Вы находитесь на странице: 1из 28

Compensation and Rewards

Compensation may be defined as money received in the performance of work,

plus the many kinds of benefits and services that organizations provide their
Money is included under direct compensation (popularly known as wages, i.e.,
gross pay); while benefits come under indirect compensation, and may consist of
life, accident, and health insurance, the employers contribution to retirement, pay
for vacation or illness,
Objectives of Compensation
(1) Acquire qualified personnel
compensation needs to be high enough to attract applicants. Pay levels must respond to
the supply and demand of workers in the labor market since employers compete for
workers. Premium compensation are sometimes needed to attract applicants already
working for others.
(2) Retain current employeesEmployees may quit when compensation levels are not competitive, resulting in
higher turnover.
(5) Further administrative efficiencywage and salary programs should be designed to be managed efficiently, making
optimal use of the HRIS , although this objective should be a secondary consideration
compared with other objectives.
(4) Efficient allocation of labor in the labor market.
workers may move form a labor surplus or low wage area to a high wage area.
They may acquire new skills to benefit form the higher wages paid for skills. When
an employers 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 labor due to
structural changes takes place.
Framework of a Compensation Policy
Employee motivation and performance management depend on good systems
that offer both financial and non-financial rewards
A good rewards and remuneration system ensures that each person receives
appropriate financial and nonfinancial recognition to account for the
personal contribution they are making and the overall value of their position
to the organization.
The compensation policy will based on the following factors


Document the position

Evaluate the position value
Determine remuneration rang
Conduct performance appraisal (set goals)
Commence revive
Revive achievements of goals
Determine financial and non financial rewards

Difference between Wage and salary

A wage (or pay) is the remuneration paid, for the service of labor in production,
periodically to an employee/worker. Wages usually refer to the hourly rate or daily rate
paid to such groups as production and maintenance employees(Blue color workers). On
the other hand, Salary normally refers to the weekly or monthly rates paid to clerical,
administrative and professional employees (white-color workers)
Methods of Compensation
The operating companies need to develop a compensation package for their
employees depending on the size and type of business, employers may choose to
compensate their employees
in a number of different ways.
1. Commissions
Sales commission plans vary greatly from company to company, but are
generally based on the dollar amount of sales made during a payroll period.
Commissions are usually computed on a certain percentage or commission rate.
2. Piece-Rate Plan
Workers paid on a piece-rate plan receive a certain amount for each item produced.
Gross earnings equal the rate per item multiplied by the number of items produced during
the payroll period

3. Combination Plan
Many businesses pay sales people both a salary and a commission. Such a
combination plan provides some regular income and offers an incentive for superior
4. Bonuses
Pays managers if the yearly sales or profits reach a certain level.

Wage Level
wages are something received by a worker or paid by an employer for time on the job;
What is a Wage Level?
The wage levels represent the money an average worker makes in a geographic area
or in his organization. It is only an average;
specific markets or firms and individual wages can vary widely from the average.
How Wage Levels are Set?
Wage levels are calculated using position importance and skill required as criteria.
Consult your trade association and accountant to learn the most current practices,
cost ratios and profit margins in your business field. While there is a minimum
wage set by federal law for most jobs, the actual wage paid is entirely between
you and your prospective employee.
Determinants of the Wage Structure
Before discussing the wage determination process in detail let us first discuss the
determinants of wage structure.

Economic Determinants

In the labor market there commonly exists, known as Occupational Wage

Differentials. The reason for its existence is that in different occupations require
different qualifications, different wages of skill and carry different degrees of
responsibility, wages are usually fixed on the basis of the differences in
occupations and various degrees
of skills.
Adam Smith explains occupational wage differentials in terms of :

1. Hardship,
2. Difficulty of learning the job,
3. Stability of employment,
4. Responsibility of the job.

The Wage Determination Process

Factors Influencing Wage and Salary Structure

First, competition demands that competitors adhere to the same relative wage
Second, various government laws and judicial decisions make the adoption of
uniform wage rates an attractive proposition;
Third, trade unions encourage this practice so that their members can have equal
pay, equal work and geographical
differences may be eliminated;

Fourth, functionally related firms in the same industry require essentially the
same quality of employees, with the same skills and experience. This results in a
considerable uniformity in wage
and salary rates;
Finally, if the same rates of wages are not paid to the employees as are paid by
the organization's competitors, it will not be able to attract and maintain a
sufficient quantity and quality of manpower.
Other Factor That Influence the Wage Structure

1. The organizations ability to pay;

2. Supply and demand of labor;
3. The prevailing market rate;
4. The cost of living;
5. Productivity;
6. Trade unions Bargaining power;
7. Levels of skills available in the market.

Introduction to the concept of Framework

A compensation framework that supports a long term strategic vision for compensation
and implements new initiatives, will provide the needed direction, changes will involve
moving towards solving special salary problems using innovative concepts.
Managers will have more accountability for the compensation of their employees, and
will be profiled with the required tools, systems and support. Senior mangers will
approve, within the framework, exceptional compensation changes, based on sound
business decisions. Senior managers will also have authority to approve the classification
levels of pre-identified jobs within their organization.

Framework of a Compensation Policy

Employee motivation and performance management depend on good systems that
offer both financial and non-financial rewards. This performance management
article applies to all organizations. In some organizations, a multitude of different
salary and pay arrangements exist. It is time to bring these different systems into a
new framework. Employees at all levels need to have confidence in the salary
administration system. Employees want the rewards to be shared fairly and
equitably. If they are not, dissatisfaction can cause severe morale and performance
If they haven't done so already, leading organizations will need to establish an
improved salary administration structure. A good rewards and remuneration
system ensures that each person receives appropriate financial and non financial
recognition to account for the personal contribution they are making and the
overall value of their position to the organization.
This includes:
Creating and maintaining an organizational structure and culture that facilitates
both employee and organizational performance.
Recognizing and rewarding individual and team performance
Implementing compensation systems that fairly treat and recognize all
employee's. regardless of their level within the organization. This is the equity
issue. It involves matching remuneration with the contribution made,
The best performance appraisal system in the world will not work if it is linked to
a rewards and remuneration system that employees do not trust or support.
A motivated employee will achieve a great deal. A demotivated employee will be
slow, prone to error and not likely to achieve.
Remuneration is a component of both financial and non-financial reward;
financially, in terms of cash and benefits received; non-financially in terms of
recognition, status and esteem, e.g. the status of full private use of a motor
Good salary administration requires that employees should receive financial
recognition for the contribution that they make, and that positions of equal value
should be entitled to equal compensation. If organizations handle this incorrectly,
or manipulate it in some way, the impact on the employee is significant.

To know concept and need of Wage Plans

There are two major kinds of wage and salary payment plans: those under which
remuneration does not vary with output or the quality of output, but depends on the time
unit consumed in performing work. These are known as time wage plans. The time unit
may be the day, week, or month. Time plans are non-incentive in the sense that earnings
during a given time period do not vary with the productivity of an employee during that
The second kind is concerned with the output or some other measure of
productivity during a given period of time. To earn more, an employee is required
to put in more labor and produce more. This Kind is known as the piece or
output wage plan. It is a direct financial incentive plan,
Thus, the "time" and the "output" wage plan are the two basic systems. All the
other plans are simply variations of these two.

Types of Wage Plans

(1) Time Rate
Under this system, workers are paid according to the work done during a certain
period of time, at the rate of so much per hour, per day, per week, per fortnight or per
month or any other fixed period of time.
The merits of the system are:
(1) It is simple, for the amount earned by a worker can be easily calculated
(2) As there is no time limit for the execution of a job, workmen are not in a hurry
to finish it and this may mean that they will pay attention to the quality of their
(3) Due to the slow and steady pace of the worker, there is no rough handling of
machinery, which is a distinct advantage for the employer.
(5) It is the only system that can be used profitably where the output of an
individual workman or groups of employees cannot be readily measured. The day
or time wage provides a regular and stable income to the worker and he can,
therefore, adjust his budget accordingly.
(6)This system is favored by organized labor, for it makes for solidarity among
the workers of a particular class. It requires less administrative attention than
others because the very basis of the time wage contract is good faith and mutual
confidence between the parties.

The main drawbacks of this system are:
(i) It does not take into account the fact that men are of different abilities and that
if all the persons are paid equally, better workmen will have no incentive to work
harder and better. They will therefore be drawn down to the level of the least
efficient workman.
(ii) The labor charges for a particular job do not remain constant. This puts the
authorities in a difficult position in the matter of quoting rates for a particular
piece of work.
2) Piece Rate
Under this system, workers are paid according to the amount of work done or the
number of units completed, the rate of each unit being settled in advance
There is indirect implication that a worker should not take more than the average
time. ' If he consistently takes more time than the average time, he does it at the risk of
losing his job.
Under this plan, a worker, working in given conditions and with given machinery, is paid
exactly in proportion to his physical output. He is paid in direct promotion to his output,
the actual amount of pay per unit of service being approximately equal to the marginal
value of his service in assisting to produce that output.
A worker's earnings can be calculated on the basis of the following formula: WE=NR,
where WE is the worker's earning, N stands for the number of pieces produced and R for
the rate per piece.
This system has many advantages:
(i) It pays the workman according to his efficiency as reflected in the amount of
work turned out by him. It satisfies an industrious and efficient worker, for he
finds that his efficiency is adequately rewarded. This gives him a direct stimulus
to increase his production.
(ii) Supervision charges are not so heavy, for workers are not likely to while away
their time since they know that their wages are dependent upon the amount of
work turned out by them.
(iii) Being interested in the continuity of his work, a workman is likely to take
greater care to prevent a breakdown in the machine or in the workshop. This is a
point of considerable gain to the management, for it reduces plant maintenance
(iv) As the direct labor cost per unit of production remains fixed and constant,
calculation of costs while filling tenders and estimates becomes easier.

(v) Not only are output and wages increased, but the methods of production too
are improved, for the worker demands materials free from defects and machinery
in perfect running conditions.
The demerits of the system are:
(i) In spite of the advantages accruing to the management as well as to the
workmen, the system is not particularly favored by workers. The main
reason for this is that the fixation piece rate by the employer is not done on a
scientific basis.
(ii) As the workers wish to perform their work at breakneck speed, they
generally consume more power, overwork the machines, and do not try to
avoid wastage of materials. This results in a high cost of production and
lower profits.
(iii) There is a greater chance of deterioration in the quality of work owing to over
zealousness on -the part of workers to increase production. This over-zealousness
may tell upon their health, resulting in a loss of efficiency.
Elements or Ingredients of a good wage plan
Ans. A good wage plan is a more or less a mandatory requirement by the operating firms
in order to attract the most creamy work force. Also it helps in tackling and employee
motivation problems to a great extent.
So below is mentioned the following features of a good wage plan:
(i) It should be easily understandable, i.e., all the employees should easily
understand what they are to get for their work. They should be instructed in how
the wage plan works.
(ii) It should be capable of easy computation, i.e., it should be sufficiently simple
to permit quick calculation. Mathematical tables may be supplied, be reference to
which calculations can. be quickly made
(iii) It should be capable of effectively motivating the employees, Le., it should
provide an incentive for work. If both the quality and quantity of work are to be
stressed at the same time, a plan should be selected that will not unduly influence
the worker to work too fast or to become careless of quality.
(v) It should be relatively stable rather than frequently varying so that employees
are assured of a stable amount of money.
(iv) It should provide for remuneration to employees as soon as possible after the
effort has been made. Daily or weekly payment of wages would be preferable to
induce employees to work.

The Wage Determination Process

Usually, the steps involved in determining wage rates are performing job analysis,
wage surveys, analysis of relevant organizational problems forming wage
structure, framing rules of wage administration, explaining these to employees,
assigning grades and price to each job and paying the guaranteed wage.
The Process of Job Analysis

Results in job descriptions which lead to job specifications. A job

analysis describes the duties, responsibilities, working conditions and interrelationships between the job as it is and the other jobs with which it is associated.
It attempts to, record and analyze details concerning the training, skills, required
efforts, qualifications, abilities, experience, and responsibilities expected of an

Job Evaluation:
After determining the job specifications, the actual process of grading,
rating or evaluating the job specifications, or evaluating the job occurs.
A job is rated in order to determine its value relative to all the other jobs
in the organization which are subject to evaluation.
Wage Surveys
Once the relative worth of jobs has been determined by job evaluation,
the actual amounts to be paid must be determined. This is done by making wage or salary
surveys in the area concerned.
Such surveys seek to answer questions like what are other firms
What are they doing by way of social insurance? What is the level of pay
offered by other firms for similar occupations? etc, by gathering information about
benchmark jobs, which are usually known as good indicators.
There are various ways to make such a survey. Most firms either use the results of
packaged surveys available from the research bodies, employers associations,
Government Labor Bureaus, etc., or they participate in wage surveys and receive
copies of results, or else they conduct their own. These surveys may be
carried out by Mailed questionnaire, telephone, or personal interviews with other
managers and personnel Agencies.

Preparation of Wage Structure

The next step is to determine the wage structure. For this, several
decisions need be taken, such as:
whether the organization wishes, or is able, to pay amounts above, below, or
equal to the average in the community or industry;
whether wage ranges should provide for merit increases or whether there should
be single rates;
which jobs are to be placed in each of the pay grades;
the actual money value to be as signed to various pay grades;

There are though no hard and fast rules for making such decisions, and procedure
commonly used is the two-dimensional
graph on which job evaluation points for key jobs are plotted against
actual amounts paid or against desired levels.
Plotting the remaining jobs then reveals which jobs seem to be
improperly paid with respect to the key jobs and to each other.

In the above figure, wage rates are shown on the vertical axis while pay grades (in points)
along the horizontal axis. The wage curve shows the relationship between:
i. the value of the job; and
ii. the average wage rates of these grades (or jobs).

The above diagram presents the other factor of influencing the wage and salary

Wage Differentials:
The word differential means relating to, or showing a difference, or making use of a
specific difference or distinction. Wage differential is an element of location selection that
is a wage scale reflecting the average schedule of workers' pay in an area that takes into
account the performance of related tasks or services.
Wages differ in different employments or occupations, industries and localities,
and 0 between persons in the same employment or grade. One therefore comes
across the terms as occupational wage differentials, inter-industry, inter-firm,
inter-area or geo graphical
differentials and personal differentials
Wage differentials has been classified into three categories:
The differentials that can be attributed to imperfections in the employment
markets, such as the limited knowledge of workers in regard to alternative job
opportunities available elsewhere; obstacles to geographical, occupational or inter-firm
mobility of workers; Examples of such wage differentials are inter-industry, inter-firm,
and geographical or inter-area wage differentials.
The wage differentials which originate in social values and prejudices and
which are deeper and more persistent than economic factors. Wage differentials by sex,
age, status belong to this category.
Occupational wage differentials, which would exist even if employment markets
were perfect and social prejudices were absent
In other words, wage differentials may be:
(i) Occupational differentials or differentials based on skill;
(ii) Inter-firm differentials;
(iii) Inter-area or regional differentials;
(iv) Inter-industry differentials; and
(v) Differentials based on sex

Description of each wage differential in detail:

(i) Occupational Differentials:
These indicate that since different occupations require different qualifications,
different wages of skill and carry different degrees of responsibility, wages are
usually fixed on the basis of the differences in occupations and various degrees of
The basis functions of such differentials are:
(a) To induce workers to undertake "more demanding," "more agreeable or dangerous"
jobs, or those involving "a great chance of unemployment, or wide uncertainty
(b) To provide an incentive to young person to incur the costs of training and education
and encourage workers to develop skills in anticipation of higher earnings in future.
(ii) Inter-firm Differentials:
Inter-firm differentials reflect the relative wage levels of workers in different
plants in the same area and occupation. The main causes of inter firm wag
differentials are:
(a) Difference in the quality of labor employed by different firms;
(b) Imperfections in the labor market; and
(c) Differences in the efficiency of equipment, supervision and other non-labor factors.
(iii) Inter-area or Regional Differentials:
Such differentials arise when workers in the same industry and the same
occupational group, but living in different geographical areas, are paid different
Regional wage differentials may be conceived in two senses. In the first sense,
they are merely a part of inter-industry differentials in a particular region.
Such differentials are the result of living and working conditions, such as
unsatisfactory or irksome climate, isolation, sub-standard housing, disparities in
the cost of living and the availability of manpower. In some cases, regional
differentials are also used to encourage planned mobility of labor.
(iv) Inter-industries Differentials:
These differentials arise when workers in the same occupation and the same area
but in different industries are paid different wages. Inter-industry differentials
reflect skill differentials. The industries paying higher wages have mostly been
industries with a large number of skilled workers, while those paying less, have
been industries with a large proportion of unskilled and semi-skilled workers.
Other factors influencing inter-industry differentials are the extent of

unionization, the structure of product markets, the ability to pay, labor-capital

ratio, and the stage of development of an industry.
(v) Personal Wage Differentials:
These arise because of differences in the personal characteristics (age or sex) of workers
who work in the same plant and the same occupation. "Equal pay for equal work" has
been recommended by the I.L.O. Convention (No. 100), as also by Industrial Courts,
Labor Tribunals, the Minimum Wages Committee and the Fair Wage Committee. But in
practice this principle has not been fully implemented because in occupations which
involve strenuous muscular work, women workers, if employed, are paid less than men
Elements or Ingredients of a good wage plan
Ans. A good wage plan is a more or less a mandatory requirement by the operating firms
in order to attract the most creamy work force. Also it helps in tackling and employee
motivation problems to a great extent
So below is mentioned the following features of a good wage plan:
(i) It should be easily understandable, i.e., all the employees should easily
understand what they are to get for their work. They should be instructed in how
the wage plan works.
(ii) It should be capable of easy computation, i.e., it should be sufficiently simple
to permit quick calculation. Mathematical tables may be supplied, be reference to
which calculations can. be quickly made
(iii) It should be capable of effectively motivating the employees, Le., it should
provide an incentive for work. If both the quality and quantity of work are to be
stressed at the same time, a plan should be selected that will not unduly influence
the worker to work too fast or to become careless of quality.
(v) It should be relatively stable rather than frequently varying so that employees
are assured of a stable amount of money.
(iv) It should provide for remuneration to employees as soon as possible after the
effort has been made. Daily or weekly payment of wages would be preferable to
induce employees to work.
Reasons for Wage Differential:
Wage differentials arise because of the following factors:
(a) Differences in the efficiency of the labor, which may be due to inborn quality,
education, and conditions under which work may be done.
(b) The existence of non-competing groups due to difficulties in the way of the mobility
of labor from low paid to high paid employments.

(e) Differences in the agreeableness or social esteem of employment.

(d) Differences in the nature of employment and occupations.
The nature and the extent of wage differentials are conditioned by a set of factors
such as the conditions prevailing in the market, the extent of unionization and the
relative bargaining power of the employers and workers.
The rate of growth in productivity, the extent of authoritarian regulations and the
centralization of decision-making, customs and traditions, the general economic,
industrial and social conditions in a country, and a host of other subjective and
objective factors operating at various levels.
To know the importance of Wage Differential
Wage differentials have a great economic and social significance, for they are
directly related to the allocation of the economic resources of a country, including
manpower, growth of the national income, and the pace of economic

(a) Cause labor to be allocated among different occupations, industries and,

geographical areas in the economy in such a manner as to maximize the national
(b) Enable full employment of the resources of the economy to be attained; and
(c) Facilitate the most desirable rate of economic progress.
Wage differentials reflect difference in the physical and mental abilities of workers,
differences in productivity, in the efficiency of management and in consumer
preferences, and act as sign posts for labor mobility. By providing an. Important incentive
for labor mobility, they bring about a re-allocation of the labor force under changing
Under competitive conditions, wages are determined by conditions of demand
(which reflect the productivity of workers) and conditions of supply (which
reflect the attractiveness of jobs).

Rewards and Incentives

Meaning of Rewards and Incentives:
An 'incentive' or 'reward' can be anything that attracts a employees' attention and
stimulates him to work. In the words of Burack and Smith, "An incentive scheme is a
plan or program to motivate individual or group performance. An incentive program is
most frequently built on monetary rewards {incentive pay or monetary bonus}, but may
also include a variety of non-monetary rewards or prizes."

An Incentive Plan has the following important features:

1. An incentive plan may consist of both 'monetary' and 'non-monetary' elements.
Mixed elements can provide the diversity needed to match the needs of individual
2. The timing, accuracy and frequency of incentives are the very basis of a
successful incentive plans.
3. The plan requires that it should be properly communicated to the employees to
encourage individual performance, provide feedback and encourage redirection.
Determinants of Incentives
These features are contingencies, which affect the suitability and design of
incentives to varying degrees. The effective use of incentives depends on three
variables - the individual, work situation, and incentive plan.

The Individual and the Incentives:

Different people value things differently. Enlightened managers realize that all
people do not attach the same value to monetary incentives, bonuses, prizes or
trips. Employees view these things differently because of age, marital status,
economic need and future objectives.
(ii) The Work Situation:
This is made up of four important elements:
(a) Technology, machine or work system, if speed of equipment operation can be varied,
it can establish range of the incentive.
(b) Satisfying job assignments, a workers' job may incorporate a number of activities that
he finds satisfying. Incentives may take the form of earned time-off, greater flexibility in
hours worked, extended vacation time and other privileges that an individual values.
(c) Feedback, a worker needs to be able to see the connection between his work and
rewards. These responses provide important reinforcement.
(d) Equity, worker considers fairness or reasonableness as part of the exchange for his
Incentives, in general, are important motivators
(i) Incentives, whether they are monetary or non-monetary, tend to increase the level of
motivation in a person.
(ii) Financial incentives relate more effectively with basic motivation or deficiency needs.
(iii) Non-financial incentives are linked more closely with higher motivation, or
becoming needs.
(iv) The higher the position of a person in an organizations hierarchy, the greater is his
vulnerability to non-financial incentives.

Introduction to classification or types of Rewards

As we all know that reward management is concerned with the development of
appropriate organizational cultures, underpinning core values and increasing the
motivation and commitment of employees. So now let us study below the
classification or types of Incentives/Rewards.

Direct compensation, (ii) Indirect compensation.

Direct compensation includes the basic salary or wage that the individual is
entitled to for his job, overtime-work and holiday premium, bonuses based on
performance, profit sharing and opportunities to purchase stock options, etc.
Indirect compensation includes protection programmes (insurance plans,
pensions), pay for time not worked, services and perquisites. But these are
maintenance factors rather than reward components.
structure of rewards.

Incentive Payments
Incentives are monetary benefits paid to workmen in recognition of their
outstanding performance. The "International labor organization (ILO) refers to
incentives as "payment by results." But it is appropriate to call them "incentive
systems of payments" emphasizing the point of motivation, that is, the imparting
of incentives to workers for higher production and productivity.
Wage Incentives
The term wage incentives has been used both in the restricted sense of
participation and in the widest sense of financial motivation. It has been defined
differently by different authors. We give below a few of these definitions.
"It is a term which refers to objectives in the external situation whose function is
to increase or maintain, some already initiated activity, either in duration or in
"According to Hummel and Nickerson: "It refers to all the plans that provide extra
pay for extra performance in addition to regular wages for a job. "Florence
observes: "It refers to increased willingness as distinguished from capacity.
Incentives do not create but only aim to increase the national momentum towards
In the words of Scott, "it is any formal and announced programme under which
the income of an individual, a small group, a plant work force or all the

employees of a firm are partially or wholly related to some measure of

productivity Output."
According to the National Commission on Labor, "wage incentives are extra
financial motivation. They are designed to stimulate human effort by rewarding
the person, over and above the time rated remuneration, for improvements in the
present or targeted results.
"A wage incentive scheme is essentially a managerial device of increasing a
worker's productivity. Simultaneously, it is a method of sharing gains in
productivity with workers by rewarding them financially for their increased rate
of Output."
According to Suri, this definition is based on the principle that "an offer of
additional money will motivate workers to work harder and more skillfully for a
greater part of their working item, which will result in a stepped-up rate of
We may define a wage incentive as a system of payment under which the amount
payable to a person is linked with his output. Such a payment may also be called
payment by results.
Objectives of Wage Incentive Schemes
Wage incentive schemes aim at the fulfillment of one or more of the following
(i) To improve the profit of a firm through a reduction in the unit costs of labor and
materials or both;
(ii) To avoid or minimize additional capital investment for the expansion of production
(iii) To increase a worker's earnings without dragging the firm into a higher wage rate
structure regardless of productivity; and
(iv) To use wage incentives as a useful tool for securing a better utilization of
manpower, better production scheduling and performance control, and a more
effective personnel policy.

Pay for performance (PFP):

Learning Objectives:
Understand the determinants of PFP systems.
Identify the critical variables related to the selection of the most appropriate PFP system.
Do you know the concept Pay for Performance?
Now let us study what it is
The PFP system put more employees pay at risk and do indeed loosen the
relationship between assignments and pay levels. The term PFP is a little misleading
since many incentive systems now award something other than pay for desired
The rationale for merit progressions is that the movement to
proficiency is actually an improvement in performance and
should be treated as such; people differ in their rate of improvement
to proficiency, and this should be taken into account; it is
performance that the organization wants and should pay for.
Determinants of Effective PFP systems?

1. Worker value outcomes (Money and Prices)

2. Outcome is valued relatively to other rewards.
3. Desired performance must be measurable.
4. Worker must be able to control rate a output.
5. Worker must be capable of increasing output.
6. Worker must believe that capability to increase exists.
7. Worker must believe that increased output will result in receiving a reward.
8. Size of reward to sufficient to stimulate increased effort.

How do you select a PFP system?

In designing a PFP system three major questions should be asked.
1. Who should be included in PFP system?
2. How will performance be measured?
3. Which incentives will be used?
Who should be included in PFP
system: In general all groups should be included in a PFP system; with one critical
condition i.e. The PFp system should be developed with specific groups and conditions in
mind. Many companies have different PFP systems for various classes of employees.

Some companies have reward system that are compatible with the culture that attempts to
minimize the distance between people at different levels in the organizational hierarchy.
How will performance be measured: Performance can measured on the basis of
different organizational policies.
Which incentive will be used: Incentives are used on the basis of Merit-Pay
plans. They are
1. Use a bonus system in which merit pay is not tied to basic salary.
2. Maintain a bonus ranging from 0 to 20% for lower pay levels and from 0 to
40% for higher pay levels.
3. Take performance appraisal seriously. Hold raters accountable for the appraisal
and provide training.
4. Focus on key organizational factors that affect the pay system. Information
systems and job design must be compatible with the performance measurement
5. Include group and team performance in evaluation. evaluate team performance
wherever appropriate and base part of individual part of merit pay on the team
6. Consider special awards separately from and annual merit merit allocation that
pay-for-performance systems are, created in the light of an understanding that
motivation 'Only takes place if the rewards are worthwhile, if they are
specifically related to
fair, objective and appropriate performance measures: if employees
understand what they
have to achieve, and if their expectations on the likelihood of receiving the
reward are high;

Voluntary Retirement Scheme

Voluntary Retirement Scheme (VRS) was introduced on 01.06.1990 in Indian Oil.
Since then, the VRS came into force for the specified duration, without / with
modification, from time to time.
The modified scheme came into force, in the current run, w.e.f. from 4th July
2003. It shall remain in operation for such periods/ periods as may be notified
from time to time.
These rules shall apply to all regular employees of the corporation in the
prescribed scales of pay, but shall not apply to the Chairman and Directors
1. Applications
i) those, in casual / muster role employment, or, paid from contingencies;
ii) employees on deputation from other organizations;
iii) those appointed on contract basis;
iv) those deputed to other organizations and opting for permanent
absorption in those organizations;
v) Re-employed pensioners with less than 10 years service

2. Eligibility
The scheme shall be applicable only in respect of such employees who have
attained the age of 45 years or have served the corporation for a minimum period
of 20 years and to re-employed pensioners who have served the corporation for a
minimum period of 10 years, in addition to meeting the requirement of age.
3. Regulation of the scheme
3.1 An employee who has attained the age of 45 years or has served the
corporation for a minimum period of 20 years, may seek voluntary retirement by a
written request in prescribed form addressed through proper channel to the
competent authority who may in his discretion, grant or not grant voluntary
retirement for reasons to be recorded in writing.
3.2 An employee seeking voluntary retirement under the scheme must give one /
three months notice, as per the terms of his appointment. However, management
may decide to release the employee early after approval of VR application
without any additional benefit.

The Reasons for Proposing VRS

1. Recession in business
2. Intense competition, which makes the establishment unviable unless
downsizing is resorted to
3. Changes in technology, production process, innovation, new product line
4. Realignment of business - due to market conditions
5. Joint-ventures with foreign collaborations
6. Takeovers and mergers
Merits of Voluntary Retirement Scheme
1. There is no legal obstacle in implementing VRS - as is predominantly
encountered in retrenchment under the labour laws.
2. It offers to the employee an attractive financial
compensation than what is permitted under retrenchment
under the law.
3. Voluntary nature of the schemes precludes the need for
enforcement, which may give rise to conflicts and disputes.
4. It allows flexibility and can be applied only to certain
divisions, departments where there is excess manpower.
5. It allows overall savings in the employee costs thus
lowering the overall costs.
Demerits of VRS
To certain extent it creates fear, a sense of uncertainty among employees.
Sometimes the severance costs are heavy and outweigh the possible gains.
Trade unions generally protests the operation of such schemes and may cause
disturbance in normal operations.
Some of the good, capable and competent employees may also apply for
separation which may cause embarrassment to the managements
The Competent Authority
(Through Proper Channel)

Sub : Application for Voluntary Retirement from the services of the Corporation
in accordance with Corporations Scheme
I hereby opt for voluntary retirement from the service of the Corporation, and to
avail the retirement benefits, payable under the Scheme. I confirm that I have read
and understood Corporations Scheme for Voluntary Retirement and rules framed
for its administration.

I understand that the decision with regard to the acceptance / rejection of

my request will be solely at the discretion of the Management, which shall
be final and binding on me.
I undertake that I have not applied for employment with any other Public
Sector Undertaking (PSU) nor I will join any PSU until my notional date of
superannuation on . after getting VR from Indian Oil
Corporation Limited (IOCL). However, in case I join another PSU before my
notional date of superannuation, I undertake to return VRS compensation
received by me to IOCL or to the Government in case IOCL is closed/
I give below necessary particulars for consideration of my request for voluntary
1. Name :
2. Employee Number :
3. Date of Birth :
4. Designation :
5. Department :
6. PreSIGNATURE _________________
ADDRESS _________________
sent Grade / Pay Scale :
7. Present Pay :
The Voluntary Retirement Scheme (VRS) is the latest mantra of many a corporate
and Public sector units.
VRS is a scheme whereby the employee is offered to voluntarily retire from his
services before his retirement date.
Subject to certain conditions the company offers VRS to its employees.


The most humane technique to retrench the employees in the company today is
the voluntary retirement scheme.

It is the golden handshake for the employees and the only option today for the
companies to downsize their headcount.
The scheme which is formally permitted by the Department of Public Enterprises
and which provides the lucrative way for the employees to terminate their services
and accept VRS.
As the name suggests the VRS is strictly voluntary i.e. one can neither compel the
workers to accept it nor apply it selectively to certain individuals.
One can however choose the levels, units and age groups among whom one wants
to offer VRS.
The company can always accept or reject the application for the VRS.
But usually this is not done in practical circumstances as it sends wrong signals to
the employees. It might imply that the VRS is not actually voluntary but a
selective procedure of downsizing.
Trade unions play a crucial role in introducing the VRS in any organized sector
firm. The scheme cannot be implemented without, at least, the approval of the
representative union. Sometimes without the consent of the trade unions, workers
legalize the VRS by accepting it en masse.
Very recently, the entire workforce of Sri Ram Mills (1,400 workers) has accepted
VRS while the major union opposed the scheme. Other companies such as Ind
Auto, SKF Bearings, Novartis, Biddle Sawyer, and Siemens have also been able
to successfully reduce their workforce through the introduction of VRS. When the
workers are convinced that the scheme is sufficiently attractive monetarily and/or
the company is in deep crisis, they opt for the scheme.
When workers find the company's performance good, they refuse to accept the
scheme. In such situations, trade unions through various strategies (for instance,
by exposing the status of those workers who have accepted VRS) persuade
workers not to accept the scheme.
A study by Shri Ram Center for Industrial Relations and Human Resources in 14
industrial centers of various states revealed that workers opted for VRS due to
apprehension of closure of firms or personal reasons such as poor health,
clearance of debt, marriage, education of children, etc.
Another study observed that complaints were recorded by some of the VRS
workers who came for retraining under NRF that invisible discrimination affected
their prospects for promotion in the organization where they were working.

Thus, the atmosphere of discrimination and apathy towards the socially

disadvantaged groups is also forcing most of the workers belonging to these groups to opt
for VRS.
Employers refer to VRS as 'golden handshake', trade unions call it 'voluntary
retrenchment scheme', and for the government, it is 'unstated exit policy' which
means that an exit policy which may not exist on paper. VRS is one of the
strategies introduced in the early 1980s in central public sector undertakings
(PSUs) to reduce the so-called surplus or redundant workforce. It gained publicity
after the introduction of new economic policy in 1991.
In pakistan, the government employs more than 70 per cent of the organized
workforce; it uses all its channels to reduce the organized sector of the workforce
without antagonizing the trade unions. It is envisaged in the new economic policy
that VRS can provide minimum sustenance security to the retired individual and
his family.

The normal benefits that an employee gets:
1. Provident fund
1. Encashed accumulated leave
1. Gratuity (money gift in
Return of some thing done
1. Salary for the notice period
1. Cost of transfer to the hometown
Also to make the scheme very attractive for the employees the severance package
as it is called can include other benefits like
1. Medical insurance
2. Housing loans
3. Subsidies on children's education loans, etc.