D MBA 402 HRM Compensation Management

Compensation Management
Notes:
D-MBA-HRM-402
Compensation
Management
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Syllabus
Course Objectives:
To familiarize the students with basic concepts, methods, techniques and principles of wage
and salary administration in India.
UNIT-I
Introduction: Conceptual Framework of Compensation Management: Concept and
Components of Wages, Theories of wages: Subsistence theory, Wage Fund Theory, Marginal
Productivity theory, Residual claimant theory, bargaining theory.
UNIT-II
Wage determination: Principles of wage and salary administration, Job Evaluation: Concept,
Scope, Methods and techniques, Performance based pay systems; Knowledge based pay
system, market based pay system, Incentive based pay system, Types of incentive plans,
Wage differentials, Internal and External Equity in Reward Management.
UNIT-III
Compensation Packages: Different Components of Compensation Package, compensation
design for specifics type of Human Resources. Modern Techniques of Compensation:
Incentive Schemes and Payment –By-Results (PBR), Tax Planning: Tax Implication of
Employee Compensation Package to the Employer, Tax Efficient Compensation Package,
VRS: Approaches to deal with the Workforce Redundancy.
UNIT-IV
Wage administration in India: Wage Policy in India, Methods of wage determination in India,
The Pay Commission, Wage Boards: Structure, Scope and functions, Role of Collective
bargaining in wage determination, statutory provision related to compensation.
UNIT-V
Emerging trends of compensation management in multinational companies, Challenges of
compensation management at international level.
Learning Outcomes:
 Explain the concepts, theories related to compensation management.
 Explain the establishing pay variables & wage boards- group & individual incentives
 Elaborate the issues related to compensation management in companies
 Explain the retirement plans including VRS/ golden handshake schemes
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Table of Contents
Chapter I
COMPENSATION MANAGEMENT: CONCEPT AND THEORIES
1. Introduction
1.1 Subsistence Theory
1.2 Wage Fund Theory
1.3 Marginal Productivity Theory
1.4 The Residual Claimant Theory
1.5 Bargaining Theory
1.6 Employment theory
1.7 Exploitation Theory
1.8 Labour Theory of Value
1.9 Competitive Theory
1.10 Low-wage Labour Market Theory
1.11 Multi-Disciplinary Theories
2. Wage Policy
2.1 Objectives
2.2 Need for Wage Policy
3 Self Assessment Questions
4 Summary
5 References
Chapter II
1. Meaning And Definition Of Incentive Payments.
2. Significance Of Incentive System
3. Disadvantages Of Incentives Systems
4. Pre-Requisites For An Effective Incentive System
5. Scope Of Incentive Schemes
6. Type Of Incentive Schemes
7. Group Incentive Plans
8. Incentives For Indirect Workers
9. Incentive Schemes In Indian Industries
10. Installing An Incentive Scheme
11. Job Evaluation And Group Dynamics
12. Socio-Technical System
13. The Effects Of Technology On Work Group
14. Technology And Alienation
15. Orientations To Work
16. Methods Of Job Evaluation
16.1 Non-analytical Methods
16.1.1 Ranking Method
16.1.2 Job-grading Method
16.2 Analytical Methods
16.2.1 Point-Ranking Method
16.2.2 Factor-Comparison Method
17. Wage Survey
18. The Job Evaluation Committee
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18.1 Size and Composition

19. Training
20. The Role Of Training In Job Evaluation
21. Identifying Key Or Benchmark Jobs
22. Selecting Compensable Factors
23. Developing Pay Scales
24. Chairing a Job Evaluation Committee
25. Operating A Job Evaluation Committee
26. The Committee And The Compensation Staff
27. The Problem Solving Role
28. Self Assessment Questions
29. Summary
30. References
Chapter III
INCENTIVE PLANS
1. Introduction
2. An incentive scheme is usually based on three assumptions
3. Pre-Requisites of effective incentive system
4. Classification of Incentives
4.1 Positive and Negative Incentives
4.2 Individual and Group Incentive
4.3 Financial and Non-financial Incentives
5. Examples of Non-financial Incentives
6. Scope of Incentive Schemes
7. Incentives for indirect workers
7.1 Definition of Incentive Systems
7.1.1 Incentive Plans Blue collar workers
8. Some Important Wage Incentive Plans
9. Long-Term Wage Incentives Plans
10. The Chief disadvantages of the group plans are:
11. Incentive plans for white coller workers/salesmen
12. Incentives for management employees
13. Why failure of Incentive Plan
14. When to use ‘Time’ or ‘Output’ basis as an incentive plan
15. Incentive schemes in Indian industries
16. The implementation of incentives Siemen’s (India)
18. Summary
19. References
Chapter IV
EQUITY IN REWARD MANAGEMENT
1. Introduction
2. Learning Objectives
3. Presentation of contents
3.1 Compensation Systems
3.2 Compensation Planning and Administration
3.3 Compensation administration
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3.4 Linking compensation system with Productivity

3.5 Wage Productivity linkage - India Experience
5. Summary
6. References
Chapter V
COMPENSATION DESIGNING FOR SPECIFIC HUMAN RESOURCES
1. Introduction
2. What is a compensation package
2.1 Non-Monetary Compensation
2.2 Direct Compensation
2.3 Indirect Compensation
3. Broad Classification of Levels of employees different characteristics
4. Primary areas of compensation management
4.1 Executive Compensation
4.2 Performance Management
4.3 Sales Compensation
4.4 Other Related Areas
5. Current trends in compensation
5.1 Skill Based Pay
5.2 HR and the Responsive Organization
6. Why Job evaluation plans are still widely used
7. Building Employee Commitment
8. A Glimpse into the Future
9. Pricing Managerial and Professional Jobs
10. Compensating Managers
11. Managerial Job Evaluation
12. Compensating Professional Employees
13. Executive remuneration has certain unique feature
14. Certain broad generalizations can be made with respect to executive remuneration in
Indian industries
16. Summary
17. References
Chapter VI
MODERN TECHNIQUES OF COMPENSATION
1. Introduction
2. Factors influencing the pay structure
3. Government legislation
4. Union influence
5. Nature of industry and work
6. Job technology
7. Nature of the worker
8. Economic conditions
9. Labour market
10. Pay practices
10.1 Internal Characteristics
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10.2 Policy Decisions on pay structure

10.3 Developing a pay structure
10.3.1 Pay Differences within and between levels or grades
11. What are the components (Tools) of compensation systems?
12. Phases of compensation management
12.1 Job descriptions
12.2 Job analysis
12.3 Job evaluations
12.4 Job ranking (Ranking Method)
13. Job grading (Classification Method)
13.1 Job Grade
13.2 Factor comparison method
13.3 Point system
14. Pay structures
15. Wage & salary survey
16. What are different types of compensation?
17. Compensation plan
17.1 Develop a program outline
17.2 Designate an individual to oversee designing the compensation program
17.3 Develop a compensation philosophy
17.4 Conduct a job analysis of all positions
17.5 Evaluate Jobs
17.6 Determine grades
17.7 Establish grade pricing and salary range
17.8 Determine an appropriate salary structure
17.9 Develop a salary administration policy
17.10 Obtain to executives approval of the basic salary program
17.11 Communicate the final program to employees and managers
17.12 Monitor the program
18. Compensation : Salary survey
18.2 What are salary surveys? Surveys:
18.2 Types of data gathered in a salary survey include
18.3 Where can I find salary surveys?
19. Compensation: salary survey: conducting your own
19.1 Roles
19.2 Determine benchmark positions
19.3 Describing benchmark jobs
19.4 Grouping positions into Job families
19.5 Defining what data to collect
19.6 Designing the questionnaire form and brief Job descriptions
19.7Assurance of confidentiality
19.7.1 Union Salary data may be misused
19.7.2 Survey Analysts
19.7.3 Results only to participants
19.7.4 Coding of participant information
20. Identification of participation
22. Summary
23. References
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Chapter VII
WAGE BOARD AND COMPENSATION MANAGEMENT
1. Introduction
2. Problems in wage and salary administration
3. Wage and salary policies
4. The peculiarities of wage scenario
5. The wage policy
5.1 Objectives of a wage policy
6. The instruments of intervention
7. Fixing minimum
8. Fixing/Revising wages in the organized sector
9. Setting indexation rules
10. Setting bonus payment rules
11. Other related aspects
12. Growth and development of wage board
13. Composition and functions of wage boards
14. The functioning of board
15. Wage boards the Indian scene
16. Evaluation of working of the wage boards
17. Remedies suggested by committees
19. Summary
20. References
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Chapter I
1. Introduction
1.1 Subsistence Theory
2. Wage Policy
2.1 Objectives
4. Summary
5. References
STRUCTURE: Chapter 1 describe the basic knowledge about meaning, definition and
relevance of compensation management to the industry.
LEARNING OBJECTIVES: After reading this chapter you should be able to:
 Identify the different components of employee remuneration. Describe the wage concept.
 Describe the theories of wage which are able to appreciate the role of wage components.
Describe the wage policy of Govt. of India.
1. Introduction
Remuneration is the compensation an employee receives in return for his or her
contribution to the organization. Remuneration occupies an important place in the life of an
employee. His or her standard of living, status in the society, motivation, loyalty, and
productivity depend upon the remuneration he or she receives. For the employer too,
employee remuneration is significant because of its contribution to the cost of production.
Besides, many battles (in the form of strikes and lock outs) are fought between the employer
and the employees on issues relating to wages or bonus. For HRM too, employee
remuneration is a major function. The HR specialist has a difficult task of fixing wages and
wage differentials acceptable to employees and their leaders.
The study of different patterns of wage payment is important both from the academic
as well as practical points of view. Wages are among the major factors in the economic and
social life of any community and country. In an economic sense, wages represent, payment of
compensation in return for work done.
In sociological sense, compensation characterizes stratification of Occupational
categories.
In psychological sense, compensation satisfies needs direct and indirectly in response
to changing employee aspirations.
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It constitutes one of several elements of job satisfaction and is instrumental for the
satisfaction of some needs more than others. In a legal sense, the term wages has acquired
various connotations, depending on the context and has become a subject of special law in
many countries. It is most important to an industrial worker because his standard of living
and that of his family depends upon his earnings. It is also important to an employer as it
constitutes one of the principal items that enter into his cost of production. The government
and the community at large are vitally interested in wage levels because of a large number of
industrial disputes and work stoppages revolving around the question of wages remuneration,
bonus and allowances. Government is also concerned with wage standards, which effect the
social climate of the country as well as such important parts of the economy as employment,
prices and inflation, national productivity, and the ability of the country to export enough
goods to pay for its imports and so keep its international receipts and payments in balance.
The government also employs a large number of workers and have, therefore, a direct interest
in wage / remuneration structure.
In many developing countries, indeed, the government is the biggest employer. In the words
of Jules Backman, "What happens to wages is of critical concern to everyone. To the worker,
wages / remuneration represent income; to the businessman, they represent costs; and to the
government, they represent potential taxes. Wages are the largest sources of purchasing
power, hence, changes in labour income have an important bearing on the level of economic
activity. At the same time, payments for labour are the most important element of cost in our
economy and thus influence the level of prices and of profits.
Wages are the remuneration for the expenditure of effort in production of goods and service.
The effort of wage earner may be physical, mental or a combination of the two; it may be
under another direction or may be of managerial and decision making character. But
whatever his specific occupation, the wage earner supplies some form of human contribution
to production and wages are reward for his contribution.
It represents the major if not the sole source of money for a large portion wage earners and
constitutes an important element in the total cost of production; more often it becomes a
source of industrial conflict also. Wage behaviour therefore, concerns the workers, managers
and the policy makers. It can also be a source of motivation to employees to perform their
duties effectively and efficiently.
It must not be overlooked that the wage and salary system should be operated to serve the
needs and objectives of the organization as a whole. A compensation system often gets
disturbed under great pressures, such as changes in the economic environment, government
legislation, and competition from other companies. Internally, temporary shortage of
personnel, excessive overtime working, slack incentive schemes, and different interpretations
of management policy may combine to distort the wage structure. The pay system must allow
certain flexibility to accommodate the pressure placed upon it. A sound strategy in pay
system is to institute a device for monitoring changes in the pay structure. A number of
people have begun to advocate the desirability of a more comprehensive overview of wages,
salaries and related data.
Wages have ethical, social, economic, political and psychological ramifications in

organizational life. Wages are expected to play a significant role in the efficient allocation
and utilization of human resources. With the changing institutional circumstances, processes
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and emergence of collective fronts put up by disciplinary focus on wage determination has
gained added dimension. The active involvement of trade unions as institutions wage
determination has focused on relationship between wage levels, and wage structure and
within the wage structure, Intra organization, inter-organization and intra industry and inter-
industry comparisons. Of great importance is the leadership of trade unions.
To quote Belcher, "the force of tradition, the political duties of a union leader and the
psychological make-up of union leaders may explain as much about differences between
unions as the economic differences between product and labour market".
The employer as an institution is also concerned with his status as wage leader or a
benevolent employer. There is a tendency at the organizational level of treat wage
determination as a decision maker taken rather than a faith accompli forced by external
forces. Compensation determination involves an expression of organizational philosophy as
well as what other organizations are doing and with the relative importance of institutional
and non institutional factors.
Studies of organizations suggest that in the early stages of development of wage system,
demographic, technological, social and economic forces played a major role in determining
wage level and The development of job evaluation constitutes landmark in the evolution of a
rational wage structure and with respect to jobs in organization.
Wage Concepts
The institution of wages, the concept of earning livelihood by doing the work of some other,
is one of the oldest institutions of the society. In earlier ages the remuneration was
determined in the quantum of commodities to be exchanged for labour. With the advent of
money, the wages are now paid in coins and/or in commodities etymologically, any
remuneration paid for services in regarded as wages,
The term "wages" may be used to describe one of several concepts, including wage rates,
straight-time average hourly earnings, gross average hourly earnings, weekly earnings,
weekly take-home pay and annual earnings, Money to the workers considered his wages.
Other types of benefits well pensions, welfare funds, social security, vacations and holidays,
are regarded as fringe benefits. They are paid in addition wages and part of total labour costs.
In the words of the British Ministry of Labour and National Services, wage is "the to the
workers for placing their skill and energy at the disposal of an employer, the method of use of
that skill and energy being at employer's discretion and the amount to the payment
accordance with terms stipulated in contract of service". Various terms are currently in use in
the payment system "compensation" and "earnings".
In Stroud's Judicial dictionary the wages had been defined, as "wages are the personal
earnings of the labourers and artisans”.
The Oxford English Dictionary defines "wages" as a payment to a person for service
rendered.... the amount paid periodically, especially the or week month, the time doing which
workman servant at employer's disposal". Webster's Comprehensive Dictionary defines
wages "pay given for labour, usually manual mechanical, short stated intervals, distinguished
from salaries fees".
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According to the Encyclopedia of Social Sciences (1957 p. 292), "wages are remuneration
for labour. Like Interest and rent, wages are contractual incomes. Wage rates, whether piece
rates or time rates or whether fixed in money or in goods, are agreed upon by the payers and
the recipients of wages before the product is sold".
The term "compensation" is of a recent origin, which includes everything an employed

individual receives in return for his work. It is a comprehensive term, which includes wage
and all other allowances and benefits. The process of compensation is a complex network of
sub-processes directed towards remunerating people for the services rendered and motivating
them to attain a desired level of performance. Thus, compensation includes all expenditures
of valued resources by the organization for the employees, including managers and
professionals, as well as blue and white collar workers.
To concept, "earnings relates to remuneration in cash and in kind paid to employees, as a

rule, at regular intervals for time worked or work done together with remuneration for time
not worked, such as for annual vacation, other paid leave or holidays./ Earnings exclude
employers' contributions in respect of their employees paid to social security and pension
schemes and also the benefits received by employees under these schemes. Earnings also
exclude severance and termination pay.
Wages, in the widest sense, means any economic compensation met by the employer under
some contract to his employees for the services rendered by them. Normally, they are
composed of two parts: the basic wage and other allowances. The basic wage is the
remuneration, which is paid or payable to an employee in terms of his contract of
employment for the work done by him. Allowances on the other hand, are paid in addition to
the basic wage to maintaining its value over a period of time. In India, however, different
labour enactments include different items under the term "wages", though all the enactments
cover basic wage and dearness allowance. When we speak "wages", we refer broadly to one
of the three things, namely”
(i) The settled wage rate per day, week or month (the rate per hour not being common in
this country except for the calculation of overtime).
(ii) The gross earnings for the day worked, which would include overtime payment,
incentive payment, and allowances payable in cash or
(iii) The take-home pay, which would be gross earnings minus deductions of all such as
social security deductions, tax deductions, if any.
Gross earnings may differ from the wage rate not only because of the specific additions
mentioned above but because of the number of days or weeks on which a worker is able, or
willing to secure employment. Absenteeism on the part of a worker can create a yawning gap
between the wage rate for a month and the actual earnings in the month. While overtime
earnings, incentive payments, etc., raise earnings above the wage rate absenteeism and short
working depress earnings to levels well below the monthly wage rate in many cases. The net
result of these opposing influences varies from industry to industry, from unit to unit, and
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from time to time. Thus, earnings depend upon wage rates, premium payments, and the time
worked or paid during the period for which earnings are computed.
The two terms often used interchangeably are "wages" and "salary. If a worker is paid by the
year, he is considered to be in receipt of a salary, not wages, if he is paid by the hour or day,
he is started to be in receipt of wages. If he is paid by the month, he is usually looked upon as
salaried employee rather a wage earner. Normally, the term "salary" is used to denote the
payment made to blue-collar workers. The dictionary meaning of the word "salary" as a
periodic payment to persons doing jobs other than mechanical has little relevance in the
context of changing technology. It is likely that the conventional pay distinction between the
blue-collar and the white-collar employees may disappear over a period of year.
Since 1948 several terms have acquired currency referring to the wage levels viz:
(i) Statutory minimum wages:

(ii) The base or basic minimum wage;
(iii)The minimum wage;
(iv) The living wage; and
(v) The fair wage;
(vi) The need-based minimum wage.
The first term owes its origin to the provision of the minimum wages Act, 1948; the second
has found its place in industrial awards and judicial dicta of the courts; the next set of three
terms have been introduced in the Report of Committee on Fair Wages; and the last one in
the Resolution of the 15th Session of the Indian Labour Conference held in July 1957. It
would be obvious that these wage concepts cannot be described in definite words because
their contents are elastic and they are bound to vary from time to time and from country to
country. It would be difficult and also inexpedient to attempt the task of giving an adequate
precision to these concepts. What is a subsistence wage is one country may appear to be
much below the subsistence level in another the same is true of a, fair wage and a living
wage. What is a fair wage in one country may be treated as a living wage in another, what as
what may be regarded as a living wage in one country may be no more than a fair wage in
another. Several attempts have nevertheless been made to describe generally the concepts of
these respective concepts from time to time.
Wage Theories
Wage theory, a highly, systematized body of knowledge began to 200 Over the years, a
number of theories have made their mark on the contemporary economic thought of the day,
only to be subsequently discarded as being of little value. In a wage theory has not progressed
from little truth to greater truth. Rather, existing theories have been pushed aside by new
theories that fit the new facts of the day better than the old theories. In this sense, a wage
theory is relative to a particular place, a particular set of conditions, a particular time, and a
particular intellectual climate.
A variety of new social ideas, Institutional forces, egalitarian and considerations,

political and economic factors, demands of social justice and equity are to work in the
establishment of a wage level and wage structure. There is an imperative need for an
acceptable wage theory to guide the wage policy of a country. The activity of the trade unions
and the positive interference of the state in the regulation of wages for the benefit of wage
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earners have brought light the inadequate treatment to the supply side of the wage theory. The
first wage theories were economic theories. Wage Theory, says Prof. Dunlop, has tended
historically to disintegrate on the supply side. In the course of refinement of the wage fund
theory and the demand function associated with marginal productivity, the supply side tended
to be pushed outside the analytical system. The amount of labour supplied and the wage rate
came to be determined by social customer or institutional considerations. The wage rate -
come to be given for purpose of economic analysis. In a sense, the pivotal tasks of wage
theory are to formulate acceptable theory on the supply side.
Most people consider theory to be something that will not work in practice.
Unfortunately, too many of the theories in economics have been open that criticism.
Essentially, however, a theorist is one who reasons things out, theory is the result of
reasoning from past experience.
The history of age theory may roughly be divided into three periods according to Dunlop.
The first, up to1870, was dominated by the wage fund theory; the second, up to1914, was the
period, when the theory of marginal productivity held sway; and the third, extending from the
First World War till the present day was characterized by the process of collective bargaining
and the Keynesian enquiry into the general wage level and employment.
1.1 Subsistence Theory:

Adam Smith (1723-1790) is regarded as the founder the classical economics. He was an
exponent of natural social harmony and was strongly opposed to all forms of state
interference with the ordinary business of industry and commerce. He also propounded the
theory of productivity of labour or theory of the value and regarded labour as the source of
the fund, which originally supplied every nation with all the necessaries, and convenience of
life, which it annually consumed. Division of labour became for Adam Smith the principal
cause of increasing productivity. His book on Wealth of Nations contains elements of various
wage theories including the subsistence, the wage-fund, the exploitation, the bargain, and the
productivity theories. The subsistence theory of wages states that in the long run, wages
would tend towards that sum which is necessary to maintain a worker and his family. Wages
beyond the subsistence level would induce workers to have larger families resulting in spurt
in supply of labour, which brings down wages of subsistence level. No matter what the
demand conditions were, supply would adjust itself until wages equalled the subsistence
level. He, however, believed that there is a limit below which the ordinary wages of even the
lower species of labour" cannot be reduced and this limit is set by the cost of maintenance of
labour. "A man must always live by his work and his wages must at least be sufficient to
maintain him," he asserted.
Adam Smit gave Importance to bargaining theory in determining wages. Wages according to
him are the result of a bargain between the workers and their masters, but it is a bargain
between parties, which are unequal. Adam Smith related wage differences to the advantages
and disadvantages connected with various trades and to differences living is in the cost of
living. According to him the low standard of living is an effect, not a cause of low wage. For
any workman including his family, low wages are only the bottom limit. Ricardo further
stated this in 1817, forty years later. He stated that the natural price of labour is that price
which necessary to enable the labourers to subsist and to perpetuate their race without either
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increase or diminution. He maintained that the total amount available for wage was fixed and
its distribution provided a subsistence wage to all the workers employed in the industry.
Adam Smith, despite his belief in the play of perfect competition in the labour market, had
inevitably to consider the effects of employers and workers combination on wages. He
concludes that generally in disputes with their servants, masters have the advantage.
Although Smith recognized the existence of wage differentials and the heterogeneity of
labour, his analysis conceived of labour as an undivided homogeneous mass.
While Adam Smith and David Ricardo argued that it is the growth of population, which
brings down wages to the level of minimum subsistence, Karl Marx (1818-83) argued that
subsistence wages emerge because of the phenomenon of unemployment and the reserve
army of labour. Further, Marx observed that in a capitalist society subsistence wages prevail
not so much because of over population, but because of capital accumulation leading to
technological unemployment. The artisans and peasants are increasingly robbed of their
independent existence and have to join the industrial proletariat. Thus, capitalism creates an
industrial reserve army, which will have a depressing effect on wages, not only in the long
run but also in the short run.
Malthus (1836) concerned as he was with the rapid growth of the population, held that
wages were bound to remain at the subsistence level, precisely because any increase in wages
would bring about an increase in the population; and the competition among the larger labour
force would tend to reduce wages. He offered an explanation of the supply side of labour and
held that a spurt in population can outstrip availability of resources unless this was checked
almost to the point of welcoming natural calamities.

In the beginning of the nineteenth century, a new wage theory, the wage fund theory
emerged, supplementing the subsistence theory rather than replacing it. This theory stated
that at nay given moment, wages are determined by the relative magnitude of work force and
the whole or a certain part of the capital of the country. The wages are paid from a fixed
'wage fund'. The wage fund theory was a rigid demand and supply explanation of wages,
which assumed that the supply of labour at any time was fixed or absolutely inelastic, and
that the demand for labour consisted of a fixed sum determined by the intentions of
capitalistic employers. According to John Staurt Mill (1878), wage was a variable dependent
on the relation between the labouring population and the aggregate funds set aside by the
capitalists to pay them. He viewed wage as a kind of advance fund earmarked out of existing
capital for payment to workers. The attack on the Wage Fund Theory came from Francis A.
Walker, Who observed that wages are the residual claimant upon the output of industry. He
argued that wages were paid out of the product of labour and not from some previously
accumulated capital. There is no reason to assume that the available fund would be constant.
It is production that furnishes the true measure of wages. After deduction of rent, interest and
profit, the remaining portion of wealth reverts to the labouring class.

Whereas the classical theories laid more emphasis on the supply aspects of labour later
theories such as the marginal productivity theory focused on demand for labour. Alfred
Marshall and J.R. Hicks are the main exponents of this theory. According to this theory, in a
competitive labour market situation, labour like any other factor of production is determined
by the marginal productivity of labour. The wages received by the marginal labourer
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determines the wages paid to all the other labourers on the same grade. This theory uses the
firm as the unit determining the wage rate. Hick's theory of marginal productivity differs
from Marshall's net productivity doctoring because while Marshall assumed the methods of
production to be fixed, Hicks assume them to be variable. Hick's concludes that a man's wage
wit be proportional and not equal to the value of his marginal product, or at least will tend to
equal it. Hicks also analyses the pressure of trade unions and collective bargaining on the
level of wages and the wage structure. In a nutshell, this theory takes into account demand,
supply and competition as the main regulators of wages and postulates relationship between
wages, productivity, and employment. It is an employment theory at the micro level and a
wage theory at the macro level, Dunlop (1950) and Reder (1962) have criticized this theory
for its focus on the demand side to the virtual exclusion of supply aspects of labour.
The subsistence theory of wages and the wages fund doctrine focussed attention on a single
determinant wages-labour supply and demand respectively. Marginal productivity theory
explains not only the general level of wages but the entire wage structure of a highly
competitive economy in terms of the interaction of supply and demand. Philip Henry
Wcksteed, a British economist and John Bates Clark, a U.S. economist, toward the end of the
19th century, developed this theory. Rudiments of the theory can be found in the writings of
several precursors, notably in those of the German economist, Johan Henrich Von Thilneu,
which appeared in 1826 but attracted little notice. More importantly, the theory rests on
general methods of marginal analysis that were the contribution of the Austrian School of
Economists in the last half of the 19th century.
As a demand theory of wages, the marginal - productivity theory fails to make full allowance
for the peculiar nature of supply curves for labour. It assumes the existence of perfect labour
markets, perfect product markets, and increasing costs for additional units of output. It also
assumes that an employer can calculate the 'net marginal product for each factor of
production and for each class of workers. Although the marginal productivity theory has
certain weaknesses as a realistic explanation of wage determination, it does explain some of
the forces and factors that influence money wages.

Francis A. Walkar (1840-1897) is probably best known as one of the chief opponents of the
wage fund doctrine: In its place he propounded a residual claimant theory of wages as that
part of residual surplus which is left after other factor charges have been met. The definite
laws according to him determine rent, interest and profits, but there is not specific law which
determines wages. Workers get the residual. Therefore, according to him, the increase of
national dividends is on account of greater efficiency and that results in increase in wages.
These views were expounded in a number of his writings, of which the earliest was "The
Wages Question" (1876). This theory was designed to emphasize the interest of the working
class in continual process and accumulation. This theory ignores that wages are the first
charge on an industry. It does not explain how trade unions are able to increase the wages. It
ignores other factors, which influence wage determination. Further, this theory did not
consider the aspect of labour market and the role of labour productivity.
Adam Smith's writings also contain traces of bargaining theory of wages, He states
that the employers have the advantage in disputes over wage rates because they can combine
more easily and have more resources. Various economists since Adam Smith have
emphasized bargaining power as a factor in wage determination. Prof. John Davidson focuses
15
on the bargaining theory of wages at some length. A discussion on the bargaining theory is
also to be found in Maurice Dobb's little book on wages.
Proponents of the bargaining theory of wages maintain that there is no single principle
for economic force that alone determines wage rates. It is influenced by a variety of factors,
some of which are non economic, such as custom and public opinion.

John Davidson propounded bargaining theory of wages in 1989. According to him, wages
are determined by the relative bargaining power between workers or trade unions and
employers; and basic wages fringe benefits, job differentials and individual differences tend
to be determined by the relative strength of the organization and the trade union. Exponents
of the bargaining theory are of the view that there should be upper and lower limits for the
rate for the given type of labour. The wage paid within this range depends on the relative
bargaining power of labour and employees. The greatest weakness of bargaining theory of
wages is its failure to define the limits precisely or to estimate the range between them. The
upper limit is that rate above which the employer will refrain to hire a certain group of
workers, and the lower limit is that rate below which workers refuse to work. Supply and
demand analysis plays an important role in the formulation of the limits.
Bargaining has received considerable attention in view of the fact that wages are now being
determined by collective groups of workers organized into trade union and employers
organized into employer's association. Bargaining theories form important elements of the
general wage theories. In construction of the bargaining theories, the vital part played by
organized labour in determining wages has been openly recognized and given a place of
equal importance with that played by the managements the motives that influence trade union
leaders in demanding and accepting certain specific wage levels or wage rates are sought to
be discovered and expressed through various models of the bargaining process. The actual
wage rate, which is ultimately embodied in a collective bargaining agreement, will depend
upon the relative bargaining strength of the employer and employees.
Collective bargaining may be seen as the process through which labour supply and demand
are equated in the labour market. Various aspects of bargaining could usefully be summarized
into three groups (a) contract for sale of labour, (b) form of industrial government, and (c)
method of management. It is a system in which the union and the management participate
together to regulate the terms and conditions of employment and in decision-making.
Walton and Mckersie, identified four bargaining sub-processes such as:
1) Intra-organizational
2) Distributive bargaining
3) Integrative bargaining; and
4) Attitudinal bargaining
In intra-organizational bargaining, the two groups, the union and management, have to arrive
separately at some consensus in dealing with each other. Within each group there may be
differences of opinion which, through negotiations, need to be thrashed out before effective
representation of group viewpoint could be made at the bargaining table. While consensus
within the management is easier to achieve, such a process is much more difficult on the
16
union side. In distributive bargaining, where resources are limited, the two parties assume
competitive behaviour. In such a situation, the gain by one party is at the expense of the
other. This may turn out to be a pure conflict situation. Here the emphasis is on issues, in
integrative bargaining, both the parties display a problem solving approach. The attempt here
is to identify the problem areas in expanding output, help find methods to overcome the
difficulties, and then to hammer out formula to share the increased surplus. Unlike
distributive bargaining, integrative bargaining is concerned with problems rather than issues.
In attitudinal bargaining, the basic relationships between the union and the management
affect the nature of bargaining and are moulded by the negotiation process. These
relationships may lie on the continuum of cooperation to conflict.

There are essentially two schools of thought, which propounded the inter-relationship
between wages and employment. One was by classical economists like J.B. Say, and Pigou.
According to this school, unemployment would disappear if the workers were to accept a
voluntary cut in wages. They strongly pleaded for wage flexibility as a means of prompting
employment at a time of depression. These wage cuts, according to them, would bring down
the costs and a consequent fall in prices. This fall in prices would cause additional demand
necessitating increased production and hence employment of more workers.
John Maynard Keynes in General Theory of Employment, Interests and Money (1936) has
developed a new approach. In his theory of employment, he advocated wage rigidity in place
of wage flexibility. The classical economists firmly believed that any cut in money wages had
little or no effect on the effective demand of the economy. But the serious flaw in this
argument is that oven through a general cut in money wages means reduced costs, it also
means a serious reduction in aggregate effective demand on account of a cut in the
purchasing power of the working class. Reduction in aggregate effective demand leads to
reduce employment because the latter depends on the former. However, Keynes does not
completely disagree with the classical economists. Volume of employment would no doubt
increase, if the cut in money wages is applied to a single industry. But, in the economy wages
are not only costs, but also a source of demand. This being the case, the fatal flaw in the
classical analysis of wages and employment is that it suffers from the lack of a theory of
effective demand. This flaw arises from the classical economists' attempt to apply to the
economy as a whole, the logic of a theory designed to apply to a particular industry. In brief,
Koynes clearly pointed out that a cut in money wages would not increase the volume of
employment in the economy. Propensity to consume, marginal efficiency of capital, rate of
interest is some of the main determinants of effective demand. Keynes examined the impact
of money wage-cut on these determinants and concluded that they were not favourably
influenced by such a general cut in money wages.

At the beginning of this chapter on "The Wages of Labour", Adam Smith suggests the basis
for an exploitation theory. He referred to the original state of thing in which the whole
produce of labour belonged to the labourers and when there were neither landlords nor
masters to share with them.
However, Karl Marx, a contemporary of Mill, drew more extensively from the writings of
Ricardo and his followers. From Ricardo he adopted such ideas as the labour theory of value,
17
the Ricardian theory of rent, and the notion that wages and profits increase only at the
expense of one another.
Starting with Ricardo's notion that labour creates all value, Marx contended that profit,
interest, and rent are unwarranted deductions from the product that labour alone creates,
According the Marx, the capitalist compels his employees to work for more hours a day than
is necessary in order to produce their subsistence. The difference between the exchange value
of the workers product and the subsistence wages they receive is the "surplus value that is
"expropriated by the capitalists and distributed as profit, interest, and rent. In short, Marx
assumes that labourers produce an "expropriated amount in addition to their subsistence and
that the capitalists, through superior bargaining power, can force the workers to perform that
additional work.

According to Marx (1893), the simplest concept, which related to man's activity of producing
his means of livelihood was human labour. He considered labour as an article of commerce
which could be purchased on payment of subsistence price. The price of any product was
determined by the labour time needed for producing it. But the labourer was not paid in
proportion to the time spent on work but much less and the surplus went to the owner. His
theory is also known as surplus value theory of wages. Labour might be viewed in its natural
(universal) form and in its social (historical) quality. As such, "labour is a natural condition of
human existence; a condition of the metabolism of man and nature which is independent of
all social forms'. There were, according to Marx, two further aspects of labour in that form-
particular labour, and the sum-total of the individual labours of all members of society which
produced the sum total of use-value which society required. In its second aspect, labour
required a social significance. He further clarified that a commodity might have use-value
without having any exchange-value of a commodity was Nothing but a fraction of 'abstract
human labour, its measure, the amount of value - forming substance, i.e. labour, which it
contains. The measure of the exchange-value of a commodity is the socially necessary labour
time embodied in the production. He observed that socially necessary labour time is the
labour time necessary to production. He observed that socially necessary labour time is the
labour time necessary to produce any use-value with the given normal conditions of social
production and the social average degree of skill and intensity of labour. Marx's contention
that all value: is created by labour had popular appeal since the generation of surplus value in
the form of rent, interest and profit was construed to mean that labour is exploited.

The force on which economist have traditionally laid the greatest stress in wage
determination is demand and supply. Adam Smith, an early English economist (1723-90),
argued that if wages were fixed in accordance with demand and supply, workers would be
attracted by high wages to industries, occupations and localities where they were most needed
and would tend to leave industries and places where the supply of labour was greater than
demand. More precisely, the basic assumption of competitive theories of pay is that
employers compete among themselves by offering a higher wage to attract employers; while
the 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. The competitive theorists assume that neither
employers nor employees combine together to influence demand or supply conditions and
that markets are perfect. But these do not hold well in the case of a monopolistic world
market. The most conspicuous type of labour market monopoly in modern capitalist
18
economies is that which arises when employees combine together into trade unions,
professional associations, and similar groupings, formal and informal. Further, social forces
may restrict the effective adjustment of demand and supply; for example, when workers are
unwilling to more away from their home localities in order to work for high wages elsewhere.
Similarly, the forces of demand and supply may be affected by government intervention in
the regulation of wages, the application of awards, and the statutory extension of the
provision of collective agreement to employers and workers who were not parties to them.

There are several conceptual approaches, which can be adopted for analyzing the behaviour
of low-income labour market. One such theory is known as the Queue theory. Stated in its
simplest form, the Queue theory asserts that workers are ranked according to the relationship
between their potential productivity and their wage rates. The most preferred workers are
selected from the queue first, leaving the less preferred to find work in the least desirable jobs
on the fringes of the economy or to remain unemployed. The disadvantaged have limited
access to the most preferred employment opportunities.
Another theory related to low-income labour market is the dual labour market theory. This
theory argues that the labour market is divided into primary and secondary markets. Jobs in
the primary market possess several characteristics, such as high wages, good working
conditions, employment stability, and chances of advancement, equity, and due process in the
administration of work rules. On the contrary, the jobs in the secondary, market tend to have
low wages and fringe benefits, poor working conditions, high labour turnover, little chance of
advancement, and often arbitrary and capricious supervision. The disadvantaged workers are
confined to the secondary market, which is associated with a mush higher level of frictional
unemployment and high levels of turnover.

A number of multi-disciplinary theories have emerged to encompass the increasing range of
variables which empirical work provided. Lester (1952) has studied labour market behaviour
to explain wage differentials by contemplating what he calls competitive, anti competitive
and impeditive factors. Reder (1962) has considered economic, psychological and
institutional factors in his theory of wage determination Dunlop (1950) relates an
organization's internal wage structure to its milieu through a limited number of key job rates
and key settlements determined by technology. Administrative practices, product market
competition and source of labour supply. He sought to identify job clusters by which he
meant a stable group of jobs within a company linked together by technology, administrative
organization, and social custom. Further, he conceived of wage contours a stable group of
firms linked together by a common product market, labour market or custom so that they
have common wage-making characteristics. Such a wage contour was visualized to have
three dimensions-occupational, Industrial and geographic. The wage making forces were
hypothesized to be concentrating on key rates in job clusters. Indeed, the task of analyzing
wage determination is not the problem of setting a single rate but rather the problem of
setting and variation in the whole structure of completed of rates. Livernash (1957) has
developed Dunlop's concept of job clusters further to show that in an organization there are
broad clusters containing narrower clusters. Ross (1956) has contended that wage contours
19
were affected by customs in the shape of traditional or historical differential and that inter -
industry comparisons are the strongest force in wage determination.
Quite a number of economists have put forward wage-push theories of inflation which
implicitly or explicitly involve the notion that the behaviour of the general money wage level
is influenced by ideas of fairness. The wage-price spiral theory maintain that unions have
particular ideas about what would constitute a fair real wage, and that wage demands and
settlements are dependent on the behaviour of the general price level.
In sum, according to the subsistence theory, the sex instinct of the workers, by increasing the
labour supply, is the chief factor in wage determination. The wage fund theory, although still
retaining the notion that workers are responsible for the supply, placed the emphasis on the
demand side, with the demand for labour depending largely upon the intention of the
capitalist employers. The "exploitation" theory of Karl Marx places the responsibility for
wages and the wage level, upon the capitalist employer, emphasizing his power to exploit the
workers. The residual-claim and bargaining theories, in turn, place a part of the responsibility
for wage determination upon the workers. The marginal-productivity theory has been used to
place the primary responsibility for employment and wages upon labour itself. A discussion
of wage theories reveals that each theory contains some truth, but none of them alone covers
the whole ground and explains all the facts.
The concept of wages includes economic, sociological, psychological and organizational

elements. In an industrial society, wages determine the worker's way of life, including his
social position. A number of theories have been advanced attempting to explain the different
dimensions of wages and their evolution. Experience has shown that while the various
theories and policies have some validity in certain defined conditions and serve to explain
many aspects of the wage situation, none is adequate as a general theory applicable to all
circumstances. Wage theorists, however have given much thought and devoted much
research to attempting to discover an acceptable general theory of wages that would explain
in all circumstances the way in which the levels of wages are determined. No such theory has
been worked out because the factors affecting wages are very complex and are closely linked
with the whole economic and industrial system and with social considerations. However, on
the basis of the above theories, it can be stated that the fundamentals of wage determination
are related to:
(i) Ratio of capital and labour-value of the marginal net product of labour,
(ii) Labour market-supply and demand;
(iii) Wage requirements of labour and his family;
(iv) Wage fund availability and its creation after deduction of prior charges:
(v) Value of product;
(vi) Product demand, supply and competition in the market; and
(vii) Bargaining ability of the employers and the workers.
2. Wage Policy
In all countries, wage policy is a complex and sensitive area of public policy. This is because
the relative status of workers in the society, their commitment to industry and attitude
towards management, their morale and motivation towards productivity, their living standard
and in fact their way of life are all conditioned by wages. Hence, a policy dealing with this
20
crucial problem cannot be simply economic, as it has to reckon with the realities of multi-
dimensional social phenomena, in which besides the workers and the management, the
consumer and the society at large, and in consequence the state, are all vitally interested.
Wage policy is a determinant of the shares of the rival claimants to the product of industry
and national dividend, but there may often be a conflict between private and social interests.
There are, of course, theoretical generalizations or principles that may provide scientific
guidelines for framing a wage policy. Equally important in this context are the concrete social
facts that must be taken into account in its formulation at any given time. No principle of
wage policy can ever by applied in vacuum and in disregard of the realities of a situation.
Wage policy has to be pragmatic though it does not follow that it has to be unscientific and
remain simply a matter of expediency.
2.1 Objectives
The real purpose of wage policy is to protect workers against exploitation or unduly low
wages; improve workers efficiency and performance; encourage acquisition of newer skill;
provide an incentive to labour mobility, stabiliza prices; and acceleration of the nation's
development process. As an instrument of economic policy, wage policy was considered as a
means of promoting;.
i) Investment
ii) Internal price stability
iii) Worker efficiency
iv) Amore effective distribution of the labour force,
v) The international competitiveness of economy, and
vi) An influx of foreign capital.
As an instrument of social policy, it was widely known or acclaimed:

i) As an alternative to social security systems,
ii) As a means of achieving industrial peace and
iii) As a vehicle for securing social justice.
The ILO publication (problems of wage policy in Asian Countries,1956, p 39) has
enumerated the following objectives of a wage policy in developing countries: They are(1) to
abolish malpractice's and abuse in wage payment; (2) to set minimum wage for workers
whose bargaining position is weak because they are unorganized accompanied by separate
measures to promote the growth of trade unions and collective bargaining (3) to obtain for
workers a just share in the fruits of economic development, supplemented by appropriate
measures to keep workers expenditure on consumption goods in step with available supplies
so as to minimize inflationary pressure; and (4) to bring about on efficient allocation and
utilization of manpower through wage differentials and more appropriate systems of
payments by results.

The formulation of a proper wage policy consistent with the requirements of a developing
economy is beset with numerous difficulties. There are innumerable obstacles in the way of
evolving such a policy and these are further compounded by population pressure, growing
inequalities of income, historical past, dualism in the economy, increasing unemployment and
low rate of growth.
21
The developing economies have to grapple with a wage policy connected with the general
rate of increase in wages, and the range and structure of wage differences and the variability
of wages. However, the context in which these problems are discussed in the western
economies differs markedly from that of the under-developed economies, and they involve
different policy considerations. The historical experience of the present-day developed
economies of the West is not a sufficient guide to the formulation of our wage policy because
of the existence of a very low level of wages in our country. Unlike developed countries,
there is an urgent need in our country to guarantee a certain minimum living wage to the
workers, so as to remove sweating and to improve productivity.
The International Labour Organization has defined the term 'wage policy' to mean
"Legislation or government action calculated to affect the level or structure of wages or both,
for the purpose of attaining specific objectives of social and economic policy Generally, a
wage policy aims at imposing a discipline an all types of wage payments so that excessive,
inadequate, or inappropriate wage payments may not stand in the way of the fulfillment of the
objectives, both economic and national development, a progressive and realistic wage policy
is an instrument in attaining such social objectives as the elimination of exceptionally low
wages, reduction in wage differentials and the protection of real wages.
3. Self Assessment Questions:

1. Write note on wage concepts.
2. Explain different wage theories.
3. Define wage policy and what are its objectives.
4. What do you understand by employee remuneration? What is if significance.
Bring out the components of employee remuneration.
4. Summary
To survive and be successful in a global economy, an organization be competitive. A major
factor underlying organizational must competitiveness is labour costs. Not only must an
organization pay its workforce a competitive wage within its' geographic region, but it also
must vary the kinds and amounts of rewards offered, recognizing differences in individual
contributions. A major difference in individual contributions relates to the knowledge and
skills the employee brings to the workplace and the interest, effort, and innovative qualities
the employee provides in completing work assignments. The pay and reward system of the
organization must stimulate acceptable levels of performance from all employees. Money is
the name of the game, but the distribution of organizational funds determines who wins the
game.
22
5. REFERENCES:
Understanding Wage A.M. Sharma Himalya Publishing 2001

System House
Business Policy and Acharya Govekar Himalya Publishing 2002
Administration House
Elements of Mercantile N.D. Kapoor Sultan Chand & Sons 2003
Law
Personnel Management P.C. Tripathi Sultan Chand & Sons 2002
& Industrial Relations
Labour law Reshma Arora Himalya Publishing 2000
House
Human Resource and K. Aswathappa Tata Mc Graw Hill 2001
Personnel Management Publishing Co.
23
Chapter II
1. Meaning And Definition Of Incentive Payments.

2. Significance Of Incentive System
3. Disadvantages Of Incentives Systems
4. Pre-Requisites For An Effective Incentive System
5. Scope Of Incentive Schemes
6. Type Of Incentive Schemes
7. Group Incentive Plans
8. Incentives For Indirect Workers
9. Incentive Schemes In Indian Industries
10. Installing An Incentive Scheme
11. Job Evaluation And Group Dynamics
12. Socio-Technical System
13. The Effects Of Technology On Work Group
14. Technology And Alienation
15. Orientations To Work
16. Methods Of Job Evaluation
16.1.3 Ranking Method
16.1.4 Job-grading Method
16.2.1 Point-Ranking Method
16.2.2 Factor-Comparison Method
17. Wage Survey
18.1Size and Composition
19. Training
20. The Role Of Training In Job Evaluation
21. Identifying Key Or Benchmark Jobs
25. Operating A Job Evaluation Committee
26. The Committee And The Compensation Staff
29. Summary
30. References
STRUCTURE: Chapter 10 discusses in details the job evaluation & incentive system and
process and procedure available for evaluating the jobs of an organization.
LEARNING OBJECTIVES: After reading this chapter you should be able to
 Understand the meaning & Definition, and significance of incentive system

 Describe the pre-requisites for an effective incentive system.
 Discusses, scope and types of incentive schemes.
24
 Understanding the methods of job evaluation.

 Identify importance of developing and training job evaluation committee that will provide
broad base of organizational knowledge.
 To integrate this knowledge into an evaluation system that will provide fair and equitable pay
for all the jobs of an organization.
1. Meaning and Definition of incentive payments.
Incentives are monetary benefits paid to workmen in recognition of their cutstanding
performance. They are defined as "variable rewards granted according to variations in the
achievement of specific results. The international Labour Office refers to incentives as
'payment by results. But it is appropriate to call them incentive system of payment
emphasizing the point of motivation, that is, the imparting of incentives to workers for higher
production and productivity. Unlike wages and salaries which are relatively fixed, incentives
generally vary from individual to individual, and from period to period for the same
individual.
2. Significance of incentive System

The primary advantage of incentives is the inducement, and motivation of workers for higher
efficiency and greater output. It may not be difficult to get people for fixed wages and
salaries. But with fixed remuneration, it is difficult to get people to motivate workers to show
better performance. Fixed remunerations removes fear of insecurity in the mind of
employees. A feeling of secured income fails to evoke positive response. Positive response
will surely come when incentives are included as a part of the total remuneration. Earnings of
employees would be enhanced due to incentives. There are instances where incentive
earnings exceed two to three times the time-rated wages of salaries. Increased earnings would
enable the employees to improve their standard of living.
There will be reduction in the total as well as unit cost of production, through incentives.
Productivity would increase resulting in greater number of units produced for given inputs.
This would bring down the total and unit cost of production. Production capacity is also
likely to increase. The Bangalore-based Wheel and Axle Plant, for example, has not a
production capacity of 77,000 wheels and 48,000 axles as against the initial capacity of
56,800 wheels and 23,000 axles. The higher capacity has been achieved as a result of
implementation of the recommendations for the adoption of a group-incentive scheme carried
out by the Rail India Technical and Economic Services.
The other advantages of incentive payments are reduced supervision, better utilization of
equipment, reduced scrap, reduced lost time, reduced absenteeism and turnover, and
increased output. Furthermore, systems of payment by results would, if accompanied by
improved organization and work measurement, enable firms to estimate labour costs more
accurately than under the system of payment by time. This would facilitate the application of
cost-control techniques like standard costing and budgetary control.
Apart from the benefits cited above, incentive packages are a very attractive proposition for
managements because they do not affect employer's contribution to the provident fund and
other employee retirement benefits.
3. Disadvantages of Incentives Systems

On the other hand, systems of payment by results may have disadvantages. There is a
tendency for the quality of products to deteriorate unless steps are taken to ensure
25
maintenance of quality through checking and inspection. This involves added expenses. In
some cases, it may not be possible or may be too expensive to maintain quality fully, and the
benefit, gained in the form of increased output and lower cost may be offset to a considerable
degree by deterioration in the quality of the products.
Difficulties may arise over the introduction of new machine or methods. Workers may
oppose such introduction for fear that new piece or bonus rates set. When the job is restudied
at intervals of time, may yield lower earnings; or when new machines or methods are
introduced; they may slacken their rate of work in order to avoid rising output to a level
which would make a restudy of the job necessary. Costs may not, therefore, be lowered to the
extent that would be necessary if the workers were on time-based work. Most trade unions
agree that cuts in piece or bonus rates are justifiable in such circumstances. But individual
workers may not share this view, and output and the level of costs may be affected
accordingly.
Workers tend, moreover, to regard their highest earning normal and may, therefore,
press for a considerable higher minimum wage when they are paid by results than when they
are paid by hour. Payments by results may, therefore, lead to higher labour costs in certain
industries such as paper-making and coal mining where workers experience, for reasons
beyond their control, good and bad runs. Their earnings on the days they have good runs are
apt to be regarded by them as normal earnings. Besides, there is evidence that some workers
paid by results have disregarded security regulations in order to achieve high output, thus,
increasing the danger of accidents. Some workers tend to overwork during the normal
working day and sometimes keep on working in their lunch hour. These practices would
affect their health.
Another disadvantage is that jealousies may arise among workers because some re-able to
earn more than others. In the case of group-incentives schemes, the workers who are fast in
their work may be dissatisfied with those who are slow.
One of the greatest difficulties with the incentive systems is in the setting of piece or bonus
rates, Rate fixing involves delicate problems of judgement in which there is always a risk of
error. If rates are set too low, workers are bound to be dissatisfied and will be under pressure
to work very hard. If rights are set too high, workers may slacken their efforts at times so that
their employers may not have cause to ask for a revision of rates because the earnings are too
high. Workers sometimes decide approximately how much they feel they wish to earn and
are, therefore, not interested in working for that part of the day which remains after they have
earned the amount they want. Difficulty also arises in determining the standard performance.
Many organizations sallow a safe route to fix the standards which is usually the average of
past years' performance. Past performance may not be the ideal basis for fixing production
norms.
Since preparing incentive schemes is such a complex business managements usually outwit
their employees. For instance, the period over which incentives are payable is an important
factor in determining how much a worker earns. At Bharat Gears, for example, an incentive is
payable on the average of three month's production. This gives company the opportunity to
recover the production lost as a result of late deliveries of raw materials, technical
breakdowns, and so forth. Even if the workers produce, for a certain period, in excess of the
norm, they may not be eligible for incentive pay.
26
The argument that incentives lead to higher earning for workers has its flip side too. Workers
of Premier Automobiles plant at Kurla, Mumbal, prove this point, Between 1978 and 1991,
incentive payments accounted for 60 per cent of workers GROSS income. In 1991, a daily-
rate worker whose basic wage, DA and allowance amounted to Rs. 3500 was earning an
additional Rs. 3000 as incentive payment. On one occasion, a daily-rate worker's wages
reached Rs. 9000. Since the incentive was calculated as a percentage of basic wage, the
monthly-rated workers were doing even better. Their average gross income was Rs. 9000
while estimates put the figure at Rs. 10,500. Since the high-incentive earnings remained
constant for a long period, incentive pay was treated as guaranteed pay by workers, who
pegged their consumption levels to much higher levels. They made long-term investments in
housing and consumers durables, and even availed of loans amounting to a few lakhs from
HDFC and other such co operative societies.
But in recent years, as stocks piled up and production came to a virtual stop, the workers lost
their entire incentive payment. Worse for some, after deductions for loans, take home pay
was considerably less than the guaranteed wage of Rs. 4000 to 5000. A reliable source within
the company estimated that about 10 percent of the work men take home no pay at all. The
workers, as a result, remain an extremely disgusted lot, but there is little anyone can do about
it. There is an ethical dimension to incentive payments as well. It is unjust to pay extra to the
employees they are already paid their usual wages and salaries. If an employee is paid for
eight hours a day, he or she is expected to show better performance for the day. To show
increased production, extra payments are not necessary. There are also instances where
incentives lead to corruption. Supervisors and workmen join hands, false production figures
are recorded and wrong time booking are made in order to enable employees earn enhanced
incentives. The booty is later shared with the supervisors who colluded with the employees in
the fraud. Incentive payments are linked to employee's performance. A standard performance
is set for employees. The actual performance is then compared with the standard, and
depending upon the degree of efficiency, incentives are fixed. Unfortunately, these standards
themselves become ceilings on productivity of employees. Workers would be happy to attain
a performance near the standards, and may not strive to cross them.
One of the arguments for incentives is that they motivate employees for higher performance.
This argument seems to be untenable going by Herzberg theory of motivation. According to
Herzberg, money is a hygiene factor which, when provided, will help remove dissatisfaction.
For motivation to take place, other motivators like opportunities for achievement and
challenging job, must be provided in addition to adequate financial rewards. Potential pitfalls
like the ones stated above do not mean that incentive schemes should not be implemented.
Rather, they suggest that such plans are more effective when implemented as a part of a
comprehensive management programme aimed at maximizing output by tapping the potential
and commitment of employees.
4. PRE-REQUISITES FOR AN EFFECTIVE INCENTIVE SYSTEM

All things considered, it may be concluded that in many industries or undertakings and for a
large group of operations, well-designed systems of payment by results shall yield advantages
to all concerned. Many of these advantages will be realized provided sufficient safeguards are
provided. Such-prerequisites are:
27
The cooperation of workers in the implementation of an incentive scheme is essential because

the employees somehow devise, if they do not like a scheme, ingenious ways of evading or
sabotaging the plan, often with the tacit connivance of the foreman or supervisor. Worker's co
operation may be secured through proper discussion with their representatives.
In particular, workers co-operation is necessary in:

i) The methods followed in measuring the results or output upon which payment is based.
ii) The methods followed in setting wage rates for different classes of work, and
iii) Appropriate safeguards concerning earnings, job security and settlement of disputes over
piece-work rates and allotted time.
The scheme must be based on scientific work measurement. The standards must be realistic
and must motivate workers to put in better performance. Workers must be provided with
necessary tools, equipment and materials so as to enable them reach their standards.
Indirect workers, such as supervisors, foremen, charge hands, helpers, crane operators,
canteen staff, store keepers and clerical staff should also be covered by incentive schemes.
There should be management commitment to the cost and time necessary to administer
incentive schemes properly, and these must be carefully assessed before embarking on an
incentive programme. There are many situations in which the potential gains are just not
worth the cost and effort involved. It also means a commitment interns of integrity to the
spirit as well as the letter of the programme - having the courage to abide by it when the
payout deteriorates and the honour to own up when results are not forthcoming.
There is greater need for planning. Many Incentive schemes, started hurriedly, planned
carelessly, and implemented indifferently have failed and have created more problems for the
organization than they have tried to solve. This was what happened to the three big plants of
Hindustan Steel (now SAIL), where an incentive scheme was introduced during 1960s.
Though the initial objective of raising the input of steel was achieved, problems arose
regarding production of sophisticated items and improvement of their quality of products.
The scheme did not function satisfactorily from the point of view of maintenance of plant and
equipment, which intern, affected output. The performance of ancillary units like repair
shops, was unsatisfactory because the incentives in these shops were based on the overall
steel production and not the units own performance Thus the need for careful preparation for
the installation of an incentive scheme.
The other safeguards are:

(i) The incentive scheme should be appropriate to the type of work carried out and the workers
employed.
(ii) The reward should be clearly and closely linked to the efforts of the individual or group.
(iii) Individuals or groups should be able to calculate the reward they get at each of the levels of
output they are capable of achieving.
(iv) Individuals or groups should have a reasonable amount of control over their efforts and
therefore their rewards.
(v) The scheme should operate by means of a well-defined and easily understood formula.
(vi) The scheme should be properly installed and maintained.
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(vii) Provisions should be made for controlling the amounts paid to ensure that they are
proportionate to effort.
(viii) Provisions should be made for amending rates in defined circumstances.
(ix) Create incentives for performance and disincentives for non-performance.
(x) Set and review specific objectives for each employee periodically.
5. SCOPE OF INCENTIVE SCHEMES

Although the incentive payments have a universal appeal, their application is confined to
certain important industries. Stated differently, payment-by-results schemes are difficult to
apply in:
Industries in which measurement of individual or group output is rendered difficult or

impossible either by technical consideration or by psychological circumstances which might
be prejudicial output.
Industries in which the control of quality is necessary and is particularly difficult. Or in the
case of certain classes or workers, where high quality and precision of work is of prime
importance and
Industries in which the work is dangerous and it is particularly difficult to ensure the
observance of adequate safety precautions.
Barring the above three categories, incentive schemes can be applied to all industries.
Specifically, they are being successfully employed in the textile and metallurgical industries,
the metal trades, mining, and many branches of clothing, leather and rubber industries.
Incentive schemes have also been successfully applied in certain countries, and in certain
circumstances in the building industry and in chemical and other industries.
Generally speaking, systems of payment by results can be most successfully

employed in the large companies which can effort to employ administrative and engineering
staff needed to ensure an efficient organization of production, quality and measurement of
work. However, such systems frequently yield appreciable results in smaller undertakings
which may, in case of nee, take recourse to the services of experts for the design of Incentive
schemes. It is often argued that incentive schemes are more desirable in labour incentive
manufacturing processes. Their application in fully automated plants is doubted. It may be
stated that the schemes of payment by results have their role in mechanized enterprises too.
But the justification comes for the wrong reasons. It would be easy for an operator to damage
to a CNC machine or for a programmer to plant virus in the computer if incentive earnings
are denied to him or her. It is mainly to prevent such damages that incentive schemes are
recommended in fully automated plants.
As a rule, incentives must not be introduced in a newly set-up unit. Workers must be content
with time-rated earnings, at least during the first four to five years. This time period is
necessary for the unit to carve a niche for itself in the market. This being achieved, it would
be easy for the unit to sell the increased output brought in by incentives. Furthermore, as was
noted earlier, incentives are likely to affect the quality of output. Any defect in quality would
seriously affect fortunes of the newly set-up unit, particularly in its formative years.
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6. TYPE OF INCENTIVE SCHEMES

Incentives schemes are many and varied. The international Labour Organization (ILO)
classifies all the schemes of payment by results into four categories:
Schemes where the workers earning vary in the same proportion as output.
Schemes where earnings vary less proportionately than output.
Schemes where earnings vary proportionately more than output.
Schemes where earnings differs at different levels of output.
Incomes Varying in Proportion to out- The chief characteristic of the schemes where
incomes vary in proportion to output is that any gains or losses resulting directly from a
worker's output accurate to him or her (leaving to the employer any gains or losses in
overhead costs per unit of output). In contrast, when the worker is paid by the hour, day or
month, all gains or losses resulting from changes in his or her output accrue to the employer.
The success of this type of incentive requires that the measurement of standard of individual
outputs must be extremely accurate. Inaccuracy in these matters gives rise to inequities and
may finally lead to the failure of the schemes due to worker dissatisfaction. The straight piece
work and the standard hour systems are the two popular incentive schemes which come under
the first category. Straight piece work method is the simplest, oldest and the most commonly
used method. Here, the rate per unit of output is fixed, and the total earnings of the worker
are arrived at by multiplying the total output (measured in terms of units) by the rate per unit.
Obviously, earnings of the worker directly depend upon his or her performance. For example,
if the rate per unit is 10 paise and the total output of an employee is 100 nits, his or her
earnings will be 100 x 0.10 Rs. 10. Extending the logic of the piece rate system, a worker has
to go without wages if he or she fails to turn out the required goods. For this reason, the
system is modified in one respect the workers time rate is guaranteed. The time rate is usually
at a level which will yield earnings below the expected average earnings on piece work in
average conditions. It is designed to protect the worker against unduly low to beyond his or
her control.
In standard hour system (also called 100 percent gins-sharing), standard time in terms of
hours is fixed for completion of job. The rate per hour is then determined. A worker is paid
for a standard at his or her time rate if he or she completes the job in the standard time or less.
He or she is aid the same wages if he or she takes more than the standard time, unless he or
she is guaranteed time wages. If time wages reguaranteed, he or she gets paid on the basis of
the time taken multiplied by the time rate.
The following examples illustrate the method:
Standard time = 10 hrs.

Rate per hour = Re1
Case (i)
Time taken Earnings = 8 hrs.
Earnings = 10*1=Rs.10
Case (ii)
Time taken = 12 hrs.
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a) Earning time wages are not guaranteed = 10*1 = Rs. 10

b) Earning time wages are not guaranteed = 12*1 = Rs. 12
Earnings Varying Proportionately Less than Output - Four allied but different systems
come in this group, namely, Halsey, Rowan, Barth and Bedaus. The common feature of all
these is that time is used as the measure of output and bonus is paid on the time saved, that is
the difference between the standard time set for the job and the time actually taken. These
schemes are called gain sharing schemes as both the employer as well as the employees share
the gains resulting from the saved time. The worker may be paid for half (or any other
fraction) of the saved time, the employer getting the balance.
These systems are often applied in case where it is not possible to set standards or to measure
the workers output accurately. Under some of these schemes, it is possible for a worker to
earn more for certain levels of output than he or she would, under piece-work, when
production difficulties are encountered. If no such difficulties are confronted and the worker
is able to increase his or her output substantially, he or she receives progressively for such
output than he or she would if he or she were working on a straight piecework. Under the
Halsey system, standard time is fixed for the completion of a job and the rate per hour is then
determined. If the worker takes the standard time or more to complete the job, he or she gets
paid at the time rate. In other words, time wages are guaranteed even if the output of the
worker is below standard. Where the work is done in less than the standard time, he or she
gets paid for the actual time. At the time rate plus a bonus which is calculated "at" or "as" a
specified percentage of the saved time. The percentage varies from 30-70 percent. The usual
share is 50 percent, the remaining going to the employer.
The following examples illustrate the scheme:

Rate per hour = Re 1
Case (i)
Earnings = 10*1=Rs. 10
Case (ii)
Time taken = 12hrs.
Earnings = 12*1= Rs. 12
Case (iii)
Time taken = 8 hrs.
Earnings
Time wages = 8*1= Rs. 8.00
Bonus = ½*2*1= Rs. 1.00
Rs. 9.00
Under the Rowan System too, standard time and rate per hour are fixed. If the time taken to
complete the job is equal to or exceeds the standard time, the employee is paid for the time
taken at the rate per hour. If the time taken is less than the standard time the employee is
entitled to bonus, in addition to the time wages. The bonus takes the form of a percentage of
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the worker's time rate. This percentage is equal to the proportion of the saved time, to the
standard time.
Rowan system operates on the following lines

Case (i)
Time taken = 10hrs.
Case (ii)
Case (iii)
Time taken = 8 hrs.
Earnings = 8*1 = Rs. 8.00
Bonus = 2/10 *8 = Rs. 1.60
Rs. 9.60
Unlike the Halsey and the Rowan systems, the Barth Variable Sharing systems does not
guarantee the time-rate. The worker's pay is ascertained by multiplying the standard hour by
the number of hours actually taken to do the job, taking the square roof of the product and
multiplying it by the worker's rate. For example:
Standard time = 10 HRS.

Case (i)
Earnings = Unrude 10.95*1=Rs. 10.95
Case (ii)
Earnings = Unrude 10*10
= 10*1=Rs. 10
Case (iii)
Time taken = 8 hrs.
Earnings = Unrude 8 x 10
= 8.94 x 1 = Rs. 8.94
Under the Bedaux scheme, the standard time for a job is determined. Each minute of the
allowed time is called a point of B Thus there are 60 B's in one hour. Each job has a standard
number of B's. The rate per hour is also determined. The worker receives in addition to his or
her hourly rate, a bonus which under the original plan is equal to 75% of the number of points
earned, in excess of 60 per hours multiplied by one sixtieth of the worker's hourly rate. If a
worker does not reach his or her standard, he or she is paid at the time-rate.
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An example to illustrate the Bedaux system is as follows:

Case (i)
Actual time = 12 hrs.
Earnings = 12*1=Rs. 12
Case(ii)
Actual time = 8 hrs.
Earnings: Time wages = 8*1=Rs.8
Case (iii)
standard Bs = 10*60=600
Actual Bs =8*60=480
Bs saved =120
75∗120∗1
Bonus = =Rs. 1.50
100∗60
Total earnings = 8+1.50 = Rs. 9.50
Earnings Varying Proportionately More than Output: This category includes two
methods (1) the high piece rate and (ii) the high standard hour system. Under the former, the
earnings of the worker are in proportion to his or her output, as in straight piece-work, but the
increment in earnings for each unit of output above the standard I greater. For example, for
each one per cent increase in output above the standard, there may be a 4/3 times increase in
earnings as compared to one per cent increase in earnings under the straight piece-rate
system. The higher rates start applying after the standards have been reached. Similar logic
applies to the high standard hour system.
The main feature of these two schemes is that since direct labour costs per unit increased for
levels of output above the standard, the worker also shares the earnings in overhead costs
which results from an increased output. The amount of this share depends on the size the
increments in earnings which are payable at different levels of output. If these increments
were large enough and increased progressively with output, the workers obviously could
obtain all the savings in overhead costs. This is not, of course, the case where the increment
in, earnings remains the same for each successive increase in output.
Earnings Differing at Different Levels of Output: This group includes several schemes.
These systems can be best explained by describing how earnings very from minimum to
maximum at different levels of output. Earnings for one part of the range may very
proportionately less than output and for another part proportionately more, or more usually in
the same proportion as the output. The Talyor's Differential Piece-rates system, the Merrick
Differential piece rate system, the Gantt. Task system, the Emerson's efficiency system and
Accelerating premium system fall under the category where earnings differ at different levels
of output.
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Under the Taylor's Differential piece rate system (developed by F.W. Taylor in 1880) there is
a low rate for output below the standard, and a higher piece rate for output above the standard
with a large bonus of 50 percent of the time rate when the standard output is attained.
To illustrate the Taylor's piece rate system, we take the following:
Standard output = 100 units

Rate per unit = 10 paise
Differential to be applied:
120 percent of piece rate at or above the standard time
80 percent of piece rate when below the standard time
Case (i)
Output = 120 units

Earnings = (120*120*0.10)/100
Rs. 14.40
Case (i)
Output = 90 units
Earnings = (90 x 80 x 0.10)/100 =Rs. 7.20
The Merrick differential piece rate system is a modification of the Taylor system, with three
instead of two rates. One large step is broken into two, so to encourage new. and average
workers. Straight piece rates are paid upto 83 percent of the standard output, at which a bonus
of 10 percent of the time rate is payable, with further 10 percent bonus on reaching the
standard output. For outputs above the standard, high piece rages are paid.
The Merick system can be illustrated as follows:
Standard time =100 units

Rate per hour= 10 paise
Case (i)
Output = 80 units
Efficiency= (80 x 100)/100 = 80%
Earnings: = As the efficiency is less than 83 percent. only the base piece-rate applies
=80 x 0.10= Rs. 8.00
Case (ii)
Output=90 units
Efficiency= (90 x 100)/100 = 90%
Earnings: As the efficiency is more than 83 percent but less than 100 percentage,
110 percentage of the base piece-rate applies
= (90 x 110 x 0.10)/100 = Rs. 9.90
Case (iii)
Output = 110 units
Efficiency = (110*100)/100=110%
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Earnings: As the efficiency exceeds 100 percent, 120 percentage of the base piece-
rate applies
= (120 x 110 x 0.10)/100
= Rs. 13.20
Under the Gantt Task system the worker is guaranteed his or her time rate for output below
the standard. On reaching the standard output or task, which is set at a high level, the worker
is entitled to at bonus of 20 percent of the time wages. For outputs above the task, high piece-
rates are paid.
The Gantt Task system operates as bellows:
Rate per hour = Re. 0.50

High piece-rate = Re. 0.10
Standard output = 80 units
Time taken = 8 hrs.
Case (i)
Output = 70 units
As the output is less than the standard only time wages are paid to the worker's
Earnings = 80x0.50= Rs. 4.00
Case (ii)
Output = 80 units
Earnings:
As the output is equal to the standard, the worker is entitled to time wages plus 20 percent of
time wages as bonus.
Time wages 8 x 0.50 = Rs. 4.00

Bonus = (20 x 4)/100 Rs. 0.80
Total earnings = Rs. 4.80
Case (iii)
Output earnings = 110 units
As the output is more than the standard, the worker is entitled to high piece rate.
110 x 0.10 = Rs. 11.00
Under the Emerson's Plan, a standard time is set for each job, and the efficiency of each
worker is determined by dividing the time taken by the standard time. Up to 67 per cent of
efficiency, the worker is paid by time rate. Therefore, a graduated bonus, which amounts to a
20 percent bonus at 100 percent efficiency is paid to the worker. Therefore, an additional
bonus of 1 percent is added for each additional 1 percent efficiency. The following example
illustrates the method;
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Standard output in 10 hrs. = 100 units

Rate per hour = Re.1
Case (i)
Output in 10 hrs = 50 units

Earnings:
Efficiency = 50 percent
As the efficiency is below 67 percent the worker is entitled to time wages only 10×1=Rs. 10/-
Case (ii)

Earnings:
The worker is entitled to time wages plus 20 percent of time wages as bonus
Time wages = 10*1 = Rs.10/-
Bonus = (20 x 10)/100=Rs. 2.00
Earning Rs. 12.00
Case (iii)

Earnings:
At the rate of 20 percent at 100 percent efficiency and one percent increase for every one per
cent increase in efficiency, the worker is eligible for 50 percent of the time wage as bonus,
Time wages = 10*1 = Rs. 10/-

Bonus = (50 x 10)/100= Rs. 5.00
Earning Rs. 15.00
Under the Accelerated Premium system, the earnings of workers increase with output, the
rate of increase itself rising progressively with the output. The worker receives a strong
incentive to increase his or her output in order to get increased earnings. But the accelerated
premium system are complicated and are difficult to understand and implement.
7. GROUP INCENTIVE PLANS

The discussion till now has covered incentive schemes for individual direct workers. A
fundamental assumption common to all individuals schemes is that the output of each worker
can be accurately measured. But in some cases, for example, in the grinding and welding
works in the electrical industry, the operations are performed by the group as a whole, and the
contribution of each worker in the group cannot be accurately measured. In such cased, the
group incentive scheme is followed. Group incentives are as common as individual plant in
industrial establishments.
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Any individual scheme, which has already been discuss may be applied to a group of
workers. But the most common is the piece work system. The total earnings of a group are
first determined in accordance with the incentive method, which is followed and the earnings
are then distributed among the members of the group on some equitable basis. If the group
consists of members with equal skill, the earnings are divided equally among the When the
members are of unequal skill, the earnings of the group may be divided among the members
in proportion to their individual time rates, or according to specified percentages, or in some
cases among only a certain number of members of the group.
Some of the advantages of group incentives are:

1. Better co-operation among workers.
2. Less supervision.
3. Reduced incidence of absenteeism,
4. Reduced clerical work and
5. Shorter training time.
The disadvantages are:

1. An efficient worker may be penalized for the inefficiency of the other members in the
group.
2. The incentive may not be strong enough to serve its purpose and
3. Rivalry among the members of the group defeats the very purpose of team work and
co-operation
8. INCENTIVES FOR INDIRECT WORKERS

Indirect workers such as crane operators, helpers, charge hands, canteen staff, security staff,
employees in purchasing, sales and accounts and maintenance staff also deserve incentives at
par with direct workers. Incentives should be paid to such workers either on the ground that
they contribute to the increased production which the direct workers may achieve or on the
ground that their work has increased because of increased production, or both. Such
payments are desirable to avoid dissatisfaction and dissension among the workers in a plant,
or even strikes, which may result if indirect workers are paid at time-rates while direct
workers receive substantial bonus.
The payment of bonus to indirect workers poses a serious problem because the output of
many of them cannot be accurately measured. For example, it is extremely difficult to
measure the output of maintenance staff, security personnel, or canteen employees, though it
is possible to assess the performance of inspectors, sweepers and packers.
But whether the output of indirect staff can be measured or not a single system of bonus
payment is made applicable to all of them. In some cases, the bonus is calculated according to
some agreed percentage on the output of the plant or of a department. In others, the bonus is a
specified percentage of the incentives of all or some of the direct workers. Many
managements however, prefer to apply a merit rating system to indirect workers, which
rewards these workers for the other qualities, in addition to their output.
9. INCENTIVE SCHEMES IN INDIAN INDUSTRIES

Introduced in 1946, incentive payments have become highly popular in our industries. They
are as common as monthly wages and salaries. But the schemes in operation defy any
generalization because no two plants follow an identical scheme. The schemes differ from
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industry to industry and from plant to plant within an industry. Some of the incentive
schemes described by the ILO are followed here, but not in their original form. They have
been modified to suit the local requirements. This is necessary because the implementation of
incentive schemes, in their original form, necessitates work measurement and standardization
of operations, which in many cases are not possible in our industries. Thus, the features of
incentive payments are:
Though incentives are as old as industries themselves, it was only in 1946 that they were
introduced in our country. Even to this day the incentive schemes are in their infancy.
In most industrial establishments, the introduction on incentive schemes has not been
preceded by work studies, consultations with workers representatives and rationalization of
wage structure through job evaluation.
Incentive schemes differ from industry to industry and from plant to plant within an industry.
Most incentive schemes in operation fall under one or the other of the four classes mentioned
by the ILO. But the schemes are fine tuned to suit the requirements of the organization.
The schemes in public sector plants have an extremely varied coverage, some applying only
to day rated employees while other are being made applicable right up to the top
management.
Inflation has reduced the motivational effect of incentives Hence Incentives have to be
substantial if workers are to be motivated for higher efficiency and greater output.
In many cases, incentives seem to have achieved their objectives, that is increased
productivity and enhanced earnings.
10. INSTALLING AN INCENTIVE SCHEME

Installing a scheme of payment by results most proceed on the following lines:
Define the objectives of the payment system and, if necessary challenge the assumptions held
about the purpose of the system and how it should operate.
Collect facts about the existing system the pay structure, the types of payment schemes in
use, the number of people paid under each arrangement, the levels of earnings in different
occupations, and the makeup of earning including overtime payment.
Analyse the circumstances in which the payment system operates.
Compare the existing or proposed arrangement against the criteria for evaluating systems
listed above.
Analyse the effectiveness of the payment structure and payment systems by
(i) Comparing the results achieved with the objectives of the system under such
headings as ability to attract and retain staff, effect of productivity, effect on
management employee relationships.
(ii) Identifying particular problem area where the system is producing anomaties in pay
or earnings between occupations or units, where the requirements of the equal pay
legislation are not met or where rates of pay are not competitive with local going
rates.
Consider conducting an attitude survey to obtain the views or workers, rate fixers and
supervisors about the present system and the changes need to be made.
Consult as required with unions and employees on the present arrangements and what needs
to be done about them.
Conduct pay surveys as required to establish local market rates.
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Conduct job evaluation studies as required in consultation with unions to establish correct
relatives and to provide the basic data for designing a logical pay structure.
Develop pilot tests and install any revised or new individual, group or measured day-work
payment systems that may be required in consultation with unions.
Revise the pay structure as necessary in the light of the actions 'taken in steps 8 and 10 and
consultation with the unions or employee representatives. In a unionized concern, revisions in
the pay structure would of course, have to be negotiated with the unions.
Ensure that information is available which will enable the effectiveness of a revised pay
system or structure to be monitored.
We with conclude this chapter by quoting experience of the Bangalore operations of the
Binny Mills. Here is a mill, where incentive schemes were in operation for a long time. All
the evils - wrong rate fixation, collusion between supervisors and employees, defective
standards, and lethargy were associated with the schemes. The schemes invariably benefited
the employees and the supervisors, and the loser was always the mill, Insiders admit that the
incentive schemes were the major contributing factor for the downfall of the once prestigious
mill in our country. Realization came to the management, through very late in 1992, the
management scrapped the system.
Review of the operation of the incentive schemes, at least once in 10 years is necessary, if
any company or mill were not to repeat the Binny experience. It should be remembered that
the incentive payments have the potential to make or mar an organization.
11. JOB EVALUATION AND GROUP DYNAMICS

Groups are an essential feature of the work pattern of any organization, members of a group
must co-operate in order for work to be carried out, and managers themselves will work
within these groups. People in groups influence each other in many ways and groups may
develop their own hierarchies and leaders. Group pressures can have a major influence over
the behaviour of individual's members and their work performance. The activities of the
group are associated with the process of leadership. The style of leadership adopted by the
manager has an important influence on the behaviour of members of the group. The classical
approach to organization and management tended to ignore the importance of groups and the
social factors at work. The ideas of people such as FW Taylor popularized the concept of the
rabble hypothesis and the assumption that people carried out their work, and could be
motivated, as solitary individuals unaffected by other.
The human relations approach, however. Gave recognition to the work organization as a
social organization and to the importance of the group, and value and norms, in a influencing
behaviour at work. The power of group membership over individual behaviour and work
performance was illustrated clearly in the famous Hawthorne experiments at the Western
Electric Company in America.
One experiment involved the observation of a group of 14 men working in the bank wiring
room. It may be remembered that the men formed their own sub-groups or cliques, with
natural leaders emerging with the consent of the members. Despite a financial incentive
scheme where workers could received more money for the more work they did, the group
decided on 6000 units a day as a fair level of output. This was well below the level they were
capable of producing. Group pressures on individual workers were stronger than financial
incentives offered by management.
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The group developed its own pattern of informal social relations and codes and practices
(norms) of what constituted proper group behaviour
 Not to b a 'rate buster'- not to produce at too high a rate of output compared with other
members or to exceed the production restriction of the group.
 Not to be a 'chiseller'- not to shrink production or to produce at too low a rate of output
compared with other members of the group.
 Not to be a 'squealer' - not to say anything to the supervisor or management which
might be harmful to other members of the group.
 Not to be 'officious' - people with authority over members of the group, for example
inspectors, should not take advantage of their seniority or maintain a social distance from
the group.
12. Socio-technical system

The system approach to organization and management also gave recognition to the
importance of groups in influencing behaviour at work. The concept of the organization as
socio-technical system is concerned with the interaction between the psychological and social
factors, as well as structural and technical requirements. Again, it may be remembered that
technologies change in the coal mining industry had brought about changes in the social
grouping of the miners.
New methods working disrupted the integration of small self selecting groups of miners who
worked together as independent teams. The change had undesirable social effects and as
result the new method did not prove as economically beneficial as it should have done with
the new technology. The result was a 'composite' method of working with more responsibility
taken by the teams as a whole. The composite method proved to be not only more rewarding
socially to the miners but also more efficient economically than the previous new method of
working.
13. THE EFFECTS OF TECHNOLOGY ON WORK GROUP

The nature of technology and the work flow system of organization is a major determinant of
the operation of groups, and the attitude and behaviour of their members. Low morale and a
negative attitude towards management and the job are often associated with a large number of
workers undertaking similar work.
A number of different studies have drawn attention to the relationship between technology
and work groups. For example, Walker and Guest referred to effects of technology on work
groups. The character or type of group is determined largely by the technological
requirements of the organization. They found that the technological layout and pacing of
work by the assemble line operation was a source of dissatisfaction to the workers.
Scott undertook a study of a larger steel plant which appeared to have an unusual history of
assimilating large scale technical change with the minimum of resistance or overt conflict
despite problems with demarcations, wage differentials and redundancies. One of the main
reasons for this was the nature of the work groups. Operators worked in close co-operation
with group members. The groups were self regulating, they allocated functions to their
members and established a hierarchy of skill and authority based on seniority, New members
of the groups started at the lower level of the hierarchy and worked their way up. They felt it
to be in their long term interests to stay with the organization and to remain in the same
group.
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14. TECHNOLOGY AND ALIENATION

The nature of technology and the work organization can result in a feeling of alienation,
especially among manual workers. Factors which have been shown to affect alienation
include the extent to which the work of the individual or the group amounts to a meaningful
part of the total production process, and the satisfaction which workers gain from
relationships with fellow workers and group membership.
In a study of assembly line and other factory work, Goldthrope found that the technology was
unfavourbale for the creation of work groups. However, he also found a group of workers
who although, alienated were still satisfied. Membership of a meaningful work was not
necessarily an important source of job satisfaction. The workers, all married men, aged
between 21 to 46 were not interested in maintaining close relationships with fellow workers
or supervisors. Their earnings were in excess of the average manual wage at the time the
'affluent workers.
15. ORIENTATIONS TO WORK

Goldthrope's study is an example of the social action approach to organizational behaviour.
His findings were based on a study of more than 200 manual workers from three different
firms in Luton. Information was collected about the work situation, organizational
participation and involvement with work colleagues, and life outside of the work
organization. Goldthorpe suggested that response to work resulted, largely from the
individual's orientation to work. He suggested the existence of three main types off
orientation to war: instrumental, bureaucratic and solidarity.
 Individuals with an Instrumental orientation defined work not as a central life issue but
in terms of a means to an end. There is a calculative or economic involvement with work
and a clear distinction between work related and non work related activities.
 Individuals with a bureaucratic orientation defined work not as a central life issue. There
is a sense of obligation to the work of the organization and a positive involvement in
terms of a career structure. There is a close link between work related and non work
related activities.
 Individuals with a solidaristic orientation defined the work situation in terms of group
activities. There is an ego involvement with work groups rather than with the
organization itself. Work is more than just a means to an end. Non-work activities are
linked to work relationships.
Goldthorpe claimed that the workers had an instrumental orientation to work. Their primary
concern was with economic interests pay and security rather than the nature of the work or
the satisfaction of social needs at work. Gold Thorpe suggests that the different orientation to
work in certain industries may help to explain the importance of work groups. He recognizes
that in other situations where there is the opportunity for team work. The worker will have
greater social expectation and the membership of work groups will be very important to
them.
16. METHODS OF JOB EVALUATION

Job-evaluation methods are of two categories- non-analytical and analytical.
41

Ranking and Job-classification methods come under this category because they make no use
of detailed job factors. Each job is treated as a whole in determining its relative ranking
16.1.1 Ranking Method: This is the simplest, the most inexpensive and the most expedient
method of evaluation. The evaluation committee assesses the worth of each job on the
basis of its title or on its contents, if the latter is available. But the job is not broken
down into elements or factors. Each job is compared with others and its place is
determined.
The method has several drawbacks. Job evaluation may be subjective as the
jobs are not broken into factors. It is hard to measure whole jobs.
16.1.2 Job-grading Method: As in the ranking method, the job-grading method (or job-
classification method) does not call for a detailed or quantitative analysis of job
factors. It is based on the job as a whole. The difference between the two is that in the
ranking method, there is no yardstick for evaluation, while in the classification
method there is such a yardstick in the form of job classes or grades. Under the
classification method, the number of grades is first decided upon, and the factors
corresponding to these grades are then determined. Facts about jobs are collected and
are matched with the grades which have been established (See Fig. 10.1)
Fig. 10.1
JOB CLASSIFICATION SCHEDULE
Level or grade Definition
1. Very simple tasks of a largely physical nature

2. Simple tasks carried out in accordance with a small number of clearly defined rules tasks
which can be carried out after a short period of training of up to two or three weeks. The
work is checked supervised.
3. Straight-forward task, but involving more complicated routines and requiring some
knowledge and alertness on the part of the worker because the job is subject to occasional
checks.
4. Tasks calling for independent arrangements of work, the exercise of some initiative, and
those which require little supervision. Detailed familiarity with one or more branches of
established procedures is required.
5. Routine work but those involving an individual degree of responsibility for answering non-
routine queries and/or exercising some measure of control over a small group of staff.
6. Non-routine work, involving the co-ordination of several lower grade functions, possibly
some measure of control over a small group of staff. Also, non-routine work involving
recognized individual knowledge and some responsibility without follow-up.
7. Work necessitating responsibility for sections involved in routine task and/or where
individual tasks are undertaken, calling for a specialist's knowledge.
The essential requirement of the job-grading method is to frame grade descriptions to cover
discernible differences in degree of skill, responsibility and other job characteristics. Job
grades are arranged in the order of their importance in the form of a schedule. The lowest
grade may cover jobs requiring greater physical work under close supervision, but carrying
little responsibility. Each succeeding grade reflects a higher level of skill and responsibility.
42
Each succeeding grade reflects a higher level of skill and responsibility, with less and less
supervision.
The advantages of the job-classification method include its simplicity and inexpressiveness.
Secondly, in organizations where number of jobs is small, this method yields satisfactory
results.
The disadvantages of the method are: (i) job grade descriptions are vague and are not
quantified: (i) difficulty in convincing employees about the inclusion of a job in a particular
grade because of vagueness of grade descriptions; and (ii) more job classification schedules
need to be prepared because the same schedule cannot be used for all types of jobs.

These include the point-ranking method and the factor-comparison method.
16.2.1 Point-Ranking Method: The system starts with the selection of job factors,
construction of degrees for each factor, and assignment of points to each degree.
Different factors are selected for different jobs, with accompanying differences in
degrees and points. The National Electrical manufacturer's Association (NEMA).
USA has given the factors (See table 10.1), degrees and points for hourly rated and
salaried jobs (Table 10.2).
TABLE 10.1
FACTORS, DEGREES AND POINTS FOR HOURLY RATED JOBS
Factors I Degree II Degree III Degree IV Degree V Degree

Skill
1. Education 14 28 42 56 70
2. Experience 22 44 66 88 110
3. Initiative & ingenuity 14 28 42 56 70
Effort
4. Physical demand 10 20 30 40 50
5. Mental and/or visual 5 10 15 20 25
demand
Responsibility
6. Responsibility for 5 10 15 20 25
equipment for process
materials or product
Safety of others.
work of others.
Job conditions
10. Working conditions 10 20 30 40 50
11. Hazards 5 10 15 20 25
43
NEMA MANUAL FOR SALARIED JOBS

Factors I II III IV V VI VII VIII
Degree Degree Degree Degree Degree Degree Degree Degree
1. Education 20 40 60 80 100 120 - -
2.Experience 25 50 75 100 125 150 175 200
3.Complexity 20 40 60 80 100 - - -
of duties
4.Monetary 5 10 20 40 60 - - -
responsibility
5. Contacts 5 10 20 40 60 - - -
6.Working 5 10 15 20 25 - - -
Conditions
Add for supervisory jobs only
Type of 5 10 20 40 60 - - -
Supervision
8. Extent of 5 10 20 40 60 - - -
Supervision
The range of scores and grades is also predetermined- for example, from 210 to 230 points,
the 5th grade 231 to 251 points, the 6th grade; and so forth. A given job is placed in a
particular grade, depending on the number of points it scores.
The advantages of point system are: *

(1) A job is split into a number of factors. The worth of each job is determined on the basis
of its factors and not by considering the job as a whole.
(2) The procedure adopted is systematic and can easily be explained to the employees.
(3) The method is simple to understand and easy to administer.
At least two defects are noticed in the point system. First, employees may disagree with the
points allotted and to factors sand their degrees identified. Second, serious doubts are
expressed about the range of points allotted and matching them with the job grades. For
example, a score range of 238 to 249 is grade seven and the next range of 250 to 271 is grade
six. A variation of one point makes all the difference.
16.2.2 Factor-Comparison Method- The factor-comparison method is yet another approach for
job evaluation in the analytical group. Under this method, one begins with the selection of
actors, usually five of them-mental requirements, skill requirements, physical exertion,
responsibility, and job conditions. These factors are assumed to be constant for all the
jobs. Each factor is ranked individually with other jobs. For example, all the jobs may be
compared first by the factor 'mental requirements. Then the skills factor, physical
requirements, factor responsibility, and working conditions are ranked. Thus, a job may
rank near the top in skills but low in physical requirements. Then total point values are
then assigned to each factor. The worth of job is then obtained by adding together all the
point values.
An advantage of the factor-comparison method is that jobs of unlike nature-for example,

manual, clerical and supervisory-may be evaluated with the same set of factor. But the
method is complicated and expensive.
44
17. Wage Survey

Now that the job hierarchy has been established with the help of evaluation method(s), it is
time to fix wage and salary differentials. Before fixing such differentials, the wage rate must
be ascertained. It is here that wage survey assumes relevance.
The first step in a wage survey is to select key jobs, the duties of which are clearly defined,
reasonably stable, and representative of all levels of job. Thus, a sample of jobs is created.
Secondly, a sample of firms in the labour-market area must be chosen. The labour market for
different jobs can vary from local to regional to national in scope. With both samples being
selected, the final task is to obtain appropriate wage information, taking care to ensure that
the job comparisons being made are valid. Job content, the varying qualities of personnel on
these jobs, and the total compensation programme must be carefully analysed, compared, and
equated. (Wage and salary survey will be explained in greater detail in the next chapter).

Job evaluation is neither simple nor precise. It is a problem-solving, decision-making process
that requires the subjective judgment of the best minds in the organization. Because of the
varying interests and dissimilar backgrounds of these people, views will quite often be
different, thus contributing to the complexity of their operations and leading, at times, to
excessive discussion debate. But shortcuts are impossible, and the discussion debate process
adds to the success of a functioning job evaluation committee, well-organized,
A job evaluation committee permits analysis of jobs from the diverse viewpoints of various
individuals with differing organizational, technical, and social backgrounds. It is most helpful
to have the job evaluation committee involved from the beginning to the end of the
evaluation process. Possibly, an organization may find it valuable to use more than one
committee. For example, a committee composed of senior managers and senior union
officials (if there is may a union) be the best qualified to select an evaluation plan and its
compensable factors, while committee composed a of operating managers and lower-level
union officials (again, if there is a union) may be the best for the selection of key jobs and the
actual evaluation of all jobs in the organization. The number of committees unimportant:
guidelines for effective operation are identical.
18.1 Size and Composition

Preferably, a committee should consist of from five to twelve members groups (refer to the
earlier discussion of the hunting in Chapter 1). These committee members should have a
broad knowledge of organizational activities and goals and a basic familiarity with job
relationships and job contributions to the output of the organization. Additionally, the
members should be familiar with the techniques of the compensation program.
19. Training
Each member should receive all necessary data and information to heighten and sharpen his
knowledge judgement in the evaluation process. Practical examples or exercise should and
application relate directly to any type of theoretical, abstract information, but the training
program should consist of no more of this type information than is absolutely necessary, and
the committee members should receive no more training data and information than is
absolutely necessary. Frugality is the answer.
45
Training and the Use of Key Concepts, Each committee member should receive a job
evaluation manual, which is useful both as an orientation to the job evaluation process and as
a guide in the problem-solving, decision-making activities required in (1) selecting an
evaluation plan, (2) identifying key jobs, (3) developing and/ or selecting compensable
factors, (4) evaluating all remaining jobs, and (5) assisting in the development of fair and
equitable wage scales.
The manual should contain a brief description of the policies of the organization with
regard to compensation. For example:
The management of Olympia, Inc. wishes to provide equitable pay to every pay to every
member. For this reason, it must recognize the contributions made by all jobs and their
relationships to other jobs in and their order to develop a fair division of the funds available
for pay purposes among all its members.
If one of the tasks of the committee is to select an evaluation plan, then the manual should
contain description of each plan with a list of the particular advantages a brief and
disadvantages of each. The committee members should review these prior to a joint training
and discussion session of the various plans. The actual selection meeting follows the training
session, and at this time the compensation specialist can still answer any questions or
unanswered doubts about any of the plans.
20. The Role of Training in Job Evaluation

This is the name of the game- the ranking of jobs as to difficulty and importance relative to
each other. At this stage, some specific and detailed training becomes essential. A well
designed training program should have at least the following two behavioral or learning
objectives for each committee member:
1. An ability to look for and see the same things when analyzing a job description.
2. An understanding and acceptance of the definition and value of each compensable factor
in order to reach agreement on the relative value of all jobs.
A variety of training techniques and aids are available for achieving these twin goals
1. A first step could be to provide each member with a completed job-analysis information
format of a well-known, rather simple job and have him develop a job description. After
writing the job description, he then analyzes each step, its meaning, and use review and
critique of the work of each member help all members to gain better understanding of the
process.
2. The next step would be to take a set of job in one department and analyze them as if
establishing scale of key jobs with this compensable factors group of jobs first rank them in
absolute scale of importance, then, using the compensable factors, assign them a relative
importance or possibly, reviewing the jobs, develop a set of compensable factors. Here again,
it is a chicken or egg" question. Is it necessary first to identify, define, and weight the
compensable factors, is it necessary first to establish the key jobs and, from them, identify,
define and weight the compensable factors? In most cases both processes occur
simultaneously, with each refining the other at various stages of development. Usually the
selection of compensable factors follows the selection of an evaluation plan. Whatever the
route selected, through the use of "training jobs "it becomes possible to teach the committee
46
members how to rank jobs, beginning with key or benchmark jobs, and how to identify those
compensable factors that are valuable in evaluating all jobs.
The training program has one fundamental goal- development of the judgment of each job
evaluation committee in order to understand what is important in a job, its relative difficulty,
the importance of its duties, and its performance qualifications.
The job evaluation committee may be called on either to provide opinions or to make
decisions with regard to a wide range of compensation related issues or problems. Three
major reasons for the existence and convening of such a committee, however, are for (1)
identifying key or benchmark jobs, (2) selecting compensable factors, and (3) developing pay
scales.
21. Identifying key or Benchmark Jobs

A careful selection of a limited number of jobs that adequately describe a wide span of
activities, duties and work requirements enhances the success of any job evaluation program.
These well-known jobs called key or benchmark jobs, represent significant numbers of
workers and are common throughout the industry or in the general locale under study.
Because of the restricted number of these key jobs, they furnish only a limited amount of
data, but their commonality and acceptance provide a basis for sound understanding and
agreement of the duties and human requirements necessary for the achievement of
organizational goals. Job evaluation based on selected key jobs provides a more valuable data
base than one using masses of data obtained from hundreds of jobs. Normally, 15 key jobs
are sufficient, and if at some stage it is necessary to drop two or three it will not be critical to
the process. The number of jobs to be identified as key jobs, however, depends on the number
of jobs being evaluated.
Prior to selecting key jobs, the compensation department must initially screen all jobs and
select those that meet key job requirements. The potential key jobs presented to the job
evaluation committee should require wide variety of a technological and interpersonal skills,
as well as rates of pay ranging from the lowest to the highest. Each job requires a full,
detailed job description.

Possibly the most difficult yet most important part of the job evaluation committee is the
selection and weighting of compensable factors. Chapter 7 has explained how to identify
define, and weight these factors.
Prior to selection process by the job evaluation committee, the compensation department
should identify and define as wide a variety of compensable factors as is applicable to the
organization. It is perfectly acceptable for the staff specialists to present a completed staff
work presentation.” In this process the staff of the compensation department develops the
pros and cons of each factor or groups of factors, and even recommends certain factors,
presenting the advantages or benefits as well the disadvantages as or costs connected with
each. It then becomes the responsibility of the evaluation committee to evaluate the staff
work and make a final recommendation. The committee may become involved in the actual
identification and definition process, but normally this is too time-consuming and such details
are left to the staff work of the compensation department.
47

Finally, the moment of truth arrives. What will be the pay of the job? Once again, a number
of methods and procedures are available for relating the relative value of a job to the amount
of pay it receives. Pay must have not only internal consistency but external consistency as
well.
Later chapters discuss pay scales in greater detail. Chapter 11 for example, reviews the area
of compensation surveys and how organizations learn what others pay for jobs similar to
those in their own organization. A discussion of various methods of grouping jobs for pay
purposes forms the core of material for Chapter 10. And Chapter 12 covers the types of pay
structures that best suit the particular organization.

Although there is much truth in the old adage, "Two heads are better than one," trying to
obtain one wise decision from two or more heads can often be an exasperating situation. A
job evaluation committee that achieves its goals must maintain independence of thought and
must encourage each member to develop critical analysis and review.
Good judgement is not a universal trait. The ability to harmonize differences is an invaluable
skill, and the committee member selected to be the chairman should be adept in facilitating
agreement by the group. As is true any area of leadership, there are many guides to help an
individual be a successful committee chairman. Probably none is more important than to
focus on the problem at hand, making sure that the idea, rather than the individual presenting
it, becomes the center of attention. It is unlikely that any one idea is the "brain child" of just
one person: in all probability it is the accumulation of masses of data and information
gathered and developed by many individuals.
Seven guidelines for assisting a committee chairman develop a smoothly functioning, self-
respecting group are listed below:
1. Good leader does everything he can to help each member preserve his own image. Each
person is vitally concerned with his image because it also represents his level of need
achievement. Most of us will cease to cooperate when the motivators cannot operate when
one cannot satisfy needs by doing something.
2. A good leader directs aggression where it belongs against the problem, not the people trying
to solve it. This is important because it encourages a free flow of ideas. Time is put cannot
satisfy needs by to creative use rather than being used to attack the ideas of others.
3. A good leader demonstrates to the members of his group that no one should lose and that all
should win. He forces participants to attack the problem, not the people. He honors every
idea, no matter how small or wild it may be. Rather than trying to judge, he tries to
understand.
4. A good leader provides every member with the opportunity of chairing a meeting. This gives
every member practice in this activity, which is one of the fundamental skills that every
leader must acquire. The essence of the teacher- leader- counselor function is to enable each
member to grow and learn about the responsibilities of leadership by practicing them.
5. A good leader develops his own style and permits every other member to do the same.
Productivity can be increased and workmanship improved only if we enlist the genius of the
organization (the collective knowledge and abilities of all the members of the organization) in
its service.... It is just as important to learn to be a willing participant as it to be a good leader.
48
6. A good leader serves the group not himself. The communication process in the problem
solving group is based on the concept of synergism in which the cooperative efforts of two or
more people taken together are greater than the sum of the efforts taken separately.
7. A good leader always sees to it that the problem solving group has an expert in it. The expert
is that member of the problem solving group who best understands the factual aspects of the
problem under discussion. He is therefore, the one who can make the best decisions about the
relative strengths and weaknesses of proposed solutions. Because he is also a group member
and participant in the session, he has to think in a truly flexible manner. As an expert, he will
use tunnel vision and pass group judgement. As a member and participant, he has to think
flexibly and try to understand. When needed expertise is not available within the group, a
person skilled in that particular area may be requested to join the group. The expert helps to
identify and analyze the problem; the leader then takes over for the problem solution phase.
In order to preserve the unstructured environment of the group, there should be no attempt to
make the other members of the group as knowledge as the expert. The expert is there to serve
as the resource person. The leader must determine when to shift into the problem-solution
phase.
25. Operating a Job Evaluation Committee

Once the committee has received the necessary training and is on its own guidelines are
available to improve its success factor. In performing an evaluation process, it is best if each
member performs his own rating of the jobs assigned by the compensation staff prior to the
meeting of the entire committee. There is always the possibility that in an open meeting,
certain individuals will take a dominant role and other members will accept their views or
become apathetic or hostile in any case, unlikely that such actions will provide the quality of
effort or contribution necessary for the committee to succeed in its mission.
A recently developed method for utilizing committees- the Delphi Technique-may be

extremely valuable for use in job evaluation. In this technique, much of the committee
member's work is done on his own in his own office. Through the use of a communication
medium-ranging from an in-house mail service to a telephone, to the U.S. Post Office, to
sophisticated computer-based terminal- each committee member performs the evaluation
assignment and sends it to a central location where the results of the views of all committee
members are compiled, analyzed, and returned to each member. The return report states the
evaluation of each member, the average evaluation of all members, and the range of scores of
the evaluators. The evaluators then review the analysis, and after viewing the scores of other
members, may change their evaluations or may stick with their original selection. At this time
they may also wish to comment on the reasons for their particular scores. After receiving this
additional and/ or revised information, central processing then analyzes every-thing again and
presents its findings. At this stage, it may be best to bring the committee together to review
the decisions and comments, or another scoring may be necessary. In any case, the Delphi
Technique can provide the following advantages to an organization:
1. It saves the time of the committee members by permitting them to do much of the initial
evaluation on their own offices.
2. It limits the influence that recognized or so-called "experts" may have on the group (in the
Delphi communication process, no attempt is made to identify a score with a particular
individual).
3. It requires each member to present his own views and develop his own ideas.
49
In analyzing the evaluation of the committee members, various methods are available for
identifying the quality of agreements. Furthermore the degree of disagreement is more
important than the actual amount of agreement in selecting key jobs or compensable factors,
or evaluating their worth. If one or more members have a wide range of disagreement with
the view of the majority, it may be necessary to eliminate a job when developing key job
groups or to redefine or develop new and more acceptable compensable factors.
In the final discussions, a summary sheet showing the individual evaluations is always
helpful. When evaluating the worth a key job, may set that if the evaluation has a greater
divergence than three consecutive steps, may be necessary revaluate the job eliminate it
Using the Supervisor of Data Processing Operations Job Code 012.168, described in Figures
8-1and 8-2, the seven committee members might score the communication sub-factor as
6,6,6,5+,6+ and 6. However this is not acceptable because the scoring covers four steps. If,
however, the scoring were 6, 6-, 6, 5, +6, 6 and 6-, covering three steps, it would be
acceptable. The important factor here is the similarity in view, not the average score.
Remember the old story of the statistician who drowned in a stream with an average depth of
six inches of water.
A wide variety of techniques is available to secure an evaluation method that is both valid
and reliable. Any evaluation process must recognize the need for validity and reliability.
Validity is the extent to which a measuring instrument measures what it is supposed to
measure Reliability is a measure of internal dependability of a testing or evaluation
mechanism to assure that it measures consistently what it is intended to measure
The methods for measuring the quality of validity and reliability can become very
sophisticated and are beyond the scope of this text. This does not imply in any way that these
tests are unimportant. It does mean that normally, fairly simple, straightforward procedures
are useful in determining such qualities. When these procedures prove to be unacceptable, it
may be necessary to call on experts in the field of testing and evaluation to develop methods
for obtaining valid and reliable committee measurements.
26. The Committee and the Compensation Staff.

The compensation manager and his staff have a unique relationship with the job evaluation
committee. The reason for this is that the job evaluation committee acts as both a problem-
solving and a decision-making unit. Its roles in these two cases are absolutely different and
the relationship between the compensation staff and the committee varies accordingly.

The job evaluation process is one of continuous identification and analysis of problems and
the development of various solutions to them. Compensation affects every member and every
part of the organization, and for this reason the problems confronting the compensation
department and the job evaluation committee are as broad as the organization. As problem-
solvers, the job evaluation committee assists the compensations staff in.
1. Identifying the problems as to the who, what, when, where, how, and, why of observed
differences or misunderstanding.
2. Classifying the problems by separating symptoms from problems and describing the case,
type, and nature of the problems
50

1. Define "incentives". Bring out their advantages and limitations.
2. Bring out the prerequisites for the success of incentive payments.
3. Explain the different types of incentive systems.
4. Bring out the steps in the introduction of incentive payments.
5. Bring out the salient features of the incentive schemes followed in Indian industries.
6. Bring out the linkage between incentive and productivity.
7. Debate on the assertion "if selection and placement decisions are done effectively, individual
performance should not vary a great deal, therefore, an incentive system is not necessary.
8. Do you believe that an employee's behaviour is always influenced the rewards expected?
Discuss.
29. Summary
A number of methodologies are available for establishing the worth or value of jobs.
The term job evaluation is used to identify various methodologies that provide a hierarchy or
ordering of worth to the employer. Two general ways of classifying job evaluation methods
are those that investigate as a whole are those that investigate the job from a variety of
components. These components are frequently label compensable factors. Major kinds of
whole job evaluation methods are raking and position classification-predetermined grading.
Major methods using compensable factors are point-factor, factor comparison, and multiple
regression-based methods.
A goal of any job evaluation method is to minimize subjectivity and promote

objectivity. The more complex job methodologies such as the point factor method and the
multiple regression methods have been designed to improve the inference-making of relating
job facts (elements) to levels of degrees of compensable factors in a point-factor plan or
weights of a variable in a multiple regression method.
Seldom is it positive to use one job evaluation method for all employees. It is common to use
at least one method for all non exempt employees, a second method for mid-level managers
and professionals, and at least a third method for senior managers and top executives
30. References
1. Milton L./ Rock, Handbook of Wages and Salary Administration, p. 74

2. K.N. Subramanian, Wages in India, Tata McGraw-Hill, New Delhi, 1979 p. 194.
3. ILO, payment by Results, Oxford & IBH, New Delhi, 1951, p. 151.
4. K. Aswathapa, Human Resource and Personnel Management, Tata McGraw-Hill, New Delhi.
5. Richard I. Henderson, Compensation Management Pearson Education, 2003.
51
Chapter III
INCENTIVE PLANS
1. Introduction
2. An incentive scheme is usually based on three assumptions
3. Pre-Requisites of effective incentive system
5. Examples of Non-financial Incentives
6. Scope of Incentive Schemes
7. Incentives for indirect workers
7.1 Definition of Incentive Systems
7.1.1 Incentive Plans Blue collar workers
8. Some Important Wage Incentive Plans
9. Long-Term Wage Incentives Plans
11. Incentive plans for white coller workers/salesmen
12. Incentives for management employees
13. Why failure of Incentive Plan
14. When to use ‘Time’ or ‘Output’ basis as an incentive plan
15. Incentive schemes in Indian industries
16. The implementation of incentives Siemen’s (India)
18. Summary
19. References
Structure: Chapter-12 describes nature, Definition, Importance, Drawbacks, Principles and

disadvantages of incentive payments system. It also identify the applications of incentive
schemes in Indian Industries.
Learning Objectives:
After reading this chapter, you are able to:
 Understand the nature, importance and drawbacks of incentive payments.

 List the various pre-requisite for an efficient system.
 Identify the types of incentive schemes and describe them.
 The application of incentive schemes in Indian industries.
 Describe the steps involved in installing an incentive plans.
1. INTRODUCTION
Among the various purposes of an attractive compensation plan, a good base compensation
enables the organization to attract and retain capable people. A good system, on other hand,
motivates people to perform well and incentive schemes commonly used motivate people at
work. Though there are many non-monetary incentives like appreciations, awards, publicity,
participation and so on, money has remained the best motivator, and no other motivator could
take the place of money. Hence, monetary incentives primarily be used motivate people to
52
perform in the best manner. It is, however, not easy to formulate a clear-cut plan for
incentives, since there are many difficulties to devise an incentive plan acceptable to All, An
incentive or reward can be anything that attracts a work's attention and stimulates him to
work. In the words of Burack and Smith, An incentive scheme is plan or programme to
motivate individual or group performance. An incentive programme is most frequently built
or monetary reward (incentive pay or monetary Bonus), but may also include a variety of non
montary rewards of prizes. On the other hand, French says, the term incentive system has a
limited meaning that excludes many kinds of inducements offered to people to perform work,
or to work up to or beyond acceptable standards. It does not include: (1) Wage and salary
payments and merit pay; (ii) over time payments, pay for holiday work or differential
according to shifts- i.e. all payments which could be considered incentives to perform work at
undesirable times: and (iii) premium pay for performing danger tasks. It is related with wage
payment plans, which tie wages directly or indirectly to standards of productivity or to the
profitability of the organization or to both criteria. The use of incentives assumes that
people's actions are related to their skills and ability to achieve important long-run goals.
Even though many organizations, by choice or tradition or contract, allocate rewards or non-
performing criteria, rewards should be regarded as a "pay of” for performance. In simple
words, incentive is anything that attracts a worker and stimulates him to work. The incentive
can be financial and non financial. Both types of incentives play important role under
different conditions. For example, financial incentives are considered to be more valued
under the work conditions. For example, financial incentives are considered to be more
valued under the work conditions where wages are at low levels. On the contrary, non-
financial incentives are more preferable where wage levels are high and the rate of tax is
progressive. However, a review of research evidences indicates that there is a shift in
emphasis in the demands of employees and their unions from financial to non-financial
benefits. Here, our discussion relates to financial incentives also known as wa ge incentives'.
Different authors have defined the term incentive differently.
-Burak a Smith have defined incentive as, "An incentive scheme is a plan or programme to
motivate individuals for good performance. An incentive is most frequently built or monetary
rewards (incentive pay or a monetary bonus), but also may include a variety of non-monetary
rewards or prizes.
According to the National Commission of Labour, "Wage incentive is extra financial
motivation. They are designed to stimulate human effort by rewarding the person, over the
above the time rated remuneration, for improvements in the present or targeted results."
2 AN INCENTIVE SCHEME IS USUALLY BASED ON THREE ASSUMPTIONS:

1. The belief that money is a strong motivator.
2. That the relationship between effort and reward can be systematically established. The
relationship based leaves doubts in the minds of the concerned employees.
3. The feedback to the employees is immediate and direct.
As regards the rationale behind incentive, controversy prevails over the issue. There are some
people who regard incentive schemes as beneficial to both the employees and the employer.
There are also some others who consider incentive schemes as irrational. In view of this, it
seems pertinent first to analyze both the views separately in some details. It will help us from
our opinion about the usefulness or otherwise of incentive schemes for an organization.
Incentives bear multiple effects. These motivate employees to work more helps to attract and
retain employees and lead to increased production productivity, revenue, profit, etc. For
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employers, the need for a vigorous supervision is reduced. As a consequence, there is cut in
supervision cost. The position of supervisor changes from that the being "watch dog" to that
of managers of "machines and materials". Employees absenteeism and turnover also get
reduced. With increased production, employees also get more remuneration, bonus etc. This
improves their levels of living and, in turn productivity. Such a positive cycle goes on the on.
Research studies also support these points. The cross-country experiences grained in
experience indicate that the practice of payment by results was related to increased output,
higher earnings, and lower costs. Such stories abound India also. A survey conducted by the
National Productivity Council (NPC) Pointed that 70 percent achieved increases in output
Which ranged between 30 percent and 50 percent and increases in earnings from 25 percent
to 45 percent In one study result showed that in majority of the jobs investigated wage
incentive schemes succeeded in raising productivity, increasing earnings and reduce direct
labour costs The progressively increasing productivity and falling costs as a result of
incentives in the Chittaranjan Locomotive work since 1954 also support of the positive
impact of incentives on production and productivity of an organization.
Some people consider incentive scheme just rosy, far from reality. They utilize incentives by
putting forward their argument that money being an external factor to the job fails to motivate
people. In their opinion, people derive motivation out of their work, i.e., job satisfaction.
Their views are in consonance with Herbert's two factor theory which states that money (pay
and incentives does not act as hygiene factor, i.e., motivator, but it acts only as maintenance
factor. The experience gained across the world also lends support to the fact that incentive
schemes play dubious role so far as increase in production is concerned. How? The
apprehension expressed is that even if incentives help increase output at all, these tend to
distort quality in the garb of quantity. This costs much of ran organization, not only that,
increase in output may also generate tensions among its claimants. Such a case will, then, call
for the sound the effective administration of incentive schemes, on the one hand, and in-depth
understanding of human relations, on the other. Both have never been simple tasks.
There is no denying the fact that people work for money. Then, it can safely be said that
money, i.e. incentive motivates people to work more. In fact, that argument put forward by
the critics against incentive schemes do not be little the novelty of the schemes. The criticism
relates to the application of these schemes, which become good or bad in the hands of users
only.
Therefore, incentives are welcome. It is this realization only that the study group of the
National Commission on Labour has recommended that under our conditions, a wage
incentive be concerned with an effective utilization of manpower, which is the cheapest,
quickest and surest means of increasing productivity. The only practicable and self-sustaining
means of improving manpower utilization is to introduce incentive schemes and stimulate
human efforts to provide a positive motivation to greater output.
3.PRE-REQUISITES OF EFFECTIVE INCENTIVE SYSTEM
1. Higher performance standards should be set for every individual in consultation with the
respective functional head. Performance standard must be acceptable to other, and should be
in quantitatively measurable terms as far as possible.
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2. Such performance levels must be linked with the organizational goals and objectives, so that
contribution of every individual will form a part of the overall performance.
3. Specific incentive schemes in financial terms should be fixed for specific achievement or
performance level.
4. Once the scheme is implemented, periodical feedback or information pertaining to individual

performance should be obtained for the analysis, and incentive planning.
5. Performance standard may be classified and incentive scheme for every category of
performance fixed.
6. Every incentive must be conspicuous in all respects.
7. Trade union may be taken into confidence; and a committee consisting of senior executives
from different departments, including human resource function, and prominent trade union
activists under the chairmanship of the human resource manager must look after the
administration of incentive scheme.
8. Recipients" names may be publicized in the house journal of the organization.
9. Company's HRD programmers can be linked with the incentive schemes.
10. Highest incentive-takers should be honoured with special awards, merit certificates, titles etc
annually.
11. All such awards and rewards must be reckoned for further promotions and position.
12. Top management, particularly top boss, must be actively involved in the overall management
of the scheme.
13. Incentive scheme must be a part of the company policy and strategy.
14. There must be adequate financial allocation for incentive schemes annually.
15. Incentives must not be clubbed with the base compensation.
16. Performance standards and incentives may be adjusted periodically.
17. Account for the changes, which take place in the organization.
18. Suggestions from the employees themselves may be accepted and implemented, if
appropriate, in the administration of the incentive schemes.
Incentives are monetary benefits paid to workmen in recognition of their outstanding

performance. They are defined as variable rewards granted according to variation in the
achievement of specific results. The international Labour office refers to incentives as
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'payment by results. But is appropriate to call them 'incentive systems of payment

emphasizing point of motivation, that the imparting of incentives workers for higher
production and productively. Unlike wages and salaries, which are relatively fixed, incentives
generally vary from individual to individual, and from period to period for the same
individual. The Primary advantage of incentives is the inducement and motivation of workers
for higher efficiency and greater output. It may not be difficult to get people for fixed wages
and salaries, But with fixed wages and salaries, it is difficult to motivate workers to show
better performance. Fixed remuneration removes fear of insecurity in the minds of
employees. A feeling of secured income fails to evoke positive response. Positive response
will surely come when incentives are included as a part of the total remuneration. Earnings of
employees would be enhanced due to incentives. There are instances where incentive
earnings exceed two to three times the time-rated wages or salaries. Increased earnings would
enable the employees to improve their standard of living. There will be reduction in the total
as well as unit cost of production, through incentives. Productivity would increase resulting
in greater number of units produced for given inputs. This would bring down the total a nd
unit cost of production. Production capacity is also likely to increase The Bangalore based
Wheel and Axle plant, for example, has now a production capacity of 77000 wheels and
48000 axles as against the initial capacity of 56800 wheels and 23000 axles. The higher
capacity has been achieved as a result of implementation of the recommendations for the
adoption of a group incentive scheme carried out by the Rail India Technical and Economic
Services. The other advantages of incentive payments are reduced supervision, better
utilization of equipment, reduced scrap, reduced lost time, reduced absenteeism and turnover,
and increased output. Further stems of payment by results would, if accompanied by
improved organization and work measurement, enable firms to estimate labour costs more
accurately than under the system of payment by time. This would facilitate the application of
cost-control techniques like standard costing and budgetary control. Apart from the benefits
cited above, incentive packages ar a very attractive proposition for managements because
they do no effect employer's contribution to the provident fund and other employee
retirement benefits.
On the other hand, systems of payment by results may have disadvantages. There is a
tendency for the quality of products to deteriorate unless steps are taken to ensure
maintenance of quality through checking and inspection. This involves added expenses. In
some cases, if may not be possible or may be too expensive to maintain quality fully, and the
benefit, gained in the form of increased output and lower cost may be offset to a considerable
degree by deterioration in the quality of the products. Difficulties may arise over the
introduction of new machines or methods. Workers may oppose such introduction for fear
that new piece or bonus rates set, when the job is restudied at intervals of time, may yield
lower earnings; or when new machines or methods are introduced, they may slacken their
rate of work in order to avoid rising output to a level which would make a restudy of the job
necessary. Costs may not, therefore, be lowered to the extent that would be necessary if the
workers were on time based work. Most trade unions agree that cuts in piece or bonus rates
are justifiable in such circumstances. But individual workers may not share this view, and
output and the level of costs may be affected accordingly. Workers tend, moreover, to regard
their highest earnings as normal and may, therefore, press for a considerably higher minimum
wage when they are paid by results than when they are paid by the hour. Payment by results
may, therefore, lead to higher labour costs in certain industries such as papermaking and coal
mining where works experience, for reasons beyond their control, good and bad runs. Their
earnings on the days they have good runs are apart to be regarded by them as normal
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earnings. Besides, there is evidence that some workers paid by results have disregarded
security regulations in order to achieve high output, thus, increasing the danger of accidents.
Some workers tend to overwork during the normal working day and sometimes keep on
working in their lunch hour. These practices would affect their health. Another disadvantage
is that jealousies may arise among workers because some are able to earn more than others.
In the case of group-incentive schemes, the workers who are fast in their work may be
dissatisfied with those who are slow. Where heavy work is involved, older workers are likely
to be criticized for being too slow. One of the greatest difficulties with the incentive systems
is in the setting of piece or bonus rate. Rate fixing involves delicate problems of judgment in
which there is always a risk of error. If rates are set too low, workers are bound be
dissatisfied and will be under pressure to work very hard. If rates are set too high, workers
may slacken their efforts at times so that working their employers may not have cause to ask
for a revision of rates because the earnings are too high. Workers sometimes decide
approximately how much they feel the wish to earn and are, therefore, not interested in for
that part of the day, which remains after they have earned the amount, they want. Difficulty
also arises in determining the standard performance Many organizations follow a safe route
to fix the standards- which is usually the average of past year's performance. Past
performance may not be the ideal basis for fixing production norms. Since preparing
incentive schemes is such a complex business, monuments. Usually outfit their employees.
For instance, the period over which incentive are payable is an important factor in
determining how much a worker earns. At Bharat Gears, for example, an incentive is payable
on the average the three month's production. This gives the company the opportunity to
recover the production lost as a result of late deliveries of raw materials, technical break-
downs, and so forth. Even if the workers have its flip side too. Workers of Premier
automobiles plant at Kurla, Bombay, prove this point. Between 1978 and 1991, incentive
payments accounted for 60 percent of a workers gross income. In 1991a daily-rate worker
whose basic wage. DA and allowance amounted to Rs. 35000 was earning an additional Rs.
3000 as incentive payment. On one occasion a daily-rate worker whose basic wage. DA and
allowance amounted to Rs. 3500 was earning an additional Rs. 3000 as incentive payment.
On one occasion, a daily-rate worker's wages reached Rs. 9000. Since the incentive was
calculated as a percentage of basic wages, the monthly-rated workers were doing even better.
Their average gross income was Rs. 9000 while some estimates put the figure at Rs. 10500.
Since the high-incentive earnings remained constant for a long period, incentive pay was
treated as guaranteed pay by workers who pegged their consumption levels too much higher
levels. They made long-term investments in housing and consumer durables, and even
availed of loans amounting to a few lakhs from HDFC and other such co-operative societies.
But in recent years, as stock piled up and production came to a virtual stop, the workers lost
their entire incentive payment. Worse for some, after deductions for load take home pay was
considerably less than the guaranteed wage of Rs. 4000 to 5000. A reliable source within the
company estimated that about 10 percent of the workmen take home no pay at all. The
workers, as a result, remain an extremely disgusted lot, but there is little anyone can do about
it.
There is an ethical dimension to incentive payments as well. It is unjust to pay extra to the
employees paid for eight hours a day. He or She is expected to show better performance for
the day. To show increased production, extra payments are not necessary. There are also
instances where incentives lead to corruption. Supervisors and workmen join hands, false
production figures are recorded and wrong time bookings are made in order to enable
employees earn enhanced incentives. The booty is later shared with the supervisors who are
57
clouded with the employees in the fraud. Incentive payments are linked to employees'
performance is then compared with the standard, and depending upon the degree of
efficiency. incentives are fixed. Unfortunately, these standards themselves become ceilings
on productivity of employees. Workers would be happy to attain a performance near the
standards, and not strive to cross them. One of the arguments for incentives is that they
motivate employees for higher performance. This argument seems to be untenable going by
Herzberg's theory of motivation. According to Herzberg, money is hygiene factor which,
when provided, will help remove dissatisfaction. For motivation to take place, other
motivators like opportunities for achievement and challenging job, must be provided in
addition to adequate financial rewards. Potential pitfalls like the ones stated above do not
mean that incentive schemes should not be implemented as a part of a comprehensive
management programme aimed at maximizing output by taping the potential an d
commitment of employees.
Management is the art of getting the work done through and with the people informally
organized groups. So, the main task of management is to motivate the employees to
contribute their maximum towards the accomplishment of work. Generally, if is seen that
workers produce only 60 70% of their capacity and if they are given some additional
attraction or in other words' incentives' of any kind, they work more. This increase in their
work is due to the incentive given by the management to the workers. As a matter of fact,
work result and incentives have direct or positive correlation with each other.
Dr. Earnest Ditcher has defined incentive as follows: "Incentive is a stimulus of a reason for
producing action. Almost all of the human motivations can serve as incentives-anxiety,
worries, fear, hope, prestige, money, security and so on are all actual or potential incentives
in our daily life. Thus incentive is a stimulus for more work. It incites action, motivates the
people to do more and more work to increase their efficiency and to learn newer techniques
of work.
Incentives can be classified as follows:
(a) Positive and Negative incentives.
(b) Individual and Group Incentives.
(c) Financial and Non-financial Incentives.

Positive incentives are those incentives which induce a worker to work more. They exercise
good effect on the morale and efficiency of the workers, appreciation, recognition and
promotions are the frequent examples of such incentives. On the other hand, negatives
incentives enhance production by creating feeling of fines, fear and punishment. They
motivate an individual to abstain from doing something, such as avoiding breakages,
absentees and so on.

When any incentive scheme is applied on personnel basis or individual, to individual, it is
called individual incentive. This has the objective to give more profit one who works more.
On the other hand, Group incentive is given to the group as a whole, to the people of a
department or to all employees working within the organization. Profit sharing, co-
partnership and annual bonus schemes are the examples of group incentives.
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Money in itself has to value for man but in the existing economic organization money has
become a means not only satisfying the physical needs of daily life but also of obtaining
social position status and power. For this reason financial incentives have assumed great
importance. Financial incentives are offered in industries in two ways either in the form of
salary increase or in the form of occasional bonus. They may be individual as well as group
incentives, positives as well as negatives too.
On the other hand, non-financial incentives are non-monetary social or psychological

incentives. They all satisfy the inner-man of an employee and incite him to accomplish the
best and more work. This is well-established fact now that a man does not work for the bread
alone hence they are not satisfied with more wages only. They require certain non-financial
incentives also which satisfy their social, personal and psychological needs many people
continue to do some work because it is made more pleasant and enjoyable. This is a non
financial incentive. The non-financial incentive can also be personal or collective (group)
incentives.
5 Examples of Non-financial Incentives

The following are important examples of non-financial incentives:
Non-financial incentives
Individual Group Institutional

1. Status 1. Social importance of work 1. Human relation in industry
2. Promotion 2. Team Spirit 2. Communication
3. Responsibility 3. Competition 3.Worker’s participation in mgt
4. Pleasant and 4. Informal Group 4. Morale Building
interesting job
5. Recognition of work 5. Disciplines
6. Job security
(a) Individual Non-financial Incentives

These are incentives motivate people on individual basis. The various forms of individual
motive are as follows:
1. Status- Status, in general terms, is the ranking of people in the society. In the
organization context, it means the ranking of positions, right and duties in the formal
organization structure. Good status motivates the people to put more work and do hard
work.
2. Promotion - Promotion is defined as a movement to a position in which responsibilities

and presumably prestige are increased. Promotion satisfies the needs of human beings in
the organization from various angles such as money, prestige, status and so on. The
avenues of promotion, if they exist in the organization, play an important role in
motivating the employees.
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3. Responsibility and Challenge- Many people challenging responsible job rather than
monotonous and responsible jobs. The management should provide such opportunities
also by making the work challenging and more responsible.
4. Making Job Pleasant and Interesting- The work should be made enjoyable and pleasant
if it is so designed, it will allow the employees to satisfy their natural instincts. This
creates interests in the work.
5. Recognition of work- Most people have a need for a high evaluation of themselves. They
want that others should recognize their work. Recognition means acknowledgement with
a work of appreciation. Then such appreciation is given to the work performed by
employees, they feel motivated to perform work similar or higher
6. Job Security- Job security and stability also plays an important role in motivating the
people. If job is secured, worker will demonstrate more efficiency, will be highly
motivated and give more production.
(b) Collective Non-financial Incentives

Employees work in groups. The group affects their efficiency, aspiration, behaviour norms
and standards. If the group in general is efficient, an employee tends to become more
efficient. Hence group incentives are also important. Some of the collective non financial
incentives are as follow:
 Social Importance of Work-People generally prefers a work, which is socially acceptable. If

the society gives importance and praise to the work, people like to perform. Sometimes
people prefer a job of high social importance even though the financial compensation would
be less. The reason is simple. People have to live in the society and by performing a job of
high social importance. they drive satisfaction of being important in the society.
 Team Spirit- The management should encourage team spirit that is, to work in co-operation
and co-ordination Team work is a responsibility coordinated action by a co-operative small
group in regular contract wherein members contribute responsibility enthusiastically towards
tasks achievement. If there is team spirit among the employees, they will try to put in
maximum efforts to achieve the objective.
 Competition- sometimes, for providing incentives to employees, competitions are organized

between different individuals or different groups. There may be a case of self-competition
where an individual tries to improve his earlier performance. When an individual performs
very well because of any such competition, he should be given some advantages, not
necessarily in terms of economy, but it may be in terms of recognition, prestige, praise, etc.
However, this method has a negative consequence also. Though all the employees try to put
in maximum efforts, all of them cannot win. As such they may feel frustration and their
efficiency will go down. Hence, there is a need to have only healthy competitions.
 Informal Groups- When people work together they develop some sort of affiliate in among
themselves. These relationships are not officially prescribed, but are crated on the basis of
certain factors. Both personality factors of the employees and other social factors create these
informal groups. These provide social satisfaction to employees at work-place and they feel a
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sense of belongingness or security. Management should provide for the creation of such
informal groups so long as there are not detrimental organizational efficiency and objectives.
Sometimes, the informational groups may go against the interest of the organization.
Institutional
(c) Institutional Non-financial Incentives

The incentives are related with the environmental factors in the organization. Conducive and
congenial atmosphere of the organization motivates employees to produce better results.
Following incentives fall in this category:
Human Relation in Industry- Human relation in the industry is related with the policy t the
adopted in the organization to develop a sense of belongingness in the employee, improve
their efficiency and great them as human beings and not merely a factor of production. The
emphasis is on providing greater satisfactory, both physiological and psychological, by
creating such environment in the organization where employees are able to work efficiently.
In such an environment, employees are motivated to stay with the organization and they also
adopted productive behaviour.
Participation- The superior-subordinate relationship emphasis that superior takes the

decisions and subordinates implement them. However, in such a decision-making process,
subordinate does not feel very enthusiastic in implementing the decisions. As such, the
subordinate should also bb associated with decision-making process. This not only motivates
a subordinate to take prompt and proper action on decision implementation, but also make his
responsible for anything, which goes wrong.
Communication- Communication is the lifeline of an organization complex nature and big

size of organizations require greater specialization and division of work. Thus, for a
particular goal, total activities are divided into parts and sub-parts to share the information
about their functioning among themselves. This is done through communication, as
communication is the process of passing ideas and understanding from one person of group to
other person of group. A free and adequate flow of communication is necessary. This besides
providing base for successful organizational functioning provides satisfaction to Individuals
in the organization, as they want to be informed properly about the matters concerning their
interests. Thus, proper communication in the organization motivates employees properly.
Building Morale- Though there are various definitions of morale, it can be defined as the
attitudes of individuals and groups towards work environment and towards voluntary co-
operation to the full extent of their ability in the best interest of organization. Generally high
level of morale results in high productivity. High morale of employees depends on the
various facilities provided to them to satisfy their physiological and psychological needs,
latter being more / important. However, management should attempt to measure employee's
morale. If morale level is low, the factors would be analyzed and proper action shall be taken.
Discipline- Discipline is in essence obedience, application, behaviour and onward markers of

respect shown by employee. It is employee's self-control to meet organizations standards and
objectives. Management ha s primary responsibility for developing and maintain discipline. It
maintains discipline by applying standards in a consistent, fair and flexible manner. This
provides employees to behave in a particular direction as any employee whose behaviour is
inconsistent with standards invites disciplinary action.
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Financial Vs. Non-financial Incentives

This is an important, growing and alive controversy whether financial incentives are more
important or non-finical incentives are more not significant. Accordingly the workers should
be given financial or non financial incentives. Some authors as well as practicing managers
give more importance to financial incentives. They claim that money in itself has no value for
man but in the context of the existing economic organization, money has become a means not
only of satisfying the physical needs of daily life but also of obtaining social position and
power. For this reason financial incentives have assumed great importance. On getting
money, man first turns his attention towards the things he needs- food, clothes, houses, etc.
Then he satisfied the needs of health education. Once these needs have been satisfied he tries
to obtain more and more luxuries. But some individuals continue to work even after having
reached this stage because their social prestige and power increase with their bank balance.
Individuals with this lust for money continue their search throughout their life for this search
never ends. People who do not feel any specific need for power do not like to earn money
once their needs and comforts have been taken care of. In the same way economic loss has
diverse effects. Loss of money deprives the poor man of his bread while the rich man loses
his prestige although he does not suffer from hunger. Despite this the poor man suffers less
on account of this loss psychologically because only his body is directly affected. On the
other hand, the rich man suffers a blow to his social prestige and self-respect, which is a
mental injury. Money has become the means of satisfying many needs because it is the
medium of exchange. If social position and power could be dissociated from money is any
society, then money will cease to be a powerful incentive. This analysis shows the
importance of financial incentives. Financial incentives are offered in industries in two ways
either in the form of salary increase, or in the form of occasional bonus. The financial
incentives have of effect of increasing production and induction the work harder and better.
On the other hand experts claim the 'man does not live by bread along'. Hence, money cannot
act as only motivator. The workers, being human beings, need non0financila incentive more.
Non-financial incentives satisfy their social, psychological and personnel needs and this
satisfaction makes them happy and efficient. Now a day workers are more conscious as
regards to their personality, behaviour of management, self-respect and self-satisfaction.
These things cannot be provided by money only. Hence non-financial incentives become a
must. As a matter of fact, any one type of incentives cannot do in the absence of the other
type of incentives, As right and left are necessary for a man to walk smoothly, type of
incentives are necessary to establish industrial peace in the business.
6.SCOPE OF INCENTIVE SCHEMES

Although the incentive payments have a universal appeal, their application is confined to
certain important industries. Stated differently, payment-by-results schemes are difficult to
apply in:
1. Industries in which measurement of individual or group output is rendered difficult or

impossible either by technical consideration or by psychological circumstances, which
might be prejudicial to output.
2. Industries in which the control of quality is necessary and is particularly difficult, or in the
case of certain classes of workers, where high quality and precision of work is of prime
importance; and
3. Industries in which the work is dangerous and it is particularly difficult to ensure the
observance of adequate safety precautions.
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Barring the above three categories, incentive schemes can be applied to all industries.
Specifically, they are being successfully, they are being successfully employed in the textiles
and metallurgical industries, the metal trades, mining, and many branches of clothing, leather
and rubber industries. Incentive schemes have also been successfully applied in certain
countries, and in certain circumstances in the building industry and in chemical and other
industries. Generally speaking, systems of payment by results can be most successfully
employed in the large companies, which can afford to employ administrative and engineering
staff needed to ensure an efficient organization of production, quality and measurement of
work. However, such systems frequently yield appreciable results in smaller undertakings,
which may, in case of need, take the recourse to the services of experts for the design of
incentive schemes. It is often argued that incentive schemes are more desirable in labour-
intensive manufacturing processes. Their application in fully automated plants is doubted. It
may be stated that the schemes of payment by results have their role in mechanized
enterprises too. But the justification comes for the wrong reasons. It would be easy for an
operator to damage a CNC machine or for a programmer to plant virus in the computer if
incentive earnings are denied to him or her. It is mainly to prevent such damages that
incentive schemes are recommended in fully automated plants. As a rule, incentive must not
be introduced in a newly set-up unit. Workers must be content with time-rated earnings at
least during the first four to five years. This time period is necessary for the unit to carve a
niche for itself in the market. This being achieved, it would be easy for the unit to sell the
increased output brought in by incentives. Furthermore, as was noted earlier, incentives are
likely to affect the quality of output. Any defect in quality would seriously affect fortunes of
the newly set up unit, particularly in its formative years.
7. INCENTIVES FOR INDIRECT WORKERS

Indirect workers such as crane operator, helper, charge hands, canteen staff, security staff,
employees in purchasing, sale and accounts, and maintenance staff also deserve incentive at
par with direct workers. Incentives should be paid to such workers either on the ground that
they contribute to the ground that their work has increased because of increased production,
or both, Such payments are desirable to avoid dissatisfaction and dissension among the
workers in a plant, or even strikes, which may result if indirect workers are paid at time-rates
while direct workers receive substantial bonus. The payment of bonus to indirect workers
poses a serious problem because the output of many of them cannot accurately measured For
example, it is extremely difficult to measure the output of maintenance staff, security
personnel, or canteen employees, though it is possible to assess the performance of inspector,
sweepers and packers But the output of indirect staff can be measured or not, a single system
of bonus payment is made applicable to all of them. In some cases, the bonus is calculated
according to some agreed percentage on the output of the plant or of a department in others,
the bonus is a specified percentage of the incentives of all or some of the direct workers.
Much management, however, prefer to apply a merit-rating system to indirect workers, which
rewards these workers for other qualities, in addition to their output.
7.1 DEFINITION OF INCENTIVE SYSTEMS

Wage Incentive plans may discussed as (i) plans for blue-collar worker; (ii) plans for white-
collar workers; and (iii) plans for managerial personnel-because each of these categories of
employees have separate and distinct needs and specific plans tailored for each category.
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7.1.1 INCENTIVE PLANS BLUE -COLLAR WORKRS: FOR INDIVIDUALS:
(A.) SHORT-TERM PLANS

These systems may be broadly classified into three categories:
(i) System under which the rate of extra incentive is in proportion to the extra output;
(ii) System under which the extra incentive is proportionately at a lower rate than the
increase in output; and
(iii) Systems under which the rate of incentives is proportionately higher than the rate of
increase of output.
Every employer wants his workmen to do the maximum work they are capable of doing. On
the other hand, there is a feeling among the workers that an increase in effort benefits only
the employer even when they are employed on a piece-rate basis. The result is that they never
produce to their full capacity, and, in most cases, put in the minimum necessary work. This
feeling on the part of workers may be removed either through fear or through expectation of
gain. It has been found that fear can never produce the desired effect; but a hope of earning a
bonus does induce them to work harder and produce more. Incentive plans are, therefore,
known as premium plans because they offer a premium for outstanding performance. All
bonus of premium plans relate to two factors: one, they set a standard time for the completion
of a definite output of piece of work for a fixed wage; two, the fixing of a rate of percentage
by which bonus would be earned by a worker over and above his set wage, if the standard.
time is saved or the standard output is exceeded.
MERITS: The Chief advantages of an incentive-wage plan are:

(i) When well-designed and properly applied, payment by results may generally be relied
upon to yield increased output, lower the cost of production, and bring a higher income to
the workers.
(ii) A work associated with payment by result is a direct stimulus to workers to impose the
organization of work and to eliminate lost time and other waste.
(iii) Labour and total costs per unit of output can be estimate more accurately in advance.
(iv) Less direct supervision is needed to keep output up to a reasonable level.
(v) The conflicting interests of employers and employees are unified. Increased efficiency
and smooth working can therefore be promoted and sustained.
DEMIERTIS: The Plan suffers from the following defects:

(i) Quality tends to deteriorate unless there is a stricter system of checking and inspection.
(ii) Payment by results may lead to opposition or restriction on output when new machines
and method are proposed or introduced. This is because of the fear that the job may be
restudied and earnings reduced.
(iii)When paid by result, workers tend to regard their highest earnings as norms, and,
therefore, press for a considerable higher minimum wage.
(iv) The amount and cost of clerical work increases.
(v) There is a danger of disregarding safety regulations and thereby increasing the rate of
accidents.
(vi) Some workers tend to over-work and thus undermine their health.
(vii) Jealousies may arise among workers because some are able to earn more than others or
because fast workers are dissatisfied with the slower or older workers in the group.
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(viii) It is difficult to set piece or bonus rates accurately. If they are too low, workers may
be under pressure to work too hard and become dissatisfied; and if too high, they may
slacken their efforts to avoid a revision of rates.
8. SOME IMPORTANT WAGE INCENTIVE PLANS

1. Halsey Premium Plan.
2. Halsey-Weir Premium Plan.
3. Rowan Premium Plan.
4. The 100 Percent Premium Plan.
5. The Bedeaux Point Plan
6. Taylor's Differential Piece Rate Plan.
7. Metric's Multiple Piece Rate Plan.
8. Gnat Task Plan
9. Emerson Efficiency Plan.
10. Co-Partnership System.
11. Accelerating Premium Systems.
12. Profit sharing.
9. LONG-TERM WAGE INCENTIVES PLANS

Under such plans, each member of the group receives a ‘bonus’ based on the output of the
group as a whole. There are several reasons for adopting such a plan. Sometimes (as on
assembly lines) several jobs are interrelated. Here one worker's performance reflects not only
his own effort but also that of his co-worker's performance reflects not only his own effort
but also that of his co-workers too. In such cases, group incentive plans are advantageous.
Secondly, such plans also encourage cooperative among group members. There tends to be
less bickering among group members as to who has "tight" production standards and who has
"loose" ones. Thirdly, the groups can bring pressure to bear on their members (though
badgering, ostracism, etc) and help keep shirkers in line. This, in turn, can help eliminate
some of the need for close supervision. Fourthly, group production levels tend to be more
stable than individual ones, and group incentives payments vary less than individual ones.
Finally, group incentive plans also facilitate on-the job training, since each member of the
group has a vested interest in getting a new group member trained as well and as quickly as
possible.

1. Each worker's reward is no longer solely or directly on his own efforts. To the extent that
person does not see his effort leading to the desired reward group plan is probably not as
effective as an individual plan.
2. There is unevenness of performance of different members of the group and this may have
resentment of active members against mere 'passenger'.
3. Ill-feeling may be generated among the groups themselves where the technology is such that
one groups' earnings depend on the performance of another group.
4. Group incentive plans are usually applied to small work groups, for examples, 5 or 6 people
who must assemble a component together.
The incentives usually take three forms:

i) A standard Output
ii) The 'value added' by manufacture
iii) Bonus can also be calculated on the increased value of sale.
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11. INCENTIVE PLANS FOR WHITE COLLER WORKERS/SALESMEN

The salesmen are usually given incentive in the form of sales commissions. One study
reported that almost 75% of the organization surveyed paid salesmen on some type of
incentive basis. This is due to three factors: (i) the unsupervised nature of most sales works.
(ii) Tradition in the market; and (iii) the assumption that incentives are needed to motivate
salesmen. There are several incentive plans, each appropriate for different markets, products,
etc.
There are several incentive plans, each appropriate for different markets, products, etc, but all
plans are basically variations of three types of plans; straight salary, straight commission, and
combination plans.
(i) Straight Salary Method.

(ii) Straight Commission Basis.
(iii) Combination Method of Salary and Commission Basis.
(iv) Salary Plus Commission.
12. INCENTIVES FOR MANAGEMENT EMPLOYEES

In many organizations, the managers are two types of bonus plan: one determined by formula
(i.e. some criteria like increased sales) and two, determined by some discretion used in
allocation of bonus (i.e. paid on more or less permanent basis). The bonus plans are generally
reviewed annually to make them more effective. For top level management, bonuses are
generally tied to overall corporate results. The size of bonus is much higher for level
executives, and lower for the lower level executives.
13. WHY FAILURE OF INCENTIVE PLAN

Many of the incentive plans, aimed at increasing the motivation of employees, often fail to
have their desired impact. This is due to several reason most of which become apparent when
it is considered that for motivation to take place, the worker must believe that his effort will
lead to rewards and that he must want that reward. In most cases incentives plans fail because
one or both of these facts are not met. The principal reasons of failure are:
1. Unfair standards are great hindrance in the way of motivating employees. In other to motivate
them, the standard must be viewed as fair and attainable.
2. Fear of Rate Cut. There is fear in the minds of the employees that standards will be raised
high or rates will be cut if they earn too much.
3. Group Restrictions: Peer pressure is a double-edged sword when it comes to incentive plans.
If the group views the plan as fairish can keep "Loafers" in line and maintain high
production. If the group feels that plan is not in its interest it will-through education,
ostracism, or punishment-see that production levels of group members is kept at a minimum.
4. Employees do not understand the plan. This happens when either the details of the plan are
not communicated to employees or they cannot understand how performance will lead to
rewards. They plans would not prove fruitful in motivating in such case.
5. Lack of Required Tools Training, Equipment etc. The lack of required machines and tools,
equipment and absence of a sound organization structure often break the effort- reward link:
and without that link, incentive plan fails.
6. Other Causes. The inequitable wage structure with the organization and the inter-group
conflict also lead to non cooperation of the employees.
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14. WHEN TO USE 'TIME' OR 'OUTPUT' BASIS AS AN INCENTIVE PLAN?

The employees may be paid on a 'time' basis under following circumstances;
1. When units of output are difficult to measure;

2. When employees have little control over the quantity of the out-put, such as on much-paced
assembly lines;
3. When there is no clear direct relationship between the workers' effort and his output, such as
when jobs are highly interrelated.
4. When delays in the work are frequent and beyond employee's control.
5. When quality is a primary consideration as with engineering and other professional
performance
6. When precise advance knowledge of unit labour costs is not required by competitive
conditions.
On the other hand, payment on 'output' basis would be preferable if:

1. Units of output can be measured.
2. There is a clear relationship between employee effort and quantity of output.
3. The job is standardized, the work-flow is regular, and delays are few or consistent.
4. Quality is less important than quantity or, if quality is important, if is easily measured.
5. Competitive conditions require that unit labour costs be definitely known and fixed in
advance of production,
15. INCENTIVE SCHEMS IN INDIAN INDUSTRIES

Introduced in 1946, incentive payments have become highly popular in our industries. They
are as common as monthly wages and salaries. But he schemes in operation defy any
generalization because no two plants follow an identical scheme. The schemes differ from
industry to industry, and from plant to plant within an industry. Some of the incentive
schemes described by the ILO are followed here, but not in their original form. They have
been modified to suit the local requirements. This is necessary because the implementation of
Incentive schemes, in their original form, necessitates work measurement and standardization
of operations which, in many cases, are not possible in our industries. Thu the features of
incentive payments are:
1. Though incentives are as old as industries themselves, it was only in 1946 that they were
introduced in our country. Even to this day, the incentive schemes are in their infancy.
2. In most industrial establishments, the introduction of incentive schemes has not been
preceded by work-studies, consultations with workers' representatives and rationalization of
wages structure through job evaluations.
3. Incentive schemes differ from industry to industry and from plant to plan within an
industry.
4. Most incentive schemes in operation fall under one or the other of the four classes
mentioned by the ILO. But the schemes are fine-tuned to suit the requirements of the
organization.
5. The schemes in public sector plants have an extremely varied coverage, some applying only
to day-rated employees while others are being made applicable right up to the top
management.
6. Inflation has reduced the motivational effect of incentives. Hence, incentives have to be
substantial if workers are to be motivated for higher efficiency and greater output.
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7. In many cases, incentives seem to have achiever their objectives, they are increased
productivity and enhanced earnings.
16. THE IMPLEMENTATION OF INCENTIVES SIEMEN'S (INDIA)

A Siemen's the incentive scheme is exclusively used for shop floor workers. Every month,
the company awards two bonuses to its workers based on performance (introduced in 1964)
and productivity (since 1991) criteria. Both the schemes are index-based and involve
assessing and rewarding groups rather than individuals.
The company has set a ceiling of 130 percent for the performance bonus and 120 percent for
the productivity bonus. But no employee is eligible for a bonus if his or her performance and
productivity are less than 60 and 75 percent of the target. Typically, a worker can earn
between five and ten percent of his or her salary as bonus every month. On the basis of the
index, the performance of each group of worker is calculated. For instance, at the 8 percent
level; the worker will be paid, according to the predetermined rates, as per his or her grade. In
order to calculate the indices, Sidemen's uses ratios between standard man hours (SMH) and
actual man hours (AMH). The performance index is equal to the summation of SMH divided
by the summation of AMHO (idle time + learning). Similarly, the productivity index is equal
to the summation of SMH divided by the summation of AMH- learning. In these equations
learning refers to the time taken by a person on a new job to pick up skill. Hence, learning is
discounted from AMH. The factor discounted decreased over time as per the learning curve
determined by the company. In order to minimize variations in bonus from one month to
another, Siemens calculates incentives on the basis of a two-month weight average scheme.
Thus, the bonus for January will be the weighted average of those of December and January,
17. Self Assessment Questions:

1. What do you mean by incentive? What is the rationale behind offering incentives to the
employees?
2. Define "incentives". Bring out their advantages and limitations
3. Bring out the pre-requisites for the success of incentive payments.
4. Bring out the linkage between incentive and productivity?
5. Do you believe that an employee's behaviour is always influenced by the reward expected?
Discuss.
6. Debate on the assertion "If selection and placement decisions are done effectively, individual
performance should not vary a great deal therefore, an incentive system is not necessary.
7. Bring out the salient feature of the incentive schemes followed in Indian industries.
8. Bring out the steps in the introduction of incentive payments.
9. How will you define fringe benefit to employees by the Indian Organization?
10. Suggest some measure to make incentive and benefit programmes more successful.
18. Summary
Work premiums are forms of extra compensation for work considered burdensome,
hazardous, stressful, distasteful, or inconvenient. Some example of work premiums includes
pay for overtime, shift, weekends, and holidays.
Performance-based awards are paid to those who contribute output beyond certain
predetermined standards. These standards must be consistent and fair. A variety of methods
can be used develop standards. Kinds of performance- based awards include piecework, merit
pay, and special awards. Cost-reduction plans such as the Scanlon Plan are witnessing a
revival in popularity. Gain sharing plans and short-term profit sharing such as the Lincoln
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Electric plan, are receiving increased attention and interest. Short-term contest and suggestion
plans continue to stimulate employee innovation, but they require management support and
implementation.
To be effective, performance-based awards should fellow employee behaviour as
soon as possible. The law of diminishing returns applies to the effective use of any rewards.
Rewards must be monitored constantly, and changes must be made whenever their usefulness
begins to diminish. Regardless of their responsibilities and duties, employees should make to
feel their jobs contribute to success of the organization. Work premiums and rewards should
emphasize and reflect this fact.
19. REFERENCE
 Burack, EH, Personnel Management; A Human Resource Systems Approach, 1977, p.321.
 French, Wendell, The Personnel Management Process: Human Resources Administration
1974, p 521
 Marriot, R, Incentive Payment System, 1957, p31
 Government of India, Report of the National Commission on Labour, P92.
 Scott, R.C. Past and Present Incentive Study, "in Davidson, J.F. (Ed). Productivity and
Economics Incentives, 1958, p 22
 Suri, G.K., "Role of Wage Incentive in increasing Productivity."In Industrial Relations
Journal, Vol. 22, No. 6, Nov- Dec. 1971.
 Edwin B. Flippo: Personnel Management, McGraw-Hill Book Company, 1984, p331.
 National Commission on Labour: Report of the Study Group on Productivity and Incentives
1969 p 39.
 International Labour Organisation: Payment by Results, 1951 p 54-92
 N.R. Sheth: Social Implications of Wage Incentive Scheme, India Journal of Industrial
Relations, Vol 2, No. 4 April 1967, p 461.
 C.P. Thakur: Corporate Strategy on Fringe Benefits, Spectrum, and Patina, 1985.
 U.S. Chamber of Commerce: Employee Benefits, Washington, 1971.
 T.V. Sethuramna and A.V. Muthukrishanan: Impact of Monetary Incentives on Productivity,
Economic Times, Bombay, July 12, 1977.
 Frederick Herzberg: Work and Nature of Man, World Publishing, Cleveland.
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Chapter IV
EQUITY IN REWARD MANAGEMENT
1. Introduction
2. Learning Objectives
3. Presentation of contents
3.1 Compensation Systems
3.5 Wage Productivity linkage - India Experience
5. Summary
6. References
1. INTRODUCTION: Chapter 4 describe in detail compensation system. This also depicts the
picture of various factors internal and external that influence employee remuneration.
2. LEARNING OBJECTIVE: After reading this chapter, you should be able to:
 Identify the compensation system.

 Describe the various factors that influence remuneration employee
 Describe compensation planning and Administration.
 Describe linking compensation system with productivity.
 Identify wage productivity linkage - India experience.
3. PRESENTATION OF CONTENTS
3.1. Compensation Systems
The importance of compensation element is their impact on attraction, retaining and
motivating the executive. There are five basic compensation elements; salary. Employee
benefits, short-term incentives, long-term incentives and perquisites. These are very
important in attracting and retaining executives but of little value in motivating them since
money adjustments are usually cost even for top performers. However, a good employee
benefit and perquisite programme usually will have a moderate retention effect.
Once the executives are inside the organization, the next objective is to keep the better
performers. Executives not only expect to be properly paid for their performance and to
receive promotions when they have demonstrated their ability to assume greater
responsibilities. They also expect formal recognition. While pay is a form of recognition,
many individuals also need oral and written communication officially recognizing the level of
accomplishments.
Pay, is admittedly not of equal importance to all executives. The importance of pay in
altering or reinforcing performance is strongly influenced by several factors including
background and current economic status. For those who grew up in an affluent environment
and currently have sufficient money. Pay his little impact. Conversely for someone who did
not grow up with money and still doesn't have it but does have high economic desires, pay is,
very important.
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In pay survey, companies will look to other companies in the same or similar industries
which are approximately and same size. The larger the company the greater the problem in
this respect since there are only a limited number of companies of comparable size. If one
accepts that the human resources are the most important assets of the company then it is
imperative that pay programmes for the top executives be equitable and cost effective.
A sound system of executive compensation is essential for a number of reasons namely.

(i) To attract the right kind of personnel:
(ii) To retain the right kind of personnel:
(iii)To motivate the right kind of personnel: and
(iv) To get the best out of the right kind of personnel in the fact of competition. Such a system
will provide for the relationship of jobs within each function: the relationship of jobs to
jobs In other functions within the company; the relationship of jobs in similar jobs in
comparable organizations: the relationship of jobs to similar jobs in comparable
organizations in industry/ region; and the relationship of jobs to comparable jobs in other
organizations in the country.
The absence of internal equity leads to dissatisfaction among executives. In organizations

there are disparities between compensations patter. For whatever reason, compensation
practices are kept as guarded secrets by organizations. Surveys of compensation practices
tells us among other things, that executive compensation practices are based on factors like
traditions technology, management beliefs and executive acceptance.
Executives play a major part in looking after the economic health of the company. As they
are important for the success, growth and profitability of an organization, they have to be
compensated properly. To make the executives happy to the extent possible and further keep
them from turning downright hostile. Companies have been giving in recent years, bigger and
more frequently rises in salaries. The cumulative effect is that executive compensation cost is
today a sizable cost and rising cost. Companies have started looking at executive
compensation more systematically and more pro-actively so that they can expect better
performance from the executives.
To be effective, executive compensation has to be seen as a whole evolved for a situation and
administered in letter and spirit. Essentially an executive compensation system or scheme for
an organization has to be tailor-made. Also, it has to be and revised from time to time. To
management develop an approach to compensation that accounts for Internal as well as
external equity incorporation.
(i) A policy on pay differentials that reflects the dominate norms equity of the management
group as a whole, as well as the requirements.
(ii) Procedures for ensuring consistency pay levels of management, both within the company
and with respect to other companies:
(iii)A policy of relating pay to individual effort and performance:
(iv) An annual disclosure of the distribution of salary for the company as a whole, supported
by a statement of how the compensation structure relates to corporate goals and strategies.
The executive compensation will succeed when the total package.

(i) establishes sufficient levels of pay:
(ii) provides internal and external competitiveness:
(iii)offers opportunity, security and status:
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(iv) maximize after tax earnings:

(v) call forth maximum effort: and
(vi) Makes the executive a much better performer both as an individual and as a team
member for today and for tomorrow. Arch Pation a leading authority the field of
executive compensation has-identified a number of factors that make for an effective
compensation plan. These elements are (a) accomplishment: (b) feeling of worth: (c)
status: (d) promotion (e) leadership: (f) discipline: and (g) financial compensation.

Basically the problem of compensating executives and managerial personnel is almost similar
to that of compensating any other group of employees. Nevertheless executive compensation
is different from others in several ways.
First compensation practices at the executive and managerial level tend to set the tone for
compensation practices at lower levels.
Second executives and managers typically have greater latitude to make their own jobs than
personnel at lower organization levels.
Third the results achieved by the company as a whole or by a profit centre within the
company are more likely to reflect accurately the personnel contributions of higher level
executives or mangers than those of employees at lower levels.
Fourth the compensation of higher level executives and managers is subject to much higher
personnel income tax rates than the compensation of lower level employees. Fifth the
personnel department often plays a more limited role particularly in smaller companies, in
dealing with compensation for executives and managers than will compensation for other
groups.
The key requirements for effective compensation administration are:

(i) Compensation should be competitive with what other employers are paying for similar
skills or similar jobs:
(ii) Compensation paid to various individuals in an organization should reflect the
comparative value of their respective contributions to that is perceived as rational and
fair.
The compensation paid to any employee represents the value the management places on him
and the contribution he has made or can make to the organization. This value of course if
influenced by outside competitive forces i.e. compensation levels that management finds
have to be paid to attract and retain people with the desired backgrounds and skills. The
market value of an executive or manger is not always easy to determine. Some skills are more
marketable than others. Managers and executives who have spent their entire careers with the
same company are often worth more to that particular company than they are to any other.
The following aspects of compensation planning and administration of particular importance

at the executive and managerial levels:
(i) position level
(ii) the salary structure
(iii) performance appraisal
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(iv) incentives bonus plans and

(v) supplementary forms and compensation.
Once positions have been evaluated, it is necessary to translate these evaluations into
compensation structure. Since one of the primary objectives of an executive compensation
programme is to attract and retain people who are well qualified to carry out their
responsibilities, it is vital to take competitive compensation levels into account in setting the
salary structure.
If a compensation programme is to serve as a positive motivational force the most difficult

and at the same time the most critical requirement is to relate compensation to individual
performance. Virtually all salary programmes and most incentive bonus plans for executives
and managerial personnel require some judgement of individual performance as a key
ingredient in compensation decisions. Too often these judgements are superficial or even
haphazard. In many companies in fact status and seniority may carry more weight age than
their performance. In the manufacturing and retailing fields where year to year results are
largely a reflection of management performance it is common for executive and managerial
personnel to be compensated partly in the form of a base salary and partly in the form of a
year and bonus. The decision of whether to install an incentive bonus plan for executives a nd.
If so, what kind of plan to install should not be made likely On the one hand a bonus is a
more immediate and flexible form of compensation than salary and thus, has greater
motivational potential. On the other hand, the bonus plan that is poorly conceived or
administered can have a negative motivational impact. If a bonus plan seems appropriate,
careful attention should be paid to what kind of plan would be most effective.
At all employee levels non-cash forms of compensation such as contributions to social

security funds, deferred profit sharing and savings plan. Medicals have become increasingly
significant elements of the total compensation programme. At the executive level certain
forms of compensation have special interest and significance because of their tax
implications.
Unfortunately, very little research has been conducted among higher level executives to
probe deeply into the relationship between various forms and methods of compensation and
motivation. Obviously, compensation is only part of a larger pattern of factors that influence
executive behaviour. By itself, its influence may not be significant But the approach taken to
executive compensation also influence other practices and conditions that make up the
executive environment. Therefore, executive compensation demands careful thought and
attention to maintain the kind of leadership that is essential for an organizations continued
growth and vitality.

Wage administration deals with techniques and procedures for designing and maintaining
salary structures, rewarding staff, and exercising wage control. The basic aim of wage
administration is to attract retain and motivate employees by developing and maintaining
competitive and equitable wage structure. It concerned with (a) the design and maintenance
of wage structure; (b) the operation of wage progression systems: (c) the provision employee
benefits other allowances: and (d) the development of total remuneration policy. Thus the
task wage and salary administrator is broad and complex one.
There are many ways improve productivity:
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Task Redesign:
The first job redesign approach that can be used to improve productivity called job
enrichment. However, job enrichment is limited to impact on employees because can only
serve some of the employees' psychological needs. The socio-technical approach to job
design over comes some of these limitations. The socio-technical approach rests on the
notions that jobs are man-made inventions designed to suit number of technical and social
systems needs and are constantly changing. The objective of the socio-technical design such
as the famous one Volvo, is to bridge the two aspects (the technical and social) so that the
resources of the two are optimally used to co produce an outcome that desired by the
employees of the organization.
Work Flow
Work flow changes result in improved productivity based largely on the principles of
industrial engineering and organization design. This can be applied in the office, as well as in
the factory and to white collar service work as well as blue-collar manufacturing work.
Automation is so significant and likely to be a major contributor to Improving productivity.

Automation is especially critical since it has the potential of changing the nature of so many
jobs and in creating many new jobs. Automation will soon hang the face of factories and
offices. Computer-controlled systems of robots are being introduced abroad that will replace
and are replacing most humans on plant floors and will produce gains in productivity.
Automated equipment is also moving into offices. As such factories and offices will never be
same.
Office Design
The physical environment influences employee performance and quality of working
life. Office design shall allow employees to have some privacy and some time to work
uninterrupted. An entire office department, division or company can help make all employees
successful when they observe quiet time as a unit. Everyone should be included. When all
employees in the office are making a special effort to do their work quietly and not bother
their co-workers, the level of internal office interruptions is greatly reduced. External
interruptions are to be minimized that are eliminated during the quiet period, the more work
will be successfully accomplished.
While it is important to be acquainted with the individual techniques programmes to improve

productivity, it is necessary to realize that programmes for productivity improvement rarely
work well in isolation. They work best under conditions where,
- Top management visibly supports the programmes:
- there is a philosophy of productivity improvement:
- Employees are adequately trained.
- Employees are fairly rewarded.
- Employees are involved and receive feedback: and
- Appraisal systems are seen as fair and used in compensation decisions.
In other words, productivity programmes work best only when they are part of a total
management approach to productivity approach to productivity. These activities are:
- Management by team work and consensus:

- recognition and praise by management for good work done:
74
- A willingness on the part of supervisors to listen to employees and make suggested

changes if appropriate:
- An open door, open communications policy that is practiced and
- A consistent application of fair and human resource oriented personnel policies.
The benefits of a well planned, successful productivity improvement programme are
manifold and significant. Productivity programmes benefit employers in terms of profitability
and viability. Higher productivity benefits employees to as it enable them to earn more and
gives them job security. In addition, consumers get a better value for their money.
Productivity growth means, increased profits for the organization which may be needed for
its survival, expansion, diversification and growth.
Productivity improvement does not just happen as a miracle. It has to be planned. Technology
alone will not guarantee productivity increase. It must be combined with the dynamic
interaction of human skill, physical assets, and organization and institutional setting.
Productivity improvement programmes are associated with process innovation and product
innovation. In addition, all employees must be given the opportunity to be involved in the
productivity improvement schemes initiated by employers. Moreover the success of any
productivity measurement. The type of measurement used varies from organization to
organization and from industry to industry, although some are available for certain types of
manufacturing and service industries.
Some may look at productivity in term of the value added concept. Thus productivity is the
ratio between the resources put into a process and the value of goods that come out of that
process. If we can increase the value being added to some methods, then productivity
improves. These methods can be reducing costs, increasing or improving effort and skill and
so on. When the value added per worker is higher in an organization. It has the ability to pay
higher wages. The organization must make an effort to check the value being added to the
goods and services produced and explore ways to improve the value in order to be
productive.
Faster rate of economic growth can be ensured through accelerated production and higher
productivity in all branches of economic activity. Human resources being an important input,
their productivity play a significant role in determining the overall economic growth of a
nation. Apart from the level of human skills, the quality of raw materials and the technology
employed are also crucially connected with the productivity of human resource. In fact, the
modern concept is that of Total Factor Productivity (TFP) in which the productivity of all
factors of production is reflected land labour, capital and entrepreneurship, Although Indian
productivity has kept up a rising trend. It has not been sufficiently high to make Indian
products compete successfully in the international market. This is a cause of concern in view
of the globalization of the Indian economy.

Annual wage increments should be restricted to increase in value added productivity. This is
the crux of company's ability to pay. It is used extensively by Japanese Industry as a
corporate tool to evaluate the ability to pay and in wage determination. Wage hikes not linked
to productivity trigger inflation: this in turn results in a deteriorating standard of living. In
South Korea, economic growth slackened because wage increases were higher than increases
in productivity. In order to stabilize the cost of living and maintain high growth, a wage
prices spiral must be avoided.
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An enterprise creates wealth by adding value. It uses raw materials, capital and labour only as
inputs to create a product with additional value, Therefore, the primary objective of any
company is to add value, to continue to do so and to constantly increase the value it adds.
This value added will then be distributed among the various contributors to the productive
activities which went into its creation. Various costs are incurred when a company adds value
in its operations. Some of these are direct, operating costs - the cost of labour, capital, raw
material, and so on. And then there are other costs not directly connected to the enterprises
operations like excise another government imports. Some misconceptions about productivity
are to be cleared:
(1) Productivity does not signify more production:

(2) It does not mean making the manual worker work harder:
(3) It does not result in working longer hours or more number of days:
(4) It does not mean regimentation, austerity & less variety to the customer.
(5) It is not confined to factories and manufacturing organizations alone:
(6) It is not merely for the shop floor or the office desk:
(7) It is not somebody else's job and
(8) It does not normally lead to retrenchment or redundancy.
Linking wages at least a significant part of it, to the changes in productivity is of vital
concern to managements. Wage increases unrelated to improvements in productivity or
efficiency would only add to costs which may be reflected in the prices of products. From the
point of view of employees, an indiscriminate upward movement of wages may prove less
beneficial. Inflationary pressures following such increases almost certainly neutralize the
initial sensation: all the benefits of higher productivity obviously go the employer, but where
wages do not grow in correspondence with productivity standard of living and productivity
higher the productivity, higher the standard of living.
The elements of pay packet which are amenable to linkages with productivity and
performance are: has to pay the minimum bonus. It has also a profit sharing element because
the percentage of bonus is supposed to be determined by the profit sharing formula embodied
in the Act. The productivity linked bonus plan in an industrial organization will call for:
(a) Developing a procedure for measuring productivity:

(b) Determining the level of productivity beyond which the bonus is to be paid: and
(c) Determining a scale of reward which will appropriately index productivity with bonus.
Any such scheme has to be tailor made to the needs and objectives of the organization
concerned.
Incentive Bonus:
While productivity linked or statutory bonus yields an average increase in wages for
the covered employees as a whole, an incentive bonus scheme is usually designed to
recognize differences in performance of individuals or small groups. The scheme provides for
monetary payment and rewards for differential performance. The basis of sharing gains is
determined by agreement with the unions. The extra payment is made out of saving in costs,
which are made possible by performance above the existing level
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Productivity Bargaining
Productivity bargaining is a negotiation undertaken by employers association and
unions into which a specific productivity element is injected. It indicates the process of
striking a deal between the two bargaining parties with the object of improving productive
efficiency and reward for work. It is an agreement in which advantages of one kind or
another such as higher wages, increased leisure, are given to workers in return for their
agreement to accept changes in work practices, methods of work. Etc. Productivity
bargaining, however, does not mean an incentive scheme or wage increase in return for
assurances and promises from union for achieving production targets. This method implies:
(a) A detailed analysis of a firm's operation:

(b) The identification of cost reduction possibilities: and
(c) Estimation of saving in cost.
The starting point for any realistic productivity agreement is an examination of the total work
situation and a comprehensive analysis of the problems therein. A detailed feasibility study
needs to be carried out when a comprehensive productivity agreement is contemplated. The
main elements in such a study are production analysis, sociological analysis, economic
analysis: and wage analysis.
Appreciable progress has been registered in productivity bargaining in countries such as the
U.S.A. Germany, Britain and France. An important and well-known productivity agreement,
which has served as a model for others is the Fawley Productivity Agreement. It was
concluded in July 1960 between the management of the ESSO refinery at Fawley. Near
Southampton in the UK and the local representatives of trade unions of the workers for the
purpose of augmenting productivity and introducing work incentives, In essence, these
agreements might be called a 'productivity package deal which embodied the company's
elaborate measures of work incentives and innovations, such as 40 percent increase in wage
rate of all categories of practices introduced by the management for improving labour
productivity. Like other usual collective agreement, the Fawley agreements were concluded a
period of two years and the agreements were signed after five month of protracted
negotiations. Prior to the negotiation, the "Blue Book" containing the proposal of changes
was referred to the union by the management. An outstanding feature of the agreement was
that it offered a 40 hour week and up to 45 percent increase in wages. If certain conditions
relating to productivity were satisfied. These reduction were reduction in overtime,
elimination of craft demarcation, doing away with pest-pauses in provided for abolishing
payments like heat money, dirt money etc. The productivity registered a 50 percent increase,
apart from a reduction in overtime from 18 percent to 8 percent. The publicity given to
productivity bargaining since the announcement of the ESSO agreement at the Fawley
refinery and the subsequent attention it has received, have had number effects, perhaps the
most important is the change in attitude to industrial relations.
The Fawley agreement was followed by many other similar agreements at ESSO Milfor
Haven Refinery, Imperial Chemical industrial Ltd. British Oxygen and Alcan Industries Ltd,
among others. The growth of productivity agreements in America was a close parallel to
British experience. It is only recently that productivity bargaining has gained recognition and
usage in India. In several agreement references have been made to productivity. The usual
criticism that productivity cannot measured. However, has not prevented many organizations
to go ahead this direction.
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An extract from the Memorandum of Agreement, National Joint Committee for the
Steel Industry, regarding productivity is reproduced below:
Both parties recognize that steel industry should grow at a rate in order to meet the nation’s
economic needs. This would necessitate further intensification of efforts both the parties to
achieve financial viability of the industry, and also generate the required resources meet the
urgent needs to modernize the steel plants. To this end, the parties commit themselves to
work together to attain higher levels of production, productivity and profitability. Joint efforts
would be made continuously in the flowing areas:
(a) Efficient handling of raw materials and reducing wastes:

(b) Improvement in yields and reducing operating costs:
(c) Procurement of materials at economic prices;
(d) Reducing energy consumption:
(e) Improvement in house-keeping:
(f) Necessary Improvement in working conditions. Health and safety of workers:
(g) Continuously adopt better working practices:
(h) Reducing unauthorized absenteeism:
(i) Improving customer service and delivery.
(j) Improve effective utilization of all resources including human resources: and
(k) Attain 95-100% capacity utilization in each steel plant.
Redeployment, retraining consistent with skill, dignity and earning of employees,

would be necessary in the context of modernization and changing requirements of the
industry.
It is recognized by both the parties that discipline at all levels is essential for the smooth
functioning of the steel plants. They therefore, assure full cooperation for maintaining
discipline and optimizing production and productivity.
Base on the above parameters, each plant will mutually identify areas of wasteful practices
and expenditure with a view to devising specific measures for increasing operational
efficiency and reducing costs. Another extracts from the memorandum of settlement. Tata
Engineering and Locomotive Co. Ltd. (TELCO) Jamshedpur, regarding productivity is given
below:
The union and the management agree that TELCO can remain viable only through improved
standards of productivity throughout the Jamshedpur works and by optimizing utilization of
plant, equipment and human resources. Both parties recognize that it will be essential to
utilize State of the Art or the latest technology available in manufacturing methods in order to
remain competitive and both will work jointly to ensure that the company remains modem,
current and maintains the highest standards of productivity.
The union recognizes that adherence to production quotas or any restrictive practices which
inhibit production and productivity should be removed in the interest of the company and its
employees.
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The union recognizes that the productivity principle is based on the concept of return ability
with respect to input and agrees to work jointly with the management to ensure that an
improvement in productivity at the rate of 10% in terms of output per man per year is
achieved. In order to achieve this productivity level, the union will work with the
management to remove all restrictive practices which come in the way of increasing
productivity of plant and equipment.
All technical, clerical and other indirect employees working in areas like maintenance,
inspection, shop cleaning sanitation and hospitals, will also achieve the targeted levels of
productivity in their respective areas. They will also make commensurate efforts to help
enhance productivity.
The union accepts that an individual's unwillingness or inability to attain targeted

performance levels retards the improvement in overall performance. The union, therefore,
agrees to corporate with the management in counselling and training such individuals
whereby they can achieve targeted performance levels.
The union appreciates the fact that with changes in market conditions as also change in
method of production, retraining and deployment of workmen is essential. The union agrees
to cooperate with the management in such development plans so as to ensure optimum
utilization of human resources in the Jamshedpur works and flexibility production to meet
changing market condition. The union, however reserves the right to represent to the
management if there be anything which adversely affects the interests of the employees.
The union also agrees to support the management in its efforts to identify and eliminate
wasteful practices and to improve quality through replacement of out dated methods,
equipments, fooling and systems with more effective and efficient alternatives.
The union and the management recognize that participation of employees in small group
activity will go a long way in promoting goals of productivity, quality of product and quality
or work life. The parties, therefore, agree to encourage employees in their role for achieving
their goal through participation in small group activities.
The management and the union believe that quality is produced and not inspected. Hence
joint efforts will be made for self certification of products by concerned employees backed by
an effective feedback system so as to ensure products and services of the highest quality.
The union and the management agree that special attention needs to be paid and results
achieved in the following areas through joint efforts of both parties:
i) Full capacity utilization of each plant/equipment facility.
ii) Improved/effective utilization of resources, including human resources.
iii) Optimizing energy consumption.
iv) Improving quality in all operation and of products.
v) Efficient handling of raw materials and reduction of wastages
vi) Improvement in house-keeping.
vii) Improvement in environment.
viii) Continuous adaptation of better working practices.
ix) Reducing unauthorized absenteeism
x) Improving customer services and delivery.
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The union and the management agree to discuss each of these issues in detail department
wise /division, wise and arrive at specific targets and to jointly implements plants to achieve
the same.
For attaining productivity targets as indicated above, the management will identify non
performing workmen and will mutually negotiate with the union to plan corrective actions,
3.5 Wage Productivity linkage – India Experience
In most developing countries include the productivity is not rising as rapidly as it should due
to us reasons. The crux of the problem is that productivity must grow faster than prices as
well as wages in order to bring about a more ......... of investment, output and employment.
Our five year plans, recommended the introduction of incentives to promote labour
productivity, reduce unit cost of production and ensure minimum wages. However, we do not
find any ted uniform approach to productivity wage relationship in India. The employers and
workers organizations did not follow any consistent approach to productivity criterion. The
wage fixing authorities also do not appear to have given importance to productivity factor.
Wages are increasing while in many vital sectors of the economy, productivity is either
falling or remained constant. Based on purchasing power parity, the labour productivity in
India compares unfavourably even with the neighbouring Asian countries, However, Indian
workers productivity has been gradually increasing since 1950 in almost all sectors.
Dr. S.C. Shrivastava studied the relationship between wages, profits and productivity in
selected industries of India during 1950-64. His study revealed that in the cement and cotton
textile industry, there was a strong correlation between total value added and wages paid to
the workers. Total wage bills in these industries bore a linear relationship with value added.
Its trend value was positive. The study also revealed that in the case of cement industry there
had been s fold increase in the average money value of the benefits and privileges from 1950
to 1964. The corresponding value for the match Industry was 1.25 and 4 for paper and paper
boards, 5 for sugar, 24.5 for cotton, 8 for woollen. 6.5 for jute and 5 for iron and steel
industry.
There is need for developing productivity culture and consciousness in India in the interests
of all the parties - the workers, employers, and the economy. Normally, under productivity-
linked wage scheme, a part of the benefit of rise in productivity will accrue to the community
in the form of lower prices of products concerned.
4. Self Assessment Questions :

1. How compensation planning and administration is done.
2. Outline the external as well as internal environments of employee remuneration?
3. Discuss in detail productivity bargaining?
5. Summary
To survive and be successful in a global economy, an organization must be
competitive. A major factor underlying organizational competitiveness is labour costs. Not
only must an organization pay its world force a competitive wage within its geographic
region, but it also must vary the kinds and amounts of rewards offered, recognizing
differences in individual contributions. A major difference in individual contributions relates
to the knowledge and skills the employee brings to the workplace and the Interest, effort, and
innovative qualities the employee provides in completing work assignments. The pay and
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reward system of the organization must stimulate acceptable levels of performance from all
employees. Money is the name of the game, but the distribution of organizational funds
determines who wins the game.
6. References
Understanding Wage A. M. Sharma Himalaya Publishing House 2001

System
Business Policy and Acharya & Govekar Himalaya Publishing House 2002
Administration
Elements of Mercantile N.D. Kapoor Sultan Chand & Sons 2003
law
Personnel Management P.C. Tripathi Sultan Chand & Sons 2004
Industrial Relations
Labour Law Reshma Arora Himalaya Publishing House 2004
Human Resource and K. Aswa Thappa Tata Mc Grow Hill 2001
Personnel Management
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Chapter V
COMPENSATION DESIGNING FOR SPECIFIC HUMAN RESOURCES
1. Introduction
2. What is a compensation package
2.2 Direct Compensation
3. Broad Classification of Levels of employees different characteristics
4. Primary areas of compensation management
5. Current trends in compensation
5.1 Skill Based Pay
5.2 HR and the Responsive Organization
10. Compensating Managers
11. Managerial Job Evaluation
12. Compensating Professional Employees
Indian industries
16. Summary
17. References
Structure: Chapter 6 describe the major occupational grouping found in the most
organisation and how Compensation Designing done for Specific Types of Human
Resources.
After reading this chapter, you should be able to:
 Identify the compensation package
 Understand Broad classification of levels of employees on different characteristics.
 Describe primary Areas of compensation Management.
 Understand the process of compensation package for specific Human resources.
 Understand current trends in compensation.
 Describe the future trend.
 Understand Broad generalisation related to executive remuneration in India Industries.
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1. INTRODUCTION
Part II develops a systematic approach for analyzing and evaluating the unique contributions
each job makes toward the achievement of organizational goals and objectives. This is the
first step in achieving fair and equitable compensation.
In order to develop an understanding of the human structure common to most organizations,

it is necessary first to view the sequence o activities that occur from the time the organization
is nothing more than a dream of some individual to the time that it is actually producing
goods and/or service.
The output of an organization may bear little resemblance to that initially conceived
by its founder(s) but the seed of an idea must germinate and develop before there can be a
resulting output. The processes for producing the output can have infinite variety and their
Description is beyond the scope of this text. What is important to mention here, however, is
that the output and its production processes are the crucial elements that dictate the human
structure of the organization? After they have been determined, it then becomes possible to
analyze the wide variety of functions employees must perform in order to achieve the
objectives of the organizations.
Idea of Goods Technology Human Actual

output in and/or used: structure: Output
mind(s) of services to equipment, hierarchy of
Founder(s) be produced processes, leadership,
methods, basic
procedures groupings,
knowledge
and duties
Functional analysis examines the reason for the performance of each activity, its
relative importance, the manner in which each functional area and each activity interrelate,
and the human skills and qualities necessary to perform the work. It also provides the
organization with a human framework that relates the individuals, groups, and units with
consistency. A functional framework of this type moves an organization toward the
achievement of its basic purpose by linking the activities of its members throughout the
organization. This flow of activities transpires in a manner that assures continued survival
and growth of the organization by providing goods and/or services that conform to quality
and quantity standards and meet consumer demands.
Although each organization develops its own culture which results in unique activities and
behaviour, must organizations have certain common membership characteristics? To a large
degree, federal labour legislation determines, or at least strongly influences, many of these
characteristics.
The objective of remuneration is to duly compensate employees for the services rendered by
them. Therefore, employers need to pay a fair and satisfactory remuneration to their
employees. Fair remuneration depends on one's ability and performance. This is precisely the
reason that remuneration wages vary from employee, as seen earlier, mainly due to
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differences in ability and performance of employees. As managerial jobs require more

qualification, skill, and knowledge and involve more responsibilities, they need greater
incentives to ensure the greater commitment to their jobs. In view of this, the manager's
remuneration cannot be decided on a general basis as for the rank and file workers. In case of
the managerial remuneration, certain fringe benefits are given solely to the managers as
added incentives to duly compensate for their skills and performance. For example, the
United States Compensation Institute's Phonex plan uses as many as 28 compensatory benefit
incentives to the manager. Various criteria have been evolved to compensate the executives
and managers. One such criterion suggested by a US Agency called the Hay Group, is based
on three factors, namely, accountability, problem solving and know-how. There are others
who determine the managerial compensation depending on the market value of the job, its
relationship to other positions in the organization, and the person's value to the organization
based on performance and experience. As regards executive compensation in India, it is
mainly based on three important factors Job complexity, employer's ability to pay and
executive human capital.
Each of these factor themselves depends on other factors. For example, the complexity of the
manager's job will depend on the size of the company in terms of employees, sales volume,
assets growth, number of units, etc. On the whole, the managerial remuneration in India is
based on performance and efficiency.
2. WHAT IS A COMPENSATION PACKAGE

Most managers are busy asking: What do I have to pay to...? That is not an easy question to
answer. A better question might be "What do I want my compensation package to say? It is
already saying a lot, whether you realize it or not. Compensation can be linked to business
structure and to employee recruitment, typically among the first things which potential
employees consider. For employees, compensation signifies not so much how they are paid,
but how they are valued. It's easy to think "dollars or Rupees per hour when thinking about
compensation. However, successful compensation packages go a lot further and can be
considered total rewards system that contains non monetary, direct and indirect elements.

Any benefit an employee receives from an employer or job that does not involve tangible
value. This includes career and social rewards such as job security, flexible hours, and
opportunity for growth, praise and recognition, task enjoyment, and friendships.
2.2 Direct Compensation:

An employee's base wage, which can be an annual salary, or hourly wage and any
performance-based pay that an employee receives such profit-sharing bonuses.

Far more varied, including everything from legally required public protection programs such
as Social Security to health insurance, retirement programs, paid leave, child care or moving
expenses.
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DIRECT COMPENSATION ALTERNATIVES:
Base Pay:
Cash wage paid to the employee. Because paying a wage is a standard practice, the
competitive advantage can come only by paying a higher amount.
Incentive Pay:
A bonus paid when specified performance objectives are met incentive may inspire
employees to set and achieve higher performance levels and motivate them to accomplish
farm goals.
Stock Option:
A right to buy a piece of the business which may be given to an employee to reward excellent
services. An employee who owns a share of the business is far more likely to go the extra
mile for the farm
Bonus:
A gift given occasionally to reward exceptional performance or for special occasions,
Bonuses can show that an employer appreciates his or her employees; they ensure that good
performance is rewarded.
Indirect Compensation Alternatives:

1. Flexible working Schedules
2. Retirement programs
3. Insurance (health, dental, eye)
4. Paid leave (Sick, holiday, personal days)
5. Tickets to events (ball games< concerts)
6. Boots and clothing
7. Wellness programs
8. Farm produce, food, meals
9. Child care
10. Elder care
11. Moving expenses
12. Subsidized Housing
13. Subsidized Utilities
14. Magazine subscriptions
15. Laundry Services
16. Use of farm trucks or machinery
17. Cellular phones, pagers.
18. Use of Farm pastures and gardens.
3. BROAD CLASSIFICATION OF LEVELS OF EMPLOYEES DIFFERENT

CHARACTERISTICS.
1. Level One: Employees who are either very new have no advanced skills.
2. Level Two: Very specialized individuals who perform from one to many specific tasks that
require training.
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3. Level Three: Employees who are very skilled in at least one specified are and have
supervisory capacity and decision making authority over a very limited portion of the
business.
4. Level four: Employees with exceptional skill levels, who make decisions that, affect entre
areas of the operation. These people have potential for broad supervisory and decision
making authority.
5. Level five: These are the most skilled and qualified full-time employees. They have complete
supervisory authority and the most decision-making authority given any full-time employee.
By using a competency scale, each employee can be cross-referenced by job title and
competency level or studied solely within either category. Employees of similar skills levels,
or competency, are taken together in compensation "bands" regardless of job title. These
bands then compensate similar employees at similar rates across the entire organization and
maintain both internal and external equity.
Farm managers face many decisions every day. Finding the time to build and implement an
equitable wage structure can be difficult. To make the process easier, consider following
checklist.
Decide what you want your compensation package to do

a) Recruit new employees.
b) Motivate current employees.
c) Reward employees for good performance.
d) Minimize risk of violating faderal laws.
e) Build employee loyalty,
f) Any combination of the above.
Pick you compensation philosophy, either

a) Job evaluation
b) Employee evaluation
c) Combination of both
Determine your internal wage structure, either

a) Evaluate the jobs
b) Evaluate the employees
c) Create competency groupings
Talk to your employees about their indirect compensation needs:

a) Health Insurance
b) Paid vacation
c) Housing
d) Child care
e) Retirement Planning
Structure your total rewards system, including:

a) Indirect Compensation (based on your employee's needs and your compensation
objectives)
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b) Direct Compensation (based on labour market Information and your compensation

objectives)
Implement your new system, remembering to:

a) Communicate with your employees about their needs.
b) Review your compensation package regularly to make sure that it is fair, equitable
competitive.
c) Be flexible and innovative to maintain a competitive advantage.
Successful agricultural procedures rely heavily on common sense when it comes to

management decision. The area of employee compensation should be no different. If you
want your employees to be innovative, reward them for new ideas. If you want your
employees to stay with you for a long time instead of providing training to new employees
every season, offer bonuses or tie their wages to their tenure. If you need employees who
show up on time, work hard and can be trusted with the most challenging tasks, recruit those
people; reward those people; promote those people. The future of your business could depend
on it
4. PRIMARY AREAS OF COMPENSATION MANAGEMENT

1. Total Compensation program reviews
2. Annual incentive plans
3. Stock Reward programs
4. Long-term cash and equity plans
5. Board of Director's Compensation
6. Executive perquisites supplementary benefits
7. Income deferral
8. Employment and change of control agreements
9. Special retention programs

1. Performance Appraisal Systems
2. Competitive Market Studies.
3. Job Evaluation Systems
4. Pay-for-Performance salary programs
5. Group Incentives and Gain sharing plans
6. Alternative Rewards & “Market – Basket” Programs

1. Sales Compensation Studies
2. Sales Compensation Programs

1. Customized Compensation, Benefits and Pay Practice Surveys
2. Compensation and Benefits Administration
3. Compensation Communication
4. Human Resource Policy Manuals
5. Employee Opinion Surveys
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6. Human resource consulting

7. Human resource audits
PROCESS OF COMPENSATION PACKAGE FOR SPECIFIC HUMAN

RESOURCES
STEP 1: CONDUCT THE SALARY SURVEY

Clerical supervisory, drafting and clerical. They provide information about straight - time
earning as well as production bonuses, commissions, and most of living increases. The
American Management Association of New York (AMA) conducts and furnishes executive,
managerial and professional compensation data as one of services. For example, its executive
compensation report includes information from almost 4000 firms covering about 31,000
executives in 75 top positions in 53 industries listed and both salaries and bonuses earned by
these ex3ecutvies. The AMA publishes a middle management report providing similar data
on about 15000 executives in 73 key jobs in about 650 firms. Its reports on administrative
and technical position cover employee's positions beneath middle management in about 600
companies. Its supervisory management compensation report surveys about 700 companies
and 55 categories of first-line manage and staff supervisors.
The Administrative Management Society (AMS) conducts an annual survey of 13 clerical

Jobs. 7 data processing jobs, and various middle management jobs about 30 cities in the
United States, Canada, and the West Indies. The AMS surveys report data salaries, length of
workweeks, overtime, paid holidays and the extent of unit membership among survey
participants for over 600000 employees. They can provide a useful reference for employers
making compensation decisions in two cities surveyed. Private consulting and/or executive
recruiting companies like Hedrick and struggles, and Hewitt, Associates annually publish
data covering the compensation of top and middle management and members of board of
directors, Professional organizations like the Society for Human Relation Source
Management and the Financial Executive Institute Publish surveys compensation practices
among members of their associations. For many firms, jobs are priced directly based on
formal or informal salaries surveys. In most of the cases, though, surveys are used to price
benchmark jobs around which other jobs are then slotted based on their relative worth.
Determining the relative worth of a job is the purpose of job evaluation, to which we now
turn.
STEP 2: DETERMINE THE WORTH OF EACH JOB: JOB EVALUATION

Purpose of Job Evaluation:
Job evaluation is aimed at determining a job's relative worth. Is a formal and systematic
comparison of job to determine the worth of one job relative to another and eventually results
in a wage or salary hierarchy? The basic procedure is to compare the content of jobs in
relation to one another, for example, in terms of their efforts, responsibility; skills. Suppose
you know (based on your salary survey and compensation policies) how to price benchmark
jobs can use job evaluation determine relative worth of all other jobs your firm relative to
these key jobs. Then you are well on your way to being able to equitably price all the jobs in
your organization. Compensable Factors: There are two basic approaches you could use for
comparing several jobs. First, you could take more Intuitive approach. You might decide that
one jobs "more important than other. An alternative you could compare the jobs by focusing
on certain basic factors they have in common. In compensation management these basic
factors are called Compensable factors. They are the factors that determine your definition of
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job contents, establish how the jobs are compared to each other, and set the compensation
paid for each job.
Some employers develop own compensable factors. However, most useful factors that have
been popularized by packaged job evaluation systems or oral legislation. For example, the
Equal Pay Act factors on four compensable factors, like skills, efforts responsibility and
working conditions. As another example, the job evaluation method popularized by the Hay
consulting firm focuses on three compensable factors: know-how, problem solving and
accountability. The compensable factors you focus on depended on the job and the method
job evaluation to be used. For example, you might choose to include the compensable factors
of decision making for manager's job, which might be inappropriate for the job of assembler.
Identifying compensable factors plays a pivotal role in job evaluation. In Job evaluation each
job is usually compared with all comparable jobs using the same compensable factors. An
employer thus evaluates the same elemental components of each job and is then better able to
compare them for example, in terms of the degree of skills, efforts responsibility and working
conditions present in each.
Planning and Preparation for the Job Evaluation:

Job evaluation is mostly a judgmental process, one that demands close cooperation between
supervisors, personnel specialists, and the employees and their union representatives. The
main steps involved include identifying the need for the program, getting cooperation, and
then choosing an evaluation committee, the latter then carries out the actual job evaluation.
Identifying the need for job evaluation should not be difficult. For example, dissatisfaction
reflected in high turnover, work stoppages, or arguments may result from the inequities of
paying employees different rates for similar jobs. Similarly, managers may express
uneasiness with the current, informal way of assigning pay rates of jobs, accurately sensing
that a more systematic means assigning pay rates would be more equitable. Next. Since
employees may fear that a systematic evaluation of their jobs may actually reduce their wage
rates, getting employee cooperation for the evaluation is a second important step. You can tell
employees that as a result of the impending job evaluation program, wage rate decisions will
no longer be made just by management within, that job evaluation will provide a mechanism
for considering the complaints they have been expressing and that no present employee's rate
will be adversely affected as a result of the job evaluation.
Next choose a job evaluation committee, and there are two reasons for doing so. First, the
committee should bring to bear the view points of several people who are familiar with the
jobs in question, each of whom may have a different perspective regarding the nature of the
jobs. Second, assuming the committee is comprised of at least partly of employees, the
committee approach can help ensure greater acceptance by employees of the job evaluation
results. The composition of the committee can be important. The group usually consists of
about five members, most of whom are employees. While management the right to serve on
such committees, presence be viewed with suspicion employees "it is probably beat to have
managerial representative involved committee evaluation non managerial jobs... However, an
HR specialist can usually be justified on the grounds that he or she has a more impartial
image than line managers and can provide expert assistance in the job evaluation. One
method is to have this person serve in a non-voting capacity.
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Union representation is possible. In most cases, though the union's position is that it is
accepting job evaluation only as an initial decision technique and is reserving the right to
appeal the actual job pricing decisions through grievance or bargaining channel. Once
appointed, each committee member should receive a manual explaining the job evaluation
process and special instructions and training that explain how to conduct a job evaluation.
The evaluation committee performs three main functions. First, it usually identifies 10 or 15
key benchmark jobs. These will be the first job to be evaluated and will serve as the anchors
or benchmarks against which the relative importance or value of all jobs can be compared.
Next, the committee may select compensable factors (although the human resource
department will usually choose these as part of the process of determining the specific job
evaluation technique to be used). Finally, the committee turns to its most important action-
actually evaluating the worth of each job. For this, the committee will probably use one of the
following job evaluation methods; the ranking method, the job classification method, the
point method, or the factor comparison method.
GROUP SIMILAR JOBS IN TO PAY GRADE

Once job evaluation method has been used to determine the relative worth of each job, the
committee can turn to the task of assigning pay rates to each job, but it will usually to first
group into pay grades. If the committee used the ranking, point, or factor comparison
methods, it could assign pay rates to each individual job. But for a larger employer such a pay
would be difficult to administer, since there might be different pay rates for hundreds or even
thousands of jobs. And even a smaller organization there is a tendency to try to simplify wage
and salary structures as much as possible. Therefore, the committee will probably want to
group similar jobs (in terms of their ranking or number of points, for instance) into grades for
pay purposes. Then, instead of having to deal with hundreds of pay rates, it might only have
to focus, on, say, 10 or 12. A pay grade is comprised of jobs of approximately equal difficulty
or importance as determined by job evaluation. If the point method was used, the pay grade
consists of job falling within a range of points. If the ranking plan was used, the grade
consists of all jobs that fall within two or three ranks. If the classification system was used,
then the jobs are already categorized into classes or grades. If the factor comparison method
is used, the grade will consist of a specified range of pay rates, Ten to 16 grades per "job
cluster" (a cluster is a logical grouping such as factor jobs, clerical jobs, and so on) are
common.
PRICE EACH PAY GRADE-WAGE CURVES

The next step is to assign pay rates to each of your pay grades (Of course, if you chose not to
slot jobs into pay grades, individual pay rates would have to be assigned to each individuals
job). Assigning pay rates to each pay grade (or to each job) is usually accomplished with a
wage curve. The wage curve depicts graphically the pay rates currently being paid for jobs in
each pay grade, relative to the points or rankings assigned to each job or grade by the job
evaluation. The purpose of the wage curve is to show the relationship between (1) the value
of the job as determined by one of the job evaluation methods and (2) the current average pay
rates for your grades. The pay rates on the graph are traditionally those now paid by the
organization. If there is reason to believe that the present pay rates are substantially out of
step with the prevailing market pay rates for thee jobs, benchmark job within each pay grade
are chosen and priced via compensation survey. These new market based pay rates are then
plotted on the wage curve. There are several steps in pricing jobs with a wage curve. First,
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find the average pay for each pay grade, since each of the pay grades consists of several jobs.
Next plot the pay rates for each pay grade. Then fit a line (called a wage line) through the
points just plotted. This can be done either freehand or by using a statistical method, finally
price jobs. Wages along the wage line are the target wages or salary rates for the jobs in each
pay grade. If the current rate being paid for any of your jobs or grades fall well above or well
below the wage line that rate may be "out of line"; raises or a pay freeze for that job may be
in order. Your next step then is to fine tune your pay rates.
FINE TUNE PAY RATES

Fine tuning involves correcting out-of-line rates and (usually) developing rate ranges.
Developing rate range most employees do not just pay one rate for all jobs in a particular pay
grade. Instead, they develop rate ranges for each grade so that there might, for instance, be
ten levels or "steps" and ten corresponding pay rates within each pay grade. As of the time of
this pay schedule, for instance, employee in positions that could be paid annual salaries
between $ 24,011 and $ 31,211, depending on the level or step at which they were hired into
the grade, the amount of time they were in the grade, and their merit increases (if any).
Another way to depict the rate ranges of pay rates (in this case, per hour) to be paid for each
pay grade. There are several benefits to use rate ranges for each pay grade. First, the
employer can take a more flexible stance with respect to the labour market. For example, it
makes easier to attract experienced, higher paid employees into a pay grade where the
starting for the lowest step may be low to attract such experience personnel. Rate ranges also
allow you to provide for performance difference between employees within the same grade or
between those with differing seniorities.
The rate range is usually built around the wage line or curve. One alternative is to
arbitrarily decide on a maximum and minimum rate for each grade, such as 15% above and
below the wage line. As an alternative, some employers allow the rate range for each grade to
become wider for the higher pay ranges, reflecting the greater demands and performance
variability inherent in there more complex jobs.
Correcting out-of-line rates

The wage rate for a job may fall well off the wage line or well outside the rate range
for its grade. This grade, this means that the average pay for that job is currently too high or
too low, relative to other jobs in the firm. If the plot well above the wage line pay cuts or a
pay freeze may be required. Underpaid employees should have their wages raised to the
minimum of the rate range for their pay grade, assuming you want to retain the employees
and have the funds. This can be done either immediately or in one or two steps. Rates being
paid to overpaid employees are often called red circle, flagged, or overrates, and there are
several ways to cope with this problem. One is to freeze the rate paid to employees in this
grade until general salary increase bring the other jobs into line with it. A second alternative
is to transfer or promote some or all of the employees involved to jobs for which they can
legitimately be paid their current pay rates. The third alternative is to freeze the rate for six
months, during which time you try to transfer or promote the overpaid employees. If you
cannot, then the rate at which these employees are paid is cut to the maximum in the pay
range for their pay grade.
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5. CURRENT TRENDS IN COMPENSATION
5.1 Skill Based Pay

With skill based pay, you are paid for the range, depth, and types of skills and knowledge you
are capable of using rather than for the job you currently hold. According to one expert, there
are several key differences between skill based pay (SBP) and job evaluation-driven job-
based pay (JBP).
Competence testing. With JBP, you receive the pay attached to your job regardless of
whether or not you develop the competence needed to perform the job effective. With SBP,
your base pay is tied not to the job, but to your skills. You have to be certified as competent
in the skills required by the job to be certified as competent in the skills required by the job to
get a pay increase.
Effect of job change. With JBP, your pay usually changes automatically when you switch
jobs. With SBP that's not necessarily so. Before getting a pay raise, you must first
demonstrate proficiency at the skills required by the new job.
Seniority and other factors. Pay in JBP system is often tied to "time in grade or seniority: In
other words, the longer you're in the job, the more you get pay, regardless of how well you
perform. SBP systems are based on skills, not seniority.
Advancement opportunities. Typically (but not always) there tend to be more opportunities
for advancement with SBP plans than with JBP plans because of the company's wide focus
on skill building. A corollary to this is that SBP enhances organizational flexibility by
making it easier for workers to move from job to job because their skills (and thus their pay)
may be applicable to more jobs and thus more portable.
A skill-based pay was implemented at a General Mills manufacturing facility. In this-case,

General Mills sought to boost the commitment and flexibility of its plant work force by
implementing what it referred to as a high-involvement / high performance work elements
included egalitarian management practices such as having no reserved parking spaces for
management and hiring employees who represented a close, team based organizational
culture in the plant In this plant, the workers were paid on the bases of their attained skill
levels. There was based organizational culture in the plant. In this plant, the workers were
paid on the bases of their attained skill levels. There were basically four clusters in the plant.
In this plant, the workers were paid on the bases of their attained skill levels. There were
basically four clusters (or "blacks") of jobs, corresponding to the four production areas;
mixing< filling, packaging, and materials. Within each of these blacks workers could attain
three levels of skill Level I indicates limited ability, such as knowledge of basic facts and
ability to perform simple tasks without direction. Level 2 means the employee attained partial
proficiency and could, for instance, apply technical principles on the area and could, for
example, analyze and solve production problem. Each block or production area had a
different average wage rate. There were, therefore, 12 pay levels (four blocks with three pay
levels each) in the plant.
A New employee could start in any block, but always at level. 1. If after several weeks the
employee was able to complete certification at the next higher skill level, his or her salary
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was correspondingly raised. Furthermore, employees were continuously rotated from

production area or block to production area. To be rotatable into a block, however, the
employee had to achieve level 2. Performance without that skill block. The system
encouraged the learning of new skill. It also fostered flexibility by encouraging workers to
learn multiple skills and willingly switch over from block to back. The actual pricing of the
12 skill levels was accomplished in part by making the lowest of the 12 plant skill levels
wage rate equal to the average entry-level wage rate for similar jobs in the community.
(Notice, therefore, that even with skill-based pay your still can't entirely escape evaluating
jobs, market pricing them, and ranking them relative to one another in some fashion).
Whether or not skill-based pay results in improved productivity is an open question? When
used in conjunction with team building and worker involvement and empowerment programs
does appear to lead to higher quality as well as lower absenteeism rates and fewer accidents.
However, the findings in one firm, which are not conclusive, suggest that productivity was
higher at its nor-skill-based facility.
5.2 HR AND THE RESPONSIVE ORGANISATION
Broad banding
The tread today for employers is to reduce the salary grades and ranges from ten or more
down to three to five, i.e. a process called broad banding. Broad banding means collapsing
salary grades and ranges into just a few wide levels or brands. Each of which then contains a
relatively wide range of jobs and salary deals. Thus, instead of having, say, ten salary grades
each of which contains a salary into three broad bands, each with a set, of jobs such that the
difference between the lowest and highest paid jobs might be s 40000 or more. One survey
found that almost one-third of the 3400 employers responding said they had adopted a broad
banding approach or were considering doing so. Broad banding's basic advantage is that it
injects greater flexibility into employee compensation. Broad banding is especially sensible
where firms flatter their hierarchies and organize around self managing teams. The new,
broad salary bands can include both supervisors and subordinates and can also facilitate
moving accompanying promotional raises or devotional pay cuts. For example, the employee
who needs to spend time in a lower-level job to develop a certain skill set can receive higher
than usual pay for the work a circumstance considered impossible under traditional pay
systems. Broad banding also facilitates the sorts of less specialized, boundary less jobs and
organizations being embraced by many firms like General Electric. Less specialization and
more participation in cross departmental processes generally mean enlarged duties or
capabilities and more possibilities for alternative career tracks; broader, more inclusive
actually salary bands facilitate this. One expert argues that traditional quantitative evaluation
plans actually reward inadaptability. The argument here is the being slotted into job that is
highly routine as defined by a compensable factor such as "know-how” is unlikely to
encourage job incumbents to think independently or be flexible. Instead, the tendency may be
for workers to concentrate on the specific, routine jobs to they are assigned and for which
they are rewarded. General Electric and Toyota are two employers who have broad banded
their pay scales. At Toyota there are only three plant job classification Division 1 includes all
production team members; Division II includes all general maintenance team members; and
Division III includes all tie and dye members. Similarly, General Electric, huge as it is, was
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able to restructure its entire pay plan into just five broad compensation bands. Broad banding
a pay system Involve several steps. The number of bands is decided upon and each is
assigned a salary range. The bands usually have wide salary ranges and also overtap
substantially. As a result, there's much more flexibility to move employees from job to job
within bands and less need to "promote" those to new grades just to get them higher salaries.
The bands are then typically subdivided into either specific jobs or skill level. For example,
band may consist of number of jobs each assigned a market value. More often, bands are
subdivided into several skills levels. Recall that with this second approach, workers are not
base above market value just for doing a job well or for having seniority Instead they must
increase their competencies such as skills, knowledge and abilities.

Quantitative job evaluation systems such as the point and factor comparison plans are still
used by 60% to 70% of all U.S. firms. There are several reasons for this. Proponents argue
that individual differences in skill attainment can be taken into consideration even when point
type plans are used, since most firms use salary ranges for groups of similar jobs.. These
salary ranges often reflect differences in the skills attained by, say different people who may
be working on the very same job. Job evaluation advocates also argue that a job description is
not necessarily a job restriction, since it's native to believe that employees automatically limit
their behaviour to what is written on a piece of paper. Furthermore, they say, there's no
reason why job evaluation needs to be limited to a specific job. Instead, one could
theoretically evaluate the "job" of doing a whole project and from there ascertain the problem
solving, accountability and knowledge that a worker would need to do all the jobs involved in
that project. Furthermore, neither skill based pay nor market based pay entirely eliminates the
need for evaluating the worth of one job relating to others.
In the final analysis their relative ease of use and security are probably the major reasons for
the continued widespread use of quantitative plans: Quantitative plans have also recently
been facilitated by computerized packages, as explained the accompanying information
technology and HR box.
Pay plans at well-known and progressive firms such as Saturn Corporation help to illustrate
the current trends in job evaluation and compensation management. As at the General Mills
plant previously mentioned, the compensation plans at Saturn are elements in more
comprehensive programs aimed at fostering employee commitment. These elements, as we've
seen, include value-based hiring, career oriented appraisals, and extensive employee
involvement programs. Compensation therefore tends to reflect the trust with which these
firms treat their employees, and the fact that employees are and should be treated as partners
in the business. The compensation policies at Saturn are typical. Saturn's pay plan is built on
four principles - salary, trust, few classification and pay for performance. All Saturn
employees are salaried, and there are no time clocks in the facility, to report your hours you
worked. While there are some checks and balances, the process is basically an honour
system. "What it comes down to." said one operating technician" is a matter of trust. As at
Toyota, there are also relatively few job classifications .Virtually all the assembly employees
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are classified as "operating technicians as are all non skilled trade members such as
machinists In additional classifications for skilled trades members.
Pay for performance is also important. Unclear the reward system originally envisioned in the
memorandum of agreement between Saturn and the UAW, about 20% of each employee's
pay was to be "at risk" specifically each employee's base compensation was to equal 80% of
straight time wages of the average for comparable jobs rates in the U.S. automobile
manufacturing industry. Over and above that a reward system was to be developed that would
be based on factors such as achievement of objective productivity targets individuals and
work unit performance, quality bonuses, and eventually a "Sat sharing formula" through
which profits were to be shared above a specified level of retaining to Saturn. At a minimum,
therefore, 20% of each person's pay was to be at risk, to earn back if the individual and the
company met their productivity goals. Then a pro sharing formula was to kick in. A slower
than expected start up at Saturn forced the firm to reduce the at-risk component to 5% and
thus boost the "guaranteed" components of the pay. Under a modified skill based approach,
employees can earn that 5% back by me in specified training goals (attending training
sessions, improving their skills, and so on. In summary, the trend in firms like Saturn is to
(1) Offer packages of above average pay combined with incentives and extensive benefits.
(2) Builds a compensation package that puts a significant portion of pay at risk.
(3) Emphasize self reporting of hours worked rather than devices like time clocks.
(4) Build a pay plan that encourages employees to think of themselves as partners. This means
that they should have a healthy share of the profits in good years and share in the down to
during bad times.
(5) Provide a package of benefits which makes it clear that employees are viewed as long term
investments.

The evolving practices in terms like Saturn provide us with a glimpse into the future of
compensation management, and future is now, as far as many firm are concerned. Here’s
what several compensation experts say we can expert. First with, an increasing emphasis on
empowering employees, In the U.S. companies in the year 2000, most traditional job
descriptions and hourly employee job classification will be fed unceremoniously into the
paper shredder. Replacing them will be greater latitude for employees to evolve their
responsibilities to meet customer needs as they see fit. And there will be an increasing
emphasis on paying employees for their competencies rather than just for the job's
responsibilities and activities. Measurement systems and rewards will increasingly emphasize
paying for results. Skill based will actual be a return to the compensation methods of the far
distant past. Under the apprentice systems that started with the guilds of the middle Ages,
apprentices had to demonstrate competence at their trade before becoming journeymen, and
then masters. So when firms General Mills condense dozens or hundreds of jobs into a broad
bands and then base pay differentials on skill levels, were really returning some extent to the
past.
One expert also suggests that as firms like IBM break themselves into small specialized and
decentralized pieces the concept of centrally determined compensation plans may become
obsolete. He says that at some point managers of decentralized units should get their own
salary budgets and then set pay levels for new hires, determine pay increases, decide when to
give raises, and make all other decisions concerning cash compensation for the employees
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reporting to them. There will also be a growing emphasis on pay for improved results and no
non traditional pay (also called "Alternative Towards). As summarized in traditional pay
plans based on job descriptions, job evaluation, and salary structures tends to focus, says this
expert, on creating order, reinforcing the hierarchy, and reacting behaviour. In the future
(and, for many firms, now), the emphasis will shift paying for the job to paying for the
employee's contribution. Thus the focus will shift from creating order and directing behaviour
to encouraging involvement and commitment, and to rewarding positive results. Non
traditional or alternative pay plants for doing this include competency or skill based pay and
the sorts of spot awards, team incentives and gain sharing.

Developing a compensation plan to pay executive, managerial and professional employees is
similar in many respects to developing a plan for any employees. The basic aims of plan are
the same in that the goal is to attract good employees and maintain their commitment.
Furthermore, the basic methods of job evaluation- classifying jobs, ranking them, or
assigning points to them, for instance- are about as applicable to managerial and professional
jobs as to production and clerical ones. Yet for managerial and professional jobs, job
evaluation providers only a partial answer to the question of how to pay these employees.
Such jobs tend to emphasize no quantifiable factors like judgment and problems solving more
than do production and clerical jobs. There is also a tendency to pay managers and
professionals based on ability- based on their performance or on what they can do rather than
on the basis of static job demands like working conditions. Developing compensation plans
for managers and professionals, therefore, tends to be relatively complex, and job evaluation,
while still important, usually plays a secondary role to non salary issues like bonuses,
incentives and benefits
10. COMPENSATING MANAGERS

Basic Compensation Elements
There are five elements in a manager's compensation packages salary, benefits, short-term
incentives, long-term incentives, and prerequisites. The amount of salary managers paid
usually depends on the value of the person's work to the organization as well the person is
discharging his or her responsibilities. As with other jobs, the value of the person's work is
usually determined through job analysis and salary survey and the resulting fine tuning of
salary levels. Salary is the comer stone of executive compensation. It is on this element that
the others are layered, with benefits, incentives and prerequisites normally awarded in some
proportion to the manager's base pay. Benefits (including time off with pay, health care,
employee services, survivor's protection, and retirement coverage) are discharged. Short-term
incentives are designed to reward managers for attaining short term (normally yearly) goals.
Long-term incentives are aimed at rewarding the person for long term performance terms
increased market share and the like). Perquisites (perk short) begin where benefits leave off
and are usually given only select few executives based on organizational level and (possibly)
pas performance. Perks include use of company cars emphasize performance incentives more
than do other employees pay plans since organizational results are likely to reflect the
contributions of executives more directly than those of lower employees. The heavy incentive
component of executive compensation can be illustrated with some examples of the highest
paid U.S. executives. In1995, for instance, the CEO of General Electric earned a salary of $
2000,000 a short term bonus of $3,250,000 and long term compensation of $16,740,000. For
the chairperson of Rockwell International, his salary component was $815,000 and the bonus
was $2,000,000 for total compensation of $2, 815,000. The Chairperson of Coca Cola earned
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a salary of $$ 1,680,000, a bonus of $ 3,200,000 and long term compensation of $8,000,000

for a total of almost base salary in many countries, including the United States, United
Kingdom, France and Germany. There is considerable disagreement regarding what
determines executive pay and therefore, whether top executives are worth what they are paid.
At the lower management levels (like first line supervisor), there is no debate; supervisors
pay grades are usually set to that their medium salaries are 10% to 25% above those of the
highest paid workers supervised. And many employers even pay supervisors for scheduled
overtime, although the Fair Labour. Act does not require them to do so. It is at the top
management levels that questions regarding pay abound. The traditional wisdom is that a top
manager's salary is closely tied to the size of the firm. Yet two experts who tested this idea
for the 148 highest paid executives in the United States concluded that "the level of executive
responsibility (as measured by total assets, total number of shares in the company, total value
of the shares, and total corporate profits) is not an important variable in determining
executive compensation". Instead say these experts an executive's pay is mostly determined
by the industry in which he or she works and the corporate power structure", "since
executives who also in their firm boards of directors can heavily influence how they get paid.
Yet there is conflicting evidence. In one study, for instance, the researcher found that a
statistical analysis of the total cash compassable of the chief executive officers of 129
companies showed that they were paid for both responsibility and performance. The
researchers found that four compensable factors –company size, profitability, number of
employees and experience - accounted for 83% of the differences in pay. Therefore, it
appears that there are rational, acceptable and abiding principles that govern the total cash
compensation of top executives in manufacturing firms.
In any case, shareholder activism is combining with congressional reform and other changes
to tighten up the restrictions on what firms pay their top executives. For example, the
Securities and Exchange Commission voted in 1992 to approve final rules regarding
executive compensation communications. The chief executive officer's pay is always to be
disclosed as well as other officers' pay if their compensation (salary and bonus) exceeds $
100,000. And for bankers, the Federal Deposit Insurance Act of 1991 contains a prohibition
on excessive compensation. One result is that board of directors must act responsibility in
reviewing and setting executive pay. That says one expert, includes determining the key
performance requirements of the executive's job, assessing the appropriateness of the firm's
current compensation practices, conducting a pay for performance survey, and testing
shareholder acceptance of the bound's pay proposals. The general trend today to reduce the
relative importance of base salary and boost the Importance of short and long term executive
incentive The main issue here is identifying the appropriate performance measures for each
type of incentive and then determining how to link these to pay Typical short term measures
of shareholder value include revenue growth and operating profit margin. Long-term
shareholder value measures include rate above some predetermined base.
11. Managerial Job Evaluation:

Despite questions regarding the rationality of executive pay, job evaluation of still important
of pricing executive and managerial jobs in most firms. According to one expert, "the basic
approach used by most large companies to ensure some degree of equity among various
divisions and departments is to classify all executive and management positions into a series
of grades, which a series of salary ranges is attached. As with non managerial jobs, one
alternative is to rank the executive and management positions in relation to each other,
grouping those of equal value. However, the job classification and point evaluation methods
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are also used, with compensable factors like position scope, complexity, difficulty and
creative demands.
12. Compensating Professional Employees:

Compensating non supervisory professional employees like engineers and scientists presents
unique problems. Analytical jobs put a heavy premium on creativity and problems solving,
compensable factors not easily compared or measured. Furthermore the professional's
economic impact on the firm is often related only indirectly to the person's actual efforts; for
example, the success of an engineer's invention depends on many factors, like how well, it is
produced and marketed. The job evaluation methods we explained previously can be used for
evaluating professional jobs. The compensable factors here tend to focus on problem solving,
creativity, job scope, and technical knowledge and expertise. Both the point methods and
factor comparison methods have been used, although the job classification methods seem
most popular. Here a series of grade descriptions are written, and each position is slotted in to
the grade having the most appropriate definition.
Yet, in practice, traditional methods of job evaluation are rarely used for professional job
since it is simply not possible to identify factors and degrees of factors which meaningfully
differentiate among the values of professional work, "as one expert notes, "are extremely
difficult to quantify and measure". As a result, most employers use a market pricing approach
in evaluating professional jobs. They price professional jobs in the marketplace to the best of
their ability to establish the values for benchmark jobs. These benchmark jobs and the
employer's other professional jobs are then slotted into a salary structure. Specifically, each
professional discipline (like mechanical engineering or electrical engineering) usually ends
up having four to six grade levels, each of which requires a fairly broad salary range. This
approach helps to ensure that the employer remains competitive when bidding for
professionals whose attainments vary widely and whose potential employers are literally
found worldwide.

First, managerial remuneration cannot be compared to the wage and salary schemes for other
employees in organizations Factors and variables are more in numbers in management jobs,
and simple comparisons and ratings may not be possible.
Second, executives are denied the privilege of having unionized strength, they cannot demand
for higher salaries and parks, hoist red flags on factory gates, shout slogans, pelt stones, and
burn buses. It is the workers who resort to all these and if they succeed in their efforts,
executives too benefits. Put in another way, executives often prompt workers to go on a
strike.
Third, secrecy is maintained in respect of executive remuneration. What receives is not made
known to B and what B gels, C cannot know. Secrecy is maintained because no two
executives in the private sector, in the same grade, receive the same pay Remuneration
depends upon such factors as competence, length of service and loyalty to the founders
Fourth, executive pay is not supposed to be based on individual performance measure but
rather on unit or organizational performance measure but rather on unit or organizational
performance. This is because an executive's own performance is assumed to be rather directly
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reflected in measures of unit or corporate performance. However, in practice, an executive

pay may not be linked to the organization's performance.
Finally, executive remuneration, as was stated earlier, is subject statutory ceilings. As per the
latest guidelines, the monthly salary varies from Rs. 40,000 to 87,500 subject to an overall
limit of Rs 10,50,000 per annum including perquisites.
Remuneration is restricted to five percent of its net profit if the company has one executive,
but the total remuneration is not exceed 10 percent of its net profit if the number of
managerial personnel is more than one. These ceilings, however, do not apply to private
limited companies. Theoretically, remuneration of managerial personnel is supposed to be
guided by job descriptions, job evaluation, salary grade with ranges of pay in each grade, and
salary surveys. But in practice, the norm seems to have been thrown to winds and exorbitant
amounts are paid to decision makers in organizations. At the top is Michael D. Eisner who
grass pay is more than $ 200 million which, in terms of rupees, runs into a whopping Rs. 600
crore plus. Followed by him is Sanford 1. Well who cleared more than $ 50 million (Rs. 150
crore plus). Then followed the remuneration of other executives, Gradually the trend is
spreading Into Indian Industries, more so after deregulation. The annual salaries of our CEOs
range from Rs 50 Lack to Rs one crore but this is mostly confined to financial services too
have shot up ranging from Rs. 2lakh to 4Lakh annually. Every month in addition to a basic
salary of Rs. 50.000 per month. He got Rs 50,000 as performance-linked bonus. He was also
entitled a commission on perks amounted to Rs. 4.5lakh per annum. S.M Dutta of HLL
received a total salary packet exceeding Rs. 34lakh plus perks. Naina Lal who switched over
from ANZ Grind lays to head the investment banking division of Morgan Stanley was
reportedly grossing Rs 1crore per annum. Pradip Shah quit CRISIL and joined the investment
advisory company promoted by George Soros and Chemical Bank. Stakes involved were one
crore plus per annum. In the same league can be included N. Jayakumar, who heads Prime
securities.
Indian industries:
1. Norms of wage and salary fixation, such as job description, job evaluation, grades of pay
and wage parties, are generally ignored. What an executive receives depends on
employer's ability and employee's bargaining strength.
2. Salaries and perks of executives are subject to annual reviews and hikes, unlike the
remuneration of employees which is reviewed once in three years.
3. As the ABC Consultants study reveals, executives are offered composite salaries instead
of menu salaries. The latter refers to a package of items, numbering nearly hundreds, from
which the CEO is asked to choose.
4. There is a tendency to link salaries (at least 20 percent) to performance. HCL, Tital and
Modi Xerox are reported to link salaries to performance.
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5. Holidaying abroad is gaining increasing acceptance. In a year, a typical executive works

10 months on his/her job, holidays one month abroad with his family, and attends training
classes in the remaining one month.
6. For executives posted abroad, relatively higher salaries are paid during their foreign
assignments. Once they are back in India, the same executives are paid less to maintain
parity with those working in the home office. Ranbaxy reportedly follows this practice.
7. Competition among companies to attract competent personnel is resulting in a virtual

hijacking of managerial personnel. Pepsi did it and took away quite a few executives from
HLL and Nestle. Kellogg and Coke did the same to Pepsi. Executives in the public sector
stand nowhere in comparison to their counterparts in the private sector in respect of salaries
and perks. There has, therefore, been an exodus of executives from government owned
organizations to private sector enterprises. SAIL alone has lost 50 of its brass to Mukand,
Essar and TISCO. Several of BEL executive quit and joined BPL. SBI too lost quite a few of
its general managers in favour of financial services in the private sector.
Several issues crop up in the context of remuneration provided to the highest decision makers
in organizations. The first question relates to the worth of an executive. Is the Chief
Executive per day? Rs.1387 per working hour? Surely, there are many numbers of employees
in an organization whose competency is no less significant but their remuneration is in no
way near to that of a managing director or a general manager. Take the case of Banwarilal
Chouke, a matriculate tamer in BHEL, who gets only a worker's pay scale. Choukse's
contribution to BHEL is no less significant he has offered 117 suggestions to improve
productivity, safety, quality and foreign exchange earnings. Assuming that an executive is
worth that much, the success of an organization does not depend only on one individual
(though failure does). The healthy bottom line of an organization is the result of combine
efforts of technicians, scientists, financial wizards, marketing experts, HR specialists, canteen
staff, sweepers, drivers and a host of others. If it were to so, TISCO should not have survived
after the exits of Russi Mody, SAIL after V. Krishnamurthy and HLL after T. Thomas.
Obviously, the CEO alone should not be given all the credit for healthy bottom lines.
If there is one individual who really deserves applause and handsome rewards, it is the found
of the organization. In the initial stages, this gentleman sheds his blood for the organization.
When banks refuse to sanction additional loans, he pledges family assets to raise money for
buying raw materials and paying salaries to employees. He spends sleepless night division
strategies to market his products, to tackle labour militancy and to satisfy government
agencies. It is struggle and a challenge all the way till unit starts doing well. He then needs a
deputy to assist in managing the business. The executive demands 100 times more than what
the founder had been drawing all along. Such demands naturally defy logic. Yet another issue
relates to the gap between the pay drawn by an executive and the wages paid to a worker.
While the CEOS of ITC got paid Rs. 1387 per hour, a worker gets Rs. 25 per hour a
difference of more than 55 times.
Huge disparities in incomes are often dysfunctional getting alienated from front line
employees. It creates a psychological distance and also a life style disparity. That is why
executives at various levels sometimes tend to feel out to touch and uncomfortable while
dealing with front line employees. One of the popular arguments in favour of hefty pay scales
to executives is their motivation. They should be paid more to put in better performance.
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Looking at the flip side, money ceases to be the motivator beyond a certain point. One must
have a house, vehicle, bank deposits, insurance policies and good education for children. And
money induces an individual to acquire and enjoy these. Beyond this, money makes people
extravagant and wasteful. Children are the worst affected by this kind of affluence. Then
there is the constant fear of raids by tax authorities. Surplus money therefore results in
needless tension.
Assuming that money motivates, these high flying executives hardly stick to one
organization. A few hundreds more offered by a rival organization will for organizational
root less gratitude and loyalty are words of the past. Finally there is the question of equity.
When hundreds of people are languishing in the unorganized sector, it may be unethical to
pay huge salaries and perks to select elites in the society. The hapless employees work hard
for eight to ten hours a day but get a petty sum of Rs. 500 to Rs. 600 per month each. Added
to this is the endless uncertainty of tenure. A lecturer with a doctoral degree slogs in a college
for a mere Rs. 1200 per month and stays eternally "temporary" on his or her job. An MBA
from good institute demands an entry level pay of Rs. 6lac per annum whereas the professor
who trains the MBAs takes 25 years of continuous services to earn a monthly salary of Rs.
30000-50000.
1. What are the tools used in the designing of specific compensation package?
2. How a company can develop suitable compensation package for maintaining their calibre
employees?
3. If a company ignore differentiation in compensation package? What will be the effect on
the company Human Resource?
4. What is the procedure of preparing the specific compensation package in any
organization?
5. How specific compensation package helps the companies in building image?
6. How we can implement the compensation package in the organizations?
7. What are the steps involved in preparing specific types of compensation packages.
8. Compensation Packages is very important aspect of any organization. Explain this aspect
in view of present scenario?
9. What is the role of Compensation in the employee stability in particular organization?
10. How we can prepare a suitable compensation package to satisfy the specific individual
employees?
11. What are the important factors which affect the special compensation packages?
12. What is the role of market trends in compensation management?
16. Summary
The design of a pay package for the specific human resource is not an easy job. First most
important is how to evaluate the performance or outcome of individual (group wise,
organization wise). Historically, pay for performance has meant pay for individual
performance. Piece- rate incentive systems have dramatically declined because managers
have discovered that such systems result in dysfunctional behaviour, such as low cooperation,
artificial limits on production and resistance to changing standards. Similarly more questions
are being asked about individual bonus plans for executives as top managers discover their
negative effects. The design of an individual pay for performance system requires an analysis
of the task. Does the individual have control over the performance (result) that is to be
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measured? For motivational reasons already discussed, such a relationship must exist.
Unfortunately, many individual bonus, commission or piece-rate incentive plans fall short in
meeting this requirement. An individual may not have control over a performance result, such
as sales or profit, because that result is affected by economic cycles or competitive forces
beyond his or her control. Organizational effectiveness depends on employee's cooperation in
most instances. An organization may elect to the pay or at least some portion of pay,
indirectly to individual performance. Seeking to foster teamwork, a company may tie an
incentive to some measure of group performance, or it may offer some type of profit or
productivity sharing plan for the whole plant or company. Gain sharing plans have been used
for years and in many varieties. The real power of a gain sharing plan comes when it is
supported by a climate of participation. Various structures, systems and processes involve
employees in decisions that improve the organization's performance and result in a bonus
throughout the organization.
Reward system policies should, in most instances, follow rather than lead other human
resource policies. This note began by stating that the rewards policy area presents the general
manager with one of the more difficult HRM tasks. There are numerous dilemmas and
contradictions inherent in a reward system that make it difficult to design and administer with
predictable outcomes. How important are intrinsic rewards compared with pay and other
extrinsic rewards? How much emphasis should be placed on these rewards, and what effect
do policies regarding one set of rewards, and what effect do policies regarding one set of
rewards have on the other? Questions arise not only about what system is most effective for
maintaining internal and external pay.
17. References:
 Fogleman et al. Employee Compensation and Job Satisfaction on Dairy Farms in the
Northeast April 1999, Cornell University, RB99-02.
 Kansas Department of Human Resources. Kansas Wage Survey: 1996 Edition.
 Thomas Pattern, Jr. Pay: Employee Compensation and Incentive Plans (New York: Free
Press, 1977.
 Henderson, Compensation Management, pp. 88-99.
 Jerry Mc Adams, "Why Reward Systems Fail, "Personnel Journal, Vol. 67 No. 6 (June
1998), pp. 103-113.
 James Whitney, "Pay Concepts for the 1990's Part 1. Compensation and Management
Benefits Review Vol. 20 No. 2 (March-April 1988) pp 33-44.
 Richard Henderson, Compensation management (Reston VA: Reston, 1980)
 Burack, E.H. Personnel Management: A Human Resource Systems Approach, 1977, p.
321.
 French, Wendell, The Personnel Management Process: Human Resources
Administration, 1974, p. 521
 Government of India, Report of the National Commission on Labour, p. 92.
 Edwin B. Flippo : Personnel management, McGraw- Hill Book Company, 1984, P.331.
 National Commission on Labour: Report of the Study Group on Productivity and
Incentives. 1969, P 39.
 International Labour Organization: Payment by Results, 1951, pp. 54-92.
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Chapter VI
MODERN TECHNIQUES OF COMPENSATION
1. Introduction
4. Union influence
6. Job technology
9. Labour market
10. Pay practices
10.3.1 Pay Differences within and between levels or grades
11. What are the components (Tools) of compensation systems?
12. Phases of compensation management
12.1 Job descriptions
12.2 Job analysis
12.3 Job evaluations
12.4 Job ranking (Ranking Method)
13. Job grading (Classification Method)
13.1Job Grade
13.2 Factor comparison method
13.3 Point system
14. Pay structures
15. Wage & salary survey
16. What are different types of compensation?
17. Compensation plan
17.1Develop a program outline
17.4 Conduct a job analysis of all positions
17.5 Evaluate Jobs
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17.9 Develop a salary administration policy
17.11 Communicate the final program to employees and managers
18. Compensation : Salary survey
18.3Where can I find salary surveys?
19. Compensation: salary survey: conducting your own
19.1 Roles
19.6 Designing the questionnaire form and brief Job descriptions
19.7 Assurance of confidentiality
19.7.1 Union Salary data may be misused
19.7.2 Survey Analysts
19.7.3 Results only to participants
19.7.4 Coding of participant information
20. Identification of participation
22. Summary
23. References
Structure: Chapter 5 describe the tools used in designing, improving and implementing
compensation packages.
After reading this chapter, you should be able to:
 Identify the components (Tools) of compensations system.

 Understand the phases of compensation Management
 Describe the methods of job grading
 Understand the Pay structure
 Describe principles of compensation management
 Identify the different types of compensation
 Understand the pay structure and wage & Salary Survey.
 Understand which data is relevant far evaluation.
1. INTRODUCTION
Part II develops a systematic approach for analyzing and evaluating the unique contributions
each job makes toward the achievement of organizational goals and objectives. This is the
first step in achieving fair and equitable compensation.
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Throughout this part there will be discussions that emphasize the value of certain tools and
techniques that enable the compensation manager to analyze the job and determine its worth.
These discussions may indicate that a scientific approach leads to a final and correct answer
to compensation problems. Nothing could be further from the truth because there are no
absolutes in compensations, only honest end to find a better way.
It is important to understand that although practically any tool can do the job, its success
depends entirely on the skill and artistry of its user. It is true, however, that, depending upon
the situation, some tools do provide better and more accurate approaches to solving
compensation problems.
Furthermore, even the best analytical tools in the hands of a competent compensation
manager require constant attention, Compensation programs are primarily planning and
control programs and as such require frequent adjustment. No compensation program is ever
perfect. It must adjust to constantly changing internal and external pressures while at the
same time maintaining its integrity and basic stability. This means that the initial design must
permit a degree of flexibility to adjust to the changing conditions, while allowing the basic
concepts of the program to move forward in its directed path. No plan works by itself; it
requires a certain dedication by all involved parties the compensation specialists, line
managers, and concerned employees.
The variety of pressures applied to the compensation system varies within each organization.
For this reason, each must develop its own unique compensation program.

Many pay structure decisions relate to policy, and they rest within the domain of top
management. Although the compensation manager has limited policy-making authority, if he
provides accurate, current data, he can strongly influence policy-makers to make the best
decisions for developing workable, meaningful, and acceptable compensation policies.
Identifies some of the factors that not only influence the design of the pay structure but
maintain a steady pressure on it. Some of these factors have been discussed at length in past
chapters, and others will be discussed in future chapters, but the following review will place
them in proper perspective.
Introduced some of the legislation affecting organizations and Chapter 13 will discuss
methods and procedures organizations may use to comply. There is no escape from following
these requirements.
4. Union influence
The influence of unions extends to both the non urteon and the unionized organization. Of
course, those organizations that operate within collective bargaining agreements feel the
impact more directly and readily. Chapter 14 will discuss the influence and pressures placed
on organizations through union activates.
Although this subject has been given scant attention throughout this text, it is an important
factor. Historically, certain Industries have been of a low-profit nature, and certain types of
work have provided low pay. Some adjustments have been made in these two areas, but wide
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variations still exist. An organization's sty to pay and the historically pay characteristics of a
jab are both major-dominants of the pay structure. The compensation manager in the typical
love-profit industry, or in an organization that has a significant number of employees in low-
paid jobs, works under a healer burden than do his compatriots who do not face this issue. In
overcoming these problems, the art of managing the organization interacts directly with the
art of managing compensation.
6. Job technology
As work moves from an emphasis on physical effort toward an emphasis on mental effort, the
influence of technology factors will continue to be felt at the compensation table. From
beginning to end, this text relates to these problems.

The changing nature of worker aspirations and expectations also forms part of the basic
groundwork for this text. The need for compensation to satisfy relative as well as absolute
needs places never-ending pressures on the pay structure. Relationships change constantly
there is no stability in this area. Therefore, a pay structure that is organic-living and dynamic
-is required. At the same time, this pay structure must provide stability; it cannot be in a state
of flux-The ability to provide a stable base and, at the same time, to satisfy the dynamics of
changing relationships in relative worth brings the art of compensation management into
focus.
Whether times are prosperous or inflationary, whether there is a recession or a depression,
such conditions will influence the pay structure of an organization. Economic conditions
require recognition and action. Part III deals with these economic considerations from a
variety of viewpoints.
9. Labour market
The supply and demand topic was the underlying theme of chapter II. All organizations
complete for quality labour in their respective labour markets. The hiring and retaining of
sufficient employees who can provide valuable contributions will influence the pay structure
and in turn, they will be influenced by it. Supply and demand are probably the most
influential factors in determining the basic level of the pay structure, and this emphasizes the
importance of the compensation survey.
10. Pay practices

Closely allied with the market is the "going rate". Although it is an average, and like many
averages it may provide distorted information, it is significant in identifying the pay demands
of the labour market. Next to general labour market influence, the pay rates of competitive
industries normally have the greatest effect on going rates.

Each organization has its own particular compensation features that distinguish if from all
other organizations. Not only are the features different, but each organization communicates
these rewards to its members differently, thus varying acceptability and workability. The
entire text focuses on the reward package, but Chapter 15-20 in particular will describe
methods of communicating information concerning rewards.
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Decisions are made at the senior levels of the organization which provide guidelines for the
compensation manager to follow in developing the pay structure of the organization. These
policy decisions include guidelines concerning minimum and maximum pay levels (taking
into consideration government regulations, union influences, and market pressures), the
general relationships among pay levels (between non exempt and exempt, between senior
management and middle-management, between operative employees and supervisors), and
how to divide the total compensation dollar (what portion goes into base pay, what portion
into benefits, what portion into incentive programs). Additionally, senior management
decides on how much money to allot for the total compensation package, i.e., how much will
go into pay increases for the next year, who will recommend pay increases, and, generally,
how they will be determined. In other words, will they be based on seniority or on merit? If
based on merit who will make the determination? Last, but not least, decisions made at this
level determine the extent to which compensation police are detailed and communicated
throughout the organization. Here, the issue of open or secret compensation policy becomes
one of the most important issues facing this level of management.
Although decisions made at the top of the organization do not determine anything
specifically, they do set guidelines for the compensation manager. From them, he determines
the spread of pay from minimum to maximum levels. He decides if it is worthwhile or even
possible to use a single pay structure. He decides if the pa structure should be set on a linear
base or on one that is curvilinear. He determines the number of levels or grads and whether
there should be one rate for each level or a range of rates. If he decides on a range, he must
decide on its width, the steps within it, and the amount of overlap of pay between levels.
A line of best fit or trend line provides visual Identification of the relationships of all jobs. In
addition to the trend line, there are quite often lines indicating maximum and minimum
acceptable levels of pay. Through the use of these lines, it is possible to sport those jobs with
pay levels above the acceptable maximum (frequently called red circle jobs) and these below
the acceptable minimum (sometimes called green circle jobs). The major problem area here
lies with jobs above the maximum level because it is difficult to reduce a pay rate. On the
other hand, it is normally a simple matter to raise green circle jobs to minimum levels.
Although the compensation manager is basically responsible for these areas, senior
management should review and approve them before implementation. Those who fully
understand the ramifications of the compensation issues as they affect the activities of the
organization should perform the review.

The four basic criteria that differentiate among pay structures are: (1) the pay differences
within and between levels or grads, (2) the number of pay structures, (3) the difference
between midpoints and the amount of overlap between adjoining levels or grads, and (4) the
range of pay and its division within the levels or grads. By providing the skeleton for the pay
structure, these four technical features determine, to large degree, the unique compensation
characteristics of the organization. Above all, they tell each employee the value of his
contribution, his job opportunities, rewards related to both horizontal and vertical promotion,
and whether or not his company is competitive with other organizations.
10.3.1 PAY DIFFERENCES WITHIN AND BETWEEN LEVELS OR GRADES
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In developing pay differences between levels, the compensation manager must first
consider the establishment of minimum and maximum pay levels. For equity and
acceptability purposes, some form, of consistent relationship should exist among the levels of
the pay structure as well as within each pay level.
Minimum Pay: Following the recognition of government legislation (minimum wage and
hour laws) as well as union and labour market influences, the organization must review its
lowest-rated jobs and set their pay level. In essence, this sets the minimum level or floor pay
of the organization. A floor set too high may force all following rates to be set at an overly
high level, causing excessive labour costs, which may in turn limit the competitiveness and
profitability of the organization. On the other hand, too low a level may provide an
inadequate number of suitable applicants and result in a pay structure that is
disproportionately lower than necessary to meet hiring, retention, and performance
requirements. A primary reason for the wage survey is to assist in solving this basic pay
structure problem.
Maximum Pay: The highest rate of pay within the organization usually applies to its chief
executive. This establishes the maximum or ceiling rate for the organization. At the chief
executive level, it is difficult to relate the contributions the job makes to success of the
organization; rather, it is the contribution the chief executive officer makes to the job that
determines the maximum salary. The higher the level of the position, the more difficult it is to
set a reasonable pay with any type of mathematical precision.
Although not always the case, frequently there is a reverse progression the managerial ranks
in which the pay for a less senior position bears a direct relationship to the pay for the
position directly above it. In effect, what happens is that the government, union, or labour
market sets the minimum level, while the organization, its performance, and chief executive
pay set maximum levels. In the public sector and in non profit organizations however,
maximum pay may be that set by legislation for the most senior elected or appointed official.
Internal and external pay level considerations. With the assignment of various jobs to a
specific pay grade, adjustments must be medal According to the evaluations of the jobs and
their historical precedents, some jobs require a higher rate of pay than others. Assigning one
rate or range of rates to a number of jobs with different existing rates of pay may require
adjustments for these differences without reducing the overall averages of all of the jobs
within the pay grade. The discussion of the trend line and of the least-squares method later in
this chapter will relate to this problem.
In the internal smoothing process, it is important that the pay for the jobs smoothed
downwards be competitive with comparable jobs in the marketplace. This problem of
adjusting upwards and downwards for the large variety of jobs in the lower grade levels
frequently resume in the development of a large number of pay levels with small or brands of
pay.
After averaging out the pay of the jobs within a pay grade, it is necessary to adjust the
midpoint and ranges of pay between levels, Most pay structures provide for an orderly and
smooth progression ranges from level to level, but the raw averaging of the pay of jobs within
a level will normally result in an uneven progression from step to step.
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Whether a trend line describing the progression between steps takes a straight or curved path
in unimportant. What is important is that the progression takes an orderly form. This provides
a basis for designing pay levels and ranges that satisfy competition requirements of the
organization and meet the employee needs of equity and fairness.
11. WHAT ARE THE COMPONENTS (TOOLS) OF COMPENSATION SYSTEMS?

Compensation will be perceived by employees as fair if based on systematic components.
Various compensation system, have been developed to determine the value of positions.
These systems utilize many similar components including job descriptions, salary ranges /
structures, and written procedures. The components of a compensation system include:
Job Descriptions
Job Analysis.
Job Evaluation
Job Ranking (Ranking method)
Job Grading (Classification method)
Pay Structures
Salary Surveys
Organizational Problems in Wage
Determination Policies and Regulations
Phase:
Identify and study jobs
Phase II
Internal Equity
JOB ANALYSIS
JOB EVALUATION
Job Ranking Job Grading Factor Comparison Point System
Phase III
External Equity
WAGE AND SALARY SURVEYS
Department of Employer Professional Self Conducted

Labour Associations Associations Surveys
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Phase IV
Matching Internal and external worth
PRICING JOBS
Job evaluation Worth Match Labour Market worth
Rate range for each job
12. PHASES OF COMPENSATION MANAGEMENT

12.1 JOB DESCRIPTIONS
A Critical component of both compensation and selection systems, job descriptions
define in writing the responsibilities, requirements, functions, duties, location, environment,
conditions, and other aspects of jobs. Descriptions may be developed for jobs individually or
for entire job families.
12.2 JOB ANALYSIS

Job analysis is to collected information about jobs to produce job and position
descriptions. This Information also helps to provide the basis for jobs standards. With the job
analysis information provided as part of the department's human resource information
system, compensation specialists have the minimum information they need to begin the next
phase of compensation management- job evaluations.
12.3 JOB EVALUATIONS

A system for comparing jobs for the purpose of determining appropriate
compensation levels for individual jobs or job elements. There are four main techniques,
Ranking, Classification, Factor Comparison, and Point Method.
12.4 JOB RANKING (RANKING METHOD)

The ranking methods require a committee typically composed of both management and
employee representatives to arrange jobs in a simple rank order, from highest to lowest. No
attempt is made to break the jobs down by specific weighted criteria. The committee
members merely compare two jobs and judge which one is more important or difficult. Then
they compare another job with the first two, and so on until all the jobs have been evaluated
and ranked. The most obvious limitations to the ranking method are its sheer unmanageability
in the situation where there are large numbers of jobs. Other drawbacks to be considered are
the subjectivity of the methods- there are n definite or consistent standards which justify the
rankings and because jobs are only ranked in terms of order, we have no knowledge of the
distance between the ranks.
13. JOB GRADING (CLASSIFICATION METHOD)

It is a slightly more sophisticated method than Job Ranking, though still not very
precise. In this method each job is assigned a grade or class. These classifications are created
by identifying some common denominator skills, knowledge, and responsibilities with the
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desired goal being the creation of a number of distinct classes or grades of jobs. Examples
might include shop jobs, clerical jobs, sale jobs, and so on, depending on the types of jobs the
organization requires. Once the classifications are established, they are ranked in an overall
order of importance according to the criteria chosen, and each job is placed in its appropriate
classification. The standard description that most nearly matches the job description
determines the job's grading / Classification. The classification method shares most of the
disadvantage of the ranking approach, plus the difficulty of writing classification
descriptions, judging which jobs go where, and dealing with jobs that appears to walk into
more than one classification. The largest user of this approach has been the US Civil Service
Commission, which gradually is replacing this method with more sophisticated approaches.
A job Classification Schedule for use with the job grading/classification method is
Directions: To determine appropriate Job grade, match standard description with Job
description.
13.1 JOB GRADE

Standard Description
i) Work is simple and highly repetitive, done under close supervision, requiring
minimal training and little responsibility or initiative.
ii) Examples: Janitor, File Clerk
iii) Work is Complex, varied, done under general supervision. Advanced skill level is
required. Employee is responsible for equipment of safety shows high degree of
initiative. Examples: Operator II, Die specialist.
13.2 FACTOR COMPARISON METHOD

It requires the job evaluation committee to compare critical or compensable job
components. The compensable components are those factors common to all the jobs being
evaluated - such as responsibility skill, mental effort, physical effort, and working conditions.
Each factor is compared, one at a time, with the same factor for other key jobs. This
evaluation allows the committee to determine the relative importance of each job. The factor
comparison method involves the following five steps.
Step 1: Determine the compensable factors

Analysts must first decide which factors are common and important in a broad range of jobs.
The critical factors like responsibility, skill, mental effort, physical effort and working
conditions are most commonly used. Some organizations use different factors for managerial,
professional, sales, and other types of jobs.
Step 2: Determine key jobs

Key jobs are those that are commonly found throughout the organization and are common in
the employer's labour market. Common jobs are selected because it is easier to discover the
market rate for them. Ideally, these benchmark jobs should be accepted by employees as key
jobs and should encompass a wide variety of critical factors to be evaluated. Typically, 10-25
key jobs are selected by the committee.
Step 3: Apportion present wages for key jobs

The job evaluation committee then allocates a part of each key job's current wage rate to each
critical factor. The proportion wage assigned to each of the different compensable factors
depends on the importance of the factor. The base rate agreed upon by the company.
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The apportionment of wage for key jobs:
KEY JOBS
Compensable or File Clerk Secretary Janitor
critical factors (Rs) (Rs.) (Rs.)
Responsibility 1.40 3.40 1.80
Skill 1.30 3.00 1.80
Mental effort 1.40 2.80 1.50
Physical effort 0.90 1.70 2.70
Working Conditions 0.80 1.60 1.90
Total 5.80 12.50 9.70
Wage rate 5.80 12.50 9.70
Step 4: Place key Jobs on a factor comparison chart

Once the wage rates are assigned to the compensable factors (each key job, this information
is transferred to a factor comparison chart key job. Titles are place in the columns according
to the rate of wages assigned to the job for each critical factor.
Step 5: Evaluate other Jobs

The titles of key jobs in each column of the factor comparison chart serve as benchmarks
other non-key jobs are then evaluated by fitting them on the rate scale under each factor
column. Drawbacks of factor comparison approach include complexity; their sue of the same
criteria to assess all jobs when, in fact, jobs differ across and within organizations; and its
dependence on key jobs as anchor points. On the positive side, factor comparison requires a
unique set of standard jobs for each organization, so it is a tailor made approach. Secondly,
jobs are compared with other jobs to determine a relative value.
A FACTOR COMPARISON CHART
Rate Responsibility Skill effort Mental effort Physical Working

condition
4.00 Secretary
3.00 Secretary Secretary Janitor
2.00 Janitor File Clerk Janitor File Janitor File Clerk Janitor File Secretary
Clerk Clerk
1.00 File Clerk
0.00 File Clerk
Non-Key jobs are evaluated
13.3 POINT SYSTEM

It is used more than any other method. This system evaluates the compensable factors of each
job. Instead of using wage rates, as the factor comparison method does, it uses point.
Although more difficult to develop initially, the point system is more precise than the factor
comparison method because it can handle critical, compensable factors in more details. This
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system requires six steps and is usually implemented by a job evaluation committee or by an
individual analyst.
Step 1: Determine critical factors

The point system can use the same factors as of the factor comparison method but it usually
adds more details by breaking down these factors into sub factors. For example, the factor of
responsibility can be broken down into:
a) Safety of others;
b) Equipment and martial;
c) Assisting trainees; and
d) Production or service quality.
Step 2: Determine the levels of factors

Since, the amount of responsibility, or other factors may vary from job to job, the point
system creates several levels associated with each factor. These levels help analysts in
rewarding deferent degrees of responsibility, skill, and other critical factors.
Step 3: Allocate points to sub-factors

With the factors listed down one side and the levels placed across the top, the rest is a point
systems matrix. Starting with highest level, the evaluation committee subjectively assigns the
maximum possible points to each sub factor. This allocation allows the committee to give
very precise weights to each element of the wet. For example, if safety (100) is twice as
important as assisly trainees (50) then it get twice a many points.)
Step 4: Allocate points to levels

Once the total points for each job element are assigned under highest level, analysts allocate
points across each row to reflect the importance of the different levels. For simplicity, equal
point differences usually are assigned between levels, e.g. 100, 75, 50,25, or point differences
between levels can be variable, e.g., 50, 35, 20, 5 Both approaches are used depending upon
the importance of each level of each sub factor.
Step 5: Develop the point manual

Analysts then develop a point manual. It contains a written explanation of each job element.
It also defines what is expected for the various levels of each sub factor. This information is
needed to assign jobs to their appropriate levels.
Step 6: Apply the point system

When the point matrix and manual are ready, the relative value of each job can be
determined. This process is subjective. It requires specialists to compare job description is
with the point manual for each sub factor. The match between the job description and the
point manual statement reveals the levels and points for each sub factor of every job. The
points for each sub factor are added to find out the total number of points for the job. After
the total point for each job is known, the jobs are ranked. As with the job ranking, job
grading, and factor comparison systems, this relative ranking should be reviewed by
department managers to ensure that it is appropriate.
Beyond the four job evaluation Methods discussed, many other variations exist. Large
organizations often modify standard approaches to create unique in-house variations.
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Although other job evaluation approaches exist, all effective job evaluation schemes attempt
to determine a job's relative worth to ensure internal equity. The point method offers the
greatest stability jobs may change over time, but the rating scales established under the point
method stay intact. Additional, the methodology underlying the approach contributes to a
minimum of rating error. On the other hand, the point method is complex, making it costly
and three consuming to develop. The key criteria to be carefully and clearly Identified,
degrees of factors have to be agreed upon in terms that mean the same for all ratters, the
weight of each criteria must be established, and point values must be assigned to levels.
While it is expensive and time consuming to implement and maintain, the point method
appears to be the most widely used method.
14. PAY STRUCTURES

Useful for standardizing compensation practices. Most pay structures include several grades
with each grade containing a minimum salary wage and either stop increments or grade
range. Step increments are common with union positions where the pay for each job is pro
determined through collective bargaining.
15. WAGE & SALARY SURVEY

After the relative worth of jobs has been determined by job evaluation, the actual wages to be
paid must be determined. A major factor in taking such decisions is the survey of wages and
salaries in other enterprises in the same region and in the same industry. The purpose of wage
survey is to determine the extent to which the organization's pay scales are like those of other
enterprises in the region. The wage and salary practices of other organizations have an
important impact on the employment, retention and morale of the personnel. So they must be
taken into consideration while fixing the wages for different jobs in an organization. The
wages and salaries paid by a firm for different jobs must be in alignment with the wages and
salaries for similar jobs paid by other firm in the industry and region. If this external
alignment is lacking, the organization will not be able to retain its capable employees or
attract employees from outside. The need to achieve external alignment is highest, when there
is a shortage of employees with specific skills and the employees leave the organization for
better pay package somewhere else. This is why, many employers choose the average wage
level. But wage level must be above the average level under the following situations:
a) When the organization wants to choose employees from a wider reservoir of talents.
b) When qualified personnel are in short supply
c) When the organization wants to build image as a good employer
d) When there is union pressure to pay high wages
e) When management wants to keep the union out
f) When wages are linked to productivity which is rising.
16. WHAT ARE DIFFERENT TYPES OF COMPENSATION?

Different types of compensation include:
a. Basic Pay
b. Commission
c. Overtime Pay
d. Bonus, Profit sharing, Merit Pay
e. Stock Options
f. Travel / Meal / Housing Allowance
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g. Benefit including: dental, insurance, medical, vacation, leaves,, retirement, taxes.
17. COMPENSATION PLAN
17.1 Develop a program outline.
a) Set an objective for the program.

b) Establish target dates for implementation and completion.
c) Determine a budget.
a) Determine whether this position will be permanent or temporary.

b) Determine who will oversee the program once it is established.
c) Determine the cost of going outside versus looking inside.
d) Determine the cost of a consultant's review.

a) From compensation committee (presumably consisting of officers or at least including
one officer of. the company).
b) Decide what, if any, differences should exist in pay structures for executives,
professional employees, sales employees, and so on (e.g. hourly versus salaried rates,
incentive-based versus no contingent pay).
c) Determine whether the company should set salaries at, above or below market.
d) Decide the extent to which employee benefits should replace or supplement cash
compensation.
17.4 Conduct a job analysis of all positions.

a) Conduct a general task analysis by major departments. What tasks must be
accomplished by whom?
b) Get input from senior vice presidents of marketing finance, sales, administration,
production, and other appropriate departments to determine the organizational
structure and primary functions of each.
c) Interview department managers and key employees, necessary, to determine their
specific job functions.
d) Decide which job classifications should be exempt and which should be non exempt.
e) Develop model job descriptions for exempt and non exempt positions and distribute
the models to incumbents for reviews and comment; adjust job description if
necessary.
f) Develop a final draft of job descriptions.
g) Meet with department managers, as necessary, to review job descriptions.
h) Finalize and document all job descriptions.
17.5 Evaluate Jobs

a) Rank the jobs within each senior vice presidents and Manager's department and then rank
jobs between and among departments.
b) Verify ranking by comparing, it too industry market data concerning the ranking, and
adjust if necessary.
c) Prepare a matrix organizational review.
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d) On the basis of required tasks and forecasted business plans, develop a matrix of jobs
crossing line and departments.
e) Compare the matrix with data from both the company structure and the industry wide
market.
f) Prepare flow charts of all ranks for each department for ease of interpretation and
assessment.
g) Present data and charts to the compensation committee for review and adjustment.

a) Establish the number of levels- senior, junior, intermediate, and beginner- for each job
family and assign a grade to each level.
b) Determine the number of pay-grades, or monetary range of a position at a particular
level, within each department.

a) Establish benchmark (key jobs.)
b) Review the market price of benchmark jobs within the industry.
c) Establish a tread line in accordance with company philosophy (i.e. where the company
wants to be in relation to salary ranges in the industry)

a) Determine the difference between each salary step.
b) Determine a minimum and a maximum percent spread,
c) Slot the remaining jobs.
d) Review job descriptions.
e) Verify the purpose, necessary or other reasons for maintaining a position.
f) Meet with the compensation committee for review adjustments, and approval.
17.9 Develop a salary administration policy.

a) Develop and document the general company policy.
b) Develop and document specific policies for selected groups.
c) Develop and document a strategy for merit raises and other pay increases, such as cost of
living adjustments, bonus, annual reviews, and promotions.
d) Develop and document procedures to justify the policy (e.g. performance appraisal
forms, a merit raise schedule)
e) Meet with the compensation committee for review, adjustments, and approval.

a) Develop and present cost impact studies that project the expense of brining the present
staff up to the proposal levels.
b) Present data to the compensation committee for review, adjustment and approval.
c) Present data to the executive operating committee (senior managers and officers) for
review and approval.
17.11 Communicate the final program to employees and managers.

a) Present the plan to the compensation committee for feedback, adjustments, review, and
approval.
b) Make a presentation to executive staff managers for approval or change, and
Incorporate necessary changes.
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c) Develop a plan for communicating the new program to employees, using slide shows or
movies, literature, handouts, etc.
d) Make presentations to managers and employees, implement the program.
e) Design and develop detailed systems, procedures, and forms.
f) Work with HR information systems staff to establish effective implementation
procedures, to develop appropriate data input forms, and to create effective monitoring
reports for senior managers.
g) Have the necessary forms printed.
h) Develop and determine format specifications for a report.
i) Executive test runs on the human resource information system.
j) Execute the program.

a) Monitor feedback from Managers.
b) Make changes where necessary.
c) Find flaws or problems in the program and adjust a modify where necessary.
18. COMPENSATION: SALARY SURVEY

a) Gather and summarize information to movement and developments in the labour market.
b) Provide a means for comparison of salaries at the institution.
a) Basic Salaries
b) Salary Ranges
c) Starting Salary
d) Incentive /Bonus
e) Allowances and Benefits
f) Working Hours
g) Working Conditions
18.3 Where can I find salary surveys?

List of on line survey vendors is available at hr-guide. Associations that conduct survey their
member.
"Choosing the right survey" and "What to look for in a survey", How do I choose a salary
survey? The results of surveys conducted by third parties (e.g. associations, consultants,
survey vendors) can be relatively inexpensive compared to the cost of developing the same
results yourself. Surveys conducted by associations and vendors are often have a large
number of participants which results in a more accurate analysis. Before purchasing survey
results, you should make sure that the result contains:
1. Appropriate Job Titles.

Industry-specific occupational titles
Little overlap in job titles
Use of titles that don't differentiate / specify the duties performed
2. Summary
3. Methodology: There is minimum number of responses needed before reporting results,
Data should not be reported for too few incumbents. Need to report median salary as
well as averages. The mean is the average of all numbers divide by the number of
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responses. The mean can be affected by extreme values. The median is the midpoint with
half of the responses is above that number and half fall below. Please not that in salary
data. The median tends to be lower than the mean due to the fact that there is no upper
limit to the rates that can be paid for a Job. However, the lower limit is zero. Therefore,
the distribution of salaries tends to be skewed with a few salaries at the extreme high end
of the range. In salary data, the median will almost always be lower than the mean.
Explanation.
4. Tabulation of results by Job Title, public/private industry, geographic region.
5. Breakdowns by size/location / industry.
Standard Industrial Classification (SIC) codes:
07 Agricultural Services
10, 12-14 Mining
15-17 Construction
20-39 Manufacturing
40-42, 44-49 Transportation, Communication, and Public Utilities(TCPU)
50-59 Wholesale and retail trade
60-65, 67 Finance, Insurance, and real estate (FIRE)
70, 72, 73, 75, 76,
78-84, 86. 87, 98 Services
19. COMPENSATION: SALARY SURVEY: CONDUCTING YOUR OWN
How do I conduct a salary survey?

Comprehensive Methodology for conduction salary survey is use of clear and consistent
guidelines for evaluating labour market conditions.
Identifying benchmark positions and employers
Goal: To develop a survey process that is streamlined and refined
Goal: To improve the methodology and survey process
19.1 Roles:
a) Survey Administrator / Advisory Committee:
Determine the positions to be included in the survey and the types of information to be
collected.
b) Analyst: Responsible for monitoring the progress of survey participants; may perfonn
data entry of survey response; assists the participants in the process of completing the
questionnaire: may assist in interpreting the survey results:
c) Participant: Matches jobs on the survey questionnaire to jobs at the participating

institution; may computer average salaries, minimum, or maximum salaries; provides
survey response within the specified deadline;

a) Common Classification Standard: Jobs on a survey should be developed by using a
common classification standard.
b) Sample Job titles and descriptions: Demo app at H.R. Superb. Net
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c) Sources of Job titles and descriptions: DOT. SOC, other classification systems,

Balance between specificity of the description and generalize ability of the job for
matching.

a) Similarity of functions
b) Hierarchy within job family

a) General Participant Information: Name and address of participating institution,
number of employees in various categories, measures of fiscal size (Operating Budget;
Annual Revenue; Sales), industry classification /type, ownership (public/private).
b) Contact Information: Name, address, title phone fax and email of persons responding
to the survey.
c) Employment Information: Benefits, working conditions, standard work week, union

affiliations, cost of living increase.
d) Job Data including:

1. Headcount- Number of incumbents in the job classification.
2. Average salary- Sum of the salaries of the incumbents divided by the number of
incumbents.
3. Salary ranges Applies only to those positions with specified minimum and maximum
salaries.
4. Starting salary- may be the same as the minimum salary
5. Exempt salary
6. Bonus
7. Commissions
8. Overtime payments
9. Reporting relationship
10. Relative weights
19.6 Designing the questionnaire form and brief Job descriptions.
19.7 Assurance of confidentiality

Before you begin the salary survey, you should examine the measures taken to ensure
the confidentiality of the survey participants.
19.7.1 Union Salary data may be misused: by union employees to gain bargaining power.
Therefore extreme caution must be use when responding to requests by Unions for
salary survey data.
19.7.2 Survey Analysts: When using analysts to assist in conducting the survey, you may
want to reassure the survey participants that the Analysts are sworn to secrecy with
regard to the salary data; Survey Analysts shall exercise discretion when conducting
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the survey and shall not disseminate information that is proprietary and confidential.
Analysts shall not use such information for personal gain".
19.7.3 Results only to participants: Often, the survey results are only provided to survey
participants. This is one way to increase the participation rate. This also helps to
reassure participants that the results will not be used by consultants (for monetary
gain)
19.7.4 Coding of participant information- if you report the data for each participant (in
addition to averages), one way of helping to ensure confidentiality is to code the
participant’s response in the survey results using a alphabetic code.
20. IDENTIFICATION OF PARTICIPANTS
Selection of participants can effects the results.

Sources of participants include.
a) Local Businesses
b) Associations of employers (within one Industry)
c) Other salary surveys
d) Previously surveyed companies.
Criteria for selection of participants

a) Established Businesses- Start-ups may be under significant fluctuations in salary
levels.
b) Should be able to provide data on at least 30 employees.
c) As much as possible, the participants from the previous years that the survey was
conducted should be encouraged to participate. This will improve the reliability of
the survey results from one year to the next.
d) Number of Participants if surveying positions with high turnover, dramatically
increasing salaries, or large variability in salaries for the same types of jobs, you
should try to use a large number of participants to develop more accurate averages.
Contacting the participants

Letter should be sent to Human Resource Manager or Compensation Manager to announce
the survey and request participation. This letter should include information on the
participation deadlines, contact information for answers to questions.
Distribution of survey questionnaire (Mall, Fax, Internet)

a) If the questionnaire is lengthy you may want to mail it only to participants who
respond to the initial letter.
b) Mail the questionnaire either with the initial or in response to a reply from the
solicited participant.
Data Collection
Coding Responses
Follow (Phone email)
a) Non Respondents: Need more time? Deadline extension?
b) Incomplete Responses: Missing Data: Failure to report data common positions
c) Extreme Responses:
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1. Above ranges
2. Annualized salaries (only reported 10-month rates)
Clerical supervisory, drafting, and clerical provides information at straight-time earnings as

well production bonuses, commissions, and most of increases. The American Management
Association of New (AMA) conducts the surveys and furnishes executive, managerial, and
professional compensation data as one of services. For example its executive compensation
service provides about a do compensation reports. The top management report includes
information from almost 400 firms covering about 31,000 executives in 75 top positions in 53
industries listed are both salaries and bonuses earned by these executives. The AMA also
publishes a middle management report providing similar data on about 1500 executives in 73
key jobs in about 650 firms. Its reports on administrative and technical positions cover
employee positions beneath middle management in about 600 companies. Its supervisory
management compensation report surveys about 700 companies and 55 categories of first line
managers and staff supervisors.
The Administrative Management Society (AMS) conducts an annual survey of 13

clerical jobs, 7 data processing Jobs, and various middle -management jobs in about 130
cities in the United States, Canada, and the West Indies (Including) many not covered by the
BLS area wage surveys). The AMS surveys report data salaries, length of workweeks,
overtime, paid holidays, and the extent of unit membership among survey participants for
over 600000 employees. They can provide a useful reference for employers making
compensation decisions in the cities surveyed. Private consulting and or executive recruiting
companies like Hedrick and struggles, and Hewitt Associates annually publish data covering
the compensation of top and middle management and members, boards of directors,
professional organizations like the Society for Human Relation Source Management and the
Financial Executive Institute publish surveys compensation practices among members of
their associations. For many firms, jobs are priced directly based on formal or informal
salaries surveys. In most cases, though, surveys are used price benchmark jobs around which
other jobs are then slotted based on their relative worth. Determining the relative worth of a
job is the purpose of job evaluation, to which we now turn.
In brief, to determine a compensation package is not an easy job and it is going tuff day by
day due to cut throat competition in the market and growing professionalism among the
individual employees and companies. If compensation package is appropriate and suited to
the current need of employee and employer only in this situation lots of problem can
automatically be solved and company can face external competition with full energy and
team spirit. Compensation is the crucial factor for individual & company. Now next step is
how we can prepare the best compensation package. In this Chapter we have discussed the
different tools used and methods but effectiveness of these tools and effort is depended on the
use of these tools, how to use and where to use. Applicability is the major factor in this regard
for the effective compensation package.

1. What are the tools used in the designing of compensation package?
2. What is role of Salary Survey in designing the compensation package?
3. What is the procedure of preparing the Compensation package in organizations?
4. How we can implement, the compensation package in organizations?
5. What are the steps involved in creation of compensation packages?
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6. Compensation Packages is very important aspect of any organization. Explain this aspect
in view of present scenario?
7. What is the role of compensation in the employee stability in particular organization?
8. How can we prepare a suitable compensation package to satisfy the maximum employees?
9. What are the important factors which effect the compensation packages?
10. What is the role of market trends in compensation management?
22. Summary
Pay structure designers must not operate in a vacuum. They must recognize market
conditions. This does not mean that it is necessary to follow market trends blindly. It does
mean that the designer must be able to recognize differences in his or her own pay structure
compared with that being presented by market data and know why these differences exist. No
one set of rules informs any persons how to develop a pay structure for an organization. Form
is governed by organizational philosophy and compensation strategies. Refinement through
careful review of existing data and design characteristics, and iterative redesigns or intelligent
earning, usually will produce an acceptable product that has been designed by a skilled
professional who understands and makes use of objective data. It is a process that moves
from abstraction to precision.
The first step in building a pay structure is to set midpoint, minimum, and maximum
rates of pay, including minimum and maximum rates of pay for each pay grade and for the
organization as a whole. Then the number of grades, the range of pay within each grade, the
amount of overlap between adjoining pay grades, and the difference between grade midpoints
must be determined.
Much of the thinking in this area is now in a stage of transition. Whereas in the past It
was not uncommon for a large organization to have three different pay structures with 30 to
40 grades within each, today the tendency is to simplify the process.
Pressures from within and outside the organization are forcing the redesign of the
organizational structure. Such pressures as increased efficiency, equal pay for equal work,
and recognition of performance are sparking a reduction in the number of levels within the
organizational structure. These factors have the direct effect of reducing the number of pay
grades. With such reduction, it is possible and even necessary to increase the number and the
size of steps within each grade. This, combined with improved performance appraisal
techniques, provides the organization with a greater opportunity to recognize performance, to
differentiate between the inexperienced and the proven, between these willing to provide the
extra effort and those just willing to get by.
As an organization reduces the number of levels in its structure, it reduces the
opportunity for its members to gain hierarchical promotion (grade to grade), but by increasing
the spread of the range for a pay grade and the pay importance of each incremental step
within the range, it provides an opportunity for upward movement within a grade. In this
manner, the attention of the employee and the organization focuses in the proper direction -
on the job itself.
Not only does the pay structure weave together internal requirements, it also enables
the organization to compare itself with its competitors in the human resources marketplace.
The ability to make market comparisons, as well as the ability to relate to economic changes,
permits the organization to raise the entire level of the pay structure when necessary, making
it competitive with its environment without changing internal relationships.
23. References
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 Thomas Pattern, Jr. Pay: Employee Compensation and Incentive Plans (New York; Free
Press, 1977
 Heriderson, Compensation Management, pp. 88-89
 Jerry Mc Adams, "Why Reward Systems Fail," Personnel Journal, Vol 67, No. 6 (June 1988),
pp. 103-113
 James Whiney, "Pay Concepts for the 1990's Part 1. Compensation and Management Benefits
Review. Vol 20 No 2 (March-April 1988) pp 33-44 Richard Henderson, Compensation
Management (Reston. VA; Reston,1980
 Burack, E.H, Personnel Management; a Human Resource Systems Approach, 1977, p 321.
 French, Wendell, the Personnel Management Process: Human Resources Administration,
1974, p. 521.
 Government of India, Report of the National Commission on Labour, P. 92 Edwin B. Flippo,
Personal Management, Mc-Graw-Hill Book Company, 1984, p. 331
 National Commission on Labour: Report of the Study Group on Productivity and incentives.
1969. p 39.
 International Labour Organization: Payment by Results, 1951, pp. 54-92, C.P. Thakur:
Corporate Strategy on Fringe Benefits, Spectrum, and patina, 1985.
 U Chamber of Commerce: Employee Benefits, Washington, 1971. Frederick Herzberg Work
and Nature of Man, World Publising, Cleveland, 1966
Chapter VII
WAGE BOARD AND COMPENSATION MANAGEMENT
1. Introduction
2. Problems in wage and salary administration
3. Wage and salary policies
4. The peculiarities of wage scenario
5. The wage policy
5.1 Objectives of a wage policy
6. The instruments of intervention
7. Fixing minimum
8. Fixing/Revising wages in the organized sector
9. Setting indexation rules
10. Setting bonus payment rules
11. Other related aspects
12. Growth and development of wage board
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13. Composition and functions of wage boards

14. The functioning of board
15. Wage boards the Indian scene
16. Evaluation of working of the wage boards
17. Remedies suggested by committees
19. Summary
20. References
Structure: Chapter 14 describe that how wage board give fair and equitable remuneration to
their employees. It also identifies the principle, evolution, problem of wage policy in India.
Learning objectives: After reading this chapter, you are able to

 Understand the problems wage and salary administration
 Describe wage and salary policies Identify peculiarities wage scenario
 Describe objectives of wage policy Understand instruction intervention
 Describe the growth and development of wage board
 Identify the working and functions of wage board
 Reminder suggested by committee
1. INTRODUCTION
Wages and salaries represent a substantial part of total costs in most of the organizations.
Although to the economist these are variable costs, but the business they are becoming ever
increasing costs in view of the ability of unions to win upward adjustments. Instances of
general wage salary reductions are rare and where it is necessary to reduce labour costs, this
is accomplished more and more through technological changes resulting in increasing the
productivity of workers. Not with standing this, the control of wage and salary levels is
paramount important, even though the amount of control which can be exerted may vary
among organisations and within organization from time to time. The general objectives of the
wage and salary administration are as follows:
1. Control Costs
2. Establishment of fair and equitable remuneration.
3. Utilization of wages and salaries as an incentive to greater employee productivity.
4. Maintenance of a satisfactory public relations image.
To achieve these objectives, the responsibility for wage and salary administration usually
lies with the management (i.e. Board of Directors in case of a company) or the chief
executive officer who in turn, is expected to develop policies and procedures, which will
accomplish the company's objectives. The Personnel Managers play an important role in
developing the wage police and procedures. In most organizations, the task is entrusted
to Wage and Salary Committee composed of line and staff executives. The functions of
wage and salary committee or any other person connected with wages and salary
administration is:
1. To approve the system of job description and job evaluation.

2. To recommend to top management the wage policies for the administration of the
wage programme.
3. To recommend changes in wage policies and in the salary or wage level.
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4. To check all activities of the salary administration group against the company
policies.
5. To review wage and salary schemes department-wise.
6. To recommend to top management specific policies for executives above a specified
limit.
People have many needs and only few of these can be satisfied directly by money. Other
needs security, social affiliation, power, self-actualization etc. Too motivate behaviour but
can only be satisfied indirectly (if at all) by money. Yet despite "modern" motivation
techniques (like "job enrichment"), money is still the most important "motivation". As
researchers put it; "pay in one form or another is certainly one of the mainsprings of
motivation in our society... The evangelical human religionists insist it is important, while
protesting that other things are too (and are, perhaps in his view) nobler. It would, therefore,
be not incorrect to say that hardly any other motivation (praise, status, job security,
recognition etc.) is more important for an employee than monetary remuneration that he
receives for the services rendered the wages and incentives paid on a rational basis are
essential to achieve the goals of higher productivity, through proper utilization of human
resources "Wages means all remuneration (whether by way of salary, allowance, or
otherwise) expressed in terms of money, capable of being so expressed which should, if the
terms of employment express or implied were fulfilled, be payable to a person employed in
respect of his employment and includes.
(i) Any remuneration payable under any award or settlement between the parties or order of
a court.
(ii) Any additional remuneration payable under the terms of employment such as bonus and
any sum which by reason of termination of person employed is payable under the law or
contract of service."
Though it is often said that wages play an important role in maintaining happy industrial
relations in a business undertaking but it is unfortunate to note that in most of the
underdeveloped countries, including India, most of the workers are not paid even the base
minimum wages necessary to meet their subsistence needs, which often create problems on
industrial relations, time and again, efforts are being made at all levels. The government (by
enacting suitable labour legislation, establishing wage bards etc.) the employers and trade
unions (by collective bargaining agreements) and the industrial jurisprudence (by giving
appropriate awards) decide and implement a fair and reasonable wage structure for the
country based on the country based on the proper wage differentials.
2. PROBLEMS IN WAGE AND SALARY ADMINISTRATION

Executives, supervisors and employees constantly exert pressure on the wage and salary
committee for pay increase. If the committee yields to such pressure, it would serve to boost
the wage expenditure of the company above the funds available for the payroll. It may also
result in glaring injustice because the rewards that belong properly to the efficient workers
could be granted instead to those who press the hardest. The aggressive department head may
possess to an unusual degree the commendable loyalty to his people that to take a belligerent
stand for salary increase. Humane approach of wage and salary committee administration
may have to conceding to the department head that is aggressive. Such pressure may be
restrained to some extent if a department budget is attached to it and the department head
may be asked to explain. The individual department head, whose activities are confined to
compare the situation within his department with the other departments, may miss board view
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of the wage and salary committee. Therefore, he may have a biased view that his department
is the most important in the organization and this might lead him to seek higher monetary
rewards for his subordinates than justified. The wage committee, by virtue of its central
position can readily put a break upon all whose wage scales are definitely higher than
justified by sound company practices and as a spur to the heads who are consistently opposed
to paying a higher rate than is required. Sound practice in wage and salary administration
calls for raising wages, which are too low as well as curtailing those, which are too high.
Effective wages and salary administration recognize the need for a direct tie-up between
performance and reward and to do economic justice to all employees.
In many organisations, there are serious inconsistencies in the wage scales of different
employees. During job evaluating thoroughly may bring out these inequities. Job evaluation
is essential to any sound wage administration programme. The wage and salary committee
must give attention to individual rates and the salary range when:
1. Increase of work makes it necessary to create a new job in a department.

2. It is proposed to change the minimum or maximum rats for a job in order to maintain a
proper balance.
3. It is proposed to change the rate of pay of individual employees as a result of his
demonstrated efficiency or inefficiency.
4. It is proposed to transfer an employee to the same job but in another department.
5. It is proposed to transfer or promote an employee to another job in the same or another
department.
3. WAGE AND SALARY POLICIES

Various forms of wage and salary policies have been developed, differing according to such
factors as the nature of the business and its location. Because wages and salaries normally
constitute a substantial part of total cost, it is often advisable that the policy recognizes
competitor wages and salaries levels as well as the levels of the salaries in a geographical
area This is what the Industry-cum-region formula states. The traditional approach to wage
and salary policy has been to recognize that wages and salaries must be at a level which is
adequate to attract retain and motivate employees competent to perform the tasks assigned to
them. But this approach is not acceptable because it looks upon human labour as a
commodity subject to the economic law of supply and demand. It fails to recognize human
factors including a desire for a better way of life. As a result of this basic criticism together
with the pressure of organization labour and state legislation, many other forms of policy
statement have been adopted by different organizations.
The most prevailing general wage and salary policy is one, which relates wage, and salary
levels in an organization to those of its competitors, either within its own industry or with
those who are competitors for labour in the geographical area. A company may adopt a policy
like this: "We shall pay wages and salaries which approximate the average of the other
companies in the industry in the local geographical area". But if there is no similar company
in its industry in its local area, it may relate the wage and salary level to other companies
within its region. As a matter of fact, most of the companies want to be followers in setting
wage and salary level because they make general wage and salary changes dependent upon
the actions of others. Another form of wage and salary policy is the formula approach, which
recognizes the changes in the cost of living and productivity as a basis for wage changes.
There are so many wage incentive plans, which recognize the increase in productivity of
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workers for the increase in wage. But trade unions resist these are argue that cost of living
index of workers must be considered. It is significant to note that in order to avoid criticism,
many organizations follow a generalized policy when they say "we intend to pay wages and
salaries which will fairly and equitably reward the employees for a fair day's work. However,
a statement of this sort, being unrelated to specific standards, offers maximum flexibility in
interpretation but may not be acceptable to employees who prefer a more tangible form of
policy. The objectives of wage and salary policy should be to recognize the value of all jobs
in relation to each other within the enterprise, to ensure stable earnings to the employees, to
enable individuals to reach their full earnings potential, and to ensure employees share in the
organization prosperity as a result of increased efficiency. There are many advantages of
formulating an appropriate wage and salary policy. A general wage and salary policy can
have real value as a basis of collective bargaining, because it is only when the leaders of the
employees are aware of the company's point of view that there can be any hope of developing
accommodation to it. The management of the company can also convince its employees that
it policy on wage and salary is fair and realistic. A general wage and salary policy is also
advantageous in recruiting new employees in times of labour shortage. In addition to general
wage and salary policy, additional policies may also be made to cover specific wage and
salary considerations such as promotions.
However wage policy must consider in all basic assumption (theory), legislation and
differentiation. Following are the important theories, legislation and differentials.
4. THE PECULIARITIES OF WAGE SCENARIO

Since independence, the Indian wage scene has been in a state of disarray. In fact the wage
structure that has been in existence for the last four decades and more is replete with practice
which are quite irrational; the differentials and disparities in it, in many instance, have no
justification except that they have been in existence; and the "low wage pockets" and "high
wage islands merely reflect the so-called bargaining strength of the parties. The minimum
wages have no relation to the workers and his family and wage differentials between
occupations do not often reflect differences in skill, training and productivity of the workers.
The basic causes of this situation have been the gross neglect of wage planning, which can be
largely attributed to undue emphasis on the financial aspect of the wage plan. Another
important factor, that has been responsible for this neglect is the belief that the traditional
methods of wage fixation, such as free collective bargaining, and voluntary and compulsory
arbitration by judicial bodies are working satisfactorily and that there is, therefore, no need
for a change in the existing system to meet the various challenges of rapid economic
development. The inability to formulate a wage policy at the national level is largely regarded
as a complex economic, social and political issue, which, in fact, it is, for it calls for a fair
distribution of the national income among the best of claimants. In such a state of affairs, it is
difficult to strive for a sound wage policy. Therefore, in the absence of agreed and centrally
evolved guidelines and norms for wage fixation, the various wage fixation authorities during
the various five year plans, and the Minimum Wages Act, laid down their own criteria. Even
the concept of minimum wages, fair wages and living wages need based wages was not
properly or specifically defined.
The result has been:-
(a) That there is a wage structure without uniformity and without coordination between its
various components.
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(b) In the central sphere, agricultural workers are paid the highest minimum wages i.e. Rs.
36.89 (Aug. '92), construction workers Rs. 19.82 (June '93), whereas most of mine
workers are paid Rs. 24.36 (June '93) as minimum wages.
(c) In central sphere, the workers who are paid minimum wages along with special allowance,
there is pretty great variation in the wages of workers engaged in construction, agriculture,
railways and mining where it ranges between Rs. 19.82 to Rs. 43.39.
(d) The wages of workers employed in the manufacturing and mining sector, too varies
considerably. Further, among the different types of mining work, wages show a log of
variations.
(e) Till May 1993, the range of minimum wages in the central sphere varied from Rs.19.82
per day to Rs. 37.57 per day. The ratio of minimum to maximum was 2.33. In the state, the
difference between minimum and maximum wages was the highest in Tamil Nadu where
in 60 scheduled employments; it ranged between Rs. 7 and Rs. 49.20. The ratio between
minimum and maximum was five times, followed by Karnataka and Assam, the ratio was
5.42 and 2.14 respectively, In Karnataka, the minimum wages moved between Rs. 6.00
and 32.53 and 37 scheduled employment and in Assam between Rs. 15.35 and 32.80 for
37 scheduled employment. In Maharashtra, the ratio was 5.18 for 52 scheduled
employments the minimum wages were Rs. 11.00 and maximum Rs. 64.00. In West
Bengal, for 35 scheduled employments the minimum wages under the Act was Rs. 10.40
and maximum Rs. 45.00 the ratio works out to 6.76. In U.P. the ratio was 2.33 and 67
scheduled employments, the wages vary between Rs. 18.00 and 42.00. The State of H.P.,
Jammu and Kashmir, Nagaland, Orissa, Punjab, Rajasthan and Union Territories of Delhi,
Daman and Diu and Lakshadweep have fixed uniform minimum wages for all scheduled
employments.
(f) It is a general observation that, in the country, female workers are paid low wages in
comparison with male workers. For instance, in Orissa, the wage rate of unskilled women
workers was in range of Rs. 12.00 to Rs. 16.48 per day as compared to Rs. 16.48 to Rs.
20.00 per day of male workers. The lowest earning of piece-rated workers were found to
be Rs. 15.00 per day in the case of women workers and highest were Rs. 60.00 in the case
of male workers.
(g) That there is a wide variation in the wage rates for the same kind of work in the same
industry and in the same region or locality.
(h) That there are wage differentials, which did not reflect any differences in skill, training
and hazards involved.
(i) That a widely varying system of D.A. providing for different scales of neutralization, rates
of compensation, and basis of computation, are in operation.
(j) The different pay scale of D.A. is provided for employees in organized sectors of
employment- government public sector and financial institution. As per Fourth Pay
Commission, the minimum basic pay of D-group of employees was fixed at Rs. 975/- per
month in contrast to that of employees of Central Government Department stood Rs. 770/-
per month. This disparity in the basic pay and D.A. cannot be justified on any ground.
(k) As per Fourth Pay Commission, the ratio between the lowest and the highest paid
employee was 1:9 (after deduction), which has now gone up by 1:12, and the private
sector. The policy of liberalization has added fuel to the fir which is obvious from the
book that the MNC's the Indian companies working in collaboration with MNC’s and the
foreign companies paying exceptionally higher wages.
All these situations have created chaos on Indian wage scene besides the changing economic
political scenario and socio technical milieu has further complicated the issue of wages.
128
Among these, a few important socio-economic indices that deserves, special attention are as
under:
1. Widespread poverty - about 39.3% (1988-89) of the country's population is living below
the poverty line.
2. Stark disparities in the standard of living- black spots of “affluence” exist side by side with
"danger pockets of extreme poverty". Moreover, the gap between the "rich" and "the poor"
is growing unprecedented.
3. The high annual population growth rate the decade 1981-91 was 2.14% which is further
taxing already allied economy. Further availability of greater educational facilities turning
out large number of educated persons without any professional expertise. Every year
sizeable quantum of unemployed and under-employed people enters job market. This is
evident from the fact that by 1992, the unemployment was to the tune of 25 million, by
2002 AD is would shoot up to 94 million.
4. The GDP growth rate between1991-92 was increased to 4% during 1992-93.
5. There is low rate of investment and low rate of domestic capital formation (24.5% of GDP
during 1992-93) because of low saving propensity and increased unproductive
consumption.
6. The heavy economic burden under which an economy grown a high public debt which
was Rs. 280977crore (March 1993) deficit financing and increased depletion of precious
foreign exchange reserves have further worsened the economic situation of the country.
7. The higher price and inflationary tendencies (CPI (IW) 11.07% in July 1994 and CPI (AL
13.39%) have eroded the real value of money. That in turn has further diluted the
purchasing power of the worker.
8. Without a substantial reform, PSU finances continue to be in disarray. For 1993-94, the
ratio of net profit to capital employed for the central PSUs as a whole was a paltry 2.71 per
cent up marginally from 2.27 percent of the previous year, which has far reaching
implication on various aspects of economy, including wages.
5. THE WAGE POLICY

The term "wage policy" refers to the legislation or government action undertaken to regulate
the level or structure of wages, or both, for the purpose of achieving specific objectives of
social and economic policy. The social objectives of a wage policy aim at eliminating the
exceptionally low wages, establishing fair standards, protecting wage earners from the impact
of inflationary tendencies and increasing the economic welfare of the community as whole.
"The social and economic aspects of a wage policy are normally inter related: measures
inspired by social considerations inevitably have economic effects and re designed to achieve
specific economic results. When the social and economic implications of measures of wage
policy are in conflict, a choice has to be made". According to the ILO, the wage policy means
"legislation or government action calculated to affect the level or structure for wages, or both
for the purpose of attaining specific objectives of social and economic policy". A wage policy
may be viewed from three different angles. At the macroeconomic level, the problem is that
of resolving the conflict between the objectives of an immediate rise in the standard of living
of workers, additional employment and capital formation. At the semi aggregative level, the
problem is that of evolving a wage structure, which promotes economic development. At the
plant level, the problem is that of a system which provides Incentives for increased
productivity and improved skills.
5.1 OBJECTIVES OF A WAGE POLICY
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The objectives of a wage policy in the developing countries enumerated by ILO are as
under:-
(1) To abolish malpractices and abuses in wage payment;
(2) To set minimum wages for workers having weak bargaining power because either they
are unorganized or inefficiently organized, accompanied by separate measures to
promote the growth of trade unions and collective bargaining.
(3) To obtain for the workers a just share in the fruits of economic development,
supplemented by appropriate measures to keep workers expenditure on consumption
goods in step with the available supplies so as to minimize inflationary pressure and
(4) To bring about a more efficient allocation and utilization of manpower through wage
differentiate and where appropriate systems of payments by results cost.
In India, the objectives of a national wage policy may be stated thus:

(1) To provide a minimum wage to workers employed is seated industries.
(2) To fix wage ceilings.
(3) To improve the existing wage-structure
(4) To accelerate export promotion
(5) Other objectives.
6. THE INSTRUMENTS OF INTERVENTION

The basic framework for government interventions in the wage determination process was set
out in The Report of the Committee on Fair wages, 1948. Following the recommendations of
this Report, the government designed fairly elaborate methods of intervention into the wage
determination process. Among the principal methods which are employed to this day is
minimum wage fixing, guiding wage fixation/ revision in particular industries and sectors;
setting of indexation and bonus payment rules; and broad controls over wage differentials. Of
these, only the minimum wage rules cover the unorganized sectors; all the others seek to
regulate wages in the organized sector or a segment of it.
7. FIXING MINIMUM
The principal instrument for fixing and enforcing minimum wages for the unorganized
sectors in the minimum wage act 1948. Under this Act, minimum wages for an eight hours
work day are fixed for certain types of jobs where in the judgment of the government, the
market conditions make the workers particularly vulnerable to exploitation. With anyone
employing at least one hired worker being defined as an employer under the Act, the
coverage is wide. Minimum wages under the Act can be fixed by either the central or the
state-level authorities. To start with, the Act covered 13 occupations (agricultural labour and
12 non-agricultural occupations). Currently, 40 occupations are covered in the central sphere
and, in the major states, the number of occupations covered ranges from 5 in Manipur to 79
in Orissa. In all more than 200 occupations are currently covered under the Act.
8. FIXING/REVISING WAGES IN THE ORGANIZED SECTOR

An important recommendation of the Committee on Fair Wages was for establishment of
Tripartite Wage Boards for such industries as deemed appropriate by the government.
Accordingly, the central government and some state governments set up Wage Boards for
several industries. Thus 27 Central Wage Boards were set up covering 19 industries; for a
few industries, such Boards were set up more than once at different points of time. The basic
task of the Wag Boards was to work out a wage structure for the industry concerned keeping
in view considerations relating to the need to guarantee a decent minimum wage, the need to
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facilitate growth of the industry concerned and the need to provide incentive to workers to
upgrade skills. In the case of Central Public Sector Undertakings (PSUs), there are periodic
wage settlements (the typical period of agreement being four years). While the individual
Central PSUS enjoy a measure of autonomy and there is some scope for collective
bargaining, actual settlements are required to be consistent with the fairly detailed guidelines
issued by the Department of Public Enterprises. In principle, the state-level PSUS could have
independent systems or guidelines for wage settlement, but in practice they tend to imitate the
Central PSUs. It should be noted, however, that the recommendations of Central Pay
Commissions, specially appointed to fix salaries of central government employees, usually
serve as reference points for the work of the Wage Boards and the Department of Public
Enterprises. This has an important consequence. The fact that salaries of government
employees serve as reference points for wage settlements in industries means that
considerations relating to industrial growth and skill formation are virtually impossible to
take into account in practice.
9. SETTING INDEXATION RULES

Several government committees and study groups, apart from the wage-fixing bodies, have
addressed the question of compensating employees for increases in cost of living. As a result
of these discussions and deliberations, a few widely accepted principles have emerged. There
seems to be a consensus that full compensation for increases in cost of living should be
allowed only at the lowest level of the wag ladder, i.e., at and around the minimum wage (in
the organized sector); the extent of compensation should decline as the level of wage (or
salary) increases. The consensus is based on two main arguments. The first is that full
indexation would make the economy vulnerable to wage-price spirals. Second, it is argued
that indexation is a device for neutralizing the effects of increases in the cost of essential
items of consumption. Since the share of essential items in total consumption expenditure
declines as income rises, the degree of indexation should decline too. However, whatever be
the merits of these arguments, it is obvious that if the degree of indexation varies inversely
with the wage level, wage differentials would tend to decline over time. This can generate
dissatisfaction and hence erode incentives. But these aspects do not seem to have received
much attention. Given the principles, basically two systems of indexation have emerged. The
first is the so-called Industrial Dearness Allowance system which involves payment of a fixed
sum per point-increase in the Consumer Price Index to all employees irrespective of the wage
level. The per point payment is usually so fixed as to provide full compensation at the lowest
level of wage. And payment of fixed amount to all employees means that extend of
compensation declines as wage rises. The second system is the so called Central Government
Dearness Allowance system. This stipulates declining percentage neutralization of the rise in
the Consumer Price Index. In the case of minimum wages for unorganized sectors, there is no
systematic indexation. In one state (West Bengal), a system of full indexation of minimum
wages for certain industrial occupations were introduced 1965. In other states, efforts have
been made to introduce indexation only since the mid-seventies.
10. SETTING BONUS PAYMENT RULES

There are provisions for statutory bonus payment governed by the Payment of Bonus Act,
1965 which applies to all establishments employing 20 or more persons> under the Act, the
minimum bonus is 8.33% of the annual wage (i.e. the basic wage plus dearness allowance) of
an employee subject to an assured minimum amount. This rule applies to workers whose
monthly wag does not exceed a certain amount (currently Rs. 3,500); if wages exceed this
figure, the bonus calculated a though were this amount. This minimum bonus is payable even
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if an establishment suffers losses. Effectively, therefore, the minimum bonus is equivalent to

wages for a thirteenth month. The maximum bonus that employees can claim under the Act is
20% of annual wages. In addition to the statutory bonus, an employer can freely choose to
pay incentive bonuses.
11. OTHER RELATED ASPECTS

There other features the wage determination processes are worth noting. First, it is common
for both manual workers and white-collar employees to have pay scales so that a series of
annual increments to basic wages are automatically granted. An element of money wage
growth, therefore, is purely a function of time. Second, workers in some establishments
receive welfare benefits and other allowances. The welfare benefits are usually regulated
through schemes launched by the central government in consultation with the National Social
Security Authority (state governments also have supplementary schemes) while the
allowances are either voluntarily made by establishments or determined through collective
bargaining. Third, the government has been keen to limit wage inequality in industry. It
directly determines top salaries in public enterprises and has sought to control top salaries in
private enterprises through appropriate provisions in the Indian Companies Act 1956.
12. GROWTH AND DEVELOPMENT OF WAGE BOARDS

The history of wage boards in India dates back to the 1930s. The Royal Commission on labor
recommended the setting up of tripartite boards in Indian Industries. It said:
We would call attention to certain cardinal points in the setting up of (wage-fixing)

machinery of this kind. The main principle is the association of representatives of both
employers and workers in the constitution of the machinery. Such representatives would be
included in equal members, with an independent element, chosen as far as possible in
agreement with or, after consultation with, the representatives of both the parties." But the
recommendations were not accepted by the then British Government. After Independence,
the Industrial Disputes Act was enacted under which disputes regarding wages could be
settled through adjudication. But the parties at large were not satisfied with system. The idea
of setting up of tripartite wage board was, therefore, mooted and endorsed in the First Plan
which stated that the "Permanent wage boards with a tripartite composition should be set up
in each state and the centre to deal comprehensively with all aspects of the questions of
wages, to initiate necessary enquiries, collect data, review the situation from time to time and
take decision regarding wage adjustments sue motto or on reference from the parties or from
the Government." It is distressing to note that with regard to the establishment of wage
boards, no concrete action was taken during the First Plan period. However The Second Plan
emphasized the need for determining wages through industrial wage boards. It observed that
"The existing machinery for the settlement of wage disputes has not given full satisfaction to
the parties concerned. More acceptable machinery for setting wage disputes will be the one
which give the parties themselves as more responsible role in reaching decisions. An
Authority like a tripartite wage board, consisting of an equal number of representatives of
employers and workers and an independent chairman, will probably ensure more acceptable
decisions. Such wage boards should be instituted for individual industries in different areas."
This recommendation was subsequently reiterated by the 15th Indian Labour Conference in
1957 and various industrial committees. The Government decision to set up the first wage
board in the cotton textile and sugar industries in 1957 was also influenced by the report of
the ILO. The appointment of wage boards often results from the demands of labour unions. It
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has been result demands and pressures on the part trade unions. In their efforts to secure the
appointment of wage boards, trade unions have to pressurize not only the government but
also the employer’s whose formal or informal consent to their establishment must be
obtained."
In India, the Bombay Industrial Relations (Amendment) Act of 1948 may be regarded
as perhaps the earliest legislation including a provision for the establishment of wage boards
in any industry covered by the Act. Accordingly, the first wage boards were set up in
Bombay for the cotton textile industry. The principle purpose of starting wag boards was to
relieve the Industrial Courts and Labour Courts of a part of their adjudication work. The
amended Act of 1953 has tried to avoid multiplicity of proceedings under the Act. It
empowered Industrial Courts and Labour Courts and wage boards to decide all matters
connected with or arising out of any industrial matter or dispute.
13. COMPOSITION AND FUNCTIONS OF WAGE BOARDS

1) Composition Wage Boards: It is a tripartite body representing the interests of labour,
management and the public. The labour and management representatives are nominated in
equal numbers by the government, after consultation with the major central organizations.
Generally, the labour and management representatives are selected from the particular
industry, which is investigated. The Government cannot appoint members of the wage boards
in an arbitrary way. Independent members can be appointing only with the consent of
employers and employees. The representatives’ of employers on wage boards are the
nominees of the employers' organization and the workers representatives’ are the nominees of
the national organization of trade unions of the industry concerned. However, before their
actual appointment, a great deal of negotiations takes place not only between the two main
recalcitrant interests but also among the different groups representing particular interests. A
Judge chairs the board.
The bipartite bodies representing employers and employees or tripartite bodies comprising
representatives of employers, employees and the Government act as a mediator with a view
to sort out the difference over the issues of wages etc. (at the State level or at Central level, as
the case may be). The board generally operates within the board parameters of the scope of
enquiry, profile of industry, structure of employment, special features of industry, export,
wages, mode of determining financial, special features of industry, export, wages, mode of
determining financial capacity, interim recommendations, occupational nomenclature, revised
wage structure, productivity, dearness allowance, retaining allowance, housing and other
amenities, financial implications of revised wages on industry. The boards are generally of
two types: 1) Statutory and 2) Non-Statutory. They are set up by a Central resolution of the
Central Government and come to an end with the submission of their report.
2) Functions of Wage-Boards: They functions industry wise with broad terms of reference,
which include recommending the minimum wage, differential cost of living compensation,
regional wage differentials, gratuity, hours of work, etc.
The wage boards are required to:
a) Determine which categories of employees (manual, clerical, supervisory etc.) are to be

brought within the scope of wage fixation.
b) Work out a wage structure based on the principles of fair wages formulated by the Committee
on Fair Wages.
133
c) Suggest a system of payment by results.

d) Work out the principles that should govern bonus to workers in industries.
In addition to these common items, some wage boards may be asked to deal with the question
of "bonus" (like that of the wage boards for iron are mining, limestone and dolomite mining
industries) and the second wage board on cotton textile industry; demands for payments other
than wages (wage boards for jute and iron and steel industry): hours of work (rubber
plantation industry); interim relief (wage boards for jute industry and port and dock workers).
Some wage boards (wage boards for sugar, jute, iron ore, rubber, tea and coffee plantations,
limestone and dolomite mining industries) have been required to take into account the
"special features of the industry. Thus, wage boards have had to deal with a large number of
subjects. Of these, the fixation of wage scales on an industry basis constitutes the biggest of
all the issues before them.
In evolving a wage, structure, the board takes into account:

(a) The needs of the industry in a developing economy, including the need for maintaining and
promoting exports.
(b) The requirements of social justice, which ensures that the workman who produces the goods
gets a fair deal, is paid sufficiently well to be able to at least to sustain himself and his family
in a reasonable degree of comfort, and that he is not exploited.
(c) The need for adjusting wage differentials, which is in relation to occupational differentials;
inter firm differentials, regional or inter area differentials, inter industry differentials and
differentials based on sex in such a manner as to provide incentives to the workers for
advancing skills;
(d) The possibility of linking productivity with wages so that the workers may be motivated for
higher and quality production;
(e) The desirability of extending the system of payment by results.
For the determination of fair wages, the board has to take into consideration such
factors as the degree of skill required for his work, the fatigue involved, the training and
experience of the worker, the responsibility undertaken, the mental and physical requirements
of work, the disagreeableness or otherwise of the work and the hazards involved in it. The
board is required make due allowance for a fair return on capital, remuneration to
management and fair allocation to reserve the depreciation.
WORKING OF THE WAGE BOARDS: Although wage boards are set up by the
government, the basic reason for their establishment is the pressure brought to bear on the
government by the trade unions, industrial federations and national organizations, on the one
hand, after the employer’s formal or informal consent, on the other. Often the worker for the
setting up of the board pressurizes the government. As in the case of jute and coal industry,
the government was forced by the trade unions to set up wage boards, formation on wage
boards in other industries has been the result of similar demands and pressures on the part of
trade unions- such as plantations, iron and steel, engineering, sugar and electricity industry.
The item to be included for the consideration of the wage boards is the outcome of the
negotiations between the parties. Trade unions and employees unanimously determine the
issues/ items but these invariably relate to gratuity, bonus, hours of work, and grant of interim
relief. The quantum of interim relief is also decided by negotiations and bargaining,
whichever sometimes results in deadlocks.
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14. THE FUNCTIONING OF BOARD

(1) The first step is to prepare a comprehensive questionnaire designed to collect information on
the prevailing wage rates and skilled differentials, means of assessing an industry's paying
capacity, most desirable methods measuring worker capacity and workloads, prospects for
industry in the immediate future, and regional variations in the prices of widely consumed
goods. The questionnaires is sent out to labour unions, employers associations, interested
individuals, academic organizations and government agencies,
(2) The second step is to give a public hearing at which the labour leaders and employers
associations, not represented on the board, as well as other interested in the industry in
question, are given a verbal or oral hearing on issues dealing with wages, working conditions
and other items.
(3) The third step is to convene secret sessions at which members of the board make proposal
and counter proposals regarding the items to be covered under the terms of reference. In the
case of failure to reach a unanimous decision on the issues, each party has the right to veto
the other's decision.
WAGES BOARDS ESTABLISHED (1956-1993)
Slink Name of the Date of Date on which final Date of acceptance of
industry appointment of report was submitted to the recommendation
wage Board the Govt. by Govt
1. Wage Board for 02.05.1956 --- 11.05.1957
working
2. Cotton Textiles 30.03.1957 01.12.1959 02.03.1960
3. Sugar 26.12.1957 28.11.1960 23.02.1961
4. Cement 02.04.1958 07.10.1959 29.02.1960
5. Jute 25.08.1960 04.09.1963 27.09.1963
6. Tea Plantations 05.12.1960 31.05.1966 04.06.1966
7. Rubber 07.07.1961 12.08.1966 29.06.1966
Plantations
8. Coffee 07.07.1961 06.08.1966 19.06.1968
Plantations
9. Iron & Steel 05.01.1962 21.02.1965 09.07.1965
10. Limestone & 03.05.1963 21.02.1967 03.06.1967
Dolomite Mining
11. Iron Ore-Mining 03.05.1963 21.02.1965 03.06.1967
12. Coal Mines 10.08.1962 13.02.1967 31.07.1967
13. Working 12.11.1963 17.07.1967 27.10.1967
Journalists & Non-
Journalist
Newspaper
Employees
14. Cement (2 nd ) 02.09.1964 14.08.1967 13.02.1968
15. Non-Journalists 25.02.1964 17.07.1967 18.11.1967
16. Cotton (2 ) nd 12.08.1964 21.12.1968 17.05.1969
17. Port & Dock 13.11.1964 29.11.1969 18.03.1970
18. Engineering 12.12.1964 03.01.1969 21.03.1970
19. Heavy Chemicals 03.04.1965 29.08.1968 16.11.1968
135
& Fertilizers
20. Sugar(2 nd ) 16.11.1965 18.02.1970 07.07.1970
21. Leather & Leather 21.03.1966 14.08.1969 18.09.1969
Goods
22. Electricity 28.05.1966 18.12.1969 13.07.1970
Undertakings
23. Road Transport 28.05.1966 19.11.1969 02.02.1970
24. Working ------ 11.06.1975 ---
Journalists
25. Non-Journalists 06.02.1976 Converted into one man ---
Tribunal on 9th Feb. 79
Submitted its report on
13.8.80, which were
accepted by Govt. on 26 th
Dec. 80 and partly n 20th
July 81.
26. Working 17.07.1985 30.05.1989 31.08.1989
Journalists and
Non-Journalists
Newspaper
Employees
27. Sugar (3rd ) 17.07.1985 31.01.1989 29.12.1989
28. Minimum Wage 1993 --- ---
Advisory Board
Finally, the decision of the board (unanimous recommendations) are written down and
submitted to the government. After receiving the report, the government examines it and
modifies if found necessary. Generally, unanimous recommendations are accepted. However,
it has no legal power enforce the recommendations. It tries to persuade the parties to narrow
down their differences for accepting the board’s recommendations. It is quite clear that the
board takes on an average three to five years in submitting its final report. For instance, the
second wage board for cement and the first wage board for cotton non-journalists, jute, iron
and steel took a little over 3years; that for tea plantations took 5.5 years and for coffee
plantation 4 years, and iron-ore mining 5 years. Some of the wage boards constituted in 1964
did not submit reports even by 1969, e.g., heavy chemicals, fertilizes, engineering industries
and ports and docks. The average time taken by wage boards in the finalizations of their
deliberations various from 3 years to 5.5 year.
The main reasons for the delay in the completion of wage board’s work have been:
(i) Routine delays in the recruitment of staff: preparation and printing of questionnaires.
(ii) Getting replies to questionnaires;
(iii)Time involved in public hearing; and
(iv) Lack of accord among members in arriving at a decision.
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15. WAGE BOARDS- THE INDIAN SCENE

The first non-statutory wage board was set up for the cotton textile and sugar industries in
1957. Since then, 1994, as many as 28 wage boards covering most of the major industries
have been set up by the centre for cotton textiles, sugar, cement, working journalists and non-
working journalists (twice each) jute, tea, coffee and rubber plantations; iron-ore, coal
mining, iron and steel, engineering, heavy chemicals and fertilizers, electricity undertakings,
road transportation, ports and docks, leather goods, limestone and dolomite.
16. EVALUATION OF WORKING OF THE WAGE BOARDS

The boards have been successful in fulfilling their primary object of promoting industry wise
negotiations and active participation by the parties in the determination of wages and other
conditions of employment. The following quotations point to the success of this institution:
"The board's deliberations and awards have contributed significantly towards the
development of a national and "development-oriented" outlook on-questions pertaining to
particular areas and sectors. They have given serious attention to the impact (or wage
increase) on factors like prices, employment and the profitability of the industry."
The committee set up by the National Commission on Labour identified three major
problems from which the wage boards suffer:
(i) A majority of the recommendations of the wage boards are not unanimous:
(ii) The time taken by the wage boards to complete their task has been rather unduly long;
and
(iii)The implementation of the recommendations of the wage boards has been difficult.
But it concluded: "The system of wage boards has, on the whole, served useful purpose. As
bipartite collective bargaining on wages and allied issues on an industry wise basis at the
national level has not been found practicable at present for various reasons, this system has
provided the machinery for the same. It is true that the system has not fully met all the
expectations; and particularly in recent years, there has been an erosion of faith in this system
on the part of both employers and employees.... The Committee is convinced that these
defects are not such as cannot be remedied."
17. REMEDIES SUGGESTED BY COMMITTEES

The committee made some important recommendations. These have been given below:
(i) The Chairman of the wage board should be selected by the common consent of the
organizations of employers and employees in the industry concerned.
(ii) In future, the wage board should function essentially as machinery for collective
bargaining and should strive for unity.
(iii) Technical assessors and experts should assist the wage boards.
(iv) The government in consultation with the organizations of employers and workers
concerned should decide the terms of reference of wage boards.
(v) A central wage board should be set up in the Union Ministry of Labour on a permanent
basis to serve all wage boards through the supply of statistical and other material and
lending of the necessary staff.
(vi) The unanimous recommendations of wage boards should be accepted, and in the case of
lack of unanimity, the government should hold consultations with the organizations of
employers and employees before taking a final decision.
137
(vii) The wage boards should not be set up under any statutes, but their recommendations, as
finally accepted by the government, should be made statutorily binding on the parties.
(viii) For the industries covered by wage boards, permanent machinery should be created for
follow-up action.
(ix) The wage boards should complete their work in one year's time and the operation of its
recommendation should be between two or three years, after which the need for a
subsequent wage board should be considered o merit.

1. Wage is meant by remuneration/compensation? What are the basic objectives and principles
of wage and salary administration?
2. What do you mean by wage structure? Outline the components of wage structure?
3. Are wage differentials justified? Comment
4. Give a note on managerial remuneration?
5. Point out briefly the objectives of wage policy and methods of wage determination or fixation
of India.
6. What is the main consideration or factors related to the evolution of company wage level and
wage structure?
7. The wages in an industry are determined by wage laws and industry’s capacity to pay."
Examine this statement in the light of the experience of the company you are familiar with.
8. What is the difference between base compensation and supplementary compensation? What
types of fringe benefits are often offered to the industrial employees?
9. From an Organizational point of view, how does wage and salary administration take place?
Explain the purpose or objectives of wage and salary administration or an appropriate wage
or compensation policy in an organization.
10. Write notes on the following

a. Base Wage
b. Perquisites
c. Wage and Salary Polices
d. Principles of Wage Administration.
11. Examine the influence of "Cost of Living and Productivity as important wage criteria on the
determination of wage rates in a company.
19. Summary
As Albert Camus, the French philosopher, stated: "Without work all life goes rotten. But
when work is soulless life stifles and dies". For the great majority of people, work is a
necessity. As the result of working, people obtain compensation rewards that provide obtain
compensation rewards that provide money to purchase a wide variety of goods and services
138
or receive in-kind payments of goods and services that would have required the expenditure
of money had they not been provided by the employer. Non-compensation rewards are almost
infinite in variety. These rewards satisfy emotional and intellectual demands. They make
people feel good about themselves, permit them to make full use of their talents, and promote
interactions with others in a supportive manner.
Though work, employees have the opportunity to improve their lifestyles. The
analysis of lifestyle demands and the opportunity for maintaining a current lifestyle and
improving it in future underscore the importance of job-earned compensation. It is no wonder
that a major union leader made this statement: "A job is a job; if you don't pay enough, it is a
lousy job." Another union leader has stated, "the most sensitive artery in the human body is
the one going from the heart to the pocketbook."
20. References:
1. Hair Mansion, Giselle Edwin and Porter Lyman's, Psychological Research on Pay: An
Overview, Vol. 3, Oct., 1963/3.
2. Payment of Wages Act, 1936 (Act No. IV 1936-1978, Section 2 (VI).
3. Indian Journal of Labour, Vo. 34, July 1993, No. 7.
4. I.L.O. Problems of Wage Policy In Asian Countries, 1966, P. 128.
139

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Compensation Management

18.1 Size and Composition

3.4 Linking compensation system with Productivity

10.2 Policy Decisions on pay structure

Wages have ethical, social, economic, political and psychological ramifications in

The term "compensation" is of a recent origin, which includes everything an employed

To concept, "earnings relates to remuneration in cash and in kind paid to employees, as a

(i) Statutory minimum wages:

A variety of new social ideas, Institutional forces, egalitarian and considerations,

1.1 Subsistence Theory:

1.2 Wage Fund Theory

1.3 Marginal Productivity Theory

1.4 The Residual Claimant Theory

1.5 Bargaining Theory

Walton and Mckersie, identified four bargaining sub-processes such as:

1.6 Employment theory

1.7 Exploitation Theory

1.8 Labour Theory of Value

1.9 Competitive Theory

1.10 Low-wage Labour Market Theory

1.11 Multi-Disciplinary Theories

The concept of wages includes economic, sociological, psychological and organizational

As an instrument of social policy, it was widely known or acclaimed:

2.2 Need for Wage Policy

3. Self Assessment Questions:

Bring out the components of employee remuneration.

Understanding Wage A.M. Sharma Himalya Publishing 2001

1. Meaning And Definition Of Incentive Payments.

LEARNING OBJECTIVES: After reading this chapter you should be able to

 Understand the meaning & Definition, and significance of incentive system

 Understanding the methods of job evaluation.

2. Significance of incentive System

3. Disadvantages of Incentives Systems

4. PRE-REQUISITES FOR AN EFFECTIVE INCENTIVE SYSTEM

The cooperation of workers in the implementation of an incentive scheme is essential because

In particular, workers co-operation is necessary in:

The other safeguards are:

5. SCOPE OF INCENTIVE SCHEMES

Industries in which measurement of individual or group output is rendered difficult or

Generally speaking, systems of payment by results can be most successfully

6. TYPE OF INCENTIVE SCHEMES

The following examples illustrate the method:

Standard time = 10 hrs.

a) Earning time wages are not guaranteed = 10*1 = Rs. 10

The following examples illustrate the scheme:

Standard time = 10 hrs.

Rowan system operates on the following lines

Standard time = 10 HRS.

An example to illustrate the Bedaux system is as follows:

Standard time = 10 hrs.

Total earnings = 8+1.50 = Rs. 9.50

To illustrate the Taylor's piece rate system, we take the following:

Standard output = 100 units

Output = 120 units

The Merick system can be illustrated as follows:

Standard time =100 units

The Gantt Task system operates as bellows:

Rate per hour = Re. 0.50