Summary Sheets for Revision

HRD Part 3
Important Points

1. This Summary Sheet shall only be used for Quick Revision after you have read the
Complete Notes
2. For Building Concepts along with examples/concept checks you should rely only on
Complete Notes
3. It would be useful to go through this Summary sheet just before the exam or before
any Mock Test
4. Questions in the exam are concept based and reading only summary sheets shall not
be sufficient to answer all the questions

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 In this document, we shall discuss

1. Performance Management and Appraisal

2. Compensation Management
3. Incentives and Benefits

1 Performance Management
Performance Management basically is process of

1. Planning Performance as in what employee is expected to achieve within a certain time frame
2. Appraising the Performance whether the result has been achieved
3. Giving Feedback to Employee regarding where he lacks or what are his strengths
4. Counselling Employee regarding how he can improve his performance.

We shall discuss these steps one by one except the first step which is amazingly simple and there is
nothing to explain further.

Difference b/w Performance Management and Performance Appraisal

1. Performance Management has broader perspective as compared to Performance Appraisal.

Performance Appraisal is one of the steps in Performance management. Performance Management
unlike Performance Appraisal also contains Performance Planning, providing feedback and
counselling to employees

1.1 Performance Appraisal

A performance appraisal (PA), also referred to as a performance review, performance evaluation,
merit rating, merit evaluation, (career) development discussion or employee appraisal is a method
by which the job performance of an employee is documented and evaluated for providing promotion,
incentives or other benefits. It does not only evaluate knowledge but also evaluates behavioral
qualities

Objectives of Performance appraisal

Objectives are divided into 3 categories
1. Judgmental: To determine compensation packages, wage structure, salaries raise, etc.
2. Developmental: To tell the employee how he is doing and suggesting changes in his skills,
attitude, and behaviors
3. Counselling by the Supervisor: for giving feedback and understanding problems for mediocre
performance

1.1.1 Drawback of Performance Appraisal

Sometimes we use the term PA for Performance Appraisal

1. Subjective evaluations: Traditional performance appraisals are often based upon a manager's or
supervisor's perceptions of an employee's performance. The review may be influenced by many

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 non-performance factors such as employee 'likeability', personal prejudices, ease of
management, and/or previous mistakes or successes.

2. Negative perceptions: "Quite often, individuals have negative perceptions of PAs". Receiving
and/or the anticipation of receiving a PA can be uncomfortable and distressful and potentially
cause "tension between supervisors and subordinates".

1.1.2 Biases/Errors Performance Appraisal

Managers commit mistakes while evaluating employees and their performance. Biases and judgment
errors of various kinds may spoil the performance appraisal process

1. First Impression (primacy effect): Raters form an overall impression about the employee on the
basis some first impression.
2. Halo Effect: The individual’s performance is completely appraised based on one perceived good
or bad quality, feature, or trait. If a worker has few absences, his supervisor might give him a
high rating in all other areas of work.
3. Horn Effect: The individual’s performance is completely appraised based on a negative quality or
feature perceived. “He is not formally dressed up in the office and therefore he cannot be a
good worker.
4. Central Tendency: Appraisers rate all employees as average performers. That is, it is an attitude
to rate people as neither high nor low and follow the middle path.
5. Spillover Effect: The present performance is evaluated much based on past performance.
Example would be employee being given high rating because he has good ratings in the past
too.
6. Recent Effect: Rating is influenced by the most recent behavior ignoring the commonly
demonstrated behaviors during the entire appraisal period. For example, if a person has
performed good in the last one month but was not performing well for the rest of the year then
he might not be an excellent performer but may be rated excellent
7. Stereotyping: This implies forming a mental picture of a person based on his age, sex, caste, or
religion. It results in an over-simplified view and blurs the assessment of job performance.
8. Varying Standards or Personal Bias: When a manager appraises (evaluates) his or her
employees and the manager use different standards and expectations for employees who are
performing similar jobs.
9. Constant Errors: There are easy appraisers and tough appraisers in all phases of life. Some
appraisers habitually rate everyone high; others tend to rate low. In such a situation, the results
of two or more appraisers are hardly comparable
10. Leniency Effect: Rating of all employees are at the high end of the scale. For Example, When the
professor tends to grade all the students on a higher side
11. Strictness: When a manager uses only the lower part of the scale to rate employees. For
Example, When the professor tends to grade all the students on a lower side
12. Contrast: The tendency to rate people relative to other people rather than to the individual
performance he or her is doing. For Example, at school, if you are sitting where all the chatty
people are, and you are silent then the teacher will think you are good student even though you
were not paying attention to what teacher was saying.

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 13. Similar-to-Me / Different-from-Me: Sometimes, raters are influenced by some of the
characteristics that people show. Depending if those characteristics are similar or different to
ratters' one, they would be evaluated differently.

14. Idiosyncratic rater effect: Sometimes the rates are so biased that rating tells us more about the
rater than the person being rated. Such as phenomenon is called Idiosyncratic rater effect

1.1.3 Steps in Performance Appraisal

1.1.4 Collecting Data for Performance Appraisal

There are three main methods used to collect performance appraisal (PA) data:

1. Objective production
2. Personnel
3. Judgmental evaluation

1.1.4.1 Objective Production

The objective production method consists of direct, but limited, measures such as sales figures,
production numbers, the electronic performance monitoring of data entry workers, etc. Although these
measures deal with unambiguous criteria, they are usually incomplete because of criterion
contamination and criterion deficiency

In criterion deficiency there might be more emphasis on quantity than quality. An example of this is
that of a job of a secretary and not being able to include a criterion that measures the competency of
performing word processing tasks means that there is a criterion deficiency in the evaluation of
performance of the secretary.

The factors which are outside employees control leads to employee Criterion contamination. For
Example, keeping amount of sales in the criteria for evaluation of secretary since secretary does not
pitch for sales and hence sales target should not be part of evaluation of secretary

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 1.1.4.2 Personnel
The personnel method is the recording of withdrawal behaviors (i.e. absenteeism, accidents). Most
organizations consider unexcused absences to be indicators of poor job performance.

1.1.4.3 Judgmental Evaluation

Judgmental Evaluation basically deals with evaluations in which appraisal is made on personal
judgement of the rater rather than following a specified criterion

1.1.5 Techniques of Performance Appraisal

Numerous methods have been devised to measure the quantity and quality of performance appraisals.
Broadly all methods of appraisals can be divided into two different categories.

Traditional Methods
1. Ranking Method: Here, each employee is compared with all others performing the same job and
then he is given a rank i.e. First Rank, Second Rank etc. It states that A is superior to B. B is
superior to C and so on. This method ranks all employees, but it does not tell us the degree or
extent of superiority i.e. by how much one employee is superior to another.

2. Paired Comparison: In this method, each employee is compared with other employees on
one- on one basis, usually based on one trait only. The number of times this employee is
compared as better with others determines his or her final ranking. This method is not useful
for Large number of employees

3. Grading Method: In this method, certain categories of worth are established in advance and
carefully defined such as outstanding, satisfactory, and unsatisfactory. Employee performance
is compared with grade definitions. The employee is, then, allocated to the grade that best
describes his or her performance.

4. Forced Distribution Method: This method was evolved by Tiffen to eliminate the central
tendency of rating most of the employees at a higher end of the scale. The method assumes
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 that employees’ performance level confirms to a normal statistical distribution i.e., only 10
percent employees can be higher performer and only 10 percent can be poor performer and
like this for every rating a certain percentage is predefined.

5. Forced Choice Method: Forced-choice method is developed by J. P. Guilford. It contains a

series of groups of statements, and rater is forced to select a statement which describes
everyone being evaluated. Common method of forced-choice method contains two
statements, both positive and negative.
Each statement carries a score or weight, which is not made known to the rater. The human
resource section does rating for all sets of statements— both positive and negative. The final
rating is done based on all sets of statement.

6. Checklist: Under this method, checklist of statements of traits of employee in the form of Yes
or No based questions is prepared. Here the rater only does the reporting or checking, and HR
department does the actual evaluation.

7. Critical Incidents Method: In this method, the rater focuses his or her attention on those key or
critical behaviors that make the difference between performing a job in a noteworthy manner
(effectively or ineffectively). The basic idea behind this rating is to apprise the workers who can
perform their jobs effectively in critical situations.

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 8. Graphic Rating Scale Method of Performance: This method is also known as linear rating
scale. Under this method, scales are established for a number of fairly specific factors. Normally
these factors are employee characteristics and contribution of an employee in terms of quality
and quantity.

9. Essay Method: In this method, the rater writes a narrative description on an employee’s
strengths, weaknesses, past performance, potential and suggestions for improvement. Its
positive point is that it is simple in use. Since the essays are descriptive, the method provides
only qualitative information about the employee. In the absence of quantitative data, the
evaluation suffers from subjectivity problem

10. Field Review Method: In field review method employee is not reviewed by the superior but by
another person who is usually from the HR department. The basic idea is that such a person may
take more objective view in appraisal and may not be influenced by various types of errors.

11. Confidential Report: It is the traditional way of appraising employees mainly in the Government
Departments. Evaluation is made by the immediate boss or supervisor for giving effect to
promotion and transfer. Usually a structured format is devised to collect information on
employee’s strength weakness, intelligence, attitude, character, attendance, discipline, etc.
report

12. Group Appraisal Method: This is a method in which employees are rated by group of appraisers
consisting of immediate supervisor and three or four other members. The advantage is that it is
thorough method with least bias as it involves multiple raters

13. Self-Appraisal: Self-Appraisal involves appraising the employee himself in terms of hoe he views
his performance himself. The major advantage of this method is that employees become more
involved, improves communication between superior and subordinate and improves motivation
of employee.

Modern Methods
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 1. MBO: MBO is Management by Objectives. This method is also known as Appraisal by Results .
The concept of “Management by Objectives‟ (MBO) was first given by Peter Drucker in 1954. It
can be defined as a process whereby the employees and the superiors come together to identify
common goals which are in line with Organizational objectives. The set goals are to be taken as
the criteria for measurement of their performance and contribution

2. Behaviorally Anchored Rating Scales (BARS): It was developed by Smith and Kendall to provide a
better method of rating employees. BARS are descriptions of various degrees of critical behavior
about a specific performance dimension. It differs from "standard" rating scales in one central
respect, in that it focuses on behaviors that are determined to be important for completing a job
task or doing the job properly, rather than looking at more general employee characteristics (e.g.
personality, vague work habits
For example, the below BARS is to gauge the behavior-involvement in the job. The performance
dimension here is ‘involvement in job’

Steps in BARS
To construct BARS, several basic steps, outlined below, are followed.
I. Gathering of Data
II. Identification of Performance Measures: In this step we basically find out the performance
dimensions that we need to measure. The data collected in first step is used to find these
performance dimensions
III. Identification of Critical Behavior: Critical behaviors are those behaviors which are essential
for the performance of the job. Critical behaviors are based on critical incidents of the job
IV. Retranslation of Critical behaviors: The critical behaviors are then retranslated usually by
different set of people so that we get right language of that critical behavior
V. Scaling of Critical behavior: Then scale is defined for each critical behavior like from 1 to 7
and each point in scale defines a level of performance
VI. Development of BARS instrument: Once the scales are defined for all the critical behavior ,
we arrange them to get the BARS instrument
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 3. Assessment Centers: This concept was first applied to military situations by Simoniet in the
German Army in the 1930s and then selection of British Army in 1960s. In India companies like
HUL, Eicher, Crompton Greaves, Xerox and Modicorp have adopted this technique. The basic idea
was to assess candidate in social situation using variety of assessors and methods. An assessment
center is a central location where managers come together to participate in well-designed
simulated exercises. Assesse is asked to participate in basket exercises, interviews, work groups,
simulations, presentations, and role playing which are essential for successful performance of
actual job. At the end of the process, feedback in terms of strengths and weaknesses is also
provided to the assesse’ s.

4. 360-degree Feedback: Another method used to appraise the employee’s performance is 360 –
degree appraisal. This method was first developed and formally used by General Electric Company
of USA in 1992. In India companies like Reliance, Wipro, Infosys, Thermax, Thomas cook etc. are
using this method
Under 360 – degree appraisal, performance information such as employee’s skills, abilities and
behaviors, is collected “all around” for an employee, i.e., from his/her supervisors, subordinates,
peers, self-appraisal and even customers and clients. 360-degree feedback, also known as multi-
rater feedback, multi-source feedback, or multi source assessment

5. Peer and Self-Assessment: While assessment can be performed along reporting relationships
(usually top-down), net assessment can include peer and self-assessment.
I. Peer assessment is when assessment is performed by colleagues along both horizontal
(similar function) and vertical (different function) relationship.
II. Self-assessments are when individuals evaluate themselves. Graphic rating scale is used
for self-assessments

6. Cost Accounting Method: This method evaluates an employee’s performance from the monetary
benefits the employee yields to his/her organization. This is ascertained by establishing a
relationship between the costs involved in retaining the employee, and the benefits an organization
derives from Him/her

7. Human Asset Accounting Method: In this method the employees of the organization are treated as
Human Capital and money estimates are attached to the value of the organization’s personnel and
its external goodwill. The principle behind this system is that like any other asset, human asset is
also valuable to the organization.

8. Negotiated Performance Appraisal: The negotiated performance appraisal (NPA) is an emerging

approach for improving communication between supervisors and subordinates and for increasing
employee productivity and may also be adapted to an alternate mediation model for supervisor-
subordinate conflicts. A facilitator meets separately with the supervisor and with the subordinate to
prepare three lists. What employees do well, where the employee has improved in recently, and
areas where the employee still needs to improve. The role of the facilitator is that of a coach in the

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 pre-caucuses, and in the joint sessions the supervisor and subordinate mostly speak to each other
with little facilitator interference

1.1.6 Development Appraisal

The focus is on development and growth of employees rather than data for decision making relating
to rewards and promotions. Development appraisal is done through workshops like assessment centers
and the appraisal is done against critical success factors for the job

1.1.7 Potential Appraisal

The potential appraisal refers to the appraisal i.e. identification of the hidden talents and skills of a
person. Potential appraisal is a future – oriented appraisal whose main objective is to identify and
evaluate the potential of the employees to assume higher positions and responsibilities in the
organizational hierarchy.

Psychological appraisal is one of the types of Potential Appraisal. This method assesses the
employee's potential for future performance rather than the past one. It focuses on the employee's
emotional, intellectual, and motivational and other personal characteristics affecting his/her
performance.

1.1.7.1 Requirements for Potential Appraisal

1. Role Description: A good potential appraisal system would be based on clarity of roles and functions
associated with the different roles in an organization.
2. Qualities Required: Besides job descriptions, it is necessary to have a detailed list of qualities
required to perform each of these functions.
3. Indicators of Qualities: A good potential appraisal system besides listing down the functions and
qualities would also have various mechanisms for judging these qualities in a given individual. Some
of the mechanisms for judging these qualities are:
I. Rating by Others
II. Psychological tests
III. Simulation games and exercises
IV. Performance appraisal records
4. Organizing the System: After covering the above preliminaries, we must set up a system that will
allow the introduction of the scheme smoothly giving answers to some puzzling questions:

i. How much weightage to merit in place of seniority in promotions?

ii. How much weightage to each of the performance dimensions – technical, managerial,
behavioral qualities?

5. Feedback: If the organization believes in the development of human resources it should attempt to
generate a climate of openness. Such a climate is required for helping the employees to understand
their strengths and weaknesses and to create opportunities for development

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 1.1.7.2 Techniques for Potential Appraisal

1. Self – appraisals: Already discussed

2. Peer appraisals: Already discussed
3. MBO: Already discussed
4. Management games like role playing (Discussed in Assessment Centers)
5. Leadership exercises etc. (Discussed in Assessment Centers)
6. Rating by Superior: The potential of candidate could be rated by immediate supervisor who is
acquainted with his work
7. Psychological Tests: Managerial and behavioral dimensions can be measured through a
battery of psychological tests
8. Performance Records: Performance records and ratings of candidates in the previous job
could be examined carefully on various dimensions

1.2 Appraisal Feedback

Appraisal feedback is especially important part of Performance Management. It helps employees to
know where he stands in terms of performance efficiency and What are his strengths and weakness?

Generally, Appraisal feedback is given through an interview. There are 3 types of interview

1. Tell and Sell Interview: In this the basic idea is to tell the deficiencies to the employee and convince
him regarding those deficiencies. The appraiser also gives suggestions to overcome the deficiencies.
2. Tell and Listen Interview: The basic idea is to communicate the feedback to the employees and then
listen to his reaction. Therefore, interviewer acts as an indirect counsellor rather than dominating
the discussion.
3. Problem Solving Interview: In this interview, the basic objective is not just to communicate the
appraisal results to the employee but to invite him how he perceives the problems and what are the
possible solutions as per him.

1.2.1 Nature of Feedback

Feedback can be oral comments, written reports like performance appraisal etc. Feedback
should be

• Feedback should be descriptive and non- evaluative. Rather than putting the employee in a
defensive position by telling him” Your coming in late convinces me that you are not serious
about your work”, a manager may say, “I notice that you have been regularly coming late and
I am deeply concerned about this”.
• It should be two-way process where employee is also given a chance to express his/her
views on the performance
• It should be focused on the behavior of the person rather than on the person himself. The
intent is not to condemn the employee as an individual
• When conveying feedback, it is generally desirable to back it up with few examples of actual
events.
• Feedback should be given timely, continuous, checked, and verified.

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 1.3 Performance Counselling

Performance Counselling is interactive process between the employee and his counsellor, mentor,
coach etc. to anticipate the likely problems in the job performance and defining proactive actions
to overcome those problems

Mostly counseling is done for work performance issues, but counseling can also be done if a person
has some personal problems like alcohol abuse or death of dear one. So, counseling should be done
when we have issues like excessive workload, lack of awareness of policies, performance issues,
lack of team spirit, family problems etc.

Conditions for Effective Counselling

1. Climate of trust, confidence and openness is essential for effective counseling

2. It is necessary that the subordinate should feel free to participate without fear or inhibition as

1.3.1 Types of Counseling

1. Directive Counselling:
a. This is Counselor Centered. In this approach Counselor directs the client to take certain
steps to resolve the conflict. This assumes that client cannot solve the problems by himself
b. It gives more importance to intellectual aspects than emotional aspect
c. “Put that cigarette out now as this is a nonsmoking area” is a form of directive counseling

2. Non-Directive Counselling
a. It is client Centered. The idea is to create an atmosphere in which client can resolve the
problem by himself
b. Also known as Permissive Counselling
c. Gives more importance to emotional aspects than intellectual aspect
d. Example would be: So, the reason you are not effective is that you stayed up late last night.
What are you going to do to ensure that this does not affect your performance again?

3. Eclectic Counselling or Cooperative Counselling

a. This is neither Counselor Centered nor client Centered but in between both
b. Here both the client and Counselor tries to resolve the problem

1.3.2 Steps of Counselling

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 1. Identify the Need: One should be clear why counseling is needed. Is it due to unruly behavior or
not coming to office on time or due to substandard performance etc.?

2. Preparation for Counselling: During the preparation phase one must

a. Select the place for Counseling. It should be private not public place
b. Notify in advance to the employee so that he can also prepare
c. List the points you want to discuss

3. Conduction the session

I. Rapport Building: In the rapport building phase, a good counselor attempts to establish
a climate of acceptance, warmth, support, openness, and mutuality.

II. Exploration: In this phase, the counselor should attempt to help the employee
understand and appreciate his strengths and weaknesses. Questions should be asked
which help the employee focus on his problem. Problem identification is a critical step in
planning for improvement.

III. Action Planning: The main contribution of the superior in this phase is in helping the
employee think of alternative ways of dealing with a problem.
Finally, the superior may render some assistance in helping the employee implement
the agreed upon action plan.

4. Follow Up: Counselor should provide support to the employee and should review his
performance on regular basis. If required there might be change in action plan

1.3.3 Barriers to Effective Performance Counselling

The barriers to Effective counselling are basically

1. Faulty Assumptions: There are some faulty assumptions such as managers think opinion is better
than formal operational process
2. Psychological Blocks: The psychological blocks such as managers feeling on appraisal as extra
burden, disliking or resentment of subordinates, disliking of communicating poor performance to
subordinates

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 3. Criterion Problem: Criterion problem is that it is very difficult to define the criteria for performance.
Most of the times criteria is vague or ambiguous or not measurable easily

2 Compensation Management

2.1 Meaning of Compensation

Compensation include direct cash payments, indirect payments in form of employee benefits and
incentives to motivate employees to strive higher levels of productivity

2.2 Components of Compensations

Compensation is expressed in terms of money. It would thus include

1. Wages or salary - Guaranteed Pay

2. Incentives or Variable Pay: Bonus or cash allowances besides salary which is often linked with
performance
3. Fringe Benefits such as accident, health insurance cover, employer's contribution to the retirement
funds, provision of accommodation, uniforms, canteen, recreational activities etc.
4. Prerequisites such as Equity Compensation: Normally provided to higher management such as club
membership, free residential accommodation, stock options etc.

The above categories are sometime treated differently. Some may see Fringe benefits as part of
Incentives, some may see stock options as part of incentives rather that pre-requisites, some may see
club membership as Fringe benefit rather than prerequisite. So do not worry in case these gets mixed up

2.2.1 Pay Aggregates

Various combinations of the above four categories are referred to as pay aggregates. Common
aggregates are explained below.
Together, guaranteed, and variable pay comprise total cash compensation
Total guaranteed package or fixed cost to company are aggregates that include guaranteed pay and
benefits.
Total direct pay refers to total cash compensation plus equity compensation. Benefits are excluded from
this aggregate.
Total Compensation would include all four categories: guaranteed pay (salary and allowances), variable
pay, benefits, and equity compensation.
Remuneration is a term often used to refer to total cash compensation or total compensation.
As noted above, total rewards would include total compensation as well as intangible benefits such as
culture, leadership, recognition, workplace flexibility, development, and career opportunity.

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 2.3 Compensation Theories

2.3.1 Traditional Theories

1. Subsistence Theory: According to this theory wages would be equal to the amount just sufficient for
subsistence (minimum amount required for food, clothing, and shelter). Lassale, a German economist
developed this theory. According to this theory, wages are determined by subsistence level. The
wages so determined will remain fixed. Since there is a tendency for the wages to remain fixed at the
subsistence level, it is called as Iron Law of Wages or Brazen Law of Wages.
2. Wages Fund Theory: This theory was developed by J.S.Mill. According to him, the employers set apart
a certain amount of capital to pay wages for labourers. This is fixed and constant. This is called as
wages fund. So, if number of laborer’s increase the wages will decrease since the wages fund is
constant
3. Residual Claimant Theory: This theory was propounded by Walker. According to this theory, rent and
interest are contractual payments. After deducting rent and interest from total product, the employer
will deduct his profits. What remains after deducting rent, interest and profits is wages. It is possible
to increase wages by increasing the total product by improving the efficiency of the workers

2.3.2 Contemporary Theories

1. Reinforcement Theory: Already discusses earlier in course under motivational theories
2. Expectancy Theory: Already discussed earlier in course under motivational theories
3. Equity Theory: Already discussed earlier in course under motivational theories
4. Agency Theory: As per agency theory an agency is relationship between two parties in which one is
a principal and other is an agent who acts on behalf of the principal. Employer is the principal and
employee in the agent. For performing agency work, the principal pays remuneration to the agent
which is called remuneration. In this process the employer tries to minimize the agency cost
whereas employee tries to maximize it. Ultimately it is through negotiations that balanced state is
reached

2.4 Factors for Compensation

What is the basis or factors on which compensation gets decided? These factors are also called
contingent factors and they are of two types – External and Internal Factors

Internal Factors

1. Company objectives: Company Objective plays a key role in compensation structure. If company
wants to recruit best talent from best colleges then obviously the compensation would be high.

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 2. Ability to pay: If company is making higher profits then it can pay higher salaries
3. Nature of Jobs: Highly skilled jobs will command higher salary.
4. Potential for Performance: On the same job two people might get different salary due to different
performance

External Factors

1. Market situation or prevailing market rate: For a particular talent, there is always a rate prevailing
in the market which most of the companies are ready to give.
2. Demand and Supply: Certain kind of resources are scarce in the market. So, such people are always
given higher salaries by the company
3. Trade Unions: If trade union has high bargaining power then it may negotiate better resulting in
higher salaries
4. Legal framework such as government regulations on minimum wages, regulation on provident fund
and gratuity
5. Cost of Living: If cost of living is high then workers shall demand high salaries

2.4.1 Job-based vs. Skill Based Pay

There is always a debate whether the pay should be based on the job that is being performed or the skill
of individual who is performing the job. In job based pay all the employees performing a particular job
are paid same salary. Job based pay method is also called membership-based pay.

Skill based pay is based on skills of the individual and is different for different individuals. This is also
called competency-based pay.

2.4.2 Graded Pay Structure and Broadband Pay Structure

In graded pay structure there are different level of jobs such as unskilled, semi-skilled, workmen, for
men, supervisor, middle level managers, senior level managers etc. All jobs at particular level are of
same worth to the organization

Broad banding (or 'broad grades') is the consolidation of traditional pay structures, consisting of many,
narrow pay ranges into a few, wider ranges or bands.In a broadband pay structure, the numbers
of salary grades are consolidated into fewer, but broader, pay ranges. Broad banding was first used by
IBM and general electric in 1990’s.

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 Broad banding helps in reducing time to analyze jobs and evaluating jobs, enables employees to focus
on content of job, its challenges, and its developmental opportunities rather than worrying about grade
level.

2.5 Wage Policy in India

Government of India had set up Fair wages in 1948 which has defined various concepts of wages that
govern the wage structure. These concepts of wages are minimum wage, living wage and fair wage

Minimum Wage: A minimum wage is a compensation to be paid by an employer to his workers

irrespective of his ability to pay. Minimum wage must provide some measures of education, medical
requirements, and amenities”.

Living Wage: A living wage is one which should enable the earner to provide for himself and his family
not only the bare essentials of food, clothing and shelter but a measure of frugal comfort including
education for his children, protection against ill-health, requirement of essential social’ needs and a
measure of insurance against the more important misfortunes, including old-age.

Fair Wage: Fair wage, according to the committee on Fair Wage, is the wage which is above the
minimum wage but below the living wage. The lower limit of the fair wage is obviously the minimum
wage; the upper limit is set by the capacity of the industry to pay.

2.5.1 Methods of Wage payment

Two famous methods of Wage payment are – Time wage method, Piece Wage method and Balance
method

Time Wage Method: In this method the worker is paid for the time he has worked on hourly, weekly or
monthly basis

Piece Wage Method: In this method workers are paid on the basis of quantity of output irrespective of
the time taken

Balance Method:

Suppose the time wage is Rs. 500 per week and the piece wage rate is Rs. 10 per unit. As per his
production, his wages during the 4 weeks in a month will be as shown

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 3 Incentives (Rewards) and Benefits

3.1 Meaning and Types of Incentives

Generally, when term incentive is used it is used in monetary term. But incentive can be financial
incentive or non-financial incentive.

1. Financial Incentives include all those payments in monetary terms that provided to employees to
motivate them for better performance.

2. Non-financial incentives are the one those which do not impact employees in monetary terms, but
they are still important as they help in providing motivation to employees.

3.2 Financial Incentives and its Types

1. Output Linked Incentive: The output linked incentive can be for individual output or group output

a. Individual Output Linked Incentive: The individual gets paid more based on higher output.
The more he produced, more will be his Incentive

b. Group Output Linked Incentive: Some companies have introduced group-output linked
performance incentives. In this all members share equal incentives irrespective of their
output. By providing fair treatment to team members through team-based compensation,
group cohesiveness is increased. However, there is drawback of this called social loafing in

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 which some members in group do not provide required effort because they think that anyway
whole group will be rewarded the same.

2. Bonus: Based on Payment Bonus Act, 1965 gives govt. of India the power to prescribe minimum
bonus of 8.33 percent of the basic pay up to basic salary of 3500 per month. As per this act bonus
is treated as deferred pay to be given later.

3. Scanlon Plan: This was introduced by Joseph Scanlon at United Steel Works of USA. In this
employee can participate by giving suggestions to cut costs. Any resultant cost savings from these
suggestions is distributed among the employees.

4. Profit Sharing: It is the distribution of Profit of the company with employees. The percentage of
profit to be distributed is determined in advance. Profit sharing is different from other incentive
schemes as here profit is shared after long interval of efforts whereas in other schemes incentives
follows efforts immediately.

5. Co-Partnership: In co-partnership the employees participate in equity capital of the company i.e.
when shares of company are floated, they buy them on the market prices. The shares may be
allotted to them and hence employees become shareholder of the company. They not only share
profits but also participate in decision making of the company

6. Employees stock option: Employees are given shares of company in such a way that they enjoy
long-term benefits due to appreciation is share prices.

7. Cafeteria Compensation Plan: A cafeteria plan is an employee benefit plan that allows staff to
choose from a variety of pre-tax benefits. This arrangement is also known as smorgasboard,
menus or cafeteria plan. The basic idea is that many employees attach different values to various
incentives and rewards and hence let them choose their rewards by themselves.

8. Fringe Benefits: Discussed later

3.3 Non-Financial Incentives and its Types

1. Interesting and Challenging Job
2. Social Importance of the Job
3. Status
4. Opportunity for Personal Growth
5. Opportunity for Promotion
6. Other benefits such as calling employees by first names

3.4 Intrinsic and Extrinsic Rewards

Another way to categorize rewards is to label them ad Intrinsic or Extrinsic Rewards

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 a. Intrinsic rewards: Intrinsic rewards are the satisfactions that an individual obtains from the job itself.
It means, they are the factors of esteem and self-actualization needs of the employees.

b. Extrinsic Rewards: Extrinsic rewards are the benefits provided externally. These rewards are
provided in term of money, promotions, and fringe benefits.

4 Fringe Benefits
Employees are provided various types of benefits which are not linked to productivity of the employee
but rather they are given to all employees depending on their seniority level in the organization. They
are basically payment to employees directly or indirectly either in cash or in-kind excluding
wage/salary and incentives linked to productivity.

4.1 Types of Fringe Benefits

Fringe benefits are of two types

1. Employee Welfare
2. Social Security

4.1.1 Employee Welfare

As per Arthur James – “Welfare includes anything that is done for the comfort and improvement of
employees and is provided over and above the wages”.

Employee welfare is not only about monetary benefits, but it is understood to include such services,
facilities and amenities which enable the persons employed to perform their work in healthy, congenial
surroundings and to provide them with amenities conducive to good health and high morale.

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 4.1.1.1 Types of Employee Welfare Schemes

4.1.1.1.1 Economic, Recreational and Facilitative Services

Overall, employee welfare services may be categorized as

1. Economic Services: These provide additional economic security over and above the wages and
salaries. For example, credit facilities for borrowing money in times of need
2. Recreational Services: Jon often becomes bored by their daily life. For this they need recreational
facilities such as indoor games, library, reading rooms, radios, T.V etc.
3. Facilitative services: These are conveniences which employees usually require such as canteen
facilities, housing facilities, medical facilities, washing facilities, educational facilities, leave travel
reimbursement facilities

4.1.1.1.2 Statutory or Non-Statutory Schemes

The employee welfare schemes can be classified into two categories based on compulsory or mandatory
viz. statutory and non-statutory welfare schemes. The statutory schemes are those schemes that are
compulsory to be provided by an organization, the non-statutory schemes are voluntary schemes
implemented by the industry.

1. The statutory welfare schemes include such as Drinking water, Latrines and Urinals, Lighting,
Canteen facilities, Lighting, washing places, changing room, rest rooms, maternity leave etc.

2. The non-statutory welfare schemes are the following: Personal Health Care facilities like
Doctors on duty, Flexible timing for the workers, Employee Assistance Programs like counseling
for stress, Harassment Policy to protect employees from harassment especially sexual
harassment to Women, Medi-claim Insurance Scheme etc.

4.1.1.1.3 Intramural or Extramural Activities

Another way to categorize is based on internal or external facilities. Facilities provided inside the
organization are called Intra-mural facilities such as latrines and Urinals, Canteens etc.
Those provided outside the organization are called extra-mural facilities lie housing accommodations,
maternity benefits, holiday homes, club membership etc.

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 4.1.1.2 Types of Employee Welfare Theories
1. Policing Theory: According to this view, the factory and other industrial workplaces provide
ample opportunities for owners and managers of capital to exploit workers in an unfair manner.
But government under this condition takes some steps and enacts laws for employee welfare.
So, government acts as a policeman

2. Religion Theory: Religion theory implies that the fruits of today's deeds will be reaped
tomorrow. Inspired by this belief, some employers plan and organize canteens and crèches.

3. Philanthropic Theory: The philanthropic theory of labor welfare refers to the provision of good
working conditions, crèches and canteens out of pity on the part of the employers

4. Paternalistic Theory: According to the paternalistic theory, also called the trusteeship theory, of
labor welfare, the industrialist or the employer holds the total industrial estate, properties and
the profits accruing from them, in trust. In paternalistic theory the employer acts as a parent to
them and takes care of their needs.

5. Placating Theory: This theory assumes that appeasement pays when the workers are on strikes
or angry. Workers are like children who are intelligent, but not fully so. As crying children are
pacified by sweets, workers should be pleased by welfare works.

6. Public Relations Theory: According to this theory, welfare activities are provided to create a
good impression on the minds of the workers and the public, particularly the latter.

7. Functional Theory: Also known as the efficiency theory of labor welfare, the functional theory
implies that welfare facilities are provided to make the workers more efficient. If workers are
fed properly, clothed adequately, and treated kindly, they will work efficiently.

8. Social Theory: The social theory implies that a factory is morally bound to improve the
conditions of the society in addition to improving the condition of its employees.

4.1.2 Social Security

Social security is essentially a measure for the employees against economic and social distress
such as old age, sickness, maternity, employment injury etc. They are of the following types
1. Payment for time not worked: Weekly offs, national holidays, sick leave, casual leave,
maternity leave come under this
2. Retirement benefits such as provident fund scheme, pension scheme, gratuity
3. Insurance benefits such as health insurance, life insurance etc.

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