human Resource Professional follows:

Human Resource Professional


Behavioral Competencies
 Agency (implies company) Mission Focus
 Customer Focus
 Teamwork
 Consultation
 Achievement Orientation
Technical Competencies
 Compensation Expertise
 Recruitment/Selection Expertise
 Employee Relations Expertise
 Employee Benefits Expertise
Training and Development Expertise

How are Competency Models used?

Competency models can serve as a way to integrate human resource


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

Training and Development - connection to agency business need is


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

Recruitment and Selection - models can be developed to identify


criteria for recruiting and assessing applicants for agency positions.

Performance Management - models can be used to support the


assessment of employee performance.

Compensation Decisions - models can be developed to determine


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

How are Competency Models linked to pay?

75
The Compensation Management System, employee compensation is
based on an evaluation of the following pay factors:
 Agency business need;
 Duties and responsibilities;
 Performance;
 Work experience and education;
 Knowledge, skills, abilities and competencies;
 Training, certification and license;
 Internal salary alignment;
 Market availability;
 Salary reference data;
 Total compensation;
 Budget implications;
 Long term impact; and
 Current salary
Competency Models can be used to help evaluate performance or to
determine internal salary alignment and starting pay. Various formats
may be used to determine actual employee pay rates. Formats can
range from comprehensive inventories of individual competency
ratings to pay matrices that reference a general evaluation of
competencies and expertise.

Comprehensive inventories provide detailed information that can be


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

With a comprehensive inventory including staged competency rating,


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

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


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

How are Competency Models linked to performance planning


and evaluation?

Competency Models provide the supervisor and employee with a clear


understanding of performance expectations, and address training and

76
development activities necessary for successful performance. Models
that include specific performance criteria ensure that supervisors and
employees share the same understanding of performance
expectations. Most Competency Models require an employee self-
assessment of their performance that provides input to the supervisor
in their appraisal of the employee. Additionally, some may elicit
performance feedback from other internal and external peers, direct
reports and customers.

How is Competency-based System evaluated?

The final step in the development of a Competency Model is the design


and implementation of an on-going evaluation plan to measure the
effectiveness of the model's content and usage. Competency Models
must be reviewed and modified periodically to reflect changes in
desired behaviors and technical knowledge and skills that result from
an evolving work environment. The evaluation plan, at the minimum,
should include the individual(s) responsible for evaluating the
Competency Model, evaluation timelines and may follow the same
process used to develop the original Competency Model.

SKILL-BASED COMPENSATION SYSTEM

The Compensation Management System is designed to provide a direct


link between organizational performance and employee contribution
and pay. Skill-based Systems are one method of achieving this linkage.

Skill-based pay refers to a pay system in which pay increases are


linked to the number or depth of skills an employee acquires and
applies and it is a means of developing broader and deeper skills
among the workforce. Such increases are in addition to, and not in lieu
of, general pay increases employees may receive. The pay increases
are usually tied to three types of skills:
• horizontal skills, which involve a broadening of skills in terms of
the range of tasks

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

• depth skills, which involve a high level of skills in specialised


areas relating to the same job.
Skill-based pay differs in the following respects from traditional pay
systems which reflect skills differences in a structure consisting of
rates of pay for unskilled, semi-skilled and skilled workers:

77
• Skill-based pay is a person-based and not a job-based, system. It
rewards a person for what he/she, rather than the job, is worth.
Job worth is reflected in a basic rate of pay for minimum skills,
but pay progression is directly linked to skills acquisition (rather
than to general pay increases applicable to all) .

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


which makes the employee multi-skilled and therefore flexible.

• It positively encourages skills development.

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

• The system needs to be underpinned by opportunities for


training which is critical to the success of the system. The
traditional structure is not dependent on such opportunities.
Reasons for Skill based Pay
More than ever before in industrial relations history a commonality of
interests in the skills of employees has developed between employers
and employees. Skills provide employees with a measure of protection
against unemployment, as well as opportunities for higher earnings. At
the same time, skills provide employers with an important means of
achieving competitiveness.
Many countries today are seeking to advance to more technology and
skill-based industries, while others have become (or are becoming)
'post industrial' societies, in which the application of knowledge
determines productivity, performance and competitiveness.
Comparative advantage based on, for instance, cheap labour or raw
materials, has declined in importance relative to competitive
advantage based on the ability to add value to a particular resource or
advantage. Such comparative advantage partly (often largely) depends
on people - their standards of literacy and education, work attitudes,
value systems, skills and motivation. Critical today is the ability to
innovate and develop clusters of competitive enterprises in particular
industries. For the more industrialized countries this means 'capturing'
some of the key industries of the next century - micro-electronics,
biotechnology, new materials science industries, telecommunications,
civil aviation, computers and software, robotics and machine tools and
entertainment. An employee with skills is most flexible and productive
when he develops a broad range of skills, is able to learn the next
higher skill, develop analytical skills and is also able to work in a team.

78
Important aspects of today's skills package include multi-skills,
cognitive skills, interpersonal and communication skills, positive work
attitudes and quality consciousness. Training is no longer only for
current competence, but is also to prepare for the next stage of skills.
Thus pay systems which promote current and future skills needs are
increasing in importance among employers.

The impact of rapid technological change, the increasing globalization


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

[Top] [Previous
[Contents ] [Next]
] Introducing The System

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


and several issues to be addressed:

• The skills requirements of the enterprise should be analysed

• The availability of resources for training should be ascertained

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

• The individual jobs have to be grouped into 'job families' on the


basis that in each 'family' the skills needs are similar. The skills
within each job family and the tasks needed to perform the job
should be analyzed

• The above will lead to an identification of the skill blocks or


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

• Training modules have to be formulated

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

79
• The base rates for 'job families' have to be set, as well as the
payments that will be made thereafter when an employee moves
upwards through the skills route.

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

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

• A difficult question is how obsolete skills should be dealt with


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

• training costs

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

• the possibility that unusable skills may be acquired unless the


system is properly administered

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


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

Some of the circumstances which contribute to the success of skill-


based pay are:

80
• the employer's commitment to continuous training and
development

• the value attached by the employer to personal growth and


encouragement of a learning orientation

• dismantling strong bureaucratic hierarchies and narrow job


demarcations

• participative management practices, independent and


cooperative forms of work

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

Advantages of Skilled Based Pay


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

• Flexibility is increased by encouraging the performance of


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

• It enhances productivity and quality through better use of human


resources.

• It facilitates technological change, which may meet with


resistance in a purely job-based system.

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


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

81
• Elimination of unnecessary jobs can result from a workplace
having broad, rather than narrow, skills. It also reduces the need
for supervision.

• Job satisfaction is engendered through employees having greater


control over the planning and implementation of their work.

• Broadening of skills leads employees to develop a better


perspective of operations as a whole.

• It is an incentive for self-development.

• It provides employment security through skills enhancement.

• It reduces the need to look to promotion to higher levels (which


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

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

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


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

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

Agencies interested in developing a Skill-based System must identify


what goal(s) they are seeking to achieve. Questions to consider are
"what outcomes or results will be expected from implementing a Skill-
based System?" and "what skill sets are valued?". Some potential
answers may be increased productivity, multi-skilled workforce,
acquisition of new skills needed for changing work environment,
increased employee morale, or to solve a specific problem, issue or
need.

82
In a Skill-based System, the focus is on skill acquisition that can be
observed and objectively measured. Therefore, this type of system is
most commonly found in trades or labor settings. Skill-based Systems
can be designed from two perspectives:
• horizontal or breadth of skills where cross training is emphasized
(e.g. a multi-skilled trades worker possess electrical, plumbing, and
carpentry skills); and
• vertical or depth of skills where specialization and expertise is
valued (e.g. an electronic technician possesses the entire range of
electrical and electronic skills).
Skill blocks are identified sets of skills, knowledge and tasks that are
required based on the work to be performed. Skill blocks focused on
breadth of skills or the versatility of the individual tend to have an
array of different categories of skills. Skill blocks that focus on the
depth of skills or expertise in a particular area tend to have a more
narrowly defined, specialized set of skills. Determining whether the
Skill-based System will be based on breadth, depth or a combination is
a key design decision.

Like other alternative pay and job evaluation systems, a Skill-based


System is fairly labor intensive and requires the agency's commitment
to designate the necessary staff resources during the development
stages.

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


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

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


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

What are skills and skill blocks?

83
Skills are the basic components of a Skill-based System. These skills
typically are grouped into skill blocks that include predefined set of
skills, knowledge and tasks. When performed by employees, these skill
blocks will add value to the work process and increase the likelihood of
the work unit's success. Skills and skill blocks should be directly related
to the business needs of the agency. Based on business needs,
agencies should encourage employees in a Skill-based System to
achieve the highest potential skill level required.

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

How are Skill-based Systems used?

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


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

• Training and Development - connection to agency business


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

• Recruitment and Selection - systems can be developed to


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

• Performance Management - systems can be used to support


the assessment of employee performance.

• Compensation Decisions - systems will determine how pay will


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

What are the steps for developing Skill-based Systems?

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


process to meet business needs and objectives.

84
1. Identify the group of employees to be covered: This step consists of
linking the business goals with the Career Group or agency work unit(s)
that are most appropriate for a Skill-based System. Typically, skill
blocks are created to reflect the skills needed for employees in Career
Group(s), Role(s) or functions within a Role. Skill-based Systems
compliment job and pay structures that have broad Roles and
extended pay bands.

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

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


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

How are Skill-based Systems validated?

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

How are Skill-based Systems linked to pay?


The Compensation Management System, employee compensation is
based on an evaluation of the following pay factors:
• Agency business need;
• Duties and responsibilities;
• Performance;
• Work experience and education;
• Knowledge, skills, abilities and competencies;
• Training, certification and license;
• Internal salary alignment

85
• Market availability;
• Salary reference data;
• Total compensation;
• Budget implications
• Long term impact; and
• Current salary
Using the skill blocks, agencies determine which skills are
compensable. Market data can be obtained to identify a sub-band or
pay band to support a Skill-based System. Once the sub-band or pay
band has been established, the skill blocks can then be assigned to the
continuum. Thus, the skill blocks become the unit measurement for
pay increases within a sub-band or pay band.

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


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

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

Procedures must be developed for establishing starting pay for new


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

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


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

86
How is a Skill-based System linked to performance planning
and evaluation?

Skill-based Systems provide the supervisor and the employee with a


clear understanding of the performance expectations and clearly
address the learning activities that are necessary for successful
performance. Additionally, this type of system helps supervisors and
employees to share the same understanding of expected performance.

Agencies must determine the overall method for determining the


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

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

How are Skill-based Systems evaluated?

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

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


of skill and educational attainment. Knowledge-based pay can be an
incentive for employees to acquire additional training and education,
thus upgrading overall work force skills. Pay-for-learning programs,
also known as pay-for-knowledge, skill-based compensation,
knowledge-based pay, or pay-for-skill programs can be defined as
follows: Pay-for-learning structures link pay to depth or breadth of the
skills, abilities, and knowledge a person acquires that are relevant to
the work. Structures based on skill pay individuals for all the skills for
which they have been certified regardless of whether the work they are
doing requires all or just a few of those particular skills. Simply put,

87
pay-for-learning programs compensate employees for knowledge and
skills that they posses, not for the job in which they are performing.

The critical processes to determine a skill-based structure should


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

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


to 8 percent of U.S. corporations. They are usually applied to so-called
blue-collar work, most of these firms are in manufacturing and
assembly work where the work can be specified and defined. The
advantage of a skill-based plan is that people can be deployed in a way
that better matches the flow or work, thus avoiding bottlenecks as well
as idle hands. So far skill-based pay systems, particularly multi-skill-
based systems, have been thought to be most successful and have
been implemented with the greatest ease in new plants with a
participative team management style. In a participative new plant
environment, such systems fit the management style, reinforce
employees for learning new skills, and implementation is easier
because traditional attitudes about job ownership don't have to be
overcome. In established planes, such systems are more difficult to

88
implement precisely because of traditional views about job ownership
but offer the possibility of breaking down such views and providing an
incentive for veteran employees to learn new skills.

Using Pay-for-Learning Systems


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

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


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

Multi-skill based systems or breadth deals with generalists with


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

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

89
Advantages of Pay-for-Learning Systems
1• Greater Flexibility
2• Leaner Staff
3• Improved Problem Solving
4• Improved Horizontal Communication
5• Improved Vertical Communication
6• Supports Employment Security
7• Improved Lob Satisfaction

Limitations of Pay-for-learning
1• Increase in Labor Costs
2• Increase in Training Costs
3• Increased Administrative Costs
4• Potential bureaucracy

Real World Use of Pay-for-Learning Systems


There are well-known companies using pay-for-learning systems.
AT&T, Corning, Ford Motor Company, General Mills, General Motors,
Maxwell House, and Volvo to name a few. General Mills uses four skill
“categories” corresponding to the steps in the production process:
materials handling, mixing, filling, and packaging. Each skill category
has three blocks: 1) entry level, 2) accomplished, and 3) advanced. An
employee can start at entry level and after becoming certified on the
skill needed for the next block, will be compensated for learning those
skills. The employee can continue this process as allowed.
What is valued Skill Blocks
Quantify the value Skill Levels
Mechanisms to translate Certification and price skills in external market
into pay
Pay structure Based on skills certified/market
Pay increase Skill acquisition
Managers focus 1) Utilize skills efficiently 2) Provide training 3) Control costs via training, certification,
and work assignments
Employee focus Seek skills
Procedures Skill analysis, and Skill certification
Advantages Continuous learning, Flexibility, and Reduced work force
Limitations Requires cost controls and Potential bureaucracy

90
TEAM BASED COMPENSATION

Teams have become a popular way to organize business because they


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

Team compensation is a way of rewarding performance in team


settings. That is, individuals are rewarded based on the performance of
the team as opposed to individual performance. There are different
kinds of compensation such as a portion of base pay, other financial
rewards such as gain-sharing, and non-financial rewards such as movie
passes and gift certificates.

Teams are defined as groups of individuals who work together to


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

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


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

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


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

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


fall into three categories: a proportion of their base pay, other financial
rewards, and non-financial rewards. 5-10% of the base pay is usually a
sufficient amount to reward individuals. Gain-sharing, defined more
specifically, is another type of financial reward that shares group
improvement in productivity, cost savings, and quality with each
employee in the group. Other types of financial rewards are lump-sum
awards where individuals receive an amount of money that is
independent of their base pay, discretionary bonuses given to teams
based on after-the fact judgment of their performance, and profit
sharing where the employees share a percentage of the organization’s
profit. Finally, non-financial rewards are another alternative. For
example, organizations may award teams by recognizing them for
exceeding expectations on the job. Additional examples include coffee
mugs, T-shirts, plaques, TV, DVD Player, vacation vouchers etc.

Several companies give team bonuses to sales, management, and


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

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

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


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

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

Another consideration that the organization should take into account is


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

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


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

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


an organization. The parallel teams would primarily use the MBO’s
approach followed by the demonstration of behavioral competencies
and the results of the team effort. In a process team, the primary
criterion used is the demonstration of behavioral competencies
followed by the acquisition of skills and knowledge and results. Finally,
in a project team, the most important criteria is what the results are
followed by demonstration of behavioral competencies and the
achievement of specific objectives in a specified period of time.

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


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

Table 1. Different Approaches to Increase Base Pay


as a Function of Team Type

Team Type Increase Approach

• Parallel Merit Increases are desired with team and


regular job performance
• Process General Wage Increase
• Skill-based Pay
• Pay tied to demonstration of Competencies
• Peer Evaluations that assess the team members’
contribution to the performance of the entire team
• Project Merit Increases are desired where the
demonstration of required skills and competencies
are the criteria used to determine whether or not
an increase is in order.

Note: Adapted from Compensation for Teams: How to


Design and Implement Team-Based Reward Systems (p.
125), by S. E. Gross, 1995, NewYork: American
Management Association. Copyright 1995 by The Hay
Group, Inc.
The third component of pay is recognition. Recognizing team results is
very important in the sense that it can motivate team members and
increase the team’s level of cohesiveness. If team members are
praised for a job on which they all contributed, their teamwork will be
reinforced. Recognition can actually have more of a motivating effect
that reaches into the future. Non-monetary rewards such as plaques,
trophies, vacation trips, and small gifts can be the best incentive for
team members. However, the most important part of this kind of
recognition is that management must give it with sincerity. In
implementing recognition, the organization must reward teams that
exceed objectives, they must determine who is eligible, and they
should have several levels of recognition. For example, appreciation
non-cash rewards, awards for significant financial contribution, and
awards for extraordinary financial results. It is recommended that non-
cash rewards be the primary type of recognition for all team types, and
cash be the secondary reward for parallel and process teams but not
for project teams.

The fourth main component of a compensation plan is the incentive


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

Implementation of a reward system is the next step after identifying


and assessing the different pay components. There are three phases to
implementation. The first phase is labeled feasibility, which asks
whether the strategy in the organization is feasible at the stage, they
are in currently. It includes planning, environmental assessment,
readiness diagnostic, and the compensation strategy. The second
phase is the design phase and it includes the design concept, the
design components, testing of the compensation strategy, transition
approach, union participation strategy, and administrative
requirements. The third phase is the actual implementation of the
program and it includes education/communication program,
organizational integration, and ongoing monitoring. As mentioned
earlier, it is important that the organization be ready to implement the
new compensation system. The team design needs to be stable before
implementing a new pay structure. The organization must stress
communication and flexibility. There must be management support of
teams; the culture must be one of cooperation; and there also needs to
be strong administrative support that records team performance. Only
after these elements are in place should an organization attempt to
design and implement a team-based compensation system.
For any team-based pay plans to be implemented, there must be a link
to the organization’s strategy. Team goals should be subsumed under
the organization’s overall goals and objectives. Pay should be aligned
with the accomplishment of those objectives. A performance
measurement system also needs to be established. It is imperative
that there are explicit measures of how well the team is performing in
reaching the desired goals. These measures usually include such
factors as productivity and quality. This is important in meeting goals
and also measuring how much the team members should be paid
according to their measured performance from the predetermined
criteria. Another important design consideration is the allocation
method to the team members. Various methods of distributing rewards
- Equal payments to all members of the team; differential payments to
team members based on their contribution to the team’s performance;
and differential payments determined by a ratio of each group
member’s base pay to the total base pay of the group. The first
method fosters cooperation, whereas the second method may result in
some members feeling slighted. A measure of cooperation and
teamwork must be built in to this plan if used. The third ratio method
reflects the market rates of the jobs. The last design consideration is
the payment method. Team rewards should be kept separated from
base pay so that the team member knows that their reward is strictly
because of the performance of their team.

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

Conclusions

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

Under whatever circumstances, the compensation plan must be one


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

There are a number of prerequisites to an effective teaming


environment that creates a foundation for the reward system. These
are: interdependent jobs; accurate and objective measures of the
team’s performance; management support for teams, the
organizational culture emphasizes cooperation among the team
members at all levels; there are effective communication skills and
flexible channels between managers and employees; a flat
organizational structure that is ideal in fostering a team approach,
because there are fewer levels of hierarchy; a small group size that
facilitates communication and cooperation; no union or positive union-
management relations that forces a hierarchy on the organization;
there is strong administrative support that records performance based
on team accomplishments; and there are variable external
environmental factors that have flexibility to deal with changing
technology.

One must not forget the individual in a team. The rewarding of


individuals is still important, but it must be combined with some sort of
team-based reward as well. The most effective recognition programs
are those that recognize outstanding individuals but also reward the
collaborative efforts of the team. Ideally, individual rewards should
reward the fact that the employee has been a "team player." This
helps to foster an environment of cooperation and collaboration.

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


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

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


Cabinet of India for hiking the salaries of government employees. Pay
Commissions were set up to reshape & revise the salary structure of
central government servants.
The Central Pay Commissions were set up in the past at intervals of 10
to 13 years. These Pay Commissions examined various issues such as
pay and allowances, retirement benefits, conditions of service,
promotion policies, etc. and submitted recommendations thereon. The
extant rules do not stipulate any specific time period for constitution of
a Pay Commission for Central Government employees. Till now five
Central Pay Commissions have been constituted as under: -
Pay Commission Date of Appointment Date of Submission of Report
First Pay Commission May, 1946 May, 1947
Second Pay Commission August, 1957 August, 1959
Third Pay Commission April, 1970 March, 1973
Fourth Pay Commission June, 1983 Three Reports submitted in June, 1986;
December, 1986 and May, 1987 respectively.
Fifth Pay Commission April, 1994 January, 1997

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

The government should be model employer in all aspects. But if the


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

Sixth Pay Commission


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

As head of the Indian bureaucracy, the cabinet secretary notionally


runs India’s largest corporation of almost 3.3 million people, excluding
over a million men in military uniform. His proposed salary wouldn’t be
a patch on CEO salaries in the corporate sector, where annual
compensation packages run into crores of rupees for even medium-
sized companies.
At the bottom of the totem pole, starting salaries for Class IV
employees would rise from a basic of Rs2,550 to Rs6,500 — which is
the new minimum pay for anybody working in government. And the
jump is not as high as it seems since the new basic salary would
absorb the earlier dearness allowance (DA).
1
2
3
4

5WAGE BOARDS
6
7The Wage Board Division comes under Ministry of Labour and
Employment and majorly deals with the following:
81. Payment of Bonus Act, 1965
92. Working Journalists and Other Newspaper Employees (Conditions of
Service) and Miscellaneous Provisions Act, 1955

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

The importance of the non-statutory Wage Boards has consequently


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

The Working Journalists and other Newspaper Employees (Conditions


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

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


intervals for the working journalists and non-journalist newspaper
employees. The following table gives the details of the constitution of
wage boards and other relevant details: Constitution of Wage Boards
for Working Journalists and Non-Journalists Newspaper Employees in
the Past
S. Name of the Wage Date of Date on Date of acceptance Remarks
No. Board appointment which final of
of Wage report was recommendations
Board submitted to by the Govt.
the Govt
I Wage Board for 02-05-1956 NA 10-05-1957 -
Working Journalists
II (a) Wage Board for 12-11-1963 17-07-1967 27-10-1967 -
Working Journalists
(b) Wage Board for 25-2-64 17-7-67 18-11-67 -
Non-Journalist
Newspaper Empl.
III (a) Wage Board for 11-06-1975 13-08-1980 26-12-1980 Converted into 1
Working Journalists man Tribunals on
9th Feb 1979.

(b) Wage Board for 06-02-1976 13-08-1980 20-07-1981


Non-Journalist
Newspaper
Employees
IV Wage Boards for 17-07-1985 30-05-1989 31-08-1989 -
Working Journalists
and Non-Journalist
Newspaper
Employees
V Wage Boards for 02-09-1994 25-07-2000 05-12-2000 and -
Working Journalists 15-12-2000
and Non-Journalist
Newspaper
Employees

The last Wage Board, namely the Manisana Wage Board, was set up on
2nd September 1994, which submitted its report to the Government on
25th July, 2000. The Government accepted the recommendations of
the Manisana Wage Board, and notified the same for implementation
with minor modifications, vide notifications dated 5.12.2000 and
15.12.2000. The prime responsibility for implementing the
recommendations of the Wage Board rests with the concerned State
Governments / Union Territories under the provision of the Act.

The newspaper employees unions have been demanding constitution


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

Although the Working Journalists and Other Newspaper Employees


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

The Cabinet in its meeting held on 18.12.2006 approved the proposal


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

The present Wage Boards have been constituted vide Notification


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

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

Commission A commission is compensation based on a


percentage of sales in units or dollars.
Competency-based pay A combination of skill-based,
knowledge-based and credential-based pay
Cost-of-living adjustment (COLA) Wage increase or decrease
pegged to the rise and fall in the cost-of-living index.
Differential piece rate (Taylor plan) A piecework plan that
pays on the basis of two separate piecework rates: one for those
who produce below or up to standard and another for those who
produce above standard.
Feedback pay Based on aligning pay with strategic business
objectives and then establishing a direct connection between the
job
holder and his or her part in accomplishing these goals.
Gainsharing plans Companywide group incentive plans that,
through a financial formula for distributing organization-wide
gains,
unite diverse organizational elements in the common pursuit of
improved organizational effectiveness.
Guaranteed annual wage (GAW) A plan in which the employer
guarantees the employee a certain number of weeks of work at a
certain wage after the worker has passed a probation period.
Knowledge-based pay Knowledge-based pay rewards
employees for acquiring additional knowledge both within the
current job and in new job categories.
Merit pay Individual pay increases based on the rated
performance
of the individual employee in a previous time period.
Open system A pay system where pay ranges and even an
individual's pay are open to the public and fellow employees.
Pay compression A situation in which employees perceive too
narrow a difference between their own pay and that of their
colleagues.
Production bonus system An individual incentive system that
pays an employee an hourly rate plus a bonus when the
employee exceeds the standard.
Profit sharing plans Profit-sharing plans distribute a fixed
percentage of total organizational profit to employees in the form
of cash-deferred bonus amounts.
Salary Pay calculated at an annual or monthly rate rather than
hourly.
Secret system A compensation system where pay is regarded
as privileged information known only to the employee, the
supervisor, and staff employees such as HRM and payroll.
Severance pay An income bridge from employment to
unemployment and back to employment, provided by some
employers.
Skill-based pay An alternative to job-based pay that sets pay
levels on the basis of how many skills employees have or how
many jobs they can do.
Spot gainsharing A gainsharing system that focuses on a
specific problem in a specific department rather than on
performance improvements for the whole organization.
Standard-hour plan An individual incentive plan that sets
wages on the basis of completion of the job or task in some
expected period of time.
Straight piecework An individual incentive plan where pay
fluctuates on the basis of units of production per time period.
Suggestion system A formal method of obtaining employees'
advice for improvement in organizational effectiveness; it
includes some kind of reward based on the successful application
of the idea.
Supplementary Unemployment Benefits (SUB) The
employer adds to unemployment compensation payments to help
the employee achieve income security.
Total Compensation Approach Total compensation is made up
of base pay, variable pay, and indirect pay (benefits).
Variable pay Any compensation plan that emphasizes a share
focus on organizational success, broadens the opportunities for
incentives to nontraditional groups (such as non-executives or
non-managers), and operates outside the base pay increase
system.
Wage Pay calculated at an hourly rate.

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

2. Methods of Payment
a. flat rate -single rate in unionized firms (treating everyone
equally)
b. recognizing individual differences - assumes workers are not
interchangeable/equally productive
c. payment for time worked: wage (calculated on hourly basis);
salary (calculated on monthly/annual basis); pay adjusted
upwards through four types of increases: general across-the-
board increase, merit increase, cost-of-living-adjustment (COLA),
seniority
d. variable pay: incentive compensation - based on shared
organizational success, available to nontraditional groups &
operates outside base pay, plans need to be based on clear
goals, unambiguous measures; key design factors need to
include: management support, employee acceptance, supportive
organizational culture (teamwork, trust), timing (minimal risk of
economic downturn), total compensation approach includes:
variable pay puts a percentage of employee's paycheck at risk,
pay rate will not rise above lower base pay if goals aren't met,
flexibility can be built into the system of total compensation, base
pay: matched closely with the competition, variable pay: methods
like gainsharing, lump-sum bonuses, indirect pay: like benefits
e. merit incentives - study shows merit needs to be 6-7%; less
(unmotivate) more (demotivate) in practice merit pay systems
fail because: employees fail to make the connection between pay
& performance, secrecy of reward is perceived by other
employees as inequity, size of merit award has little effect on
performance
f. individual incentives - straight piecework, differential piece
rate, standard hour plan, production bonus system, straight sales
commission, variation (salary plus commission) / (salary plus
draw)
g. team/group incentives (used when:) there is a strong
dependence among individuals in a group, it is hard to determine
which individual is responsible for the level of achievement
because of interrelated work, the organization wishes to reinforce
teamwork, group planning and problem-solving
h. organization-wide incentives - suggestion systems, gainsharing
incentive plan (Scanlon plan, Rucker plan, ImproShare,
Winsharing), spot gainsharing, profit-sharing incentive plan,
Lincoln Electric plan, cash & deferred bonuses,
i. ownership- defined contribution plans vs. defined benefits
j.. people-based pay (alternative to job-based pay) - skill-based
pay (breadth of skills), knowledge-based pay (depth of skills),
credential-based pay (qualification dependent), feedback pay
(fulfill strategic goals – research bonus ex. NDSU), competency-
based pay (skills + knowledge + traits + motives),
k. executive pay - executive salaries, bonuses, stock options,
executive perquisites, executive pay package dependent on
comparative performance. The pay design has five underlying
principles: compensation committees consist of stockholders &
directors who link CEO compensation to shareholder returns,
variable performance-based pay is emphasized over guarantees
(bonuses), CEOs are encouraged to invest in company stock
(stock options), performance yardsticks are linked to actual key
productivity indices or to competition, CEOs are held responsible
for cost of capital, forcing them to look for vehicles of growth
rather than amassing wealth
3. Issues in Compensation Administration - pay secrecy or
openness, pay security, guaranteed annual wage (GAW),
supplementary unemployment benefits (SUB), COLAs, severance
pay, pay compression solutions for pay compression - re-
examining how many entry-level people are needed, reassessing
recruitment itself, focusing on the job evaluation process
emphasizing performance, basing all salaries on longevity, giving
first line supervisors the authority to recommend equity
adjustments for victims of pay compression
************************************************************************
*********