Employee Reward Management

UNIT
01 Introduction to Reward Management
Names of Sub-Units
Employee Reward and Compensation, Elements of a Reward System, Factors affecting Reward
Management Policy and Practice, Internal and External environment, Development of Reward
management, Types of Wages
Overview
The unit explains the definition of employee reward and compensation along with its aim, and the
elements of the reward system. The unit also describes the factors which affect the reward management
policy and practice and explores the internal and external factors influencing the reward policy.
Further, it covers the development of a reward management system. Towards the end, it enumerates
three types of wages.
Learning Objectives
In this unit, you will learn to:

 Explain employee reward and compensation
 Enumerate the aims of reward management
 Discuss the elements of a reward system
 Explain the factors affecting reward management policy and practice
 Differentiate the internal and external environment
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Employee Reward Management
Learning Outcomes
At the end of this unit, you would:

 Understand the aims of employee reward and compensation
 Assess the factors affecting reward management policy
 Appraise the internal and external environment
 Examine the development of reward management
 Understand three types of wages
Pre-Unit Preparatory Material
 http://www.diva-portal.org/smash/get/diva2:832968/FULLTEXT01.pdf
 https://globaljournals.org/GJMBR_Volume11/9-Reward-System-And-Its-Impact-On-Employee.
pdf
1.1 INTRODUCTION
For many persons, an important reason to join and continue working in an organisation is the nature of
work that they get and whether they are considered of value by the organisation. Taking care of basic
psychological needs, being appreciated, being taken care of, and feeling wanted, is far more important
than the money that they are paid. There are multiple instances of employees leaving the organisation
even when they were being paid highly, for the reason that they did not feel appreciated or valued by the
organisation. One of how employees feel valued is the compensation in the reward system. There should
be a difference between the compensation, incentives and rewards. Compensation is what the employee
receives in the form of cash or terms of other benefits, for the work that they do in an organisation.
The incentive is the additional amount of cash or kind which is given to the employee for the extra work,
productivity, effort, or time contributed by the employee to the organisation. Rewards are a form of
recognising exemplary or exceptional contribution to or achievement for, the organisation. Employee
rewards and recognition are important ways to retain employees. Employee rewards and recognition
are considered important factors behind the success of the business. Human resource managers in
various organisations across the world are trying to leverage rewards and recognition for improving
productivity and efficiency in organisations. The rationale for this is when an employee is appreciated
for the work that they do, they are more motivated to perform at higher levels. They are motivated
because they are acknowledged. Rewards and recognition or an effective way of creating a strong
bond between the employee and the organisation. The recognised employees get motivated to show
their best version through exemplary performances. Rewards and recognition are like oxygen for the
organisational culture.
1.2 EMPLOYEE REWARD AND COMPENSATION

According to Luthans, a systematically planned compensation integrated with recognition and reward
system helps in increasing the performance of employees. With the talent competition, increasing
organisations are innovating with their compensation and reward policies and practices. Variable pay,
based on performance ranges from twenty percent to two hundred percent of an employee’s fixed pay.
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UNIT 01: Introduction to Reward Management JGI JAIN
While in some organisations, bonuses have no ceiling, other organisations have variable pay based on
the level of the employee in the organisation, with lower levels getting five to fifteen percent as variable
pay and higher levels getting thirty to fifty percent as variable pay. In certain service organisations,
some of the employees earned up to a hundred and fifty percent of their incentives in a year. Cash
awards are generally regulated by industry-based benchmarking.
There are three main elements to be considered in variable compensation. The first is the ratio between
the fixed and variable components of compensation. The ratio of the variable component concerning
the fixed part has been increasing steadily. The second is the question with whose performance should
the variable compensation be linked– the individual, the team, or the organisation. Mphasis-BFL for
instance had a three-tier system that linked the variable compensation of employees to all three – the
individual, the team and the organisation. Generally, the variable component is expected to act as a
reward for performance. The third is what unit should be used for the payout of variable pay.
1.2.1 Aims of Reward Management

The aims of a reward management system are:
 To attract the best talent
 To retain employees having high competence and performance levels
 To attain high levels of performance
 To create a workplace where employees enjoy working and are proud of it
 To nurture collaboration and teamwork
 To provide continual opportunities for growth
 To empower people to take initiative and display leadership
 To achieve and sustain a leadership position by managing change effectively
1.3 ELEMENTS OF A REWARD SYSTEM

Malhotra et al. define rewards as ‘all forms of financial return, tangible services and benefits an
employee receives as part of an employment relationship’.
The essential elements of a successful reward system are:
 Recognition/Praise: Recognition and praise are two of the most inexpensive yet most powerful
rewards an organisation can provide to its employees in addition to a high impact and low cost.
Recognition and praise provide a foundation for other elements of a reward system.
 Comprehensiveness: The most effective reward systems appreciate both big and small wins. It is
important to understand that small wins need to be celebrated as they lead to big wins. In addition,
a continual string of small wins is easier to drive as compared to a single large, big win. Also,
recognising multiple small wins keeps the employees motivated over a sustained period.
 Equity: An effective reward system should also be fair. Without equity, the efforts and time invested
by the organisation in motivating the employees can lead to disengagement which would defeat the
objective of having a reward system. The reward system must be perceived to be fair.
 Timeliness: Rewards which are timely given promptly are more effective than rewards that are
handed out at periodic intervals such as monthly, quarterly, or annually. Since the achievement is
done on the spot the reward must also be given immediately. As the time between the achievement
and the reward increases, the positive impact of the reward decreases and the potential negative
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impact of the delay increases. The connection between the reward and the performance must be
direct, immediate and clear.
 Specificity: It is of key importance that the reason or rationale for the reward be shared with the
employee. The more specific the reward, the higher the impact. This guides the employees towards
preferred action. It also helps to showcase to the other employees what behaviour or performance
is appreciated, so that other employees may also tune their contribution accordingly.
 Culture alignment: A good reward system reinforces the values which are important to the
organisation and supports the organisation culture. The best way to align a reward system to the
culture is to engage everyone in developing such a system.
 Measurability/benchmarking: A good reward system builds in measurability for a more granular
understanding of the impact. Feedback can be taken from the employees on how well the reward
system is working for various teams and the organisation as a whole. Attempts should be made to
elicit quantifiable responses.
1.4 FACTORS AFFECTING REWARD MANAGEMENT POLICY AND PRACTICE

The policy and practice of reward management systems are influenced by a variety of factors. These
include contextual based on the internal and external environment of the organisation, as well as
conceptual factors which relate to the theories and perceptions about how human capitalis managed, how
strategy is developed, how pay levels are determined how motivation is handled and how commitment is
induced. The internal environment comprises the culture of the organisation, its people, technology and
its business. The external environment includes globalisation, pressure from competition, demographic
changes and the talent market dynamics. Strategy relates to inducing actions in the present which
influence the future and facilitate the achievement of the goals of the organisation. Human Capital
Management (HCM) includes procuring, analysing and reporting data that influence the strategic and
operational decisions, and includes reporting on the effectiveness of reward management policy. The
markets and industry benchmarking influence the pay levels in an organisation. Motivation includes
the non-financial rewards given to employees. Commitment and engagement to the job also influence
the reward policy. Figure 1 shows factors affecting the strategic reward system:
Factors affecting the strategic reward system
Internal factors External factors

Compensation policy or Conditions of the
organization labor market
Area wage rates

worth of job
PAY Cost of living
Employee’s
relative worth Collective bargaining
Employer’s ability to pay Legal requirements
Figure 1: Factors affecting the Strategic Reward Policy and Practice

Source: https://en.ppt-online.org/
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1.5 INTERNAL ENVIRONMENT AND THE EXTERNAL ENVIRONMENT

There are two types of the business environment, i.e., internal and external environment. Figure 2 shows
the internal and external environment:
Business Environment
Internal Environment External Environment
• Value System
• Mission and
Objectives
• Organisational
Structure Micro Environment Micro Environment
• Corporate Culture • Organisation • Economic
• Quality of Human Customer • Political – Legal
Resources • Competitors • Technological
• Labour Unions • Market • Global
• Physical Resources • Suppliers • Socio – Cultural
and Technological • Intermediaries • Demographic
Capabilities
Figure 2: Internal and External environment

Source: https://edurev.in/studytube/
Internal Environment
The internal environment of an organisation relates to the reward policy in terms of the strategy
deployed to attract retain and motivate employees. For certain organisations the reward system
represents an element of cost which is up a part of the cost of production. In this manner the reward
system influences profitability. It is common to find certain organisations copying the reward systems
of other companies. This is usually seen as a method of being competitive concerning attracting talent
in the industry. However, care needs to be taken while adopting this approach, as one system of rewards
in an organisation may not be exactly replicable in another organisation because of its context. For
instance, if a company pays its employees higher than the market standards, such a system will not
necessarily be viable in a start-up firm as it will affect profitability. Another instance of incompatibility
in reward systems is where consulting companies utilise a compensation structure heavily focused on
variable pay, which may not be directly applicable to manufacturing companies. Similarly, the reward
system should also be suited to the context of the organisation.
The job worth determines the nature of rewards for a particular position. Job worth, job analysis and
job evaluation are principal methods employed to establish job worth.
Bratton and Gold (2003) defined job analysis as the ‘systematic process of compiling and assessing
information about the tasks, key responsibility areas, and the context’.
Job analysis is the compilation of the major tasks in a job, the expected outcomes, and inter-relation
with other jobs (Milkovitch and Newman, 2002). Job analysis includes making job descriptions and
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performance standards for the job. Job evaluation aims to set a hierarchy of jobs and determine the
relative worth of the job to establish a pay structure. The pay and rewards would then be linked to
the skill requirements, nature of the job, efforts to be invested, conditions at work and the knowledge
required for the job.
External Environment
The external environment comprises the labour market, demand and supply of labour and the
government. The labour market is the area from where employers hire their employees. An organisation
needs to be clear about which positions it is approaching the labour market. External job worth is based
on what other organisations are paying for the same or similar job. This comparison of compensation
for a particular position concerning other employers in the market is also referred to as benchmarking
or comparison with market standards.
Like other markets, the labour market is also influenced by the supply and demand of labour or talent.
When the supply of labour is higher than the demand, the wage rates and compensation of employees
usually go down, whereas when the demand for labour or talent is high, and the supply is low the wage
rates or compensation of employees usually goes up. When workers encounter labour or talent-related
challenges, they move towards organisations that have better reward structures, policies and practices.
The government is an important player in the labour market as it influences the savings potential,
taxation and compliances related to the labour market. It also influences the macro-economic
environment of the industry. It also facilitates the circulation of money in the national economy along
with influencing the inflation levels, consumption levels, demand for products and services and other
such factors. The government also sets minimum wage levels in the country.
1.6 DEVELOPMENT OF REWARD MANAGEMENT

The reward management system in organisation should be based on what the organisation needs
to reinforce within the organisation and its employees. The reward system structure will vary based
on whether the organisation wants to focus on effort, loyalty, performance, team-working, process
compliance, or any other such focus area. This should ideally be informed to the employees in advance
as people exhibit behaviour which are rewarded. In a reward management system, rewards are
categorised into two types, i.e., extrinsic and intrinsic.
 Extrinsic rewards: The types of extrinsic rewards include:
 Monetary bonuses
 Paid holidays
 Employee Stock Options
 Profit-sharing
 Gifts
 Amazon/Flipkart vouchers
 Dinner with family vouchers of a restaurant
 Intrinsic rewards: These are rewards where the employee is given either:
 Greater decision-making power
 More interesting work
 More responsibility
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 Opportunity for personal growth

 Opportunity to attend an academic course in a prestigious institute
 Opportunity to attend a conference abroad
 Offsites
While designing a robust reward system, the following aspects need to be kept in mind:
 The organisation should form a consensus on the behaviours that it expects the employees to exhibit
and the culture that it wants to develop.
 Rewards should be designed for individuals as well as teams.
 The variable component of salary can be included in the reward system.
 The rewards should develop pride in the employees that they belong to the organisation, and they
should feel valued.
 The system should promote collaborative work and reinforce the desirable attributes in the
employees.
 Feedback should be obtained on the efficacy of the reward system.
 Ideally, a manual for this system should be developed to enable transparency of the policy with the
employees.
 A reward committee may also be formed to collect feedback, receive suggestions and recommend
changes if required.
 The reward system must be designed to be fair and also be perceived to be fair by the employees.
1.7 TYPES OF WAGES

As per the Minimum Wages Act 1948, wages or defined as, “all remuneration capable of being expressed
in terms of money, which if the terms of the contract of employment express or implied were fulfilled, be
payable to a person employed in respect of his employment wages, and includes house rent allowance
but does not include the value of:
(a) any supply of light water or medical attendance
(b) any amenity or service excluded by general or special order of appropriate government
(c) any contribution paid by employer to any scheme of social insurance
(d) any travelling allowance or travelling concession
(e) any reimbursement all money paid to employee to cover or be free expenses incurred by the
employee by the nature of his/her employment
(f) any gratuity on the employee’s discharge
There are various types of wages some of which are explained below:
1. Piece rate wages: These are wages that are paid as per the work done by the workers. To arrive at
the amount to be paid to the employee, the number of pieces produced by the employer are counted.
2. Time rate wages: These are wages paid to employees who work on a daily, weekly, or monthly basis
and have contributed to the organisational goals. For example, daily wagers earn and are paid daily
wages, for the work they do.
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3. Cash wages: These are wages paid to labour in terms of currency salary paid to a worker is an
instance of cash wages.
4. Wages in kind: When the worker is given some goods in exchange for the services rendered, instead
of cash, it is referred to as wages in kind. This can be seen in rural areas where the labourers are
given a certain weight of wheat grains or rice, in exchange for their services.
5. Contract wages: These are wages that are pre-decided for a particular task, irrespective of the
effort or time is taken. For example, if a plumber is told that he will be paid `10,000/- for installing
the toilet seat and the taps, then he will be paid that amount whether he finishes the job in one day
or two days.
6. Real wage: This is the translation of money wage in terms of the commodities which can be bought
with that amount of money. For example, if a worker receives `1000 per month as wages, and during
the year, the prices of commodities that the workers purchase for their household, increases by 40
percent. This would imply that though the money wage remains the same, the real wage is reduced
by 40 percent. Real wages include the additional benefits received by the employee, in addition to the
money wage.
1.7.1 Minimum Wage

Minimum wages are the least number of wages that must be paid to every worker in the country. These
rates are decided by the government. Minimum wages are defined as per Minimum Wages Act, 1948.
Minimum wages include the necessities of a worker and are the amount below which deficiency of
the worker shall be depleted. Organisations need to pay at least the minimum wages to the workers
employed by it. Minimum wages for workers are categorised as per the various skill levels and vary
from state to state within India.
1.7.2 Fair Wage

A fair wage is slightly higher than the minimum wage. A fair wage is considered adequate to meet the
normal needs of the employee. The fair wage is related to the workload of the employee. The fair wage
would be the wage paid to the workers for various jobs which need equivalent effort and efficiency and
are of similar difficulty levels.
1.7.3 Living Wage

A living wage is the lowest wage amount with which the worker can afford the basic cost of living. Since
the needs of each worker vary based on their location, marital status, number of children and other
such considerations, the term living wage gets embroiled in various controversies. Some people use the
term living wage interchangeably with minimum wages. However, these two concepts are different.
While minimum wage is regulated by legislation, a living wage is a conceptual understanding.
Living wage is the amount of wage which helps an individual to fulfil their basic needs like food, clothing
and shelter, as well as some other leisure activities. This term has not been defined in the minimum
wages act, 1948.
Conclusion 1.8 CONCLUSION
 In the sphere of human resource management, the reward system is an important element.
 Rewards refer to all kinds of remuneration, whether monetary or non-monetary provided to
employees for their contributions to the organisation.
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 Rewards are basically of two types intrinsic and extrinsic. While intrinsic rewards provide
psychological satisfaction and fulfilment and are usually non- monetary, extrinsic rewards can be
monetary or non-monetary as well as variable.
 Employee compensation is usually based on job responsibilities and the structure of compensation
as decided by job analysis and job evaluation performance-related variable compensation is related
to performance in the compensation system the salary level salary structure and salary form is key
components.
 Compensation is determined by many factors. The fixed base pay is decided by industry benchmarking
and the context of the organisation.
 The performance related compensation is based upon the sector, the industry, the context and the
demand and supply of labour.
 Another factor in determining compensation is the government, which regulates compensation
structures through legislation and regulations such control is indirect and is implemented in the
form of wage legislation.
 Compensation should also be designed to meet the basic living standard of the people working in
the organisation.
 While setting the compensation level in the structure, it is important to understand the nature of
the job, the requirement of skill for the job, the quantum of effort required to be invested in the job,
the responsibility which is part of the job, the conditions of working, and the knowledge required.
 The type of business that an organisation is in, determines the form of the rewards and compensation.
For instance, consulting firms lay a heavy emphasis on variable salaries, whereas manufacturing
organisations focus heavily on a basic pay structure.
 An organisation’s variable compensation may be used to reward and motivate high performers
to bring business to the organisation. As per the motivator-hygiene theory of Hertzberg, extrinsic
rewards are usually considered more effective and long lasting.
1.9 GLOSSARY
 Minimum wages: The least number of wages that must be paid to every worker in the country
 Rationale: A set of reasons or logical basis for an action
 Piece rate wages: These are wages that are paid as per the work done by the workers
 Incompatibility: The condition of two things being very different from each other as to be incapable
of co-existing together
 Living wage: The lowest wage amount with which the worker can afford the basic cost of living
1.10 CASE STUDY: REWARD MANAGEMENT IN BALAJI ENTERPRISES
Case Objective
The objective of this case is to discuss the elements and development of a reward management system.
Varun Sreedhar was the founder of Balaji Enterprises, the market leader in hair oil in the state of
Karnataka. The organisation had been manufacturing and selling hair oil for the past ten years. Varun
had worked hard to establish his brand in the state and had overcome many challenges during this time.
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Balaji Enterprises had a wide network of distributors and was present in all the major retail outlets in
the state as well as the smaller shops in the semi-urban areas. The sales team comprised of 12 members
who were mostly on the field every day. Most of the sales employees were locals who had grown with the
company.
Now, Varun wanted to expand to other states to grow the business. When he spoke with his sales team,
they did not show much enthusiasm as they were content in doing what they had been doing for the
past decade. Since the company had to establish a foothold in other states, the sales team members,
who were experienced with the product and culture of the organisation, would need to spend many
days away from their families, sometimes weeks together. The company did not want to hire new
salespersons for other states as they would not be conversant with the details of products and various
schemes. The members of the current sales team, however, did not like the idea of travelling out of the
state and staying away from their families for weeks at a time. It was a deadlock.
Varun wanted the existing team to handle the expansion as he was comfortable with them and they in
turn were in a comfort zone with him. This resistance by the team members came as a surprise. It forced
Varun to consider hiring new persons. He thought about it and mulled the idea of training the new sales
force on the products and policies. There would be risks of attrition and some of the new hires may also
leak inside information to the competition. After considering the pros and cons, Varun decided against
hiring new persons.
Now, he had to come up with a plan to motivate his existing team members to accept fortnightly
deployments out of the station. He engaged an HR consulting firm to advise him on how to move
forward. During a couple of rounds of discussions, it is decided that the best way forward is to develop
and implement a reward management system.
You, as a lead consultant for the HR Consulting firm, have to propose a robust reward management
system for Balaji Enterprise. How will you proceed?
Questions
1. What will you decide as some major aims of the reward management system?
(Hint: stress management, motivation, improvement in productivity)
2. Describe the elements that can be considered while developing a reward system for Balaji Enterprises.
(Hint: Comprehensiveness, recognition, praise, titles)
3. List down the kind of intrinsic regards will you recommend for implementation.
(Hint: Greater decision-making power, More interesting work, More responsibility)
4. What kind of extrinsic regards will you recommend for implementation?
(Hint: Paid holidays, Employee Stock Options, Profit sharing, Gifts )
1.11 SELF-ASSESSMENT QUESTIONS
A. Essay Type Questions

1. Enumerate the aims of reward management.
2. Describe any three elements of a reward system.
3. Describe the factors that affect the reward management policy and practice.
4. List the various types of intrinsic rewards that you are aware of.
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5. Explain types of wages.
1.12 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS
A. Hints for Essay Type Questions

1. The aims of a reward management system are:
 To attract the best talent
 To retain employees having high competence and performance levels
 To attain high levels of performance
Refer to section Employee Reward and Compensation
2. Recognition and praise are two of the most inexpensive yet most powerful rewards an organisation
can provide to its employees in addition to a high impact and low cost. A good reward system
reinforces the values which are important to the organisation and supports the organisation
culture. Refer to section Elements of a Reward System
3. The external environment includes globalisation, pressure from competition, demographic changes
and the talent market dynamics. The internal environment comprises the culture of the organisation,
its people, technology and its business. Refer to section Factors Affecting Reward Management
Policy and Practice
4. Intrinsic rewards are rewards where the employee is given either:
 Greater decision-making power
 More interesting work
 More responsibility
Refer to section Development of Reward Management
5. Time rate wages are wages paid to employees who work on a daily, weekly, or monthly basis and
have contributed to the organisational goals. Refer to section Types of Wages
@ 1.13 POST-UNIT READING MATERIAL
 https://www.managementstudyguide.com/reward-systems-and-policies.htm
 https://www.economicsdiscussion.net/wages/wages-definition-types-and-other-details/7450
1.14 TOPICS FOR DISCUSSION FORUMS
 Discuss with your classmates, the different types of wages and the context in which they may be
applied.
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UNIT
02
Aligning Reward Strategy to
Company Strategy and Concept of
Total Reward
Names of Sub-Units
Introduction to Aligning Reward Strategy to Company Strategy and Concept of Total Reward, Strategic
Reward Management, Guiding Principles of Strategic Reward Management, Best Practice Vs. Best Fit
Options, Total Reward, Significance of Total Reward, Benefits of Total Reward, Model of Total Reward,
Transactional Rewards, Relational Rewards, Types of Compensation-Financial and Non-Financial
Remuneration.
Overview
The unit introduces strategic reward management and its guiding principles. Then it goes on to explain
best practice v/s best fit Options. Later in the unit, Total reward are described along with transactional
rewards and relational rewards. Towards the end, it describes the types of compensation including
financial and non-financial remuneration.
Learning Objectives

 Explain the strategic reward management and its guiding principles
 List the best practices v/s best fit rewards
 Describe the nature of Relational awards
 Discuss the characteristics of total reward system
 Explain the nature of transactional rewards
 Differentiate between the types of compensation
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Learning Outcomes

 Analyse the factors that determine the compensation of an employee
 Define the major components of total reward model
 Evaluate the four main phases in formulating a reward strategy
 Assess Some of the best practices in reward management
 Appraise the advantages and disadvantages of transactional rewards
 Examine the major advantages of relational rewards
 https://www.local.gov.uk/sites/default/files/documents/total-reward-9b8.pdf
 https://nscpolteksby.ac.id/ebook/files/Ebook/Business%20Administration/Human%20
Resource%20Management%20Practice%2010th%20(2006)/43%20-%20Strategic%20reward.pdf
 https://www.iare.ac.in/sites/default/files/lecture_notes/IARE_CRM_NOTES.pdf
2.1 INTRODUCTION
Reward management relates to the conceptualisation and execution of strategies and policies which aim
at giving fair rewards to the employees which are consistent with the values of the organisation. Reward
management comprises analysis and monitoring of the compensation and benefits of employees in a
systematic structure. The study of reward management originated from the studies of Sigmund Freud
in the 1900s and was related to behaviour research, which examined the reaction of people towards
rewards and motivations. Psychologists started developing various theories of rewards. In order to
have a robust reward system all employees should be aware of what their task is, they should have
the necessary skills required to do the job and be motivated sufficiently enough to exhibit the desired
behaviour.
Reward management includes the processes and strategies needed to ensure the recognition of employee
contribution to the business. The objective of the reward system is to provide fair and justified rewards
in a consistent manner to the employees, which are proportional to the act committed. Reward systems
are designed to engage and inspire employees to work towards achieving strategic goals.
Reward management deals with financial as well as non-financial rewards, which will be explained
later in the unit. It has been seen that the practical application of reward management is easier to
understand than implement. Many companies have seen the reward system to yield results. At the same
time, there are many instances where companies created a reward system to encourage a particular
behaviour but ended up rewarding a completely different behaviour.
As an example, a certain company differentiated various team members on the basis of performance,
while giving the annual increment. An ‘outstanding’ rating received five percent increase, an ‘above
average’ rating received a 4% increase, and a ‘negligent’ rating received a 3% increase among workers.
Since the difference between performances was such a low percentage, many employees became
indifferent to the extra percentage point. They became indifferent between winning a percentage point
for a great job done or the loss of a point for some irresponsible behaviour. Such instances need to be
carefully examined and such occurrences need to be avoided.
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UNIT 02: Aligning Reward Strategy to Company Strategy
and Concept of Total Reward
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2.2 STRATEGIC REWARD MANAGEMENT

Strategic reward management is concerned with the conceptualisation, development, and execution of
strategies related to rewards and also relates to the guiding principles related to those strategies. It sets
the goal for what the reward practices should be in the coming future and how the organisation should
approach these goals. It sets the vision for the reward management, and also the processes which will
facilitate the realisation of the vision.
A reward strategy is a form of a declaration by the organisation about what it hopes to achieve by
instituting reward policies practices and processes to facilitate the achievement of organisation goals.
It provides a framework for deciding actions that need to be taken to realise the vision. It takes into
consideration the needs of the employees of the organisation, the needs of the organisation itself, as
well as how these needs can be satisfied. It incorporates the values which the organisation considers
important. The reward strategy is based on what behaviours should be rewarded. There are broadly 4
reasons in favour of conceptualising reward strategies:
1. The organisation should know where it is headed and how it will get there, including metrics to
indicate that it has reached the desired destination.
2. Compensation costs form a large part of the total expenses of an organisation; therefore, it is
important to plan how they are managed.
3. Research has proven that there is a positive relationship between reward and performance. The
organisation should find ways to strengthen this linkage.
4. The reward strategy should be well integrated with the other HR processes.
The reward strategy normally gets formulated after examining the current processes and practices of
giving rewards. Such a gap analysis helps to accurately identify what needs to be modified/upgraded /
embedded in the reward management strategy. The structure of management strategy can be made as
follows:
a. A statement of intent - the proposed strategy which needs to be taken up.
b. The reason why the proposal is being made and how it will meet the needs of a business including
people and product or service.
c. A time frame or a plan describing how, why, and when the initiative be executed. Such a plan should
also enumerate the steps to be taken, take into consideration the constraints related to resources,
the need for communications, and the training to be provided. A timetable should be decided for
such steps.
d. The guiding principles should be listed, which describe the values to be adopted while implementing
the strategy.
The reward strategy can be of two types, a broad-brush approach, or a specific intent approach. The
broad-brush approach guides the organisation towards a total rewards policy, and the latter deals with
specific aspects of reward management. The broad-brush approach is a more integrated approach to
reward management as it encourages personal development of employees, as well as creates career
opportunities for them. It also facilitates the development of a performance culture and clarifies what
behaviours will be rewarded along with reasons.
2.2.1 Guiding Principles of Strategic Reward Management

These principles show the approach which needs to be taken by the Company while dealing with rewards
and guide the actions from the reward strategy. These principles express the values of the organisation
and beliefs about how the employees should be rewarded. Normally employees judge the principles
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after experiencing their application. Therefore, the real-time application of guiding principles is key to
their success. The guiding principles may include factoring aspects such as:
 Support achievement of business goals
 Attract, retain, and encourage talent in the organisations
 Boost performance
 Be competitively relevant in terms of compensating employees for their achievements
 Balance the quantum of reward with the scale of achievement
 Recognise the value of all contributing employees, not just the stars
 Empower line managers with higher reward-related decisions
The process of formulating a reward strategy has four main phases. These are:
1. Diagnosis: In this phase, the goals for the rewards need to be decided, the policies and practices are
evaluated against these goals, and modifications are done as needed.
2. Detailed design: Here, the pilot testing is done for the reward strategy.
3. Testing: This phase involves final testing and preparing for the final launch.
4. Implementation: This involves the execution of the reward strategy as well as periodic assessment
and modification.
During this process, the stakeholders which include the employees, line managers, and senior managers
are consulted on a regular basis, as strategies evolve continually. Reward strategies need to be flexible
enough to adapt to the changing requirements of the organisation over time. Figure 1 shows the process
for developing a reward strategy:
Business Strategy
Analysis
HR Strategy
Current HR & Development
Stakeholder Need
Reward policy
Analysis
Analysis
Reward Strategy
Development
Guiding Principles
Involve Senior
Involve employees
Management
Pilot Testing
Train & Engage

Implementation Communicate
employees
Review & Modify
Figure 1: Process for developing a reward strategy
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Implementing new reward strategies is accompanied by challenges of managing change in the

organisation. Paul Craven, who was the Director Compensation and Benefits at GlaxoSmithKline R&D
division, advised ‘Do not expect people to change overnight and do not force change. It is better to
reinforce desirable behaviour than attempting to force a particular way of doing things.’ Nick Denby,
who was the Director Performance and Rewards at Diageo advised, ‘Keep it simple, but simple is not
easy. Involve employees in developing policies. Explain the planned changes and the rationale behind
them. Communicate how the changes will affect the workforce, to allay unnecessary fears.’
During reward policy formulation, the value of consulting employees should not be undervalued. Before
implementing any initiative, the return on investment should be considered. The initiatives should be
periodically evaluated for their effectiveness in real time and modifications should be done as needed.
2.3 BEST PRACTICE VS. BEST FIT OPTIONS

Best practices in reward management are those reward management practices which are considered
best across the industry, across various companies. Such practices are robust and can be scaled or
migrated across different organisations. They are benchmarked across competition from various
perspectives.
Best fit reward strategies in comparison are those reward related practices which fit the organisation
best. These strategies are context dependent and are specific to the particular company and its
environment. Such practices may not be appropriate for other organisations or other industries. These
practices fit the specific organisation the best, as compared to other reward management strategies.
Some of the best practices in reward management are given below:
1. Spot rewards: Having smaller rewards awarded on a more frequent basis have a greater impact
than larger rewards paid after large intervals. For instance, having weekly or fortnightly rewards
recognises and reinforces positive behaviour better, as compared to having annual rewards.
2. Integration with performance management system: When rewards are integrated with the
organisations’ performance management system, it enables the organisation to reward customers
based on intermittent customer feedback or process improvement or goal achievement, which is
linked to key result areas and is tracked on a regular basis. Standalone rewards systems become
difficult to continue and involve more resources to keep employees engaged with such rewards.
3. Multiple options: The millennial workforce is not motivated by a limited choice of rewards. They
prefer to have the flexibility to choose their own rewards based on their needs. Therefore, we can
see an increasing incidence of Amazon or Flipkart vouchers being given as rewards in various
organisations, which enable the employees to choose their own rewards based on their requirements.
Such need-based rewards are more attractive, appealing, and motivating.
4. Social recognition: Being recognised socially for receiving a reward is definitely more motivating for
employees, as compared to being rewarded in isolation. When employees are rewarded in public and
showcased socially, the appreciation and recognition which they get from their peers, friends, and
acquaintances, further enhances the feeling of achievement of the employee, thereby exponentially
increasing the motivation as a result of the reward.
5. Peer to peer recognition: This has a more meaningful impact as compared to being recognised by
managers. Top-down rewards are often seen to ignore the quiet but diligent performers, but peer-to-
peer recognition is more rewarding as the peers are more aware on a day-to-day basis about who is
working and to what extent.
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Some of the best fit practices include giving rewards based on the specific need of the organisation, the
organisational culture as well as the specific need of the employee. For instance, an increasing number
of employees would like to go on a holiday with their family. If the organisation rewards them with a
3-night 4 day stay at a resort with their family, it would be a better motivator as compared to say a
suitcase stroller. Another instance of specific need could be providing elder care facility to an employee
whose parents are aged and have no one else to look after them. Bachelors may prefer food facilities
being provided to them by their organisation as a big reward, while some may prefer an on-site gym
facility. The aim of rewards is to help employees have lesser stress, more work-life balance, and improved
productivity.
2.4 TOTAL REWARD

Total rewards in an organisation includes all forms of rewards paid through all the various initiatives.
These include performance-based variable pay, bonuses, incentives, perks, and various monetary and
non-monetary rewards. As such, total rewards may be defined as the grand total of all rewards given by
a company to its employees. The concept of rewarding an employee for displaying a specific behaviour
or performing a specific act it is a very old concept. Whenever an employee is awarded, the organisation
expects the employee to continue to display the behaviour for which the employee was rewarded. A
total rewards program compiles all the different rewards and benefits given to the employees of
the organisation under a single umbrella. Doing so, helps the organisation to be acknowledged as a
premium employer, which enables it to attract the best talent in the market. It also improves employee
retention and performance at the job.
A total reward strategy is basically a framework which provides monetary and non-monetary awards,
as well as developmental benefits to employees who achieve pre-decided goals. This strategy forms a
combination of compensation and benefits with opportunities for growth of the employee, which creates
an environment of high motivation. Designing such a strategy requires thinking with a Bird’s Eye view,
and in all likelihood also drives change in the organisation. It is critical that top management is engaged
with this concept for it to be successful. Developing a total reward strategy comprises of four steps:
1. Evaluation: The project team evaluates the current system of compensation and benefits and
determines their effectiveness in achieving goals organisational goals. During the evaluation, the
employees are surveyed, their opinions and beliefs with respect to the reward policies and practices
are obtained and analysed. The outcome includes suggestions for a new total reward system which
includes eligibility for rewards behaviours to be reported, type of rewards which will be acceptable,
and sources of funds for the rewards.
2. Design: The top management needs to decide which reward strategy will work best in their workplace.
In this step, it is decided what will be awarded, how it will be rewarded, and for what reason. The
decision makers decide what benefits will work best for their employees in their context. For instance,
will a monetary pay-out motivate better, or additional holidays, or training opportunities.
3. Implementation: In this step, HR communicates the new strategy to the employees of the
organisation. Training programs are conducted for managers and decision-makers to measure the
pre-decided achievements effectively, as well as for training employees so they understand what
they need to do, in order to obtain the rewards.
4. Measurement: The new strategy needs to be measured effectively. End results need to be
communicated in a transparent manner to the decision-makers of the organisation. Based on the
changes if any, can be proposed to the strategy for subsequent implementation.
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2.4.1 Significance of Total Reward

The relevance of total reward in reward management is not only significant but also effective total
reward as discussed above includes all the financial and non-financial rewards given to employees of an
organisation as a result of their achievement and contribution to the organisation school employees are
motivated when they are rewarded intrinsically as well as extrinsic. While extrinsic rewards may relate
to financial payments given to the employee or benefits extended to the employee, intrinsic rewards
include developmental opportunities for the employee and the climate within the organisation. Figure 2
shows Extrinsic and Intrinsic rewards:
Extrinsic Financial
Benefits
Rewards Payments
Intrinsic Development Climate

Rewards
Figure 2: Extrinsic and Intrinsic Reward types

Total reward strategies integrate with other business in nature strategies to achieve organisational
consistency. Kaplan a management guru said in 2007, that the total reward is a holistic approach
which aligns business strategy with people strategy. Such a strategy maximises returns and builds the
employer brand, which helps create comparative advantage for the organisation.
When compared with the traditional reward system, the total reward strategy impacts the organisation
to a greater extent in terms of attracting and retaining talent from the industry in achieving the
organisational objectives. Total reward includes multiple aspects relevant to employees which facilitate
their engagement with the organisation such as learning opportunities, professional development, non-
monetary benefits, as well as monetary incentives. Armstrong and Stephen in 2005, described total
rewards as comprising of tangible as well as relational awards.
Tangible awards are given as an outcome of a transaction between the employer and the employee
whereas relational awards are related to the environment which the employee interacts with, at work.
Relational awards are more specific to the individual and bind the employee to the organisation.
Research has shown that employees work in an organisation not just for the money that they receive
in lieu of the efforts that they invest, but also the intangible benefits such as recognition, culture, and
meaningfulness of the work that an employee does, which affects the employee’s commitment and
motivation towards the job.
Many organisations attempt to engage employees through monetary rewards and do not focus on non-
monetary aspects off reward management. While performance related bonuses have been prevalent for
a long time, it is the non-monetary rewards which are now increasingly gaining traction. Developments
in the strategic rewards area have led to more practical approaches of increasing alignment between
the organisation and the employees.
A typical total reward system normally has the following characteristics:
 Relevance: The reward system should meet their individual employee’s needs, to be effective. The
organisation can achieve this by focusing on what the employees feel important.
 Fairness: A robust reward system must not only be fair but also be perceived to be fair. The rewards
must be perceived as equitable and should create trust among employees. The measurement system
of the eligibility for the rewards should be perceived to be impartial.
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 Perceptible: The rewards must be visible to the employees. Visibility encourages the employees to
improve their performance.
 Flexible: The rewards should be flexible and should have a variety to meet changing expectations
of employees, the changing stages of their careers, and their changing lifestyles. The best rewards
vary for the individual employees.
 Low-cost: The organisation does not need to spend a lot of money on rewards for the rewards to
be effective. Rewards should serve as a motivator for the employees and should reinforce positive
behaviour.
2.4.2 Benefits of Total Reward

Total rewards have multiple benefits for an organisation.
 They serve as a magnet for talent and assist in recruitment of the right people.
 It helps in retaining performers in the organisation. When employees come to know that the
organisation is interested in them more than just giving them a salary cheque, when they know that
the organisation is interested in them as individuals, then the employees also reciprocate and start
contributing towards the organisational objectives with enthusiasm.
 It facilitates higher productivity since engaged employees translate to happy employees, which
results in dedication from employees towards the organisation, and this increases productivity and
efficiency.
 Total rewards program helps to centralise the administration of compensation, benefits, incentives,
bonuses, training programs, and other monetary and non-monetary rewards. This also helps to
ensure that the employees are continually upgrading their skills and contributing at increasingly
higher levels to the organisation.
2.4.3 Model of Total Reward

Total rewards can be modelled on different frameworks. A popular model of total reward has 5 major
components:
1. Compensation: A performance based variable component of the total compensation package, focuses
on the performance of the employee, and drives employees to perform better than they previously
have, both in the short term and the long term. While short term variable pay, rewards short term
achievements such as productivity improvement, long term variable component comprises of end
of the year cash bonuses or stock options which are given to employees who perform exceptionally
well. Long term variable rewards help retain high performers in the organisation.
2. Benefits: The total reward program should ideally comprise of benefits which are comprehensive
and as per guidelines of the government. These include sick leave, maternity leave, social benefits
like ESI and PF, as well as insurance. To attract the best talent these should be preferably higher than
the minimum prescribed by government guidelines.
3. Professional development: Such initiatives help employees of the organisation to continually
upgrade their skills while contributing at increasingly higher levels to the organisation. This also
includes coaching middle and senior management employees.
4. Performance recognition: Recognising performance can be done in many ways. Some of these are
recognition of individuals, recognition of team efforts, and peer recognition, which has been seen to
yield the best motivational levels across organisations globally.
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5. Work-life balance: This is a term that describes how flexible the organisation is while enabling
employees to balance their professional as well as their personal lives. For instance, if the organisation
allows employees to pick up their wards after school, drop them home, and return to work, it will
have high retention levels of employees who are parents of school-going children. Such initiatives
help improve the motivation levels of employees reduce absenteeism and increase loyalty towards
the organisation. Figure 3 shows the model of total rewards:
Total Rewards Strategy
Influences Outcomes
Compensation,
Benefits, Development,
Recognition
Internal-culture,
Organisational
leadership,
performance,
External-social
Employee
norms, regulatory
experience
market
Figure 3: Model of Total Reward

Total reward strategy should help employees focus on achieving organisational goals. The total rewards
model focuses on designing jobs which help innovation and collaboration to flourish. It also provides
resources to employees for upskiling themselves to keep up with the changing demands that the market
imposes on the business.
2.5 TRANSACTIONAL REWARDS

Transactional rewards, as the name suggests, comprises of rewards for transactions. These are mostly
financial awards and are tangible in nature. Advantages of transactional rewards are that they are
immediate i.e., the recipient can use this reward immediately and in whatever way that he or she may
desire. Many employees prefer financial rewards over non-financial ones. These are popular in nature
and are easy to implement. These are also convenient to administer as they do not require purchase
of any coupons, vouchers or gifts which may be further given away. The disadvantages of financial or
transactional rewards are that they may be taxable in the hands of the recipient. They affect the cash
flow of the organisation negatively. They require a lot of calculations to ensure that they are fair and
appropriate to the achievement. A major disadvantage of transactional rewards is that they are easily
replicable by competition.
2.6 RELATIONAL REWARDS

Relational awards or non-monetary in nature. A popular relational reward is a recognition that is very
motivating for the employees if done publicly and in an appropriate manner. Recognition is linked to
Maslow’s need hierarchy which states that all humans want to feel appreciated in one way or another.
Since recognition improves the reputation and credibility of the recipient, it is accorded a high degree
of importance by employees. Recognition should be immediate and given in public. When recognition is
given immediately, the employee also feels that he or she is being valued by their manager and therefore
the organisation. It also leads to a higher engagement of the employee with the organisation as it
creates a psychological contract between the individual and the organisation. Relational rewards have
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no impact on employee-related costs, which are incurred in the case of transactional rewards, as they
do not add to the compensation expenses. A major advantage of relational rewards is that they are not
immediately replicable by competitors.
2.7 TYPES OF COMPENSATION

Compensation includes all the monetary forms of benefits, salary, and rewards that the employees
receive as a part of their employment. Compensation is what is received by employees in exchange for
the services which they render to the organisation. It usually takes the form of monetary payment in
exchange for the time, effort, and expertise invested by the employee. Compensation, if structured well,
can help in talent acquisition, performance management, and employee engagement. Compensation in
an organisation should be adequate and fair for all employees. Some of the types of compensation that
are given to employees include financial compensation, stock options, non-financial compensation, basic
compensation, incentive compensation, specific job-related compensation, social security, payment for
overtime, and benefits such as paid holidays, insurance, sick leave, maternity leave, travel allowance,
retirement benefits, and other such benefits.
There are many factors that determine the compensation of an employee some of these factors are:
 Education of the candidate
 Experience of the candidate
 Job location
 Type of job
 Average salary paid for such a job in the industry
 Cost of living in the city of work
 Availability of qualified candidates
 Size of the company
 Brand image of the company
2.7.1 Financial Remuneration

Financial compensation is a critical part of compensation. This is given in the form of currency and is
considered important by employees as it fulfils basic needs such as food, clothing, shelters, etc. Financial
compensation is categorised into 2 parts:
1. Direct compensation: This may consist of wages, which is remuneration paid in cash for the work
done by the employee; or bonus which is the additional cash paid to the employee for exceeding the
expectations at work; or incentives which are given in cash for any reason whatsoever.
2. Indirect compensation: These are also referred to as fringe benefits, or supplementary compensation.
Such compensation helps the company to reduce absenteeism, retain its employees, and improve
their motivation and commitment to the organisation. This form of compensation is used by some
organisations to avoid the incidence of tax in the hands of the employee. Some forms of indirect
compensation are social security, medical expense, reimbursement, travel cost reimbursement,
driver salary, compensation given in lieu of injury sustained while at work, paid holidays, discounted
food in the office cafeteria, gym at work, or discounts at retail stores with whom the organisation
may have a tie-up, among many others.
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2.7.2 Non-Financial Remuneration

Non-financial remuneration is that compensation given to an employee which is not in the form of
currency but in some other form and helps improve the employee’s motivation and performance. An
important advantage of non-financial remuneration is that it avoids the incidence of tax in the hands.
Non-financial remuneration can be of the following types:
i. Job security
ii. Recognition
iii. Participation / involvement
iv. Pride in a job
v. Delegation of responsibility / Empowerment
vi. Other incentives
A good compensation structure yields happier employees, higher productivity, enhanced loyalty, better
teamwork, and increased output.
 Economists such as Karl Marx have contributed substantially towards development of theories in the
domain of compensation management. In recent years, there has been a shift from pure economics
to behavioral sensitivities.
 Compensation and reward management is being seen not just as a tool for managing performance
but also Human Performance Enhancement (HPE).
 Rewards include various offerings which the employee needs, wants, or desires and the organisation
can give in exchange for the contribution of the employee.
 Using rewards is mostly about managing expectations; the expectations that employees have from
their organisation related to being rewarded in exchange for their contribution, and the expectations
of the organisation from the employees in terms of performance.
 Organisations are increasingly recognising that employees do not leave their families behind when
they come to work. Rather they carry their family in their thoughts when they come to work. As a
result, employers now openly recognise the employees’ needs outside of their work.
 Increasingly, the focus is on valuing people for their skills and contribution, rather than seeing them
as cogs in the wheel.
 An important part of the reward system is the non-financial rewards or relational rewards, as they
are known. These rewards appeal to the intellect and the emotions of the employees they help the
employees feel good about themselves and facilitate the display of their talent and help promote
interactivity with others.
 The total reward model appears to offer a foundation for strategically building the engagement of
employees and improving the performance of the organisation.
 A robust reward management system should be aligned with the culture and climate of the
organisation and be able to achieve higher levels of employee engagement.
 A good rewards manager should be able to forecast and leverage opportunities for monetary as well
as non-monetary rewards.
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2.9 GLOSSARY
 Compensation: This is what is received by employees in exchange for the services which they render
to the organisation
 Total reward strategy: This is basically a framework that provides monetary and non-monetary
awards, as well as developmental benefits to employees
 Non-financial remuneration: Compensation given to an employee which is not in the form of
currency
 Tangible awards: These are given as an outcome of a transaction between the employer and the
employee
 Relational awards: These are related to the environment in which the employee interacts with, at
work
2.10 CASE STUDY: BELLA CLEANING PRIVATE LTD.
Case Objective
This case study aims to explain the appropriate reward management strategy for an organisation.
BELLA Cleaning Pvt. Ltd. deals in laundry detergent powder, dishwashing liquid, hand wash liquid and
floor cleaning liquids. The manufacturing facility is located in Ambala. The factory employs 100 workers.
The products are sold in over 300 retail shops across Haryana, Punjab, and Himachal Pradesh. The
products are supplied to the various retail shops in north India through its sales executives, who visit
various retailers in a city and get orders for the company. There are 2 sales executives in the medium
sized cities like Chandigarh, Ludhiana, Amritsar, and 1 sales executive in each of the smaller cities like
Phagwara, Mandi Gobindgarh, Kurukshetra, etc.
Rahul joined recently as the HR manager at BELLA Cleaning Pvt. Ltd. Among his first initiatives upon
joining the company, he conducted a competitor analysis and found that sales executives in other
similar organisations were selling more than twice the quantity every month. Surprised, he discussed his
findings with the CEO, Mr. Suresh Singla that very week. Mr. Singla explained that many sales executives
had quit their jobs and many new ones had joined in the past few years. Since sales figures translated to a
decent revenue, Mr. Singla had never thought to investigate further into the matter. But now that Rahul
showed him the competitor analysis, he was also astonished. He paid the sales executives whatever
salary they asked for and had been quite happy with the performance till date. However, Mr. Singla
asked Rahul what could be the reason that the sales executives were not performing at higher levels.
Since Rahul had studied the compensation and benefits structure of BELLA Cleaning Pvt. Ltd., he told
Mr. Singla that the sales executives were paid a fixed salary which was comparable with the industry
standards. But if they wanted better performance from the sales executives, they would need to have an
improved compensation and benefits structure which would enable them to reward good performers.
Agreeing with Rahul, Mr. Singla told him to think about it and propose a new compensation and benefits
structure, which would enable the company to motivate the sales executives to perform better. In
addition, since the high-performing sales executives would be easy targets for competitors to poach
them, Mr. Singla also tasked Rahul to propose how the high performers could be retained by offering
them financial and non-financial benefits.
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Questions
1. Assuming you are Rahul, why do you think so many people leave the organisation?
(Hint: fixed salary, no proper compensation management)
2. Help Rahul decide what kind of incentives would work best in this scenario.
(Hint: Total Rewards, monetary and non-monetary)
3. What kind of benefits should be offered to retain the sales executives, so they do not leave the
company?
(Hint: Financial and non-financial)
4. Give examples of transactional compensation which may be offered to the sales executives?
(Hint: Sale Bonuses, option exercises, payments to holders of Company Options)
5. Give examples of relational compensation which may be offered to the sales executives?
(Hint: recognition, status, employment security, training and challenging work )

1. Write a note on the Guiding principles of Strategic reward management.
2. Explain some of the best practices in reward management.
3. Write a note on the Total Reward strategy.
4. Enumerate the benefits of a Total Reward System.
5. List out the various factors which determine the compensation of an employee.

1. The guiding principles may include factoring aspects such as:
 Support achievement of business goals
 Attract, retain, and encourage talent in the organisations
 Boost performance
Refer to section Strategic Reward Management
2. Best practices in reward management are those reward management practices that are considered
best across the industry, across various companies. Such practices are robust and can be scaled or
migrated across different organisations. Refer to section Best Practice vs. Best Fit Options
3. A total reward strategy is basically a framework which provides monetary and non-monetary
awards, as well as developmental benefits to employees who achieve pre-decided goals. This strategy
forms a combination of compensation and benefits with opportunities for growth of the employee,
which creates an environment of high motivation. Refer to section Total Reward
4. It helps in retaining performers in the organisation. When employees come to know that the
organisation is interested in them more than just giving them a salary cheque, when they know that
13
the organisation is interested in them as individuals, then the employees also reciprocate and start
contributing towards the organisational objectives with enthusiasm. Refer to section Total Reward
5. There are many factors that determine the compensation of an employee some of these factors are:
 Education of the candidate
 Experience of the candidate
 Job location
 Type of job
Refer to section Types of Compensation
 https://worldatwork.org/media/pdf/2020_BRO_TRModel_J16197_FNL.pdf
 https://nscpolteksby.ac.id/ebook/files/Ebook/Business%20Administration/ARMSTRONGS%20
HANDBOOK%20OF%20HUMAN%20RESOURCE%20MANAGEMENT%20PRACTICE/46%20-%20
Reward%20Management.pdf
 http://www.mbatools.co.uk/Revision%20Sheets/OMP/BEST%20PRACTICE.pdf
 http://www.scienpress.com/Upload/BEJ/Vol%207_1_1.pdf
 http://www.scienpress.com/Upload/BEJ/Vol%207_1_1.pdf#:~:text=According%20to%20
Armstrong%20(2009)%2C,%2C%20holidays%2C%20health%20care%2C%20other
 Discuss with your colleagues and friends, whether transactional rewards are more motivating or
relational rewards.
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UNIT
03 Pay Model
Names of Sub-Units
Introduction to Pay Model: Forms of Pay, A Pay Model, Compensation Objectives, Four Policy Choices,
Pay Techniques, Salary Survey, Pay Structure, Pay Grades, Pay Policy Line.
Overview
The unit introduces the various types of remuneration, such as cash compensation, incentives and its
benefits. Further, it explains the pay model, objectives of compensation and policy choices in the pay
model. Later, in the unit pay techniques are explained, along with the need and functions of salary
survey. Towards the end, it describes the pay structure, pay policy line and pay grades.
Learning Objectives

 Explain the different forms of pay
 List the compensation objectives
 Describe the pay model, policy choices in the pay model and pay techniques
 Explain the types of information collected in a salary survey
 Describe the structure and grades of pay
 Discuss the definition of pay policy line
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Learning Outcomes

 Understand the forms of direct compensation
 Assess the elements of the pay model
 Appraise the main objectives of compensation
 Examine the four pillars of compensation structure
 Appraise the popular methods of making payments to employees
 Assess the advantages of a salary survey conducted by a third party or a professional agency
 Evaluate the different types of pay structure
 Analyse the dimensions of pay grades
 Explore the principles of pay policy
 https://cdn.ymaws.com/ahdionline.site -ym.com/resource/resmgr/ToolKits/CBP_
UnderstandingPayModels_E.pdf
3.1 INTRODUCTION
Employee remuneration is guided by principles and directives which collectively form the pay policy
of the organisation. A major objective for an organisation to design a pay policy is to ensure equitable
pay for all employees in the organisation. Pay policy of an organisation also aligns to the companies’
objectives and targets. Other objectives of the pay policy are to acquire and retain good talent, meet the
financial needs of the workforce and ensure a system of fair pay within the organisation.
There are six broad characteristics of a pay policy model these are:
1. Participative: The policy should be acceptable to the employees as well as the organisation.
2. Coherent: Employees in the same category should be paid a similar salary.
3. Individualised: The individual results in achievements should be considered while paying the
employees. There should be a balance between fixed and variable salaries.
4. Competitive: The pay should be as per industry standards. It may be more, but it should not be less
if the company wants to retain talent.
5. Understandable: The policy should be understandable by employees of all categories.
6. Permanent: The pay policy should be robust enough to be applicable over multiple years in such a
manner it does not need to be changed frequently.
The pay policy of a company should take into consideration all types of remuneration paid to the
employees instead of the work they contribute to the organisation. This includes monetary as well as
non-monetary remuneration. These remunerations are as follows:
1. Fixed salary: which is given for the employees’ job/role, amount of relevant prior experience,
responsibility level and market standards
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2. Variable salary: which includes pay dependent on the results achieved by the employee
3. Perks: such as health insurance, life insurance, training and other products or services, which may
not be exchanged by the employee for cash and which are offered to the employee to improve their
quality of life
4. Terminal payment: which includes any payment made to the employee on account of termination
of their services, such as gratuity/superannuation or pay instead of notice period or any other such
payment
Certain factors affect the company’s pay policy which are follows:
a. Geographical location of the company, such as metro, non-metro and tier-3 town.
b. Collective agreement especially about workers’ compensation.
c. The organisation’s financial condition, whether it is profit-making or loss-making
d. Employee’s circumstances, such as age, health, tenure with the company and other specific needs.
e. Market trends which the company needs to adapt to. At times, a few sectors will boom and others
will be performing at low levels.
f. Work-life balance, such as allowing employees to work from home also influences the pay policy of
the company.
Certain theories help us make decisions while developing our pay policies and pay structures. Some of
these theories are:
a. The equity theory: This is concerned with the relational satisfaction that employees receive from
their salary for the contribution that they make to the organisation. According to this theory, people
compare their salaries with others and their contribution with the contribution of others. If they
perceive this comparison to be unfair, they can be demotivated and reduce their contribution to the
organisation. This is a result of perceived inequity in pay. There are two forms of equity to look at:
internal and external. External pay equity is the comparison of salary with people working in other
companies. Internal pay equity refers to when employees compare their salaries with the salaries of
other employees in the same organisation.
b. The expectancy theory: According to this theory, employees only put in as much of effort in a job as
the salary that they expect to receive. To illustrate this, if the employees feel that their salary is less,
they will contribute less effort to the organisation.
c. The reinforcement theory: This theory was developed by E.L. Thorndike in 2011 and it states that if
good performances are accompanied by a reward, then the desired behaviour is likely to occur in
the future. Conversely, if high performance is not accompanied by a reward, a similar performance
may not be repeated in the future. An example of this is the incentives that salespeople receive upon
meeting the targets.
3.2 FORMS OF PAY

Compensation is any payment received from an employer by the employee in exchange for their time
effort and skills. This may be monetary or non-monetary, fixed or variable. Compensation is also known
as remuneration. A good compensation and benefits strategy help improve engagement levels in an
organisation. The components of compensation vary based on the country. For instance, in North
America health benefits are an important part of the compensation structure, whereas in Europe
parental leave and childcare are more commonly found components of the compensation structure.
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Compensation can maybe direct or indirect. While direct compensation is mostly financial, indirect
compensation can be financial or non-financial.
Direct compensation may be in the form of:
a. Hourly wage: provided to temporary or contractual unskilled or semi-skilled workers given the time
and effort they spend for the company. Certain jobs may attract an hourly wage, for instance in
construction, hospitality and retail.
b. Salaries: Most full-time employees receive a salary which maybe weekly or monthly in frequency.
Salaries are normally paid to teachers, doctors and other full-time employees.
c. Commission: This type of compensation is normally given to sales professionals who earn it based on
their achievement of the target sales quantum. The higher the target the higher is the commission.
Commissions are also dependent on the profitability of the product or service sold to the customers.
While some roles are available only on a commission basis, others are based on salary plus a certain
percentage of sales as commission.
d. Bonus: Bonuses are usually offered based on the outcome of the company’s performance across
the year. The decision on the amount of bonus to be paid is made by the top management. Bonuses
may also be paid quarterly or half-yearly. Bonuses and commissions are two types of incentive pay.
Bonuses may also include profit sharing. Bonuses are not necessarily dependent on the individual
performance but the performance of the company as a whole.
Indirect compensation may be either monetary or non-monetary. Indirect compensation is also referred
to as benefits or perks. An example of this is offering equity as a part of the compensation package
by many start-ups. Benefits maybe of several types, such as group life insurance, health insurance,
elderly home care, pension plans, flexible timings, childcare, paid holidays, the company provided car
and company-provided phone.
Law provides guidelines concerning the basic structure of compensation. The organisation should
comply with the same. A law-abiding, innovative compensation structure, which enables the employee
to take home most of his salary, helps attract market talent towards the organisation. At times, more
than one company is looking for the same talent. There are also times when one candidate gets similar
monetary offers from two employers. In such cases, even small benefits such as extra holidays make the
difference between the acceptance from a candidate and a regret letter from the candidate specifying
that they will not be able to join.
Therefore, it is advisable to leverage the different forms of pay to arrive at the compensation structure
for the organisation.
3.2.1 Cash Compensation

Cash compensation is the payment made over and above the salary and it is paid to those employees
who deal with cash for the organisation, for instance, the cashier’s desk in a retail outlet. This kind of
cash compensation is not obligatory for employers. However, in certain organisations, it is a common
practice. This specific component is paid to the employees to compensate for any cash deficit which
may occur during the employees’ transactions. Cash compensation is also subject to income tax. Cash
compensation should also be considered while calculating notice period salary.
3.2.2 Incentives
Incentives are big motivators for employees. Incentives may be variable based on the performance.
For example, the incentive amount may differ, based on how many sales the salesperson brings for
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the organisation in a specified period such as a month. Incentives help to drive better business results.
Incentives should be aligned with the company’s objectives. While designing an incentive plan a
structured approach may follow the following four steps:
1. Planning the frequency and quantum of incentives
2. Review of current performance with stakeholders
3. Implementation phase wherein incentive plans and targets are made transparent
4. Periodic up-dation based on market feedback
A popular practice to use incentives as motivators is to have a leader board, which is a tabular display
of names of everyone participating in sales and then tracking the daily weekly or monthly performance
in a manner to show all the participants their relative ranking for the time frame.
Incentives may be classified as casual or structured. Casual incentives are usually given as spot incentives,
such as small gifts, vouchers or free lunches. Structured incentives are given based on predetermined
criteria and include an annual bonus or commission at a specified percentage. The different types
of incentives include commissions, annual bonuses, sign-up bonuses, performance bonuses, equity,
company-provided car, paid vacation, gifts vouchers and club memberships.
Incentives help to improve productivity, enhance employee morale, boost sales and retain critical
employees. The advantages of incentives are that they communicate the company’s objectives to the
employees, motivate employees to achieve targets, enhance retention, recognise the efforts of individuals
as well as teams. The disadvantages of incentives are that they may create jealousy between employees
and make employees focus only on measurable incentive-based tasks. Unrealistic targets may be more
demotivating than motivating and performance ratings may be swayed by the personal relations of the
manager with the employee. When not used effectively, incentives may become a tool for purchasing
compliance, rather than contribute to evolving a healthy culture.
3.2.3 Benefits
Benefits are as important as compensation for ensuring employee satisfaction at the workplace. It is
important to understand the difference between compensation and benefits. Compensation is the amount
paid to an employee for their work contributes to the organisation. Compensation can be monetary, such
as salary or non-monetary, such as stock options or company-provided cars. Compensation is normally
taxable under the law. Benefits, on the other hand, are mostly non-monetary. Benefits are provided to
employees as a token of appreciation. Benefits could include the option to work from home, flexible work
timing or training opportunities. Benefits may be tax-free or partially exempted.
3.3 A PAY MODEL

The pay model was developed in 2002, by G.T. Milkovich and J.M. Newman. The pay model helps managers
to design a robust compensation management system. The model comprises three main elements:
a. Objectives of remuneration: These include efficiency, performance, quality, customers, cost, fairness
or compliance.
b. Compensation policy: This includes elements of alignment, competitiveness, contributions and
management.
c. Linkages of policy with the objectives or techniques: This includes work analysis, its description,
evaluation and internal structure; market definitions including market definition, surveys, policy
lines and pay structure.
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Compensation models vary, some link emphasis on base salary, while others lay more emphasis on
performance-based incentives, linking merit or performance with the incentives. Pay models also
consider seniority which includes performance or merit-based and incentive program-driven. A
company’s spay model should match its overall goals. Only when the pay model is aligned with the
organisation’s objectives will the model be beneficial for the company in the long term. The pay model
also has to be on the same level as the competitor’s and also be compliant with regulatory guidelines
and laws. The pay model should be cost-conscious, the costs including communication, change and
assessment.
Milkovich’s pay model and the remuneration structure of an organisation speak about the culture in
the organisation. If rewards are aligned to employee performance, then it is inferred that the culture is
performance driven. When salaries are linked to the skills of the employees, it is inferred to be knowledge-
driven. In both instances, the focus of the compensation structure should be on efficiency and fairness.
The pay model offers a structured method of organising a compensation system.
3.4 COMPENSATION OBJECTIVES

The main objectives of compensation are to:
i. Attract and hire the best talent: Employees normally switch jobs for a better working environment
or better role or better pay. In most cases, if the compensation and benefits structure is innovatively
structured, it offers a high degree of motivation to attract skilled talent.
ii. Motivate employees: Employees are motivated if they get a competitive salary in the bank as well
as benefits that make their work lives more flexible. Most employees today are looking for flexible
work timings so they may spend more time with their families. Having a flexible benefits plan helps
motivate employees to contribute at higher levels to the organisation.
iii. Enhance morale: If the morale of employees is high, then they are more efficient, they take more
pride in their organisation and the work culture evolves in a positive direction. This is influenced by
the degree of their happiness with the compensation they receive.
iv. Comply with government norms and regulations: A robust compensation structure should comply
with the laws, guidelines and regulations specified by the government.
These can be achieved by offering salaries that are attractive comparative offer useful benefits cater to
employee wellbeing ensure savings for retirement and insurance of employees.
3.5 FOUR POLICY CHOICES

There are four policy choices in the pay model. These are internal alignment external competitiveness
employee contribution and the system. Internal alignment and outward competitiveness are two
policies that are deemed more significant than the others in most organisations. In addition to this,
decisions related to training, career opportunities security of the job and employee assistance also need
to be considered while compensating an employee. While designing a compensation system the value
to the employee should be considered more important than the cost to the employer. A compensation
structure is based on 4 pillars:
1. Alignment: This refers to the alignment of salaries for all jobs which are similar. It also includes
rewarding different kinds of work achievements. Different job roles are evaluated based on their
relative contribution to the organisational objectives. A compensation structure perceived as fair by
the employees, motivates them to perform better. In a single organisation, jobs of a similar nature
should be paid similar salaries, as this affects the morale of the employees. Internal alignment
comprises a set of policies, procedures, commitment, strategies, systems and behaviours. These
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are translated in real-time practice as job analysis job evaluation and performance appraisal. The
relative contribution of each job rule is assessed while determining the compensation structure for
that particular job role. Internal alignment of pay can affect the decision of an employee to stay or
leave the organisation.
2. External competitiveness: This refers to the salary being perceived as fair when compared to
what the competitor organisations are paying for similar roles. This may be related to economic
environmental regulatory pressures industry competitiveness and trends in the related sector.
The level of demand and nature of supply of a particular skill or talent also affects compensation
structures. External competitiveness helps to understand what should be paid to the employees
in a particular industry when the salary is competitive it helps reduce the negative perception of
employees towards the organisation. External competitiveness is strategic.
3. Contribution: This refers to the criticality of performance in the organisation. A strong employee
contribution infers rewards in an organisation are directly aligned to the performance of the
employees.
4. System: This refers to the efficiency of administering the compensation and benefits structure. It
needs to be adaptive to the changing requirements as a result of evolving industry environment,
new regulations or revised objectives of the organisation.
3.6 PAY TECHNIQUES

There are many techniques by which employees can be paid. Some of the techniques include:
i. By cash: Till about two decades ago, cash payments were common for paying salaries to employees.
Now only certain organisation pay the reimbursement amounts in cash. In some sectors such as
construction, the daily wagers are paid by cash. The majority of employers now do not pay salaries
in cash.
ii. By cheque: This used to be one of the popular methods of making payments to employees. As
regulations got stricter organisations had to make salary payments by cheque or direct bank
transfer. The disadvantages of paycheques were that they could be stolen, misplaced or soiled and
they took a few days to be credited to the employee’s account.
iii. By direct deposit in the bank: With the increasing digitalisation of banks, direct transfer of salaries
from the Company’s account to the employee’s accounts became the norm. Numerous cheques no
longer needed to be signed by the authorised representative. In addition, the money was credited
immediately to the account of the employees.
iv. By mobile wallets: Certain new-tech companies pay salaries by digital wallets. In some other
organisations, rewards or smaller payments typically reimbursements are paid using digital
wallets.
3.7 SALARY SURVEY

A salary survey is a method of understanding prevalent salaries in the market for different job roles. In
this method, a survey is conducted across organisations in the same sector and at times across sectors,
across regions, across companies of varying sizes and demographics. The data may be collected from
the employees or the employers. Normally data from companies is taken when their size is large and
when the company size is small, the data can be collected from the employees.
When a salary survey is done using data received from companies there are certain disadvantages.
The company may not answer some questions, may not share sensitive data, such as salary structure,
profitability, attrition or specific incentives. In addition, the salary communication may be an aggregate
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over several months or averages, which may not reflect current and specific data. Salary surveys
done with employees directly are more advantageous in comparison. This is because salaries are an
interesting topic for most employees and if the industry data is committed to being shared with them,
they are more likely to provide current and accurate data. The information received related to benefits
is also transparent as certain levels of employees may be entitled to some benefits that employees of
other levels may not have access to.
Before undertaking a salary survey, certain essential elements need to be considered. These are:
i. Author: the survey should be conducted by a company that enjoys the public trust and high
credibility.
ii. Scope: the scope of the survey should be clearly defined concerning which type of positions will
be covered in the survey, the type of companies from which data will be collected, the size of the
company, industry, type of ownership and other such factors.
iii. Method: in which the survey will be conducted needs to be planned.
iv. Sample size: the number of respondents who will be a part of the survey, along with their
demographics should be enunciated before starting the survey.
v. Respondent selection: the criteria for selecting respondents should be pre-decided.
Salary surveys are usually conducted to know the average salary being paid to employees in specified
jobs/roles/positions and then decide the fair compensation for the employees. The type of information
collected in salary surveys can include:
a. Basic salary
b. Increment percentages
c. Performance-based pay amounts
d. Salary ranges
e. Starting salaries
f. Benefits
g. Allowances
h. Working hours
i. Educational qualification requirements
j. Geographical location
k. Hiring source, external or internal
l. Working conditions
Getting a salary survey conducted by a third party or a professional agency is advantageous as

compared to developing the survey questionnaire and administering it yourself.
3.8 PAY STRUCTURE

The structure of the salary or the salary breakup shows the remuneration given to employees and
the components therein. Different grades of pay or different levels of employees may have different
pay structures. This is due to the inclusion of certain components in some grades and the exclusion of
these components from other grades. Pay structures are influenced by the size of the organisation.
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While bigger organisations have more rigid pay structures, smaller companies can offer more flexible
benefits to attract talent. In addition, in bigger companies, the pay structures may be similar for multiple
roles, whereas in smaller organisations, with faster promotion opportunities, the pay structures may
also change as the employee grows in the organisation.
Pay structure is important for an organisation as it helps to:
i.. Monitor and control expenses
ii. Ensure parity of compensation between jobs
iii. Provide transparent communication of compensation and benefits
iv. Retain competitiveness
v. Plan budgets and employee-related expenses
vi. Anticipate and cater to raises in salary
Pay structures may be of different types. Some of these are:

1. Traditional: here the pay structures are comprised of multiple but narrow pay grades. There are
fewer opportunities to offer increases in salary in the same grade. Since the number of grades is
many, the employee can look forward to growth in their career.
Example:
Pay grade 1: INR 30000 – INR 32000 per month
2. Broadband: This structure divides employees into types instead of titles such as administrative jobs,
technical jobs and sales jobs. The salary range is wider as compared to the traditional structure, but
several grades are fewer. Thus, the opportunity for a pay increase are more.
Example:
3. Market-based: these are based on market salary surveys. The ranges of salary are described for
specific jobs instead of job types. The salary ranges are wider, but pay grades are narrower.
Example:
4. Step pay: these define the growth of salary with time, given acceptable performance, within an
organisation. These kinds of structures are normally seen in government bodies.
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Example:
Year 1: INR 30000 per month
5. Hybrid: Certain organisations may choose multiple pay structures within the organisation based
on department, job type and salary range.
The type of salary structure will depend on the size of the business, the industry the location and the
classification of employees in terms of full-time, part-time or contractual.
3.9 PAY GRADES

Pay grades are tiers in a compensation system that determine which position gets paid what salary. It is
normally a range of pay. Pay grades are used in private companies, government bodies as well as small
and big organisations. Pay grades provide a framework for compensating employees as they progress
in their careers. Pay grades comprise of two dimensions, vertical and horizontal. The vertical range
comprises of levels, each of which corresponds to a certain position. The vertical range corresponds
to increasing responsibility. The horizontal range relates to tenure or performance and gives room for
rewarding employees’ quality of work or tenure of service.
The pay an employee receives is usually influenced by factors such as:
i. Key responsibilities for that position
ii. Seniority level
iii. Degree of difficulty of the job
iv. Previous work experience
v. Educational qualification
vi. Performance levels
The salary range adjusts the experience in the same role. For instance, a fresher as a sales executive
may have a salary of INR 25,000, whereas a sales executive having spent two years with the company
may draw a salary of INR 27,000. In practice, it is common to find overlapping pay grades. This is
to accommodate employees in certain roles, who stay in that role for multiple years for any reason
whatsoever.
Pay grades provide employees a clarity of what they can expect their salary to be if they stay and grow
in the organisation. These grades help to classify different types of jobs having similar relative pay rates
and internal worth.
3.10 PAY POLICY LINE

The pay policy is a set of principles that regulate compensation and benefits of employees in an
organisation. It is responsible for ensuring salary budgets are equitably distributed. A pay policy line
refers to the intent of the pay structure, whether the organisation wishes to pay below market value,
above market value or competitively with the market.
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Pay policy is used to determine:

 Minimum pay
 Maximum pay
 Relationship between pay levels
 Whether the pay structure should be designed as a market leader or follower
 The division of the total compensation payable
The process of creating pay ranges comprises of the following steps:

1. Determine the compensation philosophy of the organisation
2. Perform Job Analysis
3. Group jobs into families
4. Use Job Evaluation to rank positions
5. Conduct Market research
6. Conceptualise Job Grades
7. Identify compensable factors such as skills, certifications, work experience, working conditions,
educational requirements, key responsibilities and other factors which may affect the price of a job
in a given pay market.
8. Based on research, create a salary range
The pay policy line may be drawn using the following methods:
1. Freehand line: The trend of data can be visualised after the points have been plotted. A freehand
line best describes the plotted points. While drawing freehand, vertical deviations from the line must
be minimised. The line may be straight or curved. When it is straight, the advantages are maximum.
A freehand line is easy to draw and explain.
2. Midpoint-progression approach: This method is seen as more evolved and permits a wider definition
at higher grades. It focuses on the pay policy line and the vertical axis of the wage structure. The
number of pay grades can be obtained by determining a standard distance between midpoints of
adjoining grades.
 In addition to being motivating for the employees, pay structure creation has other considerations
also. The size and anticipated growth of the organisation make a difference.
 Pay structures in smaller organisations having four to six employees will have a far more flexible
pay structure as compared to an organisation having 500 employees.
 Having employees in only one country will be different than having employees in other countries
also. The way the compensation and benefits are communicated to the employees also makes an
impact on the motivation of the employees.
 Salaries affect the standard of living and benefits ensure their emotional, psychological and physical
wellbeing. Therefore, an organisation needs to have a robust compensation and benefits system.
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 Inadequate compensation systems prove to be expensive for the organisation in the long run as it
translates to attribution and negative employee morale.
 To ensure that an organisation is competitive with the industry it must review its salaries
periodically and conduct market surveys to acquire the current industry data. This will ensure that
the organisation can attract, retain and motivate the best talent in the industry.
 Employee remuneration is guided by principles and directives which collectively form the pay policy
of the organisation.
 Indirect compensation may be either monetary or non-monetary. Indirect compensation is also
referred to as benefits or perks.
 Milkovich’s pay model and the remuneration structure of an organisation speak about the culture
in the organisation.
 If the morale of employees is high, they are more efficient, they take more pride in their organisation
and the work culture evolves in a positive direction.
 External competitiveness helps to understand what should be paid to the employees in a particular
industry when the salary is competitive it helps reduce the negative perception of employees towards
the organisation.
 Disadvantages of paycheques were that they could be stolen, misplaced or soiled and they took a few
days to be credited to the employee’s account.
 Salary surveys are usually conducted to know the average salary being paid to employees in specified
jobs/roles/positions and then decide the fair compensation for the employees.
 While bigger organisations have more rigid pay structures, smaller companies can offer more
flexible benefits to attract talent.
3.12 GLOSSARY
 Coherent: logical and consistent

 Equitable: fair and impartial
 Perceive: become aware or conscious of
 Quantum: a required or allowed amount
 Demographics: statistical data relating to a particular population or group of people
 Fixed salary: It is given for the employees’ job/role, amount of relevant prior experience, responsibility
level and market standards
 Bonus: Bonuses are usually offered based on the outcome of the company’s performance across the
year.
 Salary Survey: It is a method of understanding prevalent salaries in the market for different job
roles
 Pay policy: The pay policy is a set of principles that regulate the compensation and benefits of
employees in an organisation
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3.13 CASE STUDY: MAKING PAY GRADES FOR EMPLOYEES AT MUDRA TRADING
Case Objective
This case study emphasises the importance of compensation structure at Mudra Trading Pvt. Ltd.
Mudra Trading Pvt. Ltd. was established by Gyan Prakash Sinha in 1981. Gyan started this company to
trade in spices. Over the years, the company grew steadily and by 2018, it was present across most states
of India. It had a wide reach across cities, towns and even villages. The products were popular with the
customers. The products included garam masala, deghi mirch, red chilli powder, dhania powder, black
pepper, jeera powder and other spices used in cooking. The prices were competitive with the best brands
in the market.
When pandemic struck and lockdowns were enforced, Mudra Trading suffered big losses. The supplies
dried up. The sales crashed. Shops were closed. Deliveries were very expensive and not economically
viable. Gyan was a troubled man.
Though the revenues had crashed, he still needed to pay his large workforce comprising of 120 employees,
spread across the country. To reduce his expenses, he decided to hire a consultant, to restructure his
compensation structure.
His current compensation structure is as follows:
Compensation structure for 90 percent of employees
Basic salary: 50% of gross salary
HRA: 40% of basic salary
Travel allowance (fixed): ` 3,000 pm
Food allowance (fixed): ` 3,000 pm
Gross monthly salary: Basic + HRA + Travel allowance + Food allowance
Contribution to PF: as per law
Contribution to ESI: as per law
Pay grades:
L1: ` 15,000 to ` 18,000
L2: ` 17,000 to ` 20,000
L3: ` 19,000 to ` 22,000
L4: ` 21,000 to ` 24,000
L5: ` 23,000 to ` 26,000
L6: ` 25,000 to ` 28,000
L7: ` 27,000 to ` 30,000
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Benefits: Provident fund, Employee state insurance and 24 holidays in a year.

This compensation structure was made in 1990 and has been continued since then. Gyan admits that it
has been difficult to hire new people in the past couple of years, as they expect higher salaries, but Gyan
cannot give new employees higher salaries than the employees who have been working for so long with
the company. Since the stores across the geographies have to be supplied daily, Mudra Trading Pvt. Ltd.
has a six-day work week. The salespersons in the field are expected to visit shops for a few hours on
Sundays also as the customer footfall at the shops is highest on these days.
Questions
1. What happened when a pandemic hit and lockdowns were imposed?

(Hint: When pandemic struck and lockdowns were enforced, Mudra Trading suffered big losses. The
supplies dried up. The sales crashed. Shops were closed.)
2. At Mudra Trading Pvt. Ltd., how much HRA was agreed to be paid?
(Hint: HRA was decided to be paid at 40% of the basic salary.)

1. Enumerate the characteristics of a pay policy model.
2. List the factors that affect a company’s pay policy.
3. Explain direct and indirect compensation.
4. Describe the main objectives of compensation.
5. Enlist the elements required to start a salary survey.

1. There are six broad characteristics of a pay policy model these are:
 Participative: The policy should be acceptable to the employees as well as the organisation.
 Coherent: Employees in the same category should be paid a similar salary.
Refer to Section Introduction
2. Certain factors affect the company’s pay policy. These include:

 The geographical location of the company, such as metro, non-metro and tier-3 town.
 Collective agreement especially about workers’ compensation.
3. Compensation can maybe direct or indirect. While direct compensation is mostly financial, indirect
compensation can be financial or non-financial. Refer to section Forms of Pay
4. The main objectives of compensation are to:
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 Attract and hire the best talent: employees normally switch jobs for a better working
environment or better role or better pay. In most cases, if the compensation and benefits
structure is innovatively structured, it offers a high degree of motivation to attract skilled talent.
Refer to section Compensation Objectives
5. Before undertaking a salary survey, certain essential elements need to be considered. These are:
 Author: the survey should be conducted by a company that enjoys the public trust and high
credibility.
 Scope: The scope of the survey should be clearly defined concerning which type of positions will
be covered in the survey, the type of companies from which data will be collected, the size of the
company, industry, type of ownership and other such factors.
Refer to section Salary Survey
 https://www.shrm.org/certification/educators/Documents/Designing%20a%20Pay%20Structure_
IM_9.08.pdf
 Discuss the cash compensation and its various forms with your friends.
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UNIT
04 Motivation and Reward Management
Names of Sub-Units
Motivation, its process and types, Role of job design in motivation, Theories of motivation, Equity
theory, Needs Hierarchy Theory, Vroom’s VIE Theory, Goal Theory.
Overview
The unit introduces motivation, the process of motivation and the types of motivation. Further, this
unit explains the theories of motivation and describes in detail the equity theory, needs hierarchy
theory, Vroom’s theory, and the goal theory of motivation.
Learning Objectives

 Explain the process of motivation
 Enumerate the types of motivation
 Discuss the equity theory of motivation
 Explain the needs hierarchy theory of motivation
 Discuss Vroom’s theory of motivation
 Explain the goal theory of motivation
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Learning Outcomes

 Analyse the process of motivation
 Appraise the types of motivation
 Examine the equity theory of motivation
 Assess the needs hierarchy theory of motivation
 Evaluate Vroom’s theory of motivation
 Examine the goal theory of motivation
 https://chools.in/wp-content/uploads/2021/03/EMPLOYEE-REWARD-MANAGEMENT-AND-
PRACTICE.pdf
 https://www.theseus.fi/bitstream/handle/10024/170113/Impact%20of%20Reward%20System%20
on%20Employee%20Performance.pdf?sequence=2&isAllowed=y
4.1 INTRODUCTION
Motivation is the feeling that causes all of us to act whether it is picking up a glass to quench your
thirst or reading a blog to increase your knowledge. It is the initiating trigger for behaviours oriented
towards a particular goal. It involves emotional cognitive, biological and social forces which activate
behaviours. It is normally used to describe the rationale of why a person does something. Psychologists
have proposed different types of theories to explain motivation. In reality many forces influence the
strength and direction of our motivation.
Motivation can be helpful to:
 Individuals to take action
 Encourage people to feel in control of their lives
 Enhance happiness and well being
 Increase deficiency of individuals as they progress towards their goals
 Enable people to avoid unhealthy behaviours such as prediction
 Encourage people to engage in healthy behaviours
Any individual who has ever set a goal, such as losing 10 kgs of weight, realises that just having a wish is
not sufficient. In addition to fulfil that wish, the individual needs to overcome obstacles making efforts
despite difficulties.
Motivation has 3 major elements:
 Activation: This involves the initiation of behaviour, such as, waking up early to go for a morning
walk.
 Persistence: It is the continual effort a person invests despite facing obstacles, such as, going for a
walk early in the morning despite the severe cold in winters.
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 Intensity: This is the rigour of the person while moving towards their goal, such as, one individual
may go for a walk, come back home, and catch up on their sleep, while another may go for a walk,
come back home, and do some cardio exercises, some cool-down exercises and then go for a bath.
The first person lacks intensity while the second is said to have greater intensity.
The degree of these 3 elements influences the achievement of goals. A strong activation implies that you
are more likely to start working towards the goal. Persistence implies that you will continue working
towards your goal despite of any obstacle that you may face, and intensity determines the quantum of
effort you put in towards reaching your goal. Thus, the essence of motivation translates to energetic and
persistent goal-directed behaviour. When we are motivated, we take action, and when we take action,
we are more likely to succeed. Our needs affect our motivation levels to a great extent. We can derive our
motivation from external factors as well as internal ones. The external factors include the environment
and social context that we live in. The internal factors include desires, power, goals and values. In
psychology the study of motivation is about answering 2 basic questions: what factors influence our
behaviour, and what causes the intensity of our behaviour to vary.
The science behind motivation attempts to evolve theories about what motivates is and how to do the
process related to motivation work. Measuring motivation using science, involves detecting motivation
through visible behaviour, psychophysiology, and the degree of engagement. The visible aspects of
behaviour can be seen through our facial expression, gestures, effort, degree of persistence, choice of
one goal over another, and immediacy. For instance, in an interaction between 2 people the motivation
of a person can be seen through the enthusiastic participation in the conversation, the engagement of
emotions, and the degree of attention paid in the conversation.
4.2 MOTIVATION
Winner motivation is derived from internal factors. It can be categorised into needs, cognition, and
emotions, and is usually more effective than motivation which is derived externally. However, external
factors influence our inner experiences since we live in a social context. These external factors of
motivation can be in the guise of incentives, consequences, and various types of pressures emanating
from the context of the social life we lead. As physiological and psychological needs drive us, our emotions
add to the intensity, thereby, creating a helpful environment for engaging with the situation, which in
turn triggers the act or the behaviour. When such behaviour creates a more positive emotional state of
being, it reinforces the behaviour which in turn increases the probability of repeating the behaviour.
Needs originate from some sort of deficiency. Physiological needs have a strong influence on our
behaviour. For instance, when we are hungry it will trigger behaviour to look for food. If we are threatened,
our behaviour can lead us to choose between fight and flight. Similarly, if we are thirsty or sleepy our
behaviour will be directed towards fulfilling this deficiency. When there is a disconnection between
physiological and psychological needs, it creates dissonance. In addition, there may be employed or
unconscious needs that may influence emotional reactions. For instance, if a person does not have any
need for achievement, such a person may feel a certain degree of embarrassment when he or she is
asked to engage in a challenging task? As a result of this, the person may differ in the decision to act.
Motives which are implicit in nature are capable of predicting our behaviour with more specificity as
compared to explicit motives.
Our cognitions such as goals beliefs and expectations also influence our choice to avoid or differ. Though
emotions are linked to cognitions and psychological needs, they may by themselves also motivate a
person, as they signal the relevance of a specific behaviour. Less than optimal conditions in our
environment may also influence our motivation.
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The motivational process is a continually changing one, as our motives may change from time to time.
We may also be driven by multiple different motives at any given point in time. The strongest motive
at any given point in time exerts the maximum influence on our behaviour. Over a period of time,
circumstances change, and so do our motivations. Awareness of this concept is important as it helps
us to plan our goals. Normally, people find it easier to set and try to achieve short term goals. This is
because they receive frequent feedback on the progress towards their goals, which helps them persist in
following up and taking action towards their goal. Having a clear goal helps to gain a sense of control
over the goal and improves motivation. Short term goals also give a sense of the goal being in the near
future, which increases the motivation to act thereupon.
Motivation has several benefits some of which are given below.
 Motivation enables us to change our attitude from a negative to a positive one. When employees are
not motivated, they perform the minimum required activities in the organisation. On the other hand,
when they are motivated, they perform at their best levels and optimise the use of organisational
resources.
 The performance of employees is directly affected by the level of motivation they possess. Motivated
employees try to achieve their goal in the shortest possible time, with the best utilization of the
resources they are given, thereby increasing efficiencies at work.
 Motivated employees invest their best efforts in helping the organisation to achieve its goal.
 Employees who are motivated support others in achieving their goals thereby creating a supportive
work environment. In such an environment, the interpersonal relations between employees also
improve. A team spirit exists and there is more cooperation among the employees.
 Motivated employees exhibit lower resistance to organisational changes, which helps the business
evolve and adapt to changing external environments faster.
 Motivated employees help reduce attrition, as they do not give up on unfavourable situations but
work towards making the situations favourable.
 The organisation benefits from motivated employees in terms of enhanced efficiencies and
productivity.
 Motivated employees normally get higher benefits or incentives as compared to de-motivated ones.
This in turn increases their job satisfaction and creates a happier environment.
An organisation can motivate its people through several ways. One way to increase motivation is
through financial rewards, such as incentives or salary increases, and another way is through non-
financial rewards such as learning opportunities recognition, exposure to more challenging situations,
and higher responsibilities. The organisation will need to understand the specific needs of employees in
order to design the right motivational triggers.
The three essential elements of motivation are persistence, direction, and intensity. Persistence measures
the duration for which an individual continues his or her efforts. People who are motivated continue in
their tasks sufficiently long enough to ensure that they achieve their goals.
Direction implies that the effort is invested in the direction which is beneficial to the organisation. Such
a direction should be consistent with the organisational goals. Intensity describes the degree of effort
a person invests towards achieving a goal. Therefore, how long a person tries, how hard a person tries,
and in which direction a person tries, together combine to ensure success often individual in achieving
their goal.
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4.2.1 Process of Motivation

The process of motivation relates to those processes which produce behaviour which is directed towards
the goal. The essential elements in this process are:
 Goal: A goal is the end which a person tries to achieve to satisfy a need. A need may be satisfied
by alternate goals. For instance, a person having a need for power may abuse his subordinates,
whereas another may fulfil her need for power by becoming the CEO of the company.
 Motive: A motive is a reason which triggers an individual to act. The motive may also be referred
to as an element that infuses energy in behaviour. The act of an individual or the exhibition of
behaviour is generally directed towards the goal.
 Behaviour: Behaviour is basically a set of activities of an individual. Normally, behaviour is
motivated by the desire of an individual to achieve a goal. It is essential to understand the motive of
the individual in order to influence the behaviour of the individual.
Figure 1 shows the process of motivation:
Need
Motive Behaviour Goal
Reduce tension/internal dissonance
Figure 1: Process of Motivation

The process of motivation can be divided into the following steps:
1. Unsatisfied need of an individual.
2. Tension to fulfil the unsatisfied need.
3. Drive in the individual to look for alternatives to satisfy the need.
4. Search behaviour to look for alternatives.
5. Need satisfaction by indulging in a specified form of behaviour.
6. Tension reduction after the need has been fulfilled and the individual is satisfied.
As an example, suppose an employee as a need to earn more. This need makes him stressed, and he
starts thinking on how to satisfy his need. He may start thinking that he needs to work hard and get
a promotion to earn more money and therefore he starts working hard. After some months due to his
hard work, he is able to achieve his goals and therefore gets incentives or increment or promotion which
satisfies his need.
The motivation process does not end when one need has been satisfied. New needs keep developing and
the same process is followed as the needs keep emerging.
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4.2.2 Types of Motivation

There are 3 broad categories of motivation and figure 2 shows the types of motivation.
1. Positive and Negative motivation
2. Extrinsic and Intrinsic motivation
3. Financial and Nonfinancial motivation
Figure 2: Types of Motivation

Let us understand the types of motivation.
1. Positive and Negative motivation: Positive motivation is the process of influencing the behaviour of
an individual through public recognition of the individual’s contribution. This includes the manager
taking an interest in the individuals’ daily activities, appreciating them when they do a good job and
delegating some of their authority and responsibility to the individual.
Negative motivation is based on fear, such as fear of negative consequences like punishment or
lay off. The fear of punishment influences the behaviour of the individual this type of motivation is
more controlling in nature.
2. Extrinsic and Intrinsic motivation : Extrinsic motivation is usually derived from external factors,
which are not in direct control of the individual. Such factors are normally directed by other entities
such as the manager, the organisation, or the external environment. These motivators are normally
either financial or can be monetised.
Intrinsic motivation is internal to the individual and includes social recognition authority amongst
peers or status in a community.
3. Financial and Nonfinancial motivation: Financial motivation is related to monetary motivation
and includes motivators such as increments, bonuses, benefits, and others monetary motivators.
Non-financial motivation is non-monetary in nature and includes intangible aspects such as self-
actualisation, increased responsibility, and authority or ego satisfaction.
Having understood the 3 categories of motivation, let us now understand the other different types
of motivation.
1. Achievement motivation: When an individual is driven to achieve a particular goal or objective,
he is said to be achievement-motivated. Such an individual is motivated for achieving the
objective and not the monetary aspects associated with it.
2. Power motivation: This type of motivation is relevant for those individuals who seek power and
want to influence people and situations. Individuals motivated by power, strive to create an
impact on those around them and are open to taking risks to do the same.
3. Affiliation motivation: This type of motivation is seen in individuals who like to relate to other
people and are normally socially active. Such individuals are motivated when they are recognised
and appreciated for their cooperative approach towards others.
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4. Incentive motivation: In this type of motivation, individuals are normally rewarded for
performing certain activities. It is the reward here that motivates people to perform better.
5. Competence motivation: Here the individual is motivated to become good and excel at a
particular task or activity. People who are competent motivated seek mastery in their jobs and
acknowledgement from others with regard to their creative problem-solving.
6. Fear motivation: This is when people are coerced into acting against their will. Fear motivates
people to act fast. This type of motivation can be used to get people to act quickly in the short
term.
7. Attitude motivation: This refers to how people think about themselves and feel about others. It
includes their beliefs in themselves, their perspectives on the future and their approach to life.
Motivation is a psychological phenomenon and cannot be forced on others. Motivation produces
behaviour directive toward goal attainment. A motivated person does not need supervision in
their activities.
4.3 ROLE OF JOB DESIGN IN MOTIVATION

It is easier to achieve positive change when the individuals in your organisation are motivated when
people spend time in small problems when there is low cooperation among employees when the process
culture is weak, implementing improvements in the organisations becomes difficult. The negativity
in the organisation impacts engagement of employees with the team, the goals and the organisation,
performance dips and there are no innovative improvements in the organisation. The confusion and
clutter in such organisations overwhelm the employees, who then either quit or retreat into their shells.
Job design plays an important role in motivating employees in an organisation. Ways in which employees
can be motivated using robust job design are:
1. Designing jobs so that they require a wide range of skills. This will help eliminate monotony and help
drive the skill improvement of the employees. Using a variety of skills becomes motivating for the
employee who does not have to use just one skill day in and day out.
2. The employee should be able to identify with the task. Employees who identify with the tasks are
more likely to achieve their goals and are more likely to stick with their tasks from start to finish,
provided they are motivated. This means that the employee should see the result of the task to which
he contributed his efforts. When the employee contributes to multiple tasks but is not shown the
outcome, he or she tends to become demotivated.
3. Increase the relevance of the job to the employee. Significance implies the importance of a particular
job to others inside as well as outside the organisation. An employee’s sense of significance associated
with the job will motivate them to work harder and be more productive. The criticality of a particular
role to the organisation’s performance should be publicly acknowledged.
4. Individual autonomy is the degree to which the employee is micromanaged by his or her manager.
The higher the micromanagement the lesser the autonomy and therefore lesser is the employee
satisfaction, which leads to decreased productivity. The higher the autonomy, the higher the
freedom given to an individual employee, the higher will be his sense of independence and the better
he will be in terms of having the choice to work in the way he or she desires as long as the goals are
achieved.
5. Performance feedback refers to the frequency and the details with which feedback is given to an
employee by his or her manager. Giving feedback to the employees is essential if the organisation
expects them to bring about any change in their behaviour or performance. The feedback should
not be restricted to envelope results but should be given through more than one channel and at
frequent intervals based on the individual’s performance.
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The Job Characteristics Model (JCM) by Hackman and Oldham (1976) identifies five basic job
characteristics which are:
1. skill variety
2. task identity
3. task significance
4. autonomy
5. feedback
These 5 characteristics are accompanied by 3 psychological states which are:
1. experienced meaningfulness
2. experienced responsibility
3. knowledge of results
The ‘psychological state’ affects work satisfaction internal motivation and reduced attrition. The JCM
model assumes both autonomy and feedback that are more critical for an employee’s motivation, as
compared to the work characteristics. Adler in 1991 analysed that employee who had a perception
of using a variety of skills, who perceived their tasks as significant, who felt they had autonomy, and
received regular feedback, reported higher levels of satisfaction and intrinsic motivation. Various
approaches to job design have been examined; these are:
1. job engineering
2. job enrichment
3. quality of work life (QWL)
4. social information processing approach (SIPA)
5. job characteristics
In job enrichment, the work content has greater variety which needs a variety of skills. It also gives
the employees autonomy to plan and control their performance; thereby, creating meaningful work
experience. It requires interactions between humans and machines. The objective of quality of work
life (QWL) is to change the work climate and improve human technological organisational interface.
Social information processing approach (SIPA) to job design implies that socially constructed
realities such as the employee’s needs and reactions undergo a process which include decision
making, being explicit, social norms, which combine with information from the environment and
impact the job holder’s perception and behaviour.
4.4 MOTIVATIONAL THEORIES

Motivation is basically a state of mind which influences an individual to exhibit certain behaviours
and act in a certain way to achieve the individuals’ goals. Motivation is that energy which drives
individuals to work with higher commitment and focus levels despite facing obstacles. We may also say
that motivation is the force which drives all the actions of humans. The theories of motivation help us
understand the behaviour of people and their motivators. Over decades, psychologists have propounded
a variety of theories on motivation. Most of them are based on two essential factors that are, extrinsic
and intrinsic. Extrinsic implies external such as a motivation given by someone else for instance, a
bonus for achieving a goal or finishing a task. Intrinsic factors are motivators which are internal to the
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individual such as their desire to please they are superior or to achieve fame professionally. However,
most people are motivated by a combination of intrinsic and extrinsic factors.
Motivators may vary with each individual as we are all different and have different needs at different
points of times in our lives. Some of the motivators which are used in organisations or rewards, trust,
recognition, appreciation, career advancement, learning opportunity, purpose, office environment,
transparent and timely feedback.
Theories may be divided into 3 main categories:
 Content theories
 Process theories
 Contemporary theories
The process theories explain how motivation occurs and how it leads to satisfy the individual. The Porter
Lawler model and the expectancy theory by room are the examples of theory which fall into this category.
Contemporary theories help to incorporate equity control whereas the agency theory of motivation,
cool setting reinforcement and job design theory. The theories of motivation may be categorised by their
purpose, but a critical analysis reveals that they are all providing satisfaction to employees. The process
as well as content theories needs to be used in regular practice if the organisation wishes to motivate
its employees. Lower-level needs can be satisfied with extrinsic factors, but higher-level needs need
to be satisfied intrinsically. Effective managers drive through self-motivation by focusing on the job
content; they enrich the jobs of their team members by providing challenges and reward or recognition
on achievement of those challenges. Rewards and recognition encourage employees to stay with the
organisation in a motivated state, in a conductive work environment.
4.4.1 Equity Theory

The essence of the equity theory, developed by J. Stacy Adams, is the principle of having balance.
According to this theory, the motivational level of an individual correlates to his/her perception on equity
and justice. The higher the individual’s perception of fairness, the higher is the motivation level. While
assessing fairness the individual compares his or her contribution with the consequence or outcome
of the contribution such as, compensation, while comparing this with the contribution of and outcome
received by dear peer. The input-output ratio is normally used for such comparisons.
O = Output
I = Input
A = person A
B = person B
 If O/I a < O/I b, then perception is that the individual A is under-rewarded (Negative Equity tension)
 If O/I a = O/I b, then perception is that the individual A has equity
 If O/I a > O/I b, then perception is that the individual A is over-rewarded (Equity tension)
When there is a negative equity tension then individual A is motivated to do something to correct the
situation and relieve this tension.
The input includes loyalty, effort, education, commitment, and experience. The output is the salary,
incentive, increment or other benefits the individual receives.
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The comparisons may be done as per the reference given in the quadrants below in Figure 3 showing
the Referents of Equity:
Inside Outside
Self Self-Inside Self-Outside
Others Others-Inside Others-Outside
Figure 3: Referents of Equity

Referent 1: Self-Inside: Experience of an employee in a different role inside current company
Referent 2: Self-Outside: Experience of employee in a role outside current company
Referent 3: Others-Inside: Experience of another employee inside current company
Referent 4: Others -Outside: Experience of another employee outside current company
Individuals may choose any one of these referents. Such comparisons with the individual in another role
within the same organisation, or the individual in some other organisation, or with others in the same
organisations or with others in some other organisations, impact the perception of equity.
The variables which moderate this perception are mainly demographic such as, age, education, years
of experience, and identical.
The employees, who experience negative tension, generally choose to do the following:
 Change their efforts (reduce their effort)
 Change their outcome (they may reduce the quality per product and increase the number of pieces
if they are being paid on a piece rate basis)
 Change the job (leave their current role and change the role or the company)
 Change their referent
 Change their own perception (with respect to other’s jobs)
 Change the perception of others (with respect to their outcome)
The equity theory assumes that:

 Individuals are concerned with the rewards that they get as well as what others get
 Individuals expect to be compensated fairly for their contribution
 Individuals decide what is fair for them to receive after making comparisons with what others
receive
 Individuals who perceive that they have been placed in an unequitable or unfair situation, will strive
to reduce the inequity by distorting the input or output, or leaving their organisation
As per the equity theory, the level of motivation of an individual is dependent on how fair they perceive
the outcome based on their input and compare their output-input with those of others. Thus, the rewards
received by the individual are important (absolute rewards), but those received by others (relative
rewards) also have an impact on the motivation level of an individual.
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4.4.2 Needs Hierarchy Theory

Abraham Maslow postulated the Needs Hierarchy Theory. The model proposed is also known as the
Maslow’s need hierarchy. The form of a pyramid comprises 5 levels. Each level corresponds to one type
of need of an individual. Basic needs are at the bottom of the pyramid and higher needs are at the top of
the pyramid. Normally people fulfil the lower-level needs first and then progress on to the next higher
level of the pyramid. Following are the levels in the pyramid:
 Bottom or first level: At the bottom are the physiological needs these are basic needs required to
survive such as food and water.
 Second level: This level talks about the safety and security needs such as shelter, protection from
dangers.
 Third level: Once the physiological and safety needs are taken care of then the individual strives for
association with other individuals in the form of friendship, belongingness, and love.
 Fourth level: after fulfilment of the lower-level needs, in this level, the individual feels the need for
recognition and respect in the society. These are also referred to as esteem needs.
 Fifth level: at this top level the individual seeks growth learning, creative work, and fulfilment these
are also known as self-actualisation needs. This is the highest level of needs. Figure 4 shows the
Maslow’s Need Theory:
Self-actualisation
desire to become the most that one can be
Esteem
respect, self-esteem, status, recognition, strength, freedom
Love and belonging

friendship, intimacy, family, sense of connection
Safety needs
personal security, employment, resources, health, property
Physiological needs
air, water, food, shelter, sleep, clothing, reproduction
Figure 4: Maslow’s Hierarchy of Needs

Source: thoughts.com
4.4.3 Vroom’s VIE Theory

According to the Vroom’s expectancy theory, the motivation of an individual is expected by the
individual’s expectation of how the future will turn out to be. The level of motivation is influenced by:
 Expectancy: This is the belief that and increased effort will lead to better performance that is, ‘if I
work harder, I will get better results’. This in turn is influenced by having appropriate raw materials
time and other resources available; having the requisite skills; and having the necessary support to
ensure that the task is done.
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 Instrumentality: Belief that in case the individual does a job well then, the outcome will be
proportionately valuable. This is influenced by the individual’s clarity of understanding between
performance and the outcome or the rules of the game; trust in the decision makers on the recipients
of the outcome; and transparency of the process to choose who gets what.
 Valence: This is the degree of importance that the individual places on the outcome which he or she
expects. In case an individual is motivated by monetary compensation he or she may not have much
value for additional time off work.
Thus,
Motivation = V * I * E
Thus, valence instrumentality and expectancy are the 3 elements which influence the level of motivation
of an individual. The given figure 5 below shows the Vroom’s VIE Theory.
Vrooms Expectancy Theory
Expectancy Instrumentality Valence
The belief that the more The belief that if we What value we place on
effort expended on a perform well, we will the expected outcome of
task, the greater our receive a greater reward out efforts
performance
Figure 5: Vrooms Expectancy Theory

Source: sanzubusinesstraining.com
4.4.4 Herzberg’s Two-Factor Theory

The Two-factor theory propounded by Herzberg is also referred to as the Motivator-Hygiene theory. As
per this theory in a job, there are certain factors which caused satisfaction and certain other factors
which caused dissatisfaction. The motivators include challenging work achievement recognition
greater responsibility meaningful work involvement in decision making these give positive satisfaction.
The presence of these factors is motivational for the individual but the absence of these factors is not
demotivating for the individual.
On the other hand, hygiene factors are those whose presence is not considered motivating, but whose
absence is definitely considered demotivating. Hygiene factors include job security, salary, status, fringe
benefits, working conditions, and vacations.
Hygiene factors are also known as maintenance factors. The absence of hygiene factors is likely to cause
dissatisfaction amongst the employees. In order to remove dissatisfaction, hygiene factors must be
present. Their presence, however, does not ensure complete satisfaction or motivation.
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Figure 6 represents Herzberg’s two-factor theory:
Motivators Hygeine Factors
Achievement Company policies

Recognition Supervsion
The work itself Relationships
Responsibility Work Conditions
Advancement Remuneration
Growth Salary
Security
Figure 6: Herzberg’s Two-Factor Theory

Source: researchgate.net
To increase satisfaction at the workplace is to focus on the motivating factors thus as per Herzberg’s
two factor theory, there are four possible combinations:
1. High Motivation + High Hygiene: Ideal situation. Employees are highly motivated.
2. Low Motivation + High Hygiene: Employees not highly motivated but have few complaints.
Employees work for the salary.
3. High Motivation + Low Hygiene: Employees are motivated but have a lot of complaints. Job may be
exciting, but the salary is not.
4. Low Motivation + Low Hygiene: Employees not motivated and have multiple complaints. Poor work
environment.
4.4.5 Goal Theory (MBO)

For goal setting to be successful goals need to have the following features:
1. The goals need to be specific and clear.
2. The goals need to be attainable but should have a degree of challenge embedded in them.
3. The goals should be accepted by the people for whom they are intended.
4. Regular feedback must be provided on the progress of the individual towards goal achievement.
5. Goals are effective especially when they are used to assess performance.
6. The effectiveness of goals increases if deadlines are provided.
7. A learning goal orientation leads to better performance than a performance goal orientation.
8. Goal setting for a group is as important as goal setting for individuals.
Motivation refers to the willingness of an individual to fulfil a task. The goal setting theory ensures goals
are aligned to the competence of an individual, and also ensures provision of required resources to
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enable goal achievement by a motivated individual. High achievers are known to set more challenging
goals and they are more satisfied with intrinsic rewards as compared to extrinsic ones. Management
by objectives is seen to be an extension of the goal theory, as it involves a systematic goal setting across
the organisation. In goal setting the goals of the individual as well as the team need to be decided
beforehand.
The advantages of goal setting include:
1. Better performance
2. Increased task identity
3. Improved human resource utilisation
4. Clarity in rules
5. Improvement in communication
6. Better organisational control
7. A more efficient organisational structure
8. Evaluation of performance based on results
9. Trigger motivation of employees
For goal setting to be effective it must have a visible support of the top management and clarity of
setting goals the process must be participative. The authority must be decentralised. The goals may be
continually reviewed and revised as per the business environment. The employees need to be trained on
goals and goal setting to ensure achievement within the given time frames.
 Motivation is the feeling that causes all of us to act whether it is picking up a glass to quench
your thirst or reading a blog to increase your knowledge motivation is the initiating trigger for
behaviours oriented towards a particular goal motivation involves emotional cognitive biological
and social forces which activate behaviours motivation is normally used to describe the rationale
of why a person does something.
 The motivational process is a continually changing one, as our motives may change from time to
time.
 The process of motivation relates to those processes which produce behaviour which is directed
towards the goal.
 A motive is a reason which triggers an individual to act. The motive may also be referred to as an
element that infuses energy in behaviour.
 Behaviour is motivated by the desire of an individual to achieve a goal.
 Positive motivation is the process of influencing the behaviour of an individual through public
recognition of the individual’s contribution.
 Negative motivation is based on fear, such as fear of negative consequences such as punishment or
lay off.
 Extrinsic motivation is usually derived from external factors, that is, factors which are not in direct
control of the individual.
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 Intrinsic motivation is internal to the individual and includes social recognition authority amongst
peers or status in a community.
 Financial motivation is related to monetary motivation and includes motivators such as increments,
bonuses, benefits, and others monetary motivators.
 Non-financial motivation is non-monetary in nature and includes intangible aspects such as self-
actualisation, increased responsibility, and authority or ego satisfaction.
 Social information processing approach (SIPA) to job design implies that socially constructed
realities such as the employee’s needs and reactions undergo a process which include decision
making, being explicit, social norms, which combine with information from the environment and
impact the job holder’s perception and behaviour.
 Abraham Maslow postulated the Needs Hierarchy Theory. The model proposed is also known as
Maslow’s need hierarchy.
 According to the Vroom’s expectancy theory, the motivation of an individual is expected by the
individual’s expectation of how the future will turn out to be.
 The Two-factor theory propounded by Herzberg is also referred to as the Motivator-Hygiene theory.
 The goal setting theory ensures goals are aligned to the competence of an individual, and also
ensures provision of required resources to enable goal achievement by a motivated individual.
4.6 GLOSSARY
 Dissonance: Lack of harmony or agreement between individuals or things.

 Cognition: The process of acquiring knowledge and understanding.
 Micromanagement: To manage something by going into the details.
 Esteem: Respect and admiration.
 Valence: The pleasantness or unpleasantness.
4.7 CASE STUDY: INCREMENTS AT JAGDISH FASTENERS
Case Objective
The aim of this case is to show the type of motivation because of increments at Jagdish Fasteners.
Rahul Bhateja was the son of the owner of the company, Jagdish Bhateja. Jagdish had set up the
company ‘Jagdish Fasteners’ around 22 years ago in Rohtak, Haryana. After working with one of the
leading companies in this field, Jagdish had discussed starting his own venture with his family. Since no
one in their family had managed a business before, they were apprehensive about the idea. However,
after much debate, Jagdish had decided to start small with a capital of Rs. 1 lac. The first couple of years
were tough as Jagdish learnt the various aspects of managing an enterprise. After the initial learning,
the company grew by leaps and bounds. The market had a lot of opportunity for good quality products.
Jagdish ensured that all his employees were first given technical training, then quality management
training, so that each employee focused on making quality not quantity.
The orders from manufacturers started pouring in once he established his name in the industry for
quality products. From
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JGI JAIN
The first 2 employees, Jagdish Fasteners grew to around 200 employees. Financially, the company was
growing at 20% year on year, which was a healthy growth rate. In the last three years, Jagdish had hired
a professional HR consultant to establish a systematic appraisal and increment system. He had asked
Rahul to spearhead this initiative. In the first year, while Rahul implemented everything the consultant
had said to the letter, there had been some grievances which Jagdish had taken care of, explaining
that the system was new and the next year, it would be better. Last year, there had been numerous
complaints by old employees that the increments had not been fair, and that only productivity had been
rewarded, not loyalty and quality.
This year, Jagdish had noticed that some of the customers had complained of poor-quality products
being shipped to them. When this matter was investigated, it came to light that some of the employees,
who had been working for many years, told Rahul that they could not produce high quality like they had
been producing in the past as the machines had become old. Jagdish knew instinctively, this could not
be the reason. He called Rahul to discuss the increment related complaints that had come up this year
and in the previous year. A summary of the complaints is given below. The names of the complainants
have been hidden due to confidentiality.
 I have worked as hard as Ramesh, but he got more increment than me.
 My quality report was 99%. But Billu, whose quality report was 95%, got the same increment as me.
 Some of our colleagues who produced higher quantities last year were given better increments than
us, even though the quality ratings of the pieces produced by them was 5% lower than us.
 I have been happy with the increments so far. But after the new system has been implemented, some
of us get lesser increments than others. When we ask why, no reason is given.
 It seems the management has become deaf. We complained about the difference in our increments
last year also and this year also. But no action has been taken. I wonder why the management has
become so insensitive.
 Earlier the management used to give reward us, based on our individual and specific needs. Now no
one is giving us personal attention.
After reading some of these complaints, Jagdish decided to take the matter into his own hands. He had
to find a solution to the complaints about quality raised by his customers, for the first time in so many
years.
Questions
1. If you were the owner of the company, what would be your priority?
(Hint: more productivity, employee satisfaction, less conflict and delays)
2. What is need motivation theory?
(Hint: Need Hierarchy, physiological need, social need, psychological need etc.)

1. Enumerate the benefits of motivation
2. What are the essential elements of the motivation process?
3. Explain the different types of motivation
16
4. Write a note on how employees may be motivated using job design.

5. Explain Herzberg’s two factor theory.

1. Motivation enables us to change our attitude from a negative to a positive one. When employees are
not motivated, they perform the minimum required activities in the organisation. On the other hand,
when they are motivated, they perform at their best levels and optimise the use of organisational
resources. Refer to Section Motivation
2. It is the initiating trigger for behaviours oriented towards a particular goal. It involves emotional
cognitive, biological and social forces which activate behaviours. It is normally used to describe the
rationale of why a person does something. Psychologists have proposed different types of theories
to explain motivation. In reality many forces influence the strength and direction of our motivation.
3. Positive and Negative motivation: Positive motivation is the process of influencing the behaviour of
an individual through public recognition of the individual’s contribution. This includes the manager
taking an interest in the individuals’ daily activities, appreciating them when they do a good job and
delegating some of their authority and responsibility to the individual. Refer to Section Motivation
4. Designing jobs so that they require a wide range of skills. This will help eliminate monotony and help
drive the skill improvement of the employees. Using a variety of skills becomes motivating for the
employee who does not have to use just one skill day in and day out. Role of Job Design in motivation
5. The Two-factor theory propounded by Herzberg is also referred to as the Motivator-Hygiene
theory. As per this theory in a job, there are certain factors which caused satisfaction and certain
other factors which caused dissatisfaction. The motivators include challenging work achievement
recognition greater responsibility meaningful work involvement in decision making these give
positive satisfaction. The presence of these factors is motivational for the individual but the absence
of these factors is not demotivating for the individual. Refer to Section Motivational Theories
 https://www.knowledgehut.com/tutorials/project-management/motivation-theories
 https://saylordotorg.github.io/text_organizational-behavior-v1.1/s09-theories-of-motivation.html
 Discuss with your friends which theory of motivation would you use as a manager or entrepreneur
in your organisation and why?
17
UNIT
05 Job Evaluation
Names of Sub-Units
Job evaluation, Features of Job Evaluation, Objectives of Job Evaluation, Advantages of Job Evaluation,
Disadvantages of Job Evaluation, Methods of Job Evaluation, Analytical Methods, Non-Analytical
Methods
Overview
The unit introduces the concept of Job evaluation, its features and objectives. It also explains the
advantages and disadvantages of the job evaluation. Further, it discusses the methods of job evaluation
including analytical and non-analytical methods.
Learning Objectives

 Explain job evaluation
 Discuss the objectives of job evaluation
 Explain the analytical and non-analytical methods of job evaluation
Learning Outcomes

 Enlist the features of job evaluation
 Examine the methods of job evaluation
 Evaluate the advantages of job evaluation, disadvantages of job evaluation
JGI JAIN
 https://www.economicsdiscussion.net/human-resource-management/job-evaluation/job-
evaluation/32350
 https://www.civilserviceindia.com/subject/Management/notes/job-evaluation.html
5.1 INTRODUCTION
Job evaluation is a process of determining the relative worth of a job. It is a process which is helpful even
for framing compensation plans by the personnel manager. In any organisation, employees are hired at
different levels. Since their roles and position are different, they are allocated in different departments
and the functions they perform are different. These differences create a difference in perception about
the importance of each role in the organisation. For instance, sales and marketing team members are
normally perceived as being the most important to the organisation, as they bring in revenue. Since
accounts and Human Resources (HR) are support functions, the team numbers in this function are
perceived as being of lesser importance. Similarly, those working in support functions are perceived to
be of a lower priority in the list of valuable roles in an organisation. This gets translated to the salary
paid to individuals in such functions.
It has been observed that sales and marketing persons are paid higher salaries as compared to those
working in support functions. Within sales and marketing, those roles which get revenue for the
organisation are seen as more valuable, as compared to the back-end ones, such as brand design team
members. It is important to assess the worth of one job in comparison to another to ensure parity,
equity and fairness within the organisation. If the organisation is not seen to be fair, it may result in
resentment, disengagement and low productivity across the organisation.
A way of determining the fair worth of various roles in an organisation is to conduct a job evaluation.
Job evaluation is the process by which the relative worth of each job is decided. This process also helps
the HR manager to frame the compensation structures for various roles. Conducting job evaluation can
be beneficial to the organisation in the following ways:
 Bringing parity in salary structures and reducing inequalities
 Defining a job and the salary appropriate for it
 Helpful in talent acquisition as the factors deemed appropriate for job evaluation can be considered
while selecting potential employees
 Harmony can be maintained between employees and management if the salaries are perceived as
being fair
 Helps to standardise salary differentials for various jobs end helps to bring uniformity to the salary
structure
 Helps understand the relative value and relevance of a new job
It is important to note here that job evaluation is distinct from performance appraisal. In a performance
appraisal, the worth of the employee is rated, whereas in a job evaluation the worth of a job is assessed.
The goal of job evaluation is to assess various jobs in comparison with others and to develop a salary
structure that is consistent and fair for all concerned. Job evaluations are conducted by HR along
with employees (at all levels) and relevant stakeholders. At times, consulting firms specialising in job
evaluation are also invited to help the organisation conduct the job evaluations. The fairness of job
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UNIT 05: Job Evaluation JGI JAIN
evaluations can be seen from the fact that job evaluations do not consider the qualities or characteristics
or attributes of the individual holding the job. Job is given a ranking as per its relative work, and these
ranks correspond to salary scales or brackets, which are also referred to as Wage Grids.
Before conducting a job evaluation, doing job analysis is important as it helps to collate facts about the
job(s) under consideration. Job analysis is examining specific tasks of a job by systematically enumerating
the responsibilities related to it. Job analysis intern results in the job description. An important element
in evaluation is the value that the job adds to the organisation based on this assessment the job is added
to the job structure.
The European Commission encourages the use of job evaluation in organisations. Around half of all
private sector organisations in the EU, use a systematic job evaluation methodology.
5.2 JOB EVALUATION

Job evaluation is the systematic methodology by which the worth of a job is assessed about other jobs
in an organisation. This logic-based comparison between jobs helps to establish a robust compensation
structure. Job evaluation is distinct from job analysis. Job analysis is all about gathering information
about a particular job. This is an essential end form or component of the job evaluation, since job
evaluation requires information about the different jobs in an organisation. Figure 1 depicts the process
of job evaluation at the time of selecting candidates:
Acceptance
Committee
Identification
Job description
Method
Classification
Evaluation
Figure 1: Process of Job Evaluation

 Acceptance: The top management must ensure that the employees understand the aims and use of
job evaluation. This needs to be done using transparent and comprehensive communication, which
also highlights the benefits of job evaluation, the inputs required, how the process will be carried
out and the output of the process.
 Committee: It is not realistic for a single person to evaluate all the jobs in an organisation. Generally,
a committee is formed comprising of experienced employees and union representatives to ensure
engagement with the job evaluation process.
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 Identification: Identifying which jobs need to be evaluated, is an important part of the process since
every job may not need to be evaluated as it is time-consuming and resource-intensive. in every
function certain key jobs may be identified.
 Job description: Job descriptions need to be prepared for the jobs to be examined. This involves job
analysis where specifications for successful performance are noted.
 Method: The method to evaluate the jobs should be identified considering the context, organisational
culture and organisational objectives in mind.
 Classification: In this process, the company will set up a pre-determined number of classifications,
for instance, three classifications: low-skilled, high-skilled and executive. After that different jobs
will be assigned to a different category which then becomes the pay structure.
 Evaluation: The relative worth of different jobs needs to be determined through the use of the job
evaluation method. The method may compare each job to a general job description or by ranking
a set of jobs. The evaluation may also require considering the different compensable factors, such
as knowledge, skill, complexity, working conditions and impact. These factors may be compared
using numerical scoring or without such a score. In the case of numerical scoring, weights need to
be attached to each factor, which is multiplied by the points allotted, thereby giving the final score.
5.2.1 Features of Job Evaluation

The purpose of job evaluation is to find the worthiness of work, but it may vary depending upon factors
like time and place under the influence of certain economic pressure. Features of job evaluation are as
follows:
 There is an assessment of jobs, not people.
 Job analysis provided the output that is job evaluation.
 It does not design a wage structure, which can help in rationalising the system by reducing the
number of separate and different rates.
 There is a group of experts involved in the job evaluation process.
 It regulates the value of the job and each aspect of the job, such as skills and responsibility level.
 It helps in maintaining high levels of employees productivity and employee satisfaction with the
management.
5.2.2 Objectives of Job Evaluation

The primary goal of job evaluation is to ensure that the salary structure is consistent both internally and
externally. Inequalities need to be removed. For instance, if a manager gets lesser wages as compared to
a supervisor, it results in internal inconsistency. The other objectives are:
 Job evaluation strives to remove bias from salaries.
 It strives to develop a systematic and rational wage structure.
 It assists in establishing a logical basis for incentives and bonuses.
 It helps to settle disputes relating to salaries between employees and employers.
 It provides a framework for periodic review and revision of wage rates.
 It orients the organisation to conduct salary surveys to compare the organisation’s salaries with
that of other organisations.
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UNIT 05: Job Evaluation JGI JAINDEEMED-TO-BE UNIVERSIT Y
 It helps to fix minimum as well as the maximum salary levels across the organisation.
 It helps to standardise differentials between salaries.
 It helps to minimise wage discrimination based on gender, age, class, etc.
 It also helps in hiring since the factors used in job evaluation or considered while selecting a
candidate.
 It discloses the conditions related to various jobs which help make the right decision while hiring.
 It shows that all employees who do similar jobs are paid similar salaries.
The objective of job evaluation can be grouped into three categories-

1. Fixed salary and wage: Salary and wages are fixed based on the relative contribution of different
jobs and cannot be based on jobholders. After adopting the principle, the foremost requirement is to
identify the contribution of different jobs. It provides information about the worthiness of a job in
terms of contribution to the achievement of organisational effectiveness. Therefore, this method is
more appropriate.
2. Job Hierarchy restructures: Job hierarchy defines as arranging different types of jobs according
to their importance on ascending or descending basis. Sometimes, it becomes too lengthy creating
administrative problems, when the number of levels increases in the organisation. But job evaluation
exercises can be undertaken to reduce the number of job levels by merging related jobs.
3. Overcoming Peculiarity: It can help in overcoming various peculiarities that develop in an
organisation over some time about compensation management. According to Knowles and
Thompson, there are the following peculiarities that may develop in an organisation:
 High wages and salaries for the person who holds a position in the organisation do not require
a lot of skills, effort and responsibility
 Less salary paid to beginners
 Raise is given to those who do not justify receiving
 Rates of pay are decided based on seniority rather than ability
 Unequal wages and salaries based on race, sex, religion, or political differences
The International Labour Organisation (ILO) in a report has stated that “the aim of the majority of
systems of job evaluation is to establish the relative value of different jobs in a given organisation”. If
a job evaluation exercise is not conducted, the employees may feel dissatisfaction due to anomalies in
salary structures, since the complexity of each job has not been studied scientifically.
5.2.3 Advantages of job evaluation

The job evaluation process helps frame compensation plans by the personnel manager. Following are
some advantages of job evaluation
 Reduces disproportionation in salary structure: Work depends upon how well they are being paid.
Therefore, this process helps in reducing the disproportionation among the employees, so that they
get motivated to work.
 Specialisation: Many organisations have got hundreds of jobs and employees to perform them
through specialisation. Therefore, jobs should have fixed salaries and this is possible only through
job evaluation.
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JGI JAIN
 Easy in selecting employees: The job evaluation information makes it easy to select candidates.
Therefore,
 Peaceful relationship between employees and manager: The peaceful relationship could be
maintained through job evaluation, so that salary disparity can be minimised.
 Uniformity: Job evaluation helps in bringing uniformity by determining salary differentials for
different jobs.
 Importance of new job: Employees can understand the importance of their job and this is possible
through job evaluation.
5.2.4 Disadvantages of Job Evaluation

There are some disadvantages associated with job evaluation, which are-
 This process is time-consuming and expensive, especially for small concerns who do not have
adequate money and time.
 This process is not suitable if members of the job evaluation committee have a different opinion and
therefore can lead to wrong estimates.
 This method does not take into account every factor on which the wage pay structure depends.
 Equal pay for an equal job is not possible due to other factors.
 This method does not take into consideration of factors like experts and technology in that field.
5.3 METHODS OF JOB EVALUATION

Normally, the job evaluation exercise in an organisation goes through the following steps:
 Specify the scope of the job evaluation exercise and obtain approval from top management
 Identify the method for job evaluation that is to be used in the organisation
 Collect information and data related to the different jobs
 Analyse this data document the content of each job
 Identify points in these content documents to group the different jobs into categories which will then
be defined does grade
 Allocate jobs to thecurrentcompensationstructure, andifthecurrentstructure is notaccommodative
enough then conceptualise a new one
 Document the standard operating procedures and policies which may be used for reviewing
decisions and admitting appeals
 Obtain the final approval for this system
 Implement and monitors this system in the organisation
The documentation component should include clarity in:

 Selection of compensable factors
 Defining the weights for each factor
 The criteria for allocating weights to each factor
 The method of calculating final scores for each job
6
 The logic for allotting each job to a grade based on a range of points or the exact position in the
organisational hierarchy based on total points
This needs to be followed by a comprehensive communication exercise to help the employees understand
the new compensation structure and job grades.
The organisation should conduct regular reviews to ensure that the job evaluations are relevant and
current at any point in time. This will also include conducting audits which may be conducted internally
or externally to ensure the adequacy of the system. This will add credibility to the job evaluations
and the compensation structure. This will also include a review of any latest regulations about the
compensation of employees.
Though there are multiple methods for conducting job evaluation, market pricing has been seen to be
a relatively simple way to establish salary structures that are sensitive to the market this is also known
as salary benchmarking. In this method, organisation conducts a survey comparing its salaries with
those of other organisations in similar or different sectors. Some of the more robust methods are given
here and can be broadly categorised into analytical and non-analytical methods. Figure 2 shows the
methods of job evaluation:
Job Evaluation
Methods
Analytical Non-Analytical
Method Method
Factor Comparison The Point Ranking

Ranking Grading
Method Method
Figure 2: Methods of Job Evaluation
5.3.1 Analytical Methods

1. Factor Comparison Method: In this method, each job being evaluated is given a rank based on
certain pre-decided factors, such as:
a. Physical effort
b. Skills
c. Mental effort
d. Working conditions
e. Other relevant factors
The Factor Comparison Method is not as widely used as the points rating system. This is because
using points facilitates a large number of jobs to be ranked in one go. The factors are assumed to be
constant for each group of jobs.
7
JGI JAIN DEEMED-TO-BE UNIVERSIT Y
A key advantage of the factor comparison method is that it allows professions that are very different,
such as clerical, manual and managerial jobs, to be evaluated using the same set of variables. This
lends consistency and certain objectivity to job evaluation. however, this method is complicated and
time-consuming.
Some consulting firms have preferred to use this method due to its reliability and objectivity. Table
1 shows job evaluation based on pre-decided factors:
Table 1: Pre-decided factors in Job Evaluation

Key Job Physical Skills Mental Working Daily Wage
Effort Effort Conditions Rate
Employee (A) 11(3) 14(1) 15(1) 8(2) 48
Employee (B) 14(1) 10(2) 9(2) 9(1) 42
Employee (C) 12(2) 7(3) 8(3) 6(3) 33
Employee (D) 9(4) 6(4) 4(5) 5(4) 24
Employee (E) 8(5) 5(5) 6(4) 4(5) 23
2. The point ranking method: In this method, the factors influencing a job are identified these are then
broken into sub-factors. Its factor is assigned points or points relative to its importance. For example,
if skills are the most important element in performing a job, communication skills, persuasion skills
and social skills are sub-factors of skills. The more demanding the job the higher will be the value of
the points. Table 2 shows the sub-factors of skills, efforts and responsibility and the points assigned:
Table 2: Sub factor of Skills, Efforts and Responsibility

Factors 1st Degree 2nd Degree 3rd Degree 4th Degree 5th Degree
SKILLS
 Education 15 30 40 60 75
 Experience 20 40 60 80 100
 Initiative and ingenuity 15 30 45 60 75
EFFORTS
 Physical Demand 10 20 30 40 50
 Mental Demand 5 10 15 20 25
RESPONSIBILITY
 Equipment or process 5 10 15 20 25
 Material or Product 5 10 15 20 25
 Safety of others 5 10 15 20 25
 Work of other condition 5 10 15 20 25
8
The advantages of this method are:

a. It gives a rationale why different jobs are ranked differently.
b. It provides a defence against claims of jobs being of equal value.
c. It is perceived as being more objective than non-analytical methods.
d. It is easy to understand and administer.
e. It can be easily explained to employees due to the systematic adaptive procedure.
Factors that are employed more frequently than others in organisations in this method are:
 Skill: This includes education, experience, social skills, decision-making skills, problem-solving skills,
creative thinking and other such subfactors
 Responsibility: This is also seen as accountability and includes the width of responsibility given, the
degree of complexity of work, the span of control or the number of employees reporting to this role,
the nature of the subordinate staff, any specialised responsibility, the degree of freedom, the extent
of accountability for product and/or machinery
 Effort: The degree of stress on the incumbent the nature of the physical effort required nature of
mental demands on the incumbent
Each such subfactor is given a point or points. The points for each subfactor for every job have calculated
the points for each job are total and then the worth of the job is decided.
Illustration: Suppose a manager’s job in a factory has a maximum of 540 points assigned to it. During
job evaluation, all the factors and sub-factors are added, and the total comes to 640 such a job will be
priced at a higher level.
In this method, the points translate to monetary value in the compensation structure of the organisation
5.3.2 Non-Analytical Methods

There are 2 types of non-analytical methods.
1. Ranking: This is a relatively inexpensive and simple way of conducting job evaluation. In this method,
jobs are ranked from lowest to highest based on their perceived importance in the organisation. In
this method, there are no different standards to assess the relative worth of a job and no predefined
logic. It is opinion-based. In this method, difficulties have been seen while justifying the allotment
of new jobs into the structure or while re-grading a particular job to a higher level. The two key
advantages of this method are-
a. It is easy to understand.
b. It includes low expenses.
However, there are some disadvantages of this method-
a. It is subjective which may offend certain employees and may not be a robust solution for large
organisations.
b. It can not be accepted as a method of determining comparable worth on equal value bases.
c. It has no defined standard for judging relative worth.
Each department’s jobs are ranked using this method. The organisational ranking is formed by
combining the departmental rankings. Salary fluctuation is linked to changes in the employees’
jobs.
9
2. Grading: This method is also known as the job classification method in this method the job
evaluation committee determines job grades before undertaking this exercise and then each job is
assigned to each grade. For instance, Class I is defined as comprising of manager-level employees the
subclassification in this class is done based on the jobs, such as front office manager, housekeeping
manager, manager, banquet manager, sales manager and department manager.
In this method, the job is not broken into subfactors. However, a limitation of this method is that the
content of the jobs may vary, the complexity of each job may vary and therefore, putting all jobs in
one category may not be the right approach.
In India, this method has been used in government departments for a very long time.
Illustration:
 Class I: Managers – Office Manager, Deputy Manager, Senior Manager
 Class II: Skilled workers – Cashier, Purchase assistant
 Class III: Semiskilled workers – Stenotypist, Switchboard operator
 Class IV: Unskilled workers – Peons, Housekeeping staff, Office boys
This method is easy to understand and therefore becomes acceptable to most employees. It considers all
the factors which affected a job and therefore can be used effectively for a variety of jobs. The evaluators
classify the job using their subjective judgment when the job descriptions and grades do not match
appropriately.
 It is commonly believed that the point method is better than other methods and is also widely used
for evaluating jobs across the world.
 It drives the evaluators to examine all factors and sub-factors for a particular job. values are
assigned in terms of points to each subfactor and factor in a systematic manner, which helps to
eliminate bias at different stages.
 It is high on reliability since the evaluators who use similar criteria would get more or less the same
results.
 The methodology accounts for differences in salaries for various jobs based on the factors which
influence the job.
 The jobs are likely to change over time due to the external environment, but the rating skills
established under the point method remain unchanged.
 The disadvantages of the point system are:
 It is complex as compared to other methods.
 This includes preparation of a manual for various jobs, identifying values for sub-factors and
factors, establishing weights, deciding salary levels for each grade and other related work can
be a resource-consuming process.
5.5 GLOSSARY
 Support function: functions in an organisation that support the main business, such as accounts,
information technology and human resources in a utensil manufacturing factory.
10
 Bias: the tendency to favour someone or something

 Anomalies: something that deviates from the standard
 Comprehensive: Robust, including all aspects
 Objectivity: being neutral, non-subjective
5.6 CASE STUDY: JOB EVALUATION FOR MANAGERIAL POSITION
Case Objective
The primary objective of this case study was to evaluate the right candidate for a managerial position
based on his skills, qualification and ability to perform the job.
In Jonadel corporation, the chairman of the board of directors has proposed that all the managerial
positions will be filled through a job evaluation programme. This idea came from several other friends
in other companies of the chamber of commerce and industries where he is a member of the board of
directors. Because this idea of a job evaluation programme proved as successful and helpful in other
companies.
Therefore, in one of the special meetings of the board of directors, he proposed the idea to the chief
operating officer. But the chief operating officer said to hold off on this idea until he consulted his line
and operating manager who will be affected by this change if this is implemented.
Meeting has been conducted for the inclusion of a job evaluation programme. But most of the managers
opposed this idea. They argued that their position can not be rated with other positions due to the
complexity of their responsibilities. Further, they said no job evaluators can know the extent of their job
and compare the same with the subordinate position. The qualities for such a position can be varied
and the salary can be differently structured based on experience and length of service in the company.
While being neutral, the CEO of the company was in feared that if the job is evaluated then he would
lose the best people in the organisation. The other reason is developing a new manager will be a time-
consuming process and operations might suffer due to changes in the organisational structure.
Apart from all the opposition, the Human Resource Manager and chairmen of the board were in
favour of this idea. He then discussed the idea with his staff and also supported the idea of including a
managerial position.
Therefore, It is decided to implement the job evaluation programme for a managerial position. The
CEO called the president for preparing a memorandum of understanding for the Human Resource
Department to study the programme and implement it. The programme will give the details of the
advantages, what is to be done and how it is to be done.
Questions
1. What are the methods the Human Resource Department uses for job evaluation?
(Hint: The organisation should conduct regular reviews to ensure that the job evaluations are
relevant and current at any point in time.)
2. Suppose you have to conduct the process of a job evaluation programme, how will you do it?
(Hint: Job evaluation is the systematic methodology by which the worth of a job is assessed about
other jobs in an organisation.)
11

1. Enlist the benefits of conducting a Job Evaluation.
2. Enumerate the process of Job Evaluation.
3. Describe the objectives of the Job Evaluation.
4. Write a note on the point ranking method.
A. Hints for Essay Types Questions

1. Job evaluation process helps frame compensation plans by the personnel manager. Refer to Section
Job Evaluation
2. Job evaluation is the systematic methodology by which the worth of a job is assessed about other
jobs in an organisation. Refer to Section Job Evaluation
3. The primary goal of job evaluation is to ensure that the salary structure is consistent both internally
and externally. Refer to Section Job Evaluation
4. In this method, the factors influencing a job are identified these are then broken into sub-factors.
It is a factor that is assigned points or points relative to its importance. Refer to Section Methods of
Job Evaluation
@ 5.9 POST-MODULE READING MATERIAL
 https://www.aihr.com/blog/job-evaluation/
 https://upscbuddy.com/job-evaluation/
 Discuss with your classmates, whether the grading method is better than the ranking method and
explain why.
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UNIT
06 Pay for Person, Pay for Position and

Pay for Performance
Names of Sub-Units
Payment decisions for person, Skills plans and skill analysis, Purpose of Skill based structure,
Competency based structure and its purpose, Position and performance-based compensation,
External competitiveness, Competitive pay policy alternatives including match, lag, and lead.
Overview
The unit introduces payment decisions for person, skill plans and skill analysis and purpose of skill-
based structure. Then it goes on to explain competency-based structure and its purpose. Then it
describes position and performance-based compensation. Towards the end it describes external
competitiveness and competitive pay policy alternatives.
Learning Objectives

 Explain payment decisions for person
 Discuss skill plans, skill analysis and purpose of skill-based structure
 Explain competency-based structure and its purpose
 Discuss position and performance-based compensation
 Describe external competitiveness
 Enumerate competitive pay policy alternatives
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Learning Outcomes

 Understand payment decisions for person
 Appraise skill plans, skill analysis and purpose of skill-based structure
 Examine competency-based structure and its purpose
 Evaluate position and performance-based compensation
 Assess external competitiveness
 Examine competitive pay policy alternatives
 ht t p s :/ /
w w w .s h r m .o r g / r e s o u r c e s a n d t o o l s / t o o l s - a n d - s a m p l e s / t o o l k i t s / p ages/
employeerecognitionprograms.aspx
 https://www.marketing91.com/reward-management/
6.1 INTRODUCTION
The market trends affect compensation just as they affect any other aspect of a business. Broadly there
are 5 factors which affect compensation for most positions. These are:
1. The value of labour: Labour costs are usually the largest expense incurred by any employers, apart
from the cost of goods or services produced by the organisation. The labour costs include base salary,
bonuses and commissions, benefits, taxes associated with payroll, and insurance is associated with
employees. A businessman always strives to ensure that the output is more than the cost of labour.
2. Demand and supply: In case there is a shortage of qualified candidates for a job in a particular
area, the compensation for that job offered by the employer will be on the higher side to attract the
right candidates. However, if there is an oversupply of candidates, and the demand is lower, the
compensation will tend to be on the lower side.
3. New job: Normally people who change jobs expect a higher compensation increase as compared
to those who stay in the same job and expect a raise. For instance, if the industry standard for
increments in a particular year is 8% to 10%, the salary offered in case an employee changes jobs
will probably be in the range of 15% to 20%.
4. Hiring difficulty: In case an employer faces difficulty in filling the position, she/he is likely to pay
higher amount to the right candidate to fill the position. In case the position requires specialised
skills or qualification, it may become a difficult position to fill.
5. Benefits: The benefits offered to employees such as health insurance, vehicle, residence, or other
such benefits add up to a large percentage of the monetary compensation.
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UNIT 06: Pay for Person, Pay for Position and Pay for Performance JGI JAIN
A compensation analysis or a salary survey helps to standardise the compensation offered by the
employer. There are certain elements of compensation analysis that you need to keep in mind. These are:
 External competitiveness: where employers compare the compensation they offer for various jobs
with other organisations in the same sector.
 Internal equity: is ensured by employers thus, a certain degree of fairness is perceived with respect
to compensation by the employees of the organisation.
While doing a compensation analysis, not just the monetary but the non-monetary elements of
compensation such as the benefits including medical insurance, discounts, company provided
accommodation, company provided car, etc. are taken into consideration. Compensation is not static. It
changes and evolves based on changes in internal and external environment. The benefits of conducting
a compensation analysis include:
 Benchmarking of salary against other organisations in the market,
 Assessment of pay equity,
 Transparent decisions related to compensation,
 Opportunity identification to improve the current compensation strategy.
6.2 PAYMENT DECISIONS FOR PERSON

Person based compensation payment decisions are basically payment decisions made based on the
person, the employee at work, and not related to the job that he or she does. A person-based salary is
usually given for the knowledge that the employee possesses. Employees working in such a system tend
to have a higher level of motivation and work hard towards achieving their, and the organisations goals.
This is because the salary that they receive is correlated to the output they give to the organisation.
Normally ambitious individuals are found in this type of pay systems.
Person based pay programs are not suitable for all organisations or all positions. Since the pay is
given for the outcome delivered by the employee to the organisation, individuals who view pay is an
entitlement are not suited for such systems. Person based pay systems consider compensation as a
reward earned for acquiring and implementing job relevant knowledge and skills.
In today’s era of rapid technological advancement, skills become obsolete every couple of years and new
skills are needed. An individual who continues to think that the technology he or she learned ten years
ago will still be relevant; will not be suitable for such a system. Even in jobs where manual dexterity was
valued earlier, unless the employee acquires computerisation skills, he or she may not be able to cope
with the technological advancement in manufacturing and thus become obsolete.
In addition, competition from global companies is forcing organisations to become increasingly

competitive. To become competitive at an international level, organisations need employees who have
cutting edge technological skills. Therefore, salary is no longer an entitlement based on the job that
you were hired at. It is more a matter of the updated skills you possess and what you can deliver to the
company.
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Salary now is given more for the knowledge, skill, and competence that the person possesses rather
than the description that the incumbent has to fulfil in a particular job.
Talented individuals who do not get a just reward course their knowledge and skills tend to leave their
jobs and join other organisations which recognise them for who they are, and what they can contribute
to the organisation.
However, in most organisations, person-based salary is not a standard.
The person-based pay system can be viewed as 4 models:

1. Stair Step Model: In this model a job family is divided into different jobs viewed as steps. The different
jobs increase in complexity and an individual can climb the stairs by obtaining the necessary skills
and knowledge.
2. Skills block model: This is similar to the stair step model, but the skills do not build on each other. It
gives the advantage to the employee to skip a level if they have skills for the next higher level.
3. Job point accrual model: This model encourages employees to learn skills from the same job family.
4. Cross departmental model: This encourages employees to learn jobs within a particular department,
hence, they can contribute to the department in periods when there is lack of manpower.
Person based systems encourage growth of not just the individual but also of the organisation. These
systems offer job enrichment and job variety in addition to flexibility in scheduling. It encourages a
person to stay with an organisation and learn the various aspects of the organisation thoroughly,
motivating them all the way. Since an individual in this model learns the job from start to finish, it
enables them to become more engaged with the task and the organisation and can help make the
organisation leaner.
6.3 SkILL PLANS AND SkILL ANALYSIS

A skill plan is essential for every organisation. It helps the organisation to enable its employees to achieve
their maximum potential. Since the capability of the staff determines the growth of the organisation
maximising their potential thus becomes an imperative for the organisation.
A skill plan may be made either by an individual or in consultation with their manager. When the
employee creates their own skill plan, it is known as a personal development plan. When the employee
does so in consultation with the manager keeping in mind the organisational objectives, it is known as
an employee development plan. Here, we discuss skill plans in the context of employee development
plan.
The purpose of a skill development plan is to enable employees to achieve their goals. These goals have
to be aligned with the goals of the organisation as well as the employees’ aspirations. This helps the
employee to focus on what they want to achieve in the short as well as the long term which in turn helps
them to build a map on how to achieve this. For instance, the short term goal of an employee may be to
acquire experience in a different aspect of this role, with an aspiration to move into a managerial role
as the next career step. A skill plan for such an employee would include various development programs
including shadowing senior staff. A skill plan cannot be considered a static as it may take time for
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the employee to achieve their goals, and during this time the contextual environment may change.
Therefore, skill plans are dynamic in nature.
Skill plans are beneficial for the individual employees, their teams, as well as the organisation. Skill
plans help to clarify expectations from the employees in the near future. They also help to clarify the
support that the employee will receive from their supervisors and their management. A skill plan can be
used as a tracking mechanism to assess whether sufficient progress is being made. In case one party is
lagging in their delivery, appropriate actions can be taken to ensure that the employee comes back on
track for his/her development and growth. By executing the skill plan in the spirit that it was intended,
organisations can help enhance the performance of their employees. This also helps in succession
planning as well as controlling costs related to where recruiting and training of candidates acquired
from the market. A skill plan also makes the employee more employable over the long term. The process
of a skill plan can be viewed as the following steps:
1. Define goals: both short term and long term for the employee which is linked to the organisational
objectives.
2. Evaluate existing strengths and weaknesses: by doing a SWOT analysis. This will enable the
employee as well as the manager to become aware of gaps in knowledge which may not have been
considered previously. It will also help identify areas which need to be improved in order to achieve
the objectives.
3. Plan of action: This needs to be created to turn the concept into action.
4. Execution: It is critical to execute the plan that has been conceptualised otherwise the plan will
remain on paper. It is worthwhile to remember the 70:20:10 rules, which states that 70% of learning
occurs while doing, 20% of learning occurs through other people, in 10% of learning occurs through
training.
5. Development: The skill plan needs to be reviewed and updated periodically in order to stay
competitive with the internal as well as external environment. You also need to reflect on the failures
and successes of the plan, in order to optimise it for maximum efficiency in the long run.
There are various learning management systems (LMS) available which help to engage and implement
skill plants or developmental plans in organisations.
6.3.1 Purpose of the Skill-Based Structure

The purpose of a skill-based structure is to ensure that the requisite skills are available in the organisation,
as well as ensure redundancy. This implies that even though an individual employee may be absent for
any reason, there will be others in the organisation to take over from that employee and perform the job
which that absent employee was performing.
A skill-based structure helps the organisation identify what are the skills existing in the organisation as
well as which skills are missing. This helps the organisation proactively fill the gaps as well as provide
alternatives in case an employee’s ambitions overtake his worth to the organisation. Skill based structure
also helps the organisation to know what kind of new projects it can take on based on the available skills
in the organisation.
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6.4 COMPETENCY-BASED STRUCTURE

Competency based pay structure is a compensation structure which pays employees based on the
knowledge they possess, the skills that they have, and the experience that they have gained, instead of
just the job title or the position that they are in. This structure encourages employees to achieve their
aspirational salary range by improving their skills and implementing these skills at work. This helps to
develop the potential of employees in an organisation.
The competency-based pay structure has certain advantages as well as disadvantages. The advantages
include:
 Improved motivational levels of the employee,
 A culture of self-improvement in the organisation,
 Improved transparency since the employee know what skills they need to acquire to achieve the
salary level they aspire for,
 Reduced attrition since the employees feel that their knowledge and skills are important for the
company.
The disadvantages include:

 Subjectivity in pay,
 Possibility of favouritism,
 Difficulty in assessing which skills translate to productivity.
Competency based space structure motivates employees to increase their knowledge, improve their
talent, and thereby contribute at higher levels to the organisation.
In a competency-based pay structure, the employees are paid for these skills and not on the basis of
the position that they hold. Those employees who are motivated to increase their skills grow in the
organisation since they are paid for their skills and not just the position that they occupy.
6.4.1 Purpose of Competency-Based Structure

The purpose of competency-based structure is to motivate employees and enable their growth unlike a
traditional paying system. The competency-based system focuses on the contribution of by employee to
the organisation based on the skills that they possess, which contribute to the growth of the organisation.
Another important purpose of competency-based structure is to increase the engagement of the
employees as they feel that their contribution is being rewarded. A third purpose of competency-based
structure is to drive employees beyond their comfort zone, and instil a feeling of confidence as they
contribute to the organisation at higher levels by increasing their skill levels.
Illustration
Let us for instance, take an organisation which is in the business of consulting. An employee, who is
well versed with the latest trends in the market, possesses the relevant certifications, and focuses on
acquiring cutting edge skills, will be better adept in solving problems using adaptive solutions based
on the competency that he or she has acquired, and will thus be more valuable to the company. Such a
person is also likely to grow rapidly in the organisation.
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In contrast a person who is still working dependent on the skills that he had ten years ago, will soon be
considered obsolete by the company, and not remain relevant in the market anymore.
6.5 POSITION AND PERFORMANCE-BASED COMPENSATION

Position based compensation structure is one of the oldest and traditional type of compensation
systems where the compensation is based on the position that the incumbent fills. The position-
based compensation structure has certain advantages in spite of it being and outdated structure. The
advantages are:
1. Seniority is recognised. The length of service of an employee is a criterion for recognition and reward.
2. Specialisation is rewarded. The degree of specialisation in terms of knowledge qualification and
expertise is the criteria for reward.
3. Position based compensation structure rewards the employees for loyalty and helps retain the
employees as they know they will grow as their tenure in the position increases.
4. The parameters for salary increases are quite simple.
5. This structure is easy to administer as the position itself is the unit for determining the salary for
each position the minimum and maximum amounts are pre-decided.
6. This structure is known for its stability and predictability.
7. The career path is clear to the employees.
Disadvantages of this structure include:

a. Rigid bureaucracy,
b. A hierarchical organisation structure,
c. Possibility of incompetence of the incumbent in a particular position,
d. It does not reward employees for their knowledge and skills.
A performance-based compensation structure implies that quantum of compensation will be determined

by the performance of the incumbent in a particular position. The advantages of this structure are:
1. The high performing employees are motivated as they get a higher compensation for their efforts.
2. This structure attracts the best talent in the market.
3. It helps the organisation attend high levels of performance through its employees.
4. There is clarity in how much you can earn by putting in how much efforts and producing how much
quantity and quality.
5. It does not give heartburn to other employees who receive less compensation as they know that
their output is lesser than the individual who receives higher compensation.
Certain performance-based compensation structures do not have any fixed base pay for instance car
salesman maybe paid only through commissions based on the number of cars sold.
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In this compensation structure money is the main motivator for improved productivity and performance.
To design a pay for performance system the following steps are required to be followed:
1. Decide the organisation’s compensation philosophy.
2. Identify gaps between the philosophy and existing situation on the ground.
3. Update the job descriptions.
4. Decide which sources will be considered 4 obtaining information from the external market.
5. Decide who will conduct the market survey.
6. Analyse the market data and slot into salary grades.
7. Review this data along with senior management.
8. Match organisational positions with market positions.
9. Analyse impact of implementing updated salaries.
10. Align the performance appraisal system within the market.
11. Designer merit matrix Size the salary level for each position.
12. Review and communicate to employees.
6.6 EXTERNAL COMPETITIVENESS

External competitiveness refers to the competitive compensation structures being offered by other
organisations in the same sector. In other words, it is the compensation offered by an organisation
relative to its competitors. Normally an organisation pays salaries either at par with competition
or lowers than competition or higher than competition. The salaries are not just the only part of
compensation paid by an organisation to its employees. Compensation also refers to the benefits given
by the organisation to its employees in addition to the salary. When organisation pays compensation
higher than its competitors it helps the organisation to attract the best talent in the industry. This also
results in high costs for the organisation and the costs become unbearable if higher productivity is not
achieved. The factors which influence external competitiveness are:
i. The demand for labour,
ii. Supply of labour,
iii. Level of demand of product,
iv. Degree of competition,
v. Organisational factors,
vi. Size of the employer,
vii. Preferences of the employees,
viii. The industry in which the organisation exists the level of technology used,
ix. The strategy of the organisation.
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These factors affect the organisation’s decisions on salary levels and forms of compensation paid to
employees. The degree of competition affects the financial position of the organisation.
The market value of opposition can vary based on a number of factors such as industry and location.
The factors which would affect compensation in an organisation include:
a. Job title.
b. The experience required for the job, which will vary based on whether the position is at an entry
level, at a mid-management level, or a higher management level.
c. Industry in which the organisation exists influences the salary levels. For instance, in finance and
technology the salary levels may be more competitive as compared to manufacturing industry.
d. Location influences the compensation since the cost of living in metros will be higher as compared
to rural areas or tier 3 towns.
e. Availability of jobs. When there are few applicants for a particular position the salary is going to be
competitive. In contrast when there are a lot of qualified candidates for a few jobs, the salary paid
for that particular job need not be very high.
Compensation is made competitive by offering innovative packages such as paid time off, health
insurance, retirement plans, number of leaves permitted in a year, relocation bonus, stock options, and
gym or club facility.
The main objective of a competitive compensation structure is to attract and retain talented employees
at reasonable costs.
Theories of labour markets normally you have 4 assumptions:

a. Employers always wish to maximise their profits.
b. People are analogous hence, replaceable.
c. The salary is considered to be the whole amount including all the benefits and allowances.
d. The markets faced by employers are competitive; therefore there is no clear advantage for a single
employer to pay above or below the market rate.
To understand markets, one needs to understand and analyse the demand and supply of labour. The
demand side is about the number of employees the organisation needs and what they will pay to those
employees. The supply side views the potential employees their qualifications and their acceptance to
what needs to be done in exchange for the compensation.
6.7 COMPETITIVE PAY POLICY ALTERNATIVES – MATCH, LAG AND LEAD

Every organisation needs to define what kind of compensation strategy it will follow. Based on its business
strategy, it may decide to pay higher than the market; the same as the market is paying, or decide to offer
slightly lower than the market level salaries. It may be difficult to understand why an organisation may
choose to pay lesser than the market levels. However, in such cases the organisation’s cost structures
do not permit it to offer at par or higher than the market level salaries. Such an organisation offers
potential employees a career with the organisation and may offer better benefits which may be non-
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monetary in nature, such as job security, to ensure long term retention of the employees. Table 1 depicts
the advantages and disadvantages of Pay policies.
There are 3 choices that an organisation can make with respect to market competitiveness.
1. It can choose to lag the market: In such an organisation it is easy to assume that attrition will be
high. However, there may be certain constraints which may force the organisation to follow this
strategy, such as its cost structure or its market base.
2. It may choose to be at par with the market: This is usually followed by most organisations as they
do not want their costs to be abnormally high. Such a strategy is normally followed by established
organisations.
3. It may choose to lead the market as far as compensation is concerned: This means that the salary
levels in this organisation will be highest as compared to the market. Organisations which are new
in the market may choose to follow this strategy, as helps them to attract employees away from
established organisations whose brand value may have better recall.
Table 1: Shows the Advantages and Disadvantages of Pay Policies
Table 1: Pay Policies: Advantages and Disadvantages

Compensation Policy Advantages Disadvantages
Lag: Salary is lower 1. Manpower costs are lower. 1. Difficult to attract employees.
than the market 2. The savings can be deployed 2. Trained employees leave jobs.
elsewhere for better ROI.
Match: Salary is at par 1. Salary matches the competition. 1. Not able to attract star performers
with the market 2. During good business, bonuses when labour market is tight.
and short-term incentives can be 2. Not able to retain rising stars.
awarded.
Lead: Salary is higher 1. Easy to attract stars and retain 1. Should be financially strong to afford.
than what is offered in them. 2. During difficult business periods,
the market 2. Promotes perception of organisation costs may become oppressive for
as employer of choice. organisation.
Source: Adapted from Solving the Compensation Puzzle, by Sharon Koss, SHRM Publications, 2008
4. It may choose a mixed market position: This implies that for certain positions which are difficult to
fill, the salary levels may lead the market, and in those positions which are relatively easier to fill, it
may lag the market.
Compensation structures are now seen as a tool to be leveraged for engaging and retaining employees.
This is further facilitated by advanced technology which is making companies rethink the traditional
approaches to compensation. This transformation is driving compensation professionals to handle 3
key challenges:
a. Maximise the value of compensation in the hands of the employee,
b. Offer innovative and unique means of compensating employees,
c. Ensuring that the employees perceive the compensation across the organisation is fair and
motivating.
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Managers are being given increased autonomy to make decisions related to compensation. Managers
are also increasingly being given training on how to handle compensation related problems of the
employees in their team.
 The market trends affect compensation just as they affect any other aspect of a business. Broadly
there are 5 factors which affect compensation for most positions.
 A compensation analysis or a salary survey helps to standardise the compensation offered by the
employer.
 Person based compensation payment decisions are basically payment decisions made based on the
person, the employee at work, and not related to the job that he or she does. A person-based salary
is usually given for the knowledge that the employee possesses.
 Competency based pay structure is a compensation structure which pays employees based on the
knowledge they possess, the skills that they have, and the experience that they have gained, instead
of just the job title or the position that they are in.
 The purpose of a skill development plan is to enable employees to achieve their goals. These goals
have to be aligned with the goals of the organisation as well as the employees’ aspirations. This
helps the employee to focus on what they want to achieve in the short as well as the long term which
in turn helps them to build a map on how to achieve this.
 Competency based space structure motivates employees to increase their knowledge, improve their
talent, and thereby contribute at higher levels to the organisation.
 Every organisation needs to define what kind of compensation strategy it will follow. Based on its
business strategy, it may decide to pay higher than the market; the same as the market is paying, or
decide to offer slightly lower than the market level salaries.
6.9 GLOSSARY
 Internal equity: this implies that employees with similar positions in the organisation are
compensated in a similar manner, by way of salary or benefits.
 Salary: a fixed regular payment paid to the employee by employer.
 Goal: someone’s desired aims or result.
6.10 CASE STUDY: SARVATRA FINANCIAL
Case Objective
This case study explains How Sarvatra Financial grew in past half decade.
Sarvatra Financial was a twenty-year-old organisation which provided personal loans, home loans,
vehicle loans and other forms of short-term loans including loan against gold. It had branches in almost
every city of the country. It had grown into a large organisation and employed 500 employees.
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In the past couple of years, seeing the rapid growth of consumer loans in the country, many new
companies had entered into this field. The market had become very competitive. Among those who had
entered this space in the past one year, almost all of them had some or the other linkage to technology
and promoted their technology based services to the customers. Ramesh Dahiya, the founder of Sarvatra
Financial had not paid any attention to this phenomenon so far. But when one of the new players had
taken away almost five percent of Sarvatra’s customers, Ramesh became alert. He had previously
dismissed these technology-based start-ups as yet another fad in the market. But when Sarvatra lost its
top four salespersons to one of the new competitors, Ramesh sat up and took note. Losing revenue was
serious, but losing the top performers was definitely critical. Ramesh was in no mood to take this lying
down. He had to do something to get his high performing salespersons back. If he was unable to do so,
he wanted to make sure that no other high performing employee left his organisation. He has hired you
as a consultant, to devise the right solution to his problem.
Questions
1. What are the important factors which affect compensation for sales persons?
(Hint: budget of organisation, customer, experience are some factors affecting compensation)
2. Would you recommend a person-based pay system for Sarvatra Financial? Why?
(Hint: Yes/no, on the basis of merits and demerits of person-based pay system)
3. Will making a skill plan help Sarvatra financial? If yes, how?
(Hint: deciding in advance helping in eliminating deviations from the actual goal)
4. Will a competency-based structure be the right solution for Sarvatra financial? If yes, why?
(Hint: eliminates partiality, equity of pay, less employee turnover)
5. Will a position-based compensation structure be more suitable for Sarvatra financial or a
performance-based one? Give reasons in support of your answer.
(Hint: position-based and performance-based compensation)

1. What elements do you need to keep in mind while doing a compensation analysis?
2. What are the four models in which the person-based pay system can be viewed?
3. Enumerate the process of implementing a skill plan.
4. What are the pros and cons of the competency-based compensation structure?
5. What are the advantages of a position-based compensation structure? Why is it considered outdated?
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1. A compensation analysis or a salary survey helps to standardise the compensation offered by the
employer. There are certain elements of compensation analysis that you need to keep in mind. Refer
to Section Introduction
2. The person-based pay system can be viewed as 4 models. Refer to Section Payment Decisions for
Persons
3. A skill plan also makes the employee more employable over the long term. The process of a skill plan
can be viewed as the following steps. Refer to Section Skill Plans and Skill Analysis
4. Competency based pay structure is a compensation structure which pays employees based on the
knowledge they possess, the skills that they have, and the experience that they have gained, instead
of just the job title or the position that they are in. Refer to Section Competency Based Structure
5. The purpose of competency-based structure is to motivate employees and enable their growth unlike a
traditional paying system. The competency-based system focuses on the contribution of by employee to
the organisation based on the skills that they possess, which contribute to the growth of the
organisation. Refer to Section Competency Based Structure
 https://blog.vantagecircle.com/types-of-rewards/
 https://www.shrm.org/hr-today/trends-and-forecasting/special-reports-and-expert-views/
documents/implementing-total-rewards-strategies.pdf
 Discuss with your classmates, what is the best compensation structure for start-ups these days.
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UNIT
07 Designing a Pay for Performance

Plan
Names of Sub-Units
Pay for Performance Plan, Linking Organisational Strategy to Compensation and Performance
Management, Designing Pay for Performance, Role of Performance Appraisals in Compensation
Decisions, Strategies for Understanding and Measuring Job Performance
Overview
The unit introduces pay for performance plan and linking organisational strategy to compensation
and performance management. Further, this unit elaborates designing pay for performance, and
role of performance appraisals in compensation decisions. Towards the end, it explains strategies for
understanding and measuring job performance.
Learning Objectives

 Explain pay for performance plan
 Link organisational strategy with compensation and performance management
 Describe designing pay for performance
 Elaborate role of performance appraisals in compensation decisions
 Identify strategies for understanding and measuring job performance
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Learning Outcomes

 Devise pay for performance plan
 Appraise linking organisational strategy with compensation and performance management
 Evaluate designing pay for performance
 Assess role of performance appraisals in compensation decisions
 Examine strategies for understanding and measuring job performance
 https://hrmhandbook.com/hrp/pay-for-performance/
 https://www.hrhelpboard.com/performance-management/performance-appraisal-its-purpose.
htm
 https://www.researchgate.net/publication/356323881_Design_and_Implementation_of_Pay_for_
Performance
7.1 INTRODUCTION
Improving performance of employees has been a subject of much research and practitioners have tried
various methods to figure out the exact combination of tools which will improve performance. Almost
unanimously, owners of organisations across the globe will agree that compensation is one of the best
ways to increase performance. A well-designed compensation plan can motivate employees to work
harder and be more productive in line with the organisational goals. It can also help in recruiting the
required talent for the organisation as well as retain the good performers. One can also use this for
monitoring and rewarding contributions of employees to the organisation.
The performance of an employee depends on multiple factors such as the effort invested, the abilities
of the employee, the training programs attended, the skills developed, the knowledge gained, as well as
working relationship with the other employees in the organisation. In economics, when an employee
works as an agent on behalf of the employers, it is referred to as the agency theory. High performance
in an organisation is also influenced by the culture of the organisation. Organisational culture is a
set of behaviours and values which influence how things are done in the organisation. The culture of
an organisation also helps in anticipating behaviour of others, since it is known which behaviours
will be appreciated and which will not be acceptable. This predictability helps employees to determine
what is good and what is not good. Certain operational level proposals can be evaluated on the basis
of such knowledge. High performance work cultures empower employees to make a decision which
benefits the end customer. In such a culture, employees are encouraged to learn from their, as well as
other’s experiences, and are expected to share best practices. Continued learning is an important value
in such an organisational culture. The pay for performance work culture includes various processes
starting from talent acquisition, talent development, in talent management. Developing the skills of
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UNIT 07: Designing a Pay for Performance Plan JGI JAIN
the employees is an essential component of pay for performance model. The implementation of pay for
performance needs the involvement of everyone from the top management to the workers.
There are two approaches on how to reward employees. The first approach proposes that individual
performance should be rewarded through commissions and merit-based salaries. This approach
assumes that performance-based salaries will increase the risk-taking propensity and drive of the
employees. The second approach believes that the performance of teams should be rewarded without
any specific consideration of the performance of individuals in the team. By doing so, this approach
believes that cooperation, collaboration, information, and resource sharing, as well as mutual respect
among employees shall increase. Certain organisations are known to implement hybrid models
which have a certain fixed base pay, and expected deliverables for that fixed based pay, as well as
variable compensation. Performance delivered above such expectations is rewarded through variable
compensation. In this unit, we understand pay for performance at a deeper level.
7.2 PAY FOR PERFORMANCE PLAN

Pay for performance is not just about compensation. It integrates various human resource processes
with support optimal performance and contribution to the organisation. It proposes differential
payment to employees based on their performance. Pay for performance system is about the philosophy
of the organisation to reward high performing employees while building a sustainable competitive
edge. Pay for performance plan is a comprehensive package which includes high performance work
culture, organisational values, HR practices, leadership style, and policies which unlock creativity
and engagement. It is a sum total of multiple processes, all working in tandem, towards achieving
the organisational objectives. All high performing organisations are known to introduce pay for
performance. When the top performers are rewarded, it motivates the entire team to perform at a
higher level.
The pay for performance system can have multiple benefits. Some of the benefits are:
 Establish organisational values
 Improve motivation
 More control over resources
 Employees can earn more without affecting the bottom line of the business
 Employees sense a feeling of power that they can influence their salary levels and earn extra money
 Attract the best candidates for hiring
 Gives clarity about increments
 Reduces attrition
 Reduces micromanagement- as the employees are concerned about achieving their targets and do
not need constant supervision
There are certain disadvantages associated with the pay for performance, as well. Understanding these
disadvantages can be useful for you, to determine if the pay for performance system is the right fit for
your organisation.
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The disadvantages are given below:

 Teamwork gets affected: If employees are focused only on their output and their performance as
individuals, they may not contribute to other team members who may be struggling. At times, team
tasks involve interdependence which implies that one person’s performance may be dependent
on the contribution of another employee. In such a case, if a pay for performance model exists,
each individual may be more concerned about their own performance rather than the team’s
performance. This may lead to conflicts, which may affect the overall performance of the team and
therefore the organisation.
 The focus may be on quantity of work: Performance metrics are usually focused on quantity rather
than quality for instance, number of inquiries generated, number of inquiries converted into sales,
quantum of revenue generated, number of customers retained, or some measures normally seen
in a salesperson’s performance criteria. Very rarely is the quality of customer measured. Quality
of customer implies loyalty as a propagator of the brand. It may also include the positive reviews
on social media given by that customer. Another aspect of parameters which may be difficult to
quantify would be teamwork, interpersonal communication, end innovativeness. Even though these
aspects are important for any organisation, if they are not quantified, they may not be focused upon
by the employees. If the focus is on quantity instead of quality, the latter is likely to suffer. In their
effort to improve the quantity, salespersons may be motivated to acquire customers by any means
necessary, even though those customers may be coerced into making the purchase of the company’s
product.
 Difficult to implement changes: Once the employees get used to the benefits of their individual
performance, it may become difficult to implement a change and orient them towards teamwork,
especially if it negatively affects them monetarily.
 Puts the limelight on low performers: In a pay for performance system, it becomes easy to
identify those who are not performing at high levels. This gives rise to the possibility of bias and
discrimination against these individuals even though they’re low performance maybe a result of
extenuating circumstances. In order to shield such individuals from discrimination and bias, it may
become necessary to provide training programs to them for improving their performance, which
may add to the costs of the organisation.
There are two categories of pay for performance compensation:

1. Merit pay increases
2. Variable compensation
A merit pay increase refers to the increase of the base salary of an individual as an outcome of his or
her performance. Such raises or increments are normally given once in a year. Merit pay increases
were the most commonly used pay for performance model for recognising performance of employees.
Organisations are now switching to variable salary programs to retain their top performers and top
management. Variable salary includes bonuses, commissions, stock options, and other monetary and
non-monetary components, which are offered to employees and vary from year to year, depending
on the performance of the individual and the organisation. Variable compensation may be awarded
more than once a year, unlike the merit pay increase. Variable compensation may be discretionary
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or non-discretionary amounts. Discretionary bonuses such as spot bonuses, project-based bonuses,

and retention bonuses are awarded on an ad hoc basis for extraordinary performance and may be
given even in the absence of predefined goals. Non-discretionary bonuses are awarded to individuals or
teams when predefined goals are achieved. These may further be classified as short term or long term
incentives based on the duration of the period for which the assessment is being made.
In a culture of pay for performance, the organisation needs to ensure that the rewards to the employees
are aligned with their contribution to the organisational vision, mission, strategy, as well as expectations
from them in terms of performance.
7.3 LINkINg ORgANISATION STRATEgY TO COMPENSATION AND PERFORMANCE

MANAgEMENT
The business strategy or the organisation strategy drives most policies and practices in the organisation.
These policies need to be understood by the employees in the same spirit as they are intended and
should be based on objective data. Linking organisation strategy to compensation management as
well as performance management, implies standardising compensation practices, benchmarking
the compensation, achieving internal parity, revisiting job descriptions, conceptualising a robust
performance management system, and communicating these in a comprehensive manner to all the
employees to ensure that they are engaged in the implementation of these practices. Care must be taken
while communicating these to the employees, as it has been known that miscommunication causes
various disruptions at the workplace. Miscommunication is also known to lead to reduced employee
engagement, increased attrition, and low performance.
Managing performance and compensation results is a unified approach to compensation management

as well as performance management. This enables an employee’s work-related performance to be linked
to their compensation.
Traditionally compensation has been seen as a fixed amount paid for a particular position or a particular
job, based on parameters such as seniority, job requirements, and other such factors. While linking
performance to compensation, care must be taken to ensure the compensation is both consistent and
fair as well as proportionate to the performance of an employee. The compensation structure should be
motivating for the employees to perform at higher levels. The performance metrics should be clearly
laid out and comprehensively defined leaving no room for misinterpretation. Just as compensation can
be linked to performance, so can be benefits. For instance, after completing a project or an assignment
given by the client with a high difficulty level, and a tight deadline, the high performers may be given
a paid day off after the assignment is finished. Similarly, another non-monetary benefit which may be
extended for high performers who are self-starters, is to allow them to work remotely. The ways in which
compensation in performance can be aligned to achieve organisational strategy are limitless, especially
since they are limited by your imagination.
Across organisations more consternation has been expressed over performance management in
compensation issues as compared to any other human resource issue. It becomes imperative to align
performance management and compensation management if the organisation intends to improve
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the employees understanding of the expectations related to their performance, and the impact which
their performance has on their compensation. Establishing an effective linkage between organisational
strategy, performance management, and compensation management, can impact not just the
performance of the employees but also impact the performance of the organisation positively.
When the organisational strategy is linked to the performance management and the compensation
management, it gives rise to periodic and regular feedback about the performance of the employee.
Such regular and open discussions lead to agile course corrections, which ensure that the individual,
their team, as well as the organisation, are on the right track to achieving the performance goals as
well as the organisational objectives. Engaging employees in regular performance related discussions
also keeps them motivated and focused. This leads to a healthy work culture where expectations of the
employees as well as the organisation are reiterated on a regular and periodic basis. It then becomes
possible to control any deviations from the desired path leading to achievement of goals. It also gives
confidence to the employees that the organisation is invested in their growth and is concerned about
their performance.
An effective performance related compensation system has the following 6 components:

 Accurate and updated job descriptions
 Validated competitor and market information
 Robust compensation plan
 Well thought out performance metrics for employees as well as the organisation
 Incentive plans tuned to the individuals as well as the teams
 Regular and transparent communication with employees related to achievement of their goals
Aligning organisational strategy to performance management as well as compensation management

is dependent on the accuracy of the job descriptions, clarity in communicating expectations with
employees, a fair compensation structure, and the compensation philosophy of the organisation in
relation to performance.
7.4 DESIgNINg PAY FOR PERFORMANCE BY CONSIDERINg EFFICIENCY, EQUITY AND

COMPLIANCE
While designing pay for performance one should be clear about what are the goals for the system.
Even though hiring, retaining, and motivating are broad areas which justify pay for performance, the
organisation should consider other goals as well. For instance, improving internal equity could be a
priority for the organisation. Another aspect to be considered while designing a paper performance
system is to identify what needs to be rewarded. A third aspect to keep in mind is the use of multiple
measures. Multiple measures are normally deemed necessary to capture information related to
achievements in a comprehensive manner. While deciding what is to be measured, key outcomes need
to be focused upon. An example of this, is when an organisation overtly focuses on quantified results,
quality is often sacrificed. Also, when organisation wants to encourage employees to be innovative, care
should be taken to ensure that no steps often established processes are ignored or side-tracked.
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Efficiency, equity, and compliance are key parameters which need to be kept in mind while designing a
paper performance system. Efficiency implies the proficiency at which an employee is able to complete
the assignment to the satisfaction of the internal or external customer. Equity is the fairness perceived
by employees related to the compensation structure of the organisation. Compliance implies disciplined
following and zero deviation from established processes.
The organisation goals and the related measures needed to be aligned so as to benefit the organisation
from individual action. It is a good idea to cascade the goals of the organisation while aligning individual
efforts with organisational goals, especially since no employees want to know how their work affects
the goals of the organisation. The employees should also be given a certain degree of freedom to do
their work as they see fit. Excessive top-down control of goals may stifle risk taking and innovation by
employees.
The individual goals of each employee should be connected with do you overall organisational goals.
This gives a larger context to the employee about their contribution to a bigger picture. An organisation
needs to clearly define the competencies that it needs, to achieve its objectives, and when performance
management is linked to compensation management, the organisation should ensure that the employees
possess the required competencies. While focusing on outcomes the organisation also needs to bear in
mind that there may be certain constraints or circumstances beyond the control of the individual which
may affect their performance.
While aligning organisational objectives to performance management and compensation management,

it is important to consider the quantum of pay which should be dependent on performance. Organisations
across the world have varied variable salary structures, but on average at the middle management level,
a variable salary of 10 to 15% based on performance is considered adequate. The higher the level of the
managerial employee the higher will be the percentage of variable pay. Senior management in various
organisations are known to have 30 to 35% of their total compensation as variable salary based on
performance. CXOs have been known to have more than 50% of their compensation as variable salary.
Variable salary is also dependent on the nature of the role that the employee performs. For instance, a
revenue generating role, such as a salesperson, may have a higher component of the compensation as
variable salary.
Designing a pay for performance system considering efficiency implies ensuring that the compensation
system and structure are aligned to efficiencies of the employees. This means that the quantity of work
produced is not as important as the time period in which the desired quantity of work is produced. For
instance, if salesperson A sells 10 cars in a month, and salesperson B sells 10 cars in a week, salesperson
B will be considered as more efficient. This will translate to a higher pay for performance for salesperson
B.
Designing a pay for performance system considering equity will mean having parity and fairness in
compensating employees having similar performance. In the above example, if salesperson A as well
as salesperson B sell 15 cars in a month each, they should be given the same variable salary for that
particular period. This will translate to equity in compensation. An important aspect to be considered
with respect to equity in compensation is that in many organisations just prior to the performance
appraisal, certain subordinates tend to become over enthusiastic, or focus on pleasing their bosses.
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For instance, if an employee has achieved mediocre performance throughout the year and in the last 2
months preceding the performance appraisal, that employee starts preening over his or her supervisor,
and starts doing tasks to please the manager, or stays back till late in the office in these two months,
the manager gets a perception that this employee is very hardworking. This is also known as the ‘Halo’
effect. In such a situation, the performance of the employee in the last couple of months preceding the
performance appraisal overshadow all the other months of the year in which the employee may have
been a mediocre performer. Organisations need to be wary of this phenomenon and take steps to avoid
such occurrences.
Designing a pay for performance system considering compliance will translate to ensuring that all
regulatory compliances are followed while avoiding a performance-based salary. This would mean
depositing the requisite tax which may be levied on the compensation to an employee, with the
authorities, and other compliance related issues.
7.5 ROLE OF PERFORMANCE APPRAISALS IN COMPENSATION DECISIONS

Globalisation has resulted in easy access of organisations to customers across borders. This has resulted
in increased competition. Such increasing competition and rapidly evolving business environment have
resulted in organisations searching for ways to increase their competitive advantage. Human resource
professionals can create competitive advantage for organisations by implementing robust performance
appraisal systems, which can help in determining the right compensation for each employee based on
their performance. Compensating employees based on their performance will help develop an effective
appraisal system which will help to retain high performing employees, which in turn will help the
organisation attain a competitive edge.
Performance appraisal is a process initiated by the management which links the objectives of the
organisation, the standards of performance, the assessment of performance, and the compensation
paid in lieu of performance, or exchange of monetary and non-monetary benefits in return for the
contribution of the employee.
The role of performance in compensation decisions can be classified into 3 buckets:

 Provide positive and negative feedback to each employee in relation to their performance and
provide information on how they may improve their performance and thereby their compensation.
 Serve as the foundation for modifying behaviour in the direction of higher performance and
therefore higher compensation.
 To provide data to the supervisor or manager on the basis of which he or she may take decisions
about the employee and their performance and compensation.
Some pointers to a successful performance appraisal include:

 Conducting a thorough research before conducting the appraisal
 Being honest in the appraisal
 Avoid focusing on recent events
 Discussing the results of the appraisal with the employee in person
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 Providing meaningful and substantial feedback

 Developing a plan to enable the employee to improve their performance
The main purpose of a performance appraisal is to assess the employee’s efficiency and effectiveness
while doing their job, and take decisions related to training development and human resource planning.
A performance appraisal helps to assess and document the performance of an employee with the
perspective of enhancing their efficiency output and quality of work.
7.6 STRATEgIES FOR BETTER UNDERSTANDINg AND MEASURINg JOB PERFORMANCE

Before measuring job performance, it is important to understand the antecedents of the job, the metrics
for measuring performance, and the clarity of expectations from the employee. Job performance needs
to be viewed from four perspectives: Customer, Financial, Operational, and the Employee. The balance
scorecard is an effective way which looks at these four dimensions as a basis for evaluating performance
of an employee. Firstly, it views performance of the employee with respect to customer satisfaction, where
the customer may be internal or external. Secondly, it reviews the performance of the employee with
respect to the financial measures of the organisation. Thirdly, it views the performance of the employee
in terms of what growth has the employee achieved internally, and what is his or her commitment to
the organisation. Fourthly, it views the performance of the employee in terms of operational efficiencies
with respect to internal processes.
Given below are some strategies for better understanding and measuring job performance:
1. Improve appraisals: It is best to improve the format of performance appraisals, so that the essential
metrics are included this format.
2. Rating and Ranking: This requires that the appraiser compares employees against each other to
determine the relative performance of the employees. In rating, employees are ranked relative to
each other. In paid comparison ranking, each individual employee is compared separately with all
the other in the team.
3. Define measures: ‘You cannot improve what you cannot measure’, as well as, ‘What gets measured,
gets done’, are two commonly used managerial proverbs which exemplify performance appraisals.
Performance measurement may come in various forms such as quality reports or financial reports. To
effectively evaluate the performance of an individual, the standards of performance need to be decided
first. The standard may be decided on the basis of benchmarking. Benchmarking is an exercise where
the practices of the organisation are compared with those of other organisations.
Strategies to understand and measure job performance are circular in nature. They start with defining
the performance standards, communicate these to the employee, give a time period for performance,
meet the employee after the time period is over, evaluate the actual performance against the standards
which were provided earlier, give feedback to the employee, share suggestions on what the employee may
do to improve his or her performance in the forthcoming performance period, revisit the performance
standards to make changes for the forthcoming performance period.
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Certain strategies for better understanding and measuring job performance in a simplistic manner are
given below:
 Focus on a limited number of key factors, instead of an exhaustive list of multiple factors given in
detail. For instance, the customer service team could have 2 key factors of measurement, such as
percentage of complaints they solved, number of rings it took them to pick up the phone and attend
to the customer.
 Create your own formula. Different individuals/teams may have different priorities even though
they may be on the same team. Each individual/team may have their own formula for assessing
performance for various jobs.
 Have a few companywide key performance indicators. These would be common across all functions
and all levels.
 Be open to revising measurements. Do not be afraid to change the measures if the ones that you
have decided upon, do not deliver the right results.
 Communicate performance results to the team. This will help them improve their performance and
therefore benefit the organisation.
 Consider performance assessment as a daily priority. Do not leave performance appraisal to be a
year-end exercise. Frequent appraisal and frequent feedback will help in faster course correction of
your employees.
 Try 360-degree feedback. This will help you understand performance from different perspectives.
 Avoid micromanaging your employees. Give them room for performing.
 Compensation plans are meant to reward employees for contributing at high levels to the
organisational objectives.
 The compensation should reflect the value of each job to the organisation. For certain organisations,
sales jobs are the most critical for some others technical jobs are most important whereas for some
others operational rules are key for the organisation.
 Pay for performance system links and individuals’ compensation directly to his or her ability to
meet the performance levels, as specified and communicated to the employee.
 Compensation plans may reward the individual for his or her performance, or the team jointly
for their performance, or it may also be a combination of the two. A lot of research has gone into
measuring and assessing performance but there are many aspects which are not yet completely
understood. For instance, how to prevent manipulation in performance, or manipulation in reporting
of performance, are topics which need to be studied further.
 Performance can be enhanced through training and timely feedback.
 Another aspect to be explored would be at what point of an individual’s performance, does the
individual’s performance become less critical than the team’s performance. To address these and
other aspects multiple measures of performance may need to be implemented.
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 There will continue to be a certain degree of subjectivity in evaluating performance of individuals

by their managers. It would also be interesting to study how the manager’s assessment of the
subordinate’s performance is influenced, in case the manager’s variable component of compensation
is linked to the subordinate’s performance.
 A robust performance management and compensation management system will need to address
these and other aspects of performance management and compensation management.
7.8 gLOSSARY
 Micromanagement: To manage with excessive control, repeatedly ask status

 Discretionary: Left to the individual choice or judgement (of the management)
 Miscommunication: Failure to communicate clearly
 Metrics: Parameters or a system of measurement
 CXO: Top Management, usually the Chief Executive Officer (CEO), Chief Operating Officer (COO),
Chief Financial Officer (CFO), etc.
7.9 CASE STUDY: COMPENSATION SYSTEM AT NUTRAMEN ENERgY DRINkS PVT.

LTD.
Case Objective
The aim of this case is to describe compensation system of the Nutramen Energy Drinks Ltd.
Nutramen Energy Drinks Private Ltd. manufactured and sold energy drinks across India. The factory
was located in Sonipat, Haryana and had been established by the founder, Mr. Bhalladev Chaudhary
around twenty years ago. The energy drink was sold in 300ml cans, under the brand name Josh, and
competed against the likes of Red Bull. Even though Red Bull was an international brand and sold high
volumes in metros, Josh had a steady market of its own and was popular in tier 2 and tier 3 towns, in
almost all states of the country.
Over the past few years, increasing competition had led to the emergence of around eight more
competitors and as per market intelligence reports, more were on their way. The market share of Josh
would shrink rapidly, if something was not done to energise the salespersons working at Nutramen.
Over the past decade, attrition rates had been low, sales had been steady, profitability was predictable
and things all around seemed comfortable. With the new entrants, there was bound to be disruption in
the hitherto calm markets.
In order to retain and grow their market share in the forthcoming energy drinks war, Nutramen would
have to respond aggressively. This would require a shakeup of all departments within the organisation,
including sales, branding, production, logistics, human resources as well as accounting. Mr. Chaudhary
thought that the best way to do this was to link the compensation of all employees with their performance.
Since it was already the beginning of April, Mr. Chaudhary wanted this exercise had to be completed in
the coming thirty days, so that the teams would be geared for the forthcoming financial year.
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Mr. Chaudhary got your reference from his relative and impressed with your credentials he has decided
to hire you for this assignment.
Questions
1. Explain which kind of compensation system would be best for Nutramen and in what way will it be
beneficial to the organisation?
(Hint: Integrates various human resource processes with support optimal performance and
contribution to the organisation)
2. What challenges will you possibly face while implementing the pay for performance plan?
(Hint: May lead to conflicts, which may affect the overall performance of the team)
3. Which key parameters will you keep in mind while designing a paper performance system for
Nutramen?
(Hint: Efficiency, equity, and compliance are key parameters which need to be kept in mind while
designing a paper performance system)

1. Write a short note on high performance work cultures.
2. Enumerate the benefits of the pay for performance plan.
3. What are the disadvantages of a pay for performance plan.
4. List the components of an effective performance related compensation system.
5. Describe the role of performance in compensation decisions.

1. High performance work cultures empower employees to make a decision which benefits the end
customer. In such a culture, employees are encouraged to learn from their, as well as other’s
experiences, and are expected to share best practices. Refer to Section Introduction
2. Pay for performance system is about the philosophy of the organisation to reward high performing
employees while building a sustainable competitive edge. Refer to Section Pay for Performance Plan
3. Teamwork gets affected: If employees are focused only on their output and their performance as
individuals, they may not contribute to other team members who may be struggling. At times, team
tasks involve interdependence which implies that one person’s performance may be dependent on
the contribution of another employee. Refer to Section Pay for Performance Plan
4. Effective performance related compensation system has the following components:
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 Accurate and updated job descriptions

 Validated competitor and market information
 Robust compensation plan
 Well thought out performance metrics for employees as well as the organisation
 Incentive plans tuned to the individuals as well as the teams
 Regular and transparent communication with employees related to achievement of their goals
Refer to Section Linking Organisation Strategy to Compensation and Performance Management
5. Performance appraisal is a process initiated by the management which links the objectives of the
organisation, the standards of performance, the assessment of performance, and the compensation
paid in lieu of performance, or exchange of monetary and non-monetary benefits in return for the
contribution of the employee. Refer to Section Role of Performance Appraisals in Compensation
Decisions
@ 7.12 POST-UNIT READINg MATERIAL
 ht t p s : / / w w w . s h r m . o r g/ r es o ur c e s a n d t o o l s / h r -t o p i c s / c o m p e n s a t i o n / p a g e s /
payforperformancepaysoff.aspx
 https://bizfluent.com/list-5921014-advantages-pay-performance-plans.html
 Discuss with professor about the role of performance appraisals in the compensation decisions.
13
UNIT
08 Short Term Incentives
Names of Sub-Units
Introduction to short term incentives: concept of pay for unit produced, individual incentive plans,
group incentive plan, gain sharing plans, combination plans – mixing individual and group, Lincoln’s
incentive, system organisation-wide short term incentives
Overview
The unit begins by explaining the meaning of short term incentives. Further, it discusses the pay for
unit produced. The unit explains the application of the group incentive plan. It also discusses the gain
sharing plans.
Learning Objectives

 Explain the meaning of short term incentives
 Describe the nature of Pay for Unit Produced
 Discuss Group Incentive Plan
 State the importance of Gain Sharing Plans
 Explain the problems of scarcity and choice
JGI JAIN
Learning Outcomes

 Assess the importance of short-term incentives
 Appraise the tools of the Group Incentive Plan
 Evaluate the application of Gain Sharing Plans
 Analyse the problems of scarcity
 Examine the opportunity cost associated with decisions
 https://www.businessballs.com/human-resources/bonuses/
https://www.google.com/search?q=https%3A%2F%2Fwww.iedunote.
com%2Fincentives&rlz=1C1ONGR_enIN991IN992&oq=https%3A%2F%2Fwww.iedunote.
com%2Fincentives&aqs=chrome..69i58j69i57.1353j0j4&sourceid=chrome&ie=UTF-8
8.1 INTRODUCTION
Short-term incentives also called yearly incentives, are basically framed to reward executives for
performing and fulfilling the company’s short-term business plan based on the board compensation
committee’s achievement of goals. The nature of these objectives changes based on the business’s size
and maturity, as well as the company’s unique strategy, market circumstances, and other variables.
Many companies also include non-financial metrics that are consistent with company strategy, such
as meeting safety or quality assurance hurdles, or delivering on the development of a new business
or product. The nature of short term incentives is financial. Short-term incentive metrics are typically
financial in nature, for instance, revenue growth, return on capital or maximising profit. Non financial
metrics are also used by many companies which are consistent in nature with respect to company
strategies. and many companies also include non-financial metrics that are consistent with company
strategy, for instance, meeting safety or quality assurance hurdles, or delivering on the development of
a new business or product.
Annual incentive opportunity is often defined as a target % of the executive’s salary, and schemes
are typically designed to give threshold, target and maximum levels of performance, with matching
threshold, target and maximum pay levels. To minimize risk taking the company keeps an eye over
the executive’s performance. The performances which stand below the threshold level are given no
rewards whereas the performances above the maximum level are offered the maximum payout tier.
To mitigate risk-taking, performance below the threshold level will usually result in no reward, whereas
performance above the maximum level may be capped at the maximum payout tier (typically 200
percent of the target).
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UNIT 08: Short Term Incentives JGI JAIN
8.2 PREMIUM AND DIFFERENTIALS

Premiums and differentials are used to reward employees who go above and beyond what is expected
of them. These are additional rewards for an activity that is generally seen as taxing, unpleasant,
dangerous or inconvenient.
Work premiums are distinguished by the fact that they must adhere to the Compensation Act (minimum
wage, hours of work, etc.). These factors are also influenced by the organisation’s character (policy
choice) and union approval.
8.3 PAY FOR UNIT PRODUCED

It is one of the oldest incentive schemes on the market. Pay is determined by some quantifiable output,
which is referred to as ‘pay for units produced.’
The designers (industrial engineers) must examine the whole operation and build the most effective
workflow, procedures, and techniques for accomplishing assignments to execute the ‘pay for units
produced.’
Many “pay for units created” incentive systems are built on the foundation of three construction blocks:
i. Calculating how long it takes an employee to produce a unit of output.
ii. Determining what constitutes an acceptable level of performance during standard work hours.
iii. Determining an acceptable rate of pay for an employee who completes an assigned task within a
given time frame.
8.4 OVERTIME PAY

Pay for time worked outside the usual weekly working hours—a cost-cutting strategy. Many occupations
necessitate specific knowledge and abilities, and some employees may be required to work more hours.
If an employee in the obligatory overtime program refuses to work extra when asked, he or she may
be fired or penalized. Most employees like the potential to earn additional money if overtime is not
exorbitant.
Overstaffed organisations are those that do not pay overtime. Overtime charges might differ depending
on the time of day or week.
8.5 MERIT PAY

Merit pay is a sort of remuneration in which a corporation pays higher-performing employees more
money on a regular basis. Merit pays, often known as incentive pay or pay-for-performance, entails
providing employees raises in their base salary or bonuses in exchange for their performance. General
cost-of-living adjustments may be replaced by merit pay and simple pay hikes, compensation increases
based on employee rank, or general cost-of-living adjustments may be replaced by merit pay.
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A company that uses merit pay develops a set of criteria for evaluating employee performance. The
organisation also develops a plan for evaluating employee performance against those criteria, with
check-ins scheduled at monthly or quarterly intervals leading up to the review date. Employers are
given the opportunity to choose the start and end dates for merit pay which increases each fiscal year.
A corporation must be able to provide reliable, thorough data to measure employee performance so
that merit pay can be used as an effective tool to enhance employee performance
8.6 LUMPS-SUM BONUSES

The benefit of lump-sum incentives is that they encourage salespeople to strive for high levels of
performance and to achieve sales goals that they may not otherwise achieve. “Quotas are established
to equip salespeople with goals that are both demanding and worthwhile. On achieving pre-determined
performance level the salespeople are rewarded higher than what they have achieved otherwise. To
improve salespeople’s performance, management rewards them when they achieve a pre-determined
performance level (quota) that is higher than what they would have achieved otherwise” (Steenburgh,
2008)While lump-sum bonuses motivate salesmen to make more sales, they can also have disadvantages.
8.7 INDIVIDUAL SPOT AWARDS

The Spot Award notion refers to activities or services in a short period of time. Spot Award programs to
increase the efficiency of employees the organisation are considering spot awards as a part of reward and
recognition strategy. Spot Awards would likely come under Proficiency Pay under the proposed Chapter
6 guidelines. A pay-for-performance approach’s overall purpose is to leverage the promise of monetary
incentives as an incentive for personnel to increase their contributions to better or maintained agency
performance. Public sector entities’ pay-for-performance alternatives are sometimes constrained due
to fiscal constraints, public scrutiny difficulties, and legislative rules.
Obstacles to Pay-for-Performance and Spot Awards: Budgetary Issues: The expenses of Spot Awards are
adjustable, and they may be designed and changed to fit any budget. Because the most effective Spot
Award programs are continuously implemented, initial plans often incorporate a review of available
funds over time. Because the benefits are either non-monetary or small amounts of money, well-
developed policies and well-documented judgments are not often subjected to harsh public scrutiny.
Regulations of the government: The fact that a prize can be granted with little or no clearance is a key
feature of Spot Awards. Frequently, award amounts are established at levels that can be approved at
the organisation’s lower levels.
In late 2008, the Department of Environmental Quality established an official Spot Award Program.
For Quick and Efficient results Spot Award Program was favored by many Executive Staff members.
Many of the Executive Staff members were in support of the ‘Spot Award’ since it is a quick and efficient
approach to acknowledge staff for doing a good job,” said Karen Schexnayder, DEQ Human Resources
Director.
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8.8 INDIVIDUAL INCENTIVE PLANS.

Individual incentive schemes are reward systems that are linked to individual employee performance.
These plans are based on the type of worker for whom they were created. Generally, a certain pay rate is
guaranteed under this arrangement, with bonuses serving as supplementary compensation.
Three types of employees can be included in individual salary incentive programs. Production employees,
also known as blue-collar workers, white-collar workers, such as salespeople, and management staff
are among them. All of these types of employees have various demands, as well as varied qualifications
and types of work, hence unique programs have been created for them.
8.9 GROUP INCENTIVE PLAN

Employees should be rewarded for their group performance rather than for their individual achievement
in group incentive schemes. Individual contributions may not even be equal, but group incentives
programs are most effective when all members of the group have some impact on accomplishing that
goal.
Employees who accomplish or surpass pre–set corporate performance goals are rewarded with lump–
sum cash payouts, time–off awards, and/or informal recognition items known as group incentive plans.
Effective group incentive programs can help an organisation achieve its objectives.
8.10 GAIN SHARING PLANS

A profit sharing plan is a form of management strategy that a company uses to boost profits by giving
employees a financial and emotional interest in the company’s success. It entails providing employees
with financial stakes in the company’s success as a result of increased performance to encourage
them to work harder. Gain sharing schemes are a viable alternative to traditional pay systems, which
are typically viewed as unappealing forms of compensation. A profit-sharing plan links employee
compensation to performance and, as a result, is a powerful tool for improving performance and
incentives.
Traditional gain sharing schemes can be adjusted to fit a company’s specific business climate and needs.
It is vital to remember, though, that a profit-sharing plan isn’t the same as an individual incentive plan.
There are three primary types of gain sharing programs:

1. The Scanlon Plan, formulated by Joe Scanlon in the 1930s,
2. The Rucker Plan, and
3. Improshare.
8.11 PROFIT-SHARING PLAN

A profit-sharing plan is a type of pension plan in which an employee receives a portion of the company’s
profits. Employees will get a percentage of the company’s profits based on yearly or quarterly results
under this plan, which is also known as the deferred profit-sharing plan (DPSP).
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This is a wonderful choice for firms looking to give their workers a sense of ownership in the company
they work for. This will encourage them to work more and achieve better outcomes in the long term.
There will, however, be certain limitations on when employees will be allowed to take their funds without
penalty.
Breaking Down
A profit-sharing plan is a normal pension or retirement plan that receives employer contributions.
This means that a profit-sharing plan, such as the employees’ provident fund (EPF) or the national
pension system (NPS), is not a profit-sharing plan because it requires payments from the employees’
remuneration.
Profit-sharing arrangements are totally in the hands of employers. They can decide how much they
want to distribute to each employee. A company providing a profit-sharing plan can change as per its
need.
Employers have been known to make no donations in the past. In years when the employer will contribute,
the company should devise a formula for distributing revenues to its employees.
Calculation
The comp-to-comp technique is the most frequent way of calculating profit-sharing allocation in
a company. The corporation will first determine the overall remuneration of its employees by using
the approach to calculate earnings. The organisation will then determine each employee’s individual
remuneration and earnings.
8.12 COMBINATION PLANS – MIXING INDIVIDUAL AND GROUP

Now we’ll look at some of the employee incentive programs that companies use. First, we weigh the
pros and downsides of individual versus group incentive programs. Following that, we’ll look at a few
innovative methods for incentives and remuneration. Finally, we offer a set of recommendations for
effective incentive systems.
Companies typically have a variety of compensation schemes to choose from and must decide which is
the most beneficial for their scenario. Based on the unit of analysis—and the reward recipient—is an
individual or a group organisational incentive systems are commonly classified.
There is another kind of pay where workers are paid according to the quantity of production known
as piece rate incentive programs. Bonus systems of various kinds and commissions are all examples of
individual incentive schemes Merit-based pay (often known as merit compensation. In each scenario,
the awards are linked to the individual’s degree of performance.
8.13 INDIVIDUAL-BASED BONUS AND REWARDS

Individual remuneration is paid only on the basis of individual success, not team performance. This
means that higher-achieving people get paid more, while lower-achieving employees get paid less. It
encourages employees to compete for status and income, providing a strong incentive to achieve.
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Both forms of rewards are offered in group incentives. Employers might provide team incentives for
accomplishments that require the efforts of the entire team, as well as individual incentives such
as bonuses and career development chances to employees who go above and beyond their normal
responsibilities.
Merit-based pay (often known as merit compensation), piece-rate incentive programs (where workers
are paid according to the quantity of production), bonus systems of various kinds and commissions are
all examples of individual incentive schemes. In each scenario, the awards are linked to the individual’s
degree of performance.
8.14 ORGANISATION-WIDE SHORT TERM INCENTIVES

Employees are rewarded based on the organisation’s achievement over a certain period of time under
company-wide incentive programs. These programs aim to foster a sense of connection, collaboration
and teamwork among all employees to foster a culture of ownership. Profit sharing, gain sharing and
employee stock ownership programs are the three most common forms of company-wide incentive
systems.
Profit Sharing
Profit sharing is a plan in which employers agree to distribute a portion of their net earnings to their
employees if specified service requirements and qualifications are met. The major goal of implementing
profit sharing plans were to increase employee loyalty to the company by providing an annual incentive
(above and beyond standard salary) if they stayed in the company’s service jobs for a certain amount
of time. The worker’s profit share might be paid in cash or in the form of stock in the firm. Bonus shares
are what they’re called. The Payment of Bonus Act regulates the worker’s share in India.
Merits:
1. The concept of profit sharing motivates management and employees to be truthful, dedicated and
loyal to the company.
2. It aids in augmenting employees’ pay and allowing them to live a full life.
3. It is likely to improve worker and other staff motivation for faster and better work, resulting in more
firm goods and as a result, a higher worker share.
4. Workers do not require constant monitoring since they are self-motivated to go above and above for
the company’s success.
5. It invites brilliant employees to join a company’s ranks in exchange for a portion of the earnings.
8.15 SCANLON PLAN

In essence, the Scanlon plan is the forerunner of all gain sharing systems. It is a cost-cutting employee
incentive scheme in which incentives are linked to the ratio of production cost to production value. In a
Scanlon plan, the higher an employee’s production output is compared to his hourly wage, the higher
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his additional incentives are. For example, an employee who works five hours a day at a $20 hourly
rate is paid $100 for a full day’s work. Assume his employment include replacing windshields on pickup
trucks, which he does at a pace of six trucks per hour on average.
However, with a Scanlon strategy in place, the employee might improve his rate of output to eight trucks
per hour, earning an extra $100 on top of his regular pay. An hourly-paid employee has little incentive
to perform better if there isn’t a profit-sharing arrangement in place. Indeed, such a worker may try to
manipulate his timesheet by lowering his performance to display more hours for the same amount of
work done. By providing employees with a genuine incentive to perform better, a Scanlon plan removes
the risk of such offences. It also serves as a basis for improving a worker’s ability to produce.
1. The Basic Elements of the Scanlon Plan are:

 u The Ratio
Total labor cost / sales value of production.

 u The Bonus
Depends on the reduction in costs below the preset ratio.
8.16 LINCOLN’S INCENTIVE SYSTEM

 Each employee with at least three years of service is guaranteed 30 hours of labour 50 weeks per
year.
 The base salary is determined by standard job evaluation techniques, which use six compensable
elements to establish the relevance of each work.
 The bulk of employees are paid on a piecework basis.
 Except for department leaders and members of the engineering and time-study departments, all
workers are eligible to participate in the proposal program.
 Every two years, a merit rating program evaluates each employee’s real job performance.
 After the first year of employment, each employee is eligible to acquire a restricted number of shares
of company stock once a year. (Around 75% of employees currently own 40% of the company’s equity.)
 An “advisory board” is made up of employees who are elected by their peers. The board has the
authority to propose policy and operational changes.
 Employees’ yearly cash bonuses are almost identical to their annual wages.
 Independent work groups, sometimes known as “subcontractor shops,” undertake their own quality
control and establish their own manufacturing methods while executing subassembly activities
within budget, quantity and quality constraints.
 The company’s profits are distributed in three ways:
 For capital improvement and financial security, the corporation keeps a portion.
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 Dividends are paid to shareholders in the range of 6% to 8%.

 All residual profits are distributed to employees.
 Short-term incentives also called yearly incentives, are basically framed to reward executives for
committee’s achievement of goals.
 The nature of these objectives’ changes based on the business’s size and maturity, as well as the
company’s unique strategy, market circumstances, and other variables.
 Premiums and differentials are used to reward employees who go above and beyond what is
expected of them.
 These are additional rewards for an activity that is generally seen as taxing, unpleasant, dangerous
or inconvenient.
 Pay for time worked outside the usual weekly working hours—a cost-cutting strategy.
 Many occupations necessitate specific knowledge and abilities, and some employees may be required
to work more hours.
 If an employee in the obligatory overtime program refuses to work extra when asked, he or she may
be fired or penalized.
 Most employees like the potential to earn additional money if overtime is not exorbitant.
 Overstaffed organisations are those that do not pay overtime. Overtime charges might differ
depending on the time of day or week.
 Merit pay is a sort of remuneration in which a corporation pays higher-performing employees more
money on a regular basis.
 Merit pay, often known as incentive pay or pay-for-performance, entails providing employees raises
in their base salary or bonuses in exchange for their performance.
 Simple pay hikes, compensation increases based on employee seniority or general cost-of-living
adjustments may be replaced by merit pay.
 The benefit of lump-sum incentives is that they encourage salespeople to strive for high levels of
performance and to achieve sales goals that they may not otherwise achieve.
 “Quotas are established to equip salespeople with goals that are both demanding and worthwhile.
 The Spot Award notion refers to tiny monetary or non-monetary prizes given to specific employees
that do excellent quality activities or services in a short period of time.
 Individual incentive schemes are reward systems that are linked to individual employee performance.
 These plans are based on the type of worker for whom they were created.
 Generally, a certain pay rate is guaranteed under this arrangement, with bonuses serving as
supplementary compensation.
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 In essence, the Scanlon plan is the forerunner of all gain sharing systems.
 Under this incentives are associated with the ratio of production cost to production value also
known as a cost-cutting employee incentive scheme.
8.18 GLOSSARY
 Incentives: Anything that motivates a person to do action.

 Non-financial: A corporation that is not a financial institution is referred to as a non-financial
institution.
 Short-term: Short-term refers to items that will last for a short period of time or that will have an
immediate rather than long-term impact.
 Reliable: An employee who is consistently good at a performance or who can be trusted.
 Seniority: A privileged status earned by the length of continuous service in an organisation.
8.19 CASE STUDY: THE CASE OF VARIABLE PAY
Case Objective
This case aims at describing the variable compensation as a tool to improve employee’s performance.
When Nitin Arora’s phone rang, he was getting ready to leave for the day.
“Nitin, this is Anil. Is it okay if I come in for a few minutes?”
“Yes, if you can get here in less than two minutes,” Arora answered.
The other man responded, “You got it,” and hung up.
Anil Mathur worked for Care Soft, a big fast-moving consumer goods firm, as a brand manager. In
reality, it was Arora who, as Chief of HR at Care Soft, had hired Mathur from a Mumbai-based medium-
sized firm. They had developed a strong bond over the years. In any event, Arora was recognised as one
of the company’s friendlier senior executives. He had to be, after all, he was the HR person.
Arora had a hunch about what Mathur may want to talk about, but he opted to respond as he went.
In less than two minutes, the 36-year-old brand manager was in Arora’s room.
“How long has it been since we had a semi-formal gathering like this?” Arora enquired about his visitor.
Mathur answered, “I don’t recall, maybe six months ago.”
“You’ve forced me to remain back at 8:30 on a Friday evening. So, it had better be significant “Arora
feigned to be threatening to his coworker.
“You’re absolutely correct, this is crucial,” Mathur replied. “I am dissatisfied with my wage raise from
the previous fiscal year.”
“However, you received your letter a month ago; why are you only now bringing it up?” Arora inquired.
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“I’ve been thinking about it and trying to figure out if I’m the only one who thinks the new variable
compensation structure is a letdown,” Mathur said.
Care Soft made the decision to replace its fixed compensation structure with variable pay a little over
a year ago. In reality, the entire procedure was completed in three months flat, with minimal advance
notification to the staff, who were not entirely shocked given that news had spread as soon as the HR
consultant was recruited to draught the new Notes pay system. The idea was launched through an
article in the company magazine and an e-mail from the CEO.
The business, which had a revenue of 1,200 crore in the previous fiscal year, had not yet switched to stock
options but had implemented a profit-sharing scheme. The variable component, which was normally
paid out once a year, was connected to the individual’s and his team’s success. Individual performance,
understandably, was given more weight than team performance. Apart from that, there were peer
rewards for the team and individual accomplishments. Performance was rewarded in kinds, such as a
paid vacation, gift cards or presents.
Care Soft opted to introduce variable compensation exclusively at the senior and middle management
levels, separate from shopfloor personnel because the concept was new to them. Junior management
was left out. The senior management team, which included everyone from a general manager to the
CEO had a variable component that ranged from 15 to 40%. Variable pay was only 5-15 percent for those
in the lower echelon.
As a brand manager, Mathur was promoted to general manager. And the toothbrush division he
oversaw had an especially poor year. Because of price cuts, promotions and discounts, volume sales
were down 5% and rupee sales were down 15%. Furthermore, a new toothbrush that was supposed to
be released in the second part of last year had not been released. This was a low-cost brush with a sales
target of ` 1 crore.
The first full year of variable compensation was fiscal 2001-02, and Arora could see the executives
weren’t thrilled with it. Arora had already received complaints from a vice president and another
general manager. Mathur’s departure would not only push the other two to follow suit, but it would also
have an effect on the new compensation structure.
“My performance objectives were ridiculous,” Mathur added. “Show me one firm that has improved
toothbrush sales and I swear I’ll never complain again.”
“That’s correct,” answered Arora. “Take a look at it from the perspective of the organisation. Other units
have suffered as a result, and our sales for the previous year were lower. We’ve done our hardest to do
the best we could be given the circumstances.”
“Perhaps, but why should I be punished for someone else’s mistake?” Mathur grumbled.
“I’m not sure what you’re talking about.”
“I’m talking about the new toothbrush that my team was expected to release in the second part of last
year,” Mathur said. “We weren’t able to introduce it because the design team sat on it for so long, and then
the engineering team took its sweet time putting it into production.” We realized that the launch cost
wouldn’t be worth it by the time we were ready to go. My remuneration has a 20% variable component,
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which has been a double blow for me. Because we didn’t accomplish our goals, my incentives were
frozen, and the rise in base pay didn’t even come close to matching the rate of inflation.
“Don’t forget, Anil, that the majority of us at Care Soft are in the same position. Having stated that, I
believe we have a problem. Here’s what I can guarantee: I’ll bring these concerns to the compensation
committee’s attention. I can’t make any more promises.”
Both guys examined the clock on Arora’s desk. It was beyond ten o’clock.
“I have to get medications for my son,” Arora explained. “I’ll be signing my divorce papers tomorrow if I
can’t find a pharmacy open now.” Both men parted with a chuckle.
The first thing Arora did on Monday was phone his CEO, Rishab Patel, and suggest that a Compensation
Committee meeting be called.
“I have a diary so full this week that a knife wouldn’t be able to go through it,” the CEO told Arora. “Nitin,
please do me a favor. I’ll send out a meeting request, but do you think you’ll be able to manage it?”
“However, how can we make any decisions without you?” Arora inquired.
“Don’t. Fill in the blanks and have them ready for me. Let me wrap off this week’s visit from our
international partners.”
“Should we reschedule the meeting until next week?”
“No, go ahead and do it. Next week, we can have a second meeting.”
One thing that had irritated Arora all along was Patel’s apparent lack of care for HR issues. He was
more interested in “strategic concerns,” as he put it.
By the afternoon, Arora had received confirmation of Patel’s meeting request. The committee would
convene before lunch on Wednesday. (“I won’t be able to deal with HR after lunch,” someone had wise-
cracked.)
Apart from Patel and Arora, Care Soft’s Compensation Committee included CFO Narayan Shastri,
COO Niranjan Roy, Director (Marketing) Utpal Sinha, Anurag Kesaria, a principal from the consulting
firm that drew the new compensation structure, and Raman Behl, an independent director who was a
chartered accountant by profession and widely regarded for his management wisdom.
The meeting’s agenda had already been distributed the day before. As a result, all of the men were
aware of the situation.
“Nitin, how widespread is the discontent?” Roy, the COO, got things started.
“I have reason to assume it is common,” Arora added, “but just a few individuals have approached me
about it thus far.”
“Perhaps we are overreacting in that circumstance,” Shastri added. “More time should be given to the
new system. After all, it is just been a year.”
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“I don’t think it is possible to overreact to such a situation,” Behl said. “The worst thing we can do right
now is let morale suffer.”
“I concur,” Arora remarked. “I couldn’t agree with you more,” Sinha, the Director of Marketing, said. “I
can’t afford to lose any of my soldiers at this point. Not good men like Anil Mathur, for example. It makes
no difference to me whether we have to pay him extra.”
“That’s not a smart idea,” Arora said... “We can’t be accused of being picky with our incentives.” Variable
pay was created with the intention of motivating employees across the board by promising bigger
incentives for higher performance. We can’t make modifications on the spur of the moment.”
“Perhaps we didn’t adequately apply the new structure,” Sinha retorted. “Or maybe we could just go
back to the old fixed system, which worked perfectly for me.”
“You are correct about the inadequate implementation,” remarked consultant Kesaria. “However,
bringing back the previous system would be a strategic error. After all, the justifications for implementing
variable pay remain valid. The business landscape is shifting, and we can no longer afford to reward
employees based on an outdated sense of entitlement. Executives must justify their compensation.”
The business landscape is shifting, and we can no longer afford to reward employees based on an
outdated sense of entitlement. Executives must justify their compensation.”
“Besides,” Shastri, the Chief Financial Officer, interposed “Variable compensation is an excellent method
to cut expenses and boost productivity. Not to mention the fact that such a system inherently draws
people of high caliber.”
“Yes, when the market is healthy, there is no problem with variable income,” Sinha said. “However, when
the markets drop, as they are right now, your gains will diminish. Do you then expect them to forget
about all of their hard work and say, “Sorry, we won’t be able to offer you any raises because we had a
horrible year?” This company’s talent will be cleaned out in less than six months, believe me. Don’t forget
that the next year will be just as difficult for FMCG firms.”
“Not only are employees being benched in the IT field, but they’re also being asked to take wage cutbacks,”
Shastri noted.
“Perhaps,” Sinha countered. “But how many coders can become marketing directors or even CEOs in
insurance, banking, pharma, or any other industry? And expecting individuals to generate 15% growth
in a decreasing market is the surest way to lose them.”
“It is actually worth looking at what’s wrong with the system,” Behl added. “From what I gather, even
shop-floor staff whose variable compensation is connected to productivity are impacted since the firm
has reduced output to clear dealer inventories.”
“As far as I can tell,” Kesaria remarked, “it appears to be an implementation issue.” Perhaps we didn’t
communicate well; perhaps our measuring methods need to be tweaked, reviewed more regularly, and
people rewarded closer to the time of their accomplishments.”
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“That’s a great concept,” Behl replied. “Money isn’t the main reason people work, but it is certainly one
of the most important. Aside from that, a move like this needs a long lead time. It is a cultural shift for
which individuals must be prepared.”
“I would have wanted to accomplish this over the course of a year,” Arora argued. “However, I was
instructed to put it into action within three months of the board’s decision. What’s more, where is upper
management’s support for this initiative? Who is the defender of variable pay? I may be, but it would be
more credible if the CEO also demonstrated his commitment.”
Questions
1. Is variable compensation a good idea?
(Hint: Proponents of variable compensation argue that offering real benefits for excellent
performance motivates hard effort and efficiency while also acting as a barrier to substandard or
otherwise, uninspiring labour.)
2. Why might a variable pay plan aid in performance improvement?
(Hint: Employers benefit most from variable compensation schemes because they provide them
flexibility and allow them to reward staff via earnings rather than operational costs. Variable pay
plans assist an organisation in achieving the following goals: Cost control. Employee motivation
and productivity will be boosted.)
3. What proportion of a person’s compensation should be variable?
(Hint: Variable payments, which are decided by reaching individual, team, and organisation
objectives can vary from 8% to 19% of base pay in most firms, although they are frequently given
only if the company meets or exceeds its goals, according to Rubino.)
A. Multiple Choice Questions
B. Essay Type Questions

1. What do you mean by Short-term incentives?
2. Explain the Premium and Differentials.
3. Discuss about the Overtime Pay.
4. Explain the Lumps-Sum Bonuses.
5. Describe the benefits of profit sharing plan.
A. Hints For Easy Type Questions

1. Short-term incentives also called yearly incentives, are basically framed to reward executives for
14
committee’s achievement of goals. The nature of these objectives changes based on the business’s
size and maturity, as well as the company’s unique strategy, market circumstances, and other
variables. Refer to the Section of Short term incentive plans
2. Premiums and differentials are used to reward employees who go above and beyond what is expected
of them. These are additional rewards for an activity that is generally seen as taxing, unpleasant,
dangerous, or inconvenient.
Work premiums are distinguished by the fact that they must adhere to the Compensation Act
(Minimum wage, hours of work, etc.). These factors are also influenced by the organisation’s
character (policy choice) and union approval. Refer to the Section of Premium and Differential plans
3. Pay for time worked outside the usual weekly working hours—a cost-cutting strategy. Many
occupations necessitate specific knowledge and abilities, and some employees may be required to
work more hours.
If an employee in the obligatory overtime program refuses to work extra when asked, he or she may
be fired or penalized. Most employees like the potential to earn additional money if overtime is not
exorbitant. Refer to the section of Over time pay
4. The benefit of lump-sum incentives is that they encourage salespeople to strive for high levels
of performance and to achieve sales goals that they may not otherwise achieve. “Quotas are
established to equip salespeople with goals that are both demanding and worthwhile. On achieving
pre determined performance level, the salespeople are rewarded higher than what they have have
achieved otherwise. Refer to Section lump-sum incentives
5. A profit-sharing plan is a type of pension plan in which an employee receives a portion of the
company’s profits. Employees will get a percentage of the company’s profits based on yearly or
quarterly results under this plan, which is also known as the deferred profit-sharing plan (DPSP).
This is a wonderful choice for firms looking to give their workers a sense of ownership in the company
they work for. This will encourage them to work more and achieve better outcomes in the long term.
There will, however, be certain limitations on when employees will be allowed to take their funds
without penalty. Refer to Section profit- sharing plan.
 https://courses.lumenlearning.com/wm -principlesofmanagement/chapter/employee -
compensation-incentive-and-benefits-strategies/
 https://www.patriotsoftware.com/blog/payroll/what-is-profit-sharing/
 Discuss in your group about the benefits of short-term incentives.
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UNIT
09 Long Term Incentives
Names of Sub-Units
Designing Long-Term Incentives, Deferred Compensation Plan, Social Security, Retirement Plan,
Pension Plans, Profit-Sharing Plan, Stock Bonus Plan
Overview
The unit begins by explaining the meaning of long term incentives. Further, it discusses the concept of
designing long-term incentives. The unit also outlines the application of deferred compensation plan.
Towards the end, it highlights the social security.
Learning Objectives

 Explain the meaning of long term incentives
 Describe the nature of designing long-term incentives
 Discuss deferred compensation plan
 State the importance of social security
 Explain the retirement plan
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Learning Outcomes

 Assess the importance of long term incentives
 Appraise the tools designing long-term incentives
 Evaluate the application of deferred compensation plan
 Analyse the social security
 Examine the opportunity retirement plan
 https://www.beqom.com/blog/understanding-compensation-management-long-term-incentives
 https://en.wikipedia.org/wiki/Long-term_incentive_plan
9.1 INTRODUCTION
As the name implies, a long-term incentive is a vehicle with a longer time horizon (usually more than one
year) that can be used as a strategic reward vehicle to encourage long-term retention and alignment
with corporate goals. LTI may be a win-win situation for everyone involved:
 Employers may use LTI to reward employees for sticking to long-term goals and boosting corporate
performance buy-in.
 LTI is rewarded for exceptional performance as well as a mechanism for wealth accumulation for
employees.
 LTI is a mechanism for shareholders to align staff with the performance of shares (for market-
based equity vehicles) and the company’s long-term goal. After becoming shareholder of the firm,
employees get an incentive to improve the value of the firm since the performance of the shares has
a direct impact on their remuneration.
9.2 DESIGNING LONG-TERM INCENTIVES

Long-term incentives account for the majority of CEO compensation, accounting for more than 60% for
the median S&P 500 corporation. The long-term incentive is intended to reward executives for achieving
the company’s strategic goals, which will increase shareholder value. Stock-based remuneration, such
as stock options, restricted equity, performance shares, cash or stock-settled performance units, may be
used to give these benefits. Long-term incentives are often a mix of stock kinds with a cash component.
A long-term incentive often has a performance period of three to five years, with the executive not
receiving any compensation until the conclusion of the performance period.
Long-term incentive targets differ for each firm, but the most common are total return to shareholders,
operational measurements like profits per share, and return measures like return on assets. Long-term
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UNIT 09: Long Term Incentives JGI JAIN
incentives are usually designed with a goal level of performance as well as a stretch component to
compensate executives for exceeding expectations. Long-term incentives are a vital aspect of a well-
balanced compensation plan, according to the Center, since they assure alignment with shareholder
interests, particularly when paired with suitable stock ownership rules.
For achieving the company’s strategic goals, we need to first understand the following long-term
incentive plan:
 Acknowledgment based incentive: This incentive is given to the employee to increase the company’s
value over time. Therefore, this considered to be the common option.
 Stock based incentive: It is another way of giving a reward to the employee and he receives it after
a certain period of time in the company.
 Work based incentive: This incentive is usually given to the employee on the basis of his performance
instead of considering time.
 Cash based incentive: This reward is given to the employee in terms of a cash bonus.
Figure 1 shows four different types of long-term incentive plan:
Acknowledgment
based
Types of
Cash based Long-term Stock based
incentive plan
Work-based
Figure 1: Long-term Incentive Plan
9.3 DEFERRED COMPENSATION PLAN

A portion of an employee’s income is placed away for subsequent distribution as deferred compensation.
In most cases, taxes on the profit are deferred until after it is distributed. Insurance schemes, contingency
plans, and stock option plans are all examples of deferred compensation.
Deferred pay is an option for employees who want to save money on taxes. In most circumstances,
income tax is deferred until after the bonus is paid, which is normally when the employee retires. When
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an employee retires and chooses to be in a lower tax band than when the wage was earned, they will
have the opportunity to lessen their tax burden.
Deferred Compensation Plan Types
Deferred compensation plan is discussed into two broad categories:

a. Qualified deferred compensation plan
b. Non-qualified deferred compensation plan
a. Qualified deferred compensation plan: The purpose of a qualified deferred compensation plan is to
provide exclusive benefit to the employees, however, creditors will not be able to get their funds if the
company fails to pay its debts. The Employee Retirement Income Security Act (ERISA) was established
to protect the retirement asset and also set the rules for qualifying deferred compensation plan.
b. Non-qualified deferred compensation plan: For the response of the restrictions which are
imposed on the deferred compensation plans, the non-qualified deferred compensation plan has
been introduced. It has no cap on the contribution to the employee retirement saving account.
This benefit is given only to valuable employees, especially those who earn high levels of income. It
includes avoiding taxes on a huge proportion of their earnings and leveraging higher tax-deferred
investment returns.
Advantages of Deferred Compensation Plan

1. Retirement benefit: This is the best way to give a reward to any employee after his retirement. With
deferred compensation plans, employees get a stable income after their retirement. Employees can
also invest their money into mutual funds or any other best alternative.
2. Tax benefit: When the payment of an employee is deferred on future dates, it decreases the income
and not liable to be taxed until the beneficiary receives the payment. All the employees who come
under a lower income tax bracket are greatly benefited from this scheme.
3. Capital gains: The amount which gets deposited in a deferred compensation account is usually
invested into mutual funds or any other safe investment option by many employees. Whatever the
interest payment received through these investments get added to the value of the post-retirement
payment. This eventually makes capital gains.
9.3.1 Qualified Deferred Compensation Arrangement

There are two types of deferred compensation: eligible and unqualified. The legal services they provide
and the function they play from the standpoint of an employer differ greatly. Unskilled plans are
commonly referred to as deferred compensation, but the term properly incorporates both.
Deferred compensation allows the most valuable employees to save more money for retirement than
is allowed under traditional pension schemes. Deferred compensation accounts, like 401(k) and similar
plans in the United States, are tax-free. Before being paid out in retirement, the money will have grown
tax-free, and borrowers will be in reduced tax bands by then. It is no surprise that delayed executive
compensation is commonplace.
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Employees have deductions taken out of their paychecks, and they will also earn bonuses. Employers
frequently provide a predetermined rate of return on investments or invest in the employee’s favourite
fund.
The principal employee obtains a life insurance policy with cash value under the limited bonus
programmes. The premiums for life insurance are paid by the employer. The employee is eligible for an
insurance benefit bonus, but only after several years of service with the firm.
9.4 SOCIAL SECURITY

The Old-Age, Survivors, and Disability Insurance (OASDI) programme in the United States is known
as Social Security, and it is administered by the Social Security Administration (SSA), a government
agency. It is most recognised for its retirement benefits, but it also offers survivor benefits and income
to injured workers.
Social Security is a type of insurance. Workers often contribute to the programme through payroll
withholding at their place of employment. When self-employed people submit their federal tax returns,
they must pay Social Security taxes.
Each year, employees can earn up to four credits. In 2021, one credit will be awarded for every $1,470
earned, up to a maximum of $5,880 or four credits. That money is put into two Social Security trust
funds—the Old-Age and Survivors Insurance Trust Fund (OASI) for retirees and the Disability Insurance
Trust Fund (DI) for disability beneficiaries—and used to provide payments to persons who are currently
eligible. Money that is not spent is kept in trust funds.
The financial operations of the two Social Security trust funds are overseen by a board of trustees. The
Secretaries of the Treasury, Labor, and Health and Human Services, as well as the Commissioner of
Social Security, make up four of the six members, while the remaining two are public representatives
selected by the president and ratified by the Senate.
9.5 RETIREMENT PLAN

A retirement plan is intended to assist you to plan for your post-retirement years and live a stress-free
existence. A retirement savings plan, for example, can help you build your money and provide a steady
income for the rest of your life. These programmes let you put money down for your retirement while
you are still working.
Retirement planning identifies retirement income objectives as well as the activities and decisions
required to meet those objectives. Retirement planning includes identifying sources of income,
estimating costs, putting in place a savings strategy, and managing assets and risk. To determine if
the retirement income objective will be met, future cash flows are projected. Some retirement plans
differ depending on whether you live in the United States or Canada, which has its system of employer-
sponsored retirement plans.
Retirement planning should ideally be a life-long endeavour. You may begin at any moment, but it is
most effective if you incorporate it into your financial planning from the outset. That is the most effective
strategy to ensure a safe, secure and enjoyable retirement. The enjoyable aspect is why it is important to
pay attention to the serious (and maybe dull) phase of the process: figuring out how you will get there.
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Benefits of Retirement Planning
This is one of the crucial phases of life Retirement planning comes with numerous benefits, let’s discuss
some of them:
1. Rescuer in case of financial emergency: Retirement planning is always proven to be a lifesaver
for any person. This helps in fighting the unpredictable situations of life. The benefit of retirement
planning allows the individual to live a stress-free life and with dignity.
2. Tax saving: Under retirement planning, one can access tax benefits. Various companies now
provides their employees with different retirement plan. By investing in these plans, the employee
can reduce the taxable income as per the prevailing tax laws. This also saves the fund for the future.
3. Helps in Inflation: Inflation is one of the most important points to be discussed for any individual.
In this unpredictable situation, cost of living and value of money evolve so quickly. Maintaining a
lifestyle becomes a challenging task. Moreover, after retirement, it becomes more challenging than
it before. Therefore, planning before retirement becomes important so to have enough for the future
by making a proper investment decisions.
9.6 PENSION PLANS

A pension plan is an employee benefit in which the employer agrees to make monthly contributions to a
fund that will be used to provide payments to qualifying employees once they retire.
Traditional pension plans have become rare in the private sector in the United States. Retirement
benefits that are less expensive to employers, such as the 401(k) retirement savings plan, have essentially
supplanted them.
According to the Bureau of Labor Statistics, over 83 percent of public employees and roughly 15 percent
of private employees in the United States are covered by a defined-benefit plan today.
A pension plan necessitates company payments and may enable supplementary contributions from
employees. Wages are taken from employee contributions. Up to a certain percentage or monetary
amount, the employer may match a part of the employee’s yearly contributions.
Defined-benefit and defined-contribution plans are the two primary forms of pension plans.
Defined-Benefit Plan
This is the first pension plan which is introduced by the American Express company in 1875 and covers
38% private-sector workers. Defined-benefit plan provides the employee a certain monthly payment
after his retirement which is guaranteed by the employer apart from his performance. After that, the
employer will be liable to have a specific flow of pension payments to the retiree, which is determined by
a formula based on earnings and years of service.
All the benefit which is due, if not sufficient to be paid through the pension plan account then the
company will pay the remainder of the payment.
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Defined-Contribution Plan
The defined-contribution plan made the employee make a certain contribution for each worker who
are covered under this plan. The benefits received by the employee are based on the plan’s investment
performance. This is cheaper for a company to sponsor. They also help the company at the time of
shortfalls in the fund. This is the reason why many private companies moving toward a defined
contribution plan.
9.7 PROFIT-SHARING PLAN

A profit-sharing plan is a type of retirement plan that allows employees to partake in a company’s
earnings. An employee earns a share of a company’s profits based on quarterly or yearly earnings
under this type of plan, also known as a deferred profit-sharing plan (DPSP). This is a terrific method
for a firm to offer its employees a sense of ownership, but there are usually limitations on when and how
this money may be withdrawn without penalty.
So, how does profit-sharing operate in practice? To begin, any retirement plan that takes discretionary
employer contributions is referred to as a profit-sharing plan. Because of the personal contributions, a
retirement plan that includes employee contributions, such as a 401(k) or something similar, which is
not a profit-sharing plan.
Businesses determine how much they want to allocate to each employee because they set up profit-
sharing agreements. A business that provides a profit-sharing plan changes it as required, making no
payments in certain years. However, in years when it makes contributions, the corporation must devise
a standard profit allocation method.
The comp-to-comp technique is the most typical approach for a corporation to calculate the distribution
of a profit-sharing plan. An employer initially determines the total remuneration of all of its employees
using this method. The corporation then divides each employee’s yearly salary by that sum to calculate
what proportion of the profit-sharing plan that employee is entitled to. That percentage is multiplied by
the number of total earnings being divided to arrive at the amount owed to the employee.
9.8 STOCk BONUS PLAN

An incentive plan in which employees are awarded shares of their employer’s stock is known as a stock
bonus scheme. Because the arrangement is categorised as a qualified retirement plan, it is subjected to
the mandatory requirements for retirement plans, such as the limitation on withdrawals before the age
of 59 1/2 and the requirement to begin making minimum necessary distributions at the age of 70 1/2.
There cannot be any favouritism toward highly paying staff.
The system is similar to a profit-sharing plan, except that the employer’s payments are not always
dependent on the plan’s performance. A maximum contribution of 25% of each employee’s yearly
remuneration is allowed. The employer can deduct these donations from his or her taxes. Employees
benefit from stock price increases, but they are also at risk of stock price declines, which can be a serious
issue when a large portion of their retirement funds is invested in one business.
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9.9 ESOPS
An employee stock ownership plan (ESOP) is a type of employee benefit plan that provides employees a
stake in the firm in the form of stock shares. ESOPs are qualified plans because they provide different
tax benefits to both the sponsoring company—the selling shareholder—and the members. Employers
often utilise ESOPs as a corporate finance technique so that they can match their employees’ interests
with their shareholders.
An ESOP is often established to aid succession planning in a closely held business by letting employees
purchase shares of the company’s equity. Companies can finance ESOPs by investing freshly issued
shares and cash to obtain existing business shares or borrow money to buy company’s share through
organisation. Companies of diverse sizes, including some big publicly listed enterprises, employ ESOPs.
Companies can utilise ESOPs to keep plan members focused on business success and share price
appreciation because ESOP shares are part of the employee pay package. These plans ostensibly
motivate members to do what’s best for shareholders by instilling a desire to see the company’s stock
perform well in plan participants, who are also shareholders.
9.10 EMPLOYER BENEFITS AND EMPLOYER COSTS FOR ESOPS

Employee stock ownership programmes are frequently used by companies to recruit and retain
high-quality employees. Stocks are generally distributed in stages by organisations. For example, a
corporation may give its employees shares at the end of the fiscal year as an incentive to stay with the
company and get the award. Companies that provide ESOPs have long-term goals in mind. Companies
want to keep their employees for a long time, but they also want to turn them into shareholders.
Most IT businesses have frightening turnover rates, and ESOPs might assist them to reduce these high
attrition rates. Startups offer stocks as a way to recruit people. Frequently, such companies are cash-
strapped and unable to pay competitive salaries. However, by including a share in their company in
their incentive plan, they make it more competitive.
Employee stock ownership plans (ESOPs) allow employees to purchase business stock at a minimal price
and then sell them (after a fixed period of time established by their employer) for a profit. There are
countless success tales of employees making fortunes alongside the company’s founders. Google’s initial
public offering is a good example. Sergey Brin and Larry Page, the company’s founders, were the richest
people on the planet, and even ordinary workers made millions.
9.11 INDIVIDUAL RETIREMENT ACCOUNT

An Individual Retirement Account (IRA) is a particular sort of savings account where you may put your
money to build a retirement fund. The primary benefit of an IRA is that it allows you to postpone paying
taxes on your investment returns until you decide to take the funds.
You cannot withdraw assets from this account until you reach the age of 60, as it was created particularly
for the aim of building a retirement corpus. If you decide to withdraw your investment before reaching
the age of 60, you may be subject to a penalty.
Individual retirement accounts (IRAs) are tax-advantaged savings accounts that anyone can create to
save and invest for the future.
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An IRA, like a 401(k) plan that a person receives as a perk from their company, is intended to encourage
people to save for retirement. Anyone with a source of income can create an IRA and benefit from the
tax advantages it provides.
A bank, an investing business, an internet brokerage or a personal broker can all help you start an IRA.
Anyone with a source of income, even those having a 401(k) plan via their job, can create and contribute
to an IRA. Only the total amount you may contribute to your retirement accounts in a single year while
still receiving tax benefits is limited.
When you start an IRA, you have the option of investing in stocks, bonds, exchange-traded funds (ETFs),
and mutual funds, among other financial products. Self-directed IRAs (SDIRAs) allow investors to
make all of their decisions and provide them access to a wider range of assets, such as real estate and
commodities. Only the most dangerous investments are prohibited.
Traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs are among the several types of IRAs available.
Each has its eligibility, taxes, and withdrawal policies. Traditional and Roth IRAs are available to
individual taxpayers, and SEP and SIMPLE IRAs are available to small company owners and self-
employed persons. An IRA must be created with a financial institution that has been approved by the
Internal Revenue Service to provide these accounts. Banks, brokerage firms, federally insured credit
unions, and savings and loan organisations are among the options.
Because IRAs are intended for retirement savings, taking money out before the age of 5912 normally
results in a 10% penalty. There are a few significant exceptions, such as withdrawals for school costs and
first-time house purchases, to name a few. You will owe income tax on an early withdrawal if your IRA
is a regular account rather than a Roth account.
9.12 SAVINGS INCENTIVE MATCH PLAN FOR EMPLOYEES

A SIMPLE (Savings Incentive Match Plan for Employees of Small Businesses) is a form of a tax-deferred
retirement plan that can be set up by employers, including self-employed people. Contributions to a
SIMPLE account qualify for a tax deduction for the employer.
Employees can make salary deferral contributions, and the employer can make matching or non-elective
contributions to each qualifying employee’s SIMPLE IRA.
A SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) is an employer-sponsored a
retirement plan that is similar to 401(k) and 403(b) plans in certain aspects. SIMPLE IRAs are simpler to
set up and maintain than other retirement plans, with fewer start-up and administration expenditures.
With a SIMPLE IRA, there are no filing obligations for the employer.
Only firms with fewer than 100 workers that do not provide other retirement plans are eligible to open
a SIMPLE IRA, according to IRS regulations. Employees who earned $5,000 or more in income from their
company in the previous two calendar years and who anticipate receiving $5,000 or more this year are
eligible to enrol in the SIMPLE IRA plan offered by their employer.
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 Long-term incentives account for the majority of CEO compensation, accounting for more than 60%
for the median S&P 500 corporation.
 The long-term incentive is intended to reward executives for achieving the company’s strategic
goals, which will increase shareholder value.
 A long-term incentive often has a performance period of three to five years, with the executive not
receiving any compensation until the conclusion of the performance period.
 A portion of an employee’s income is placed away for subsequent distribution as deferred
compensation.
 Insurance schemes, contingency plans and stock option plans are all examples of deferred
compensation.
 In most circumstances, income tax is deferred until after the bonus is paid, which is normally when
the employee retires.
 When an employee retires and chooses to be in a lower tax band than when the wage was earned,
they will have the opportunity to lessen their tax burden.
 A retirement savings plan, for example, can help you build your money and provide a steady income
for the rest of your life.
 Retirement planning identifies retirement income objectives as well as the activities and decisions
required to meet those objectives.
 A pension plan is an employee benefit in which the employer agrees to make monthly contributions
to a fund that will be used to provide payments to qualifying employees once they retire.
 A profit-sharing plan is a type of retirement plan that allows employees to partake in a company’s
earnings.
 An employee earns a share of a company’s profits based on quarterly or yearly earnings under this
type of plan, also known as a deferred profit-sharing plan (DPSP).
 Employees benefit from stock price increases, but they are also at risk of stock price declines, which
can be a serious issue when a large portion of their retirement funds is invested in one business.
 An Individual Retirement Account (IRA) is a particular sort of savings account where you may put
your money to build a retirement fund.
 The primary benefit of an IRA is that it allows you to postpone paying taxes on your investment
returns until you decide to take the funds.
 A SIMPLE (Savings Incentive Match Plan for Employees of Small Businesses) is a form of tax-deferred
retirement plan that can be set up by employers, including self-employed people.
 Contributions to a SIMPLE account qualify for a tax deduction for the employer.
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9.14 GLOSSARY
 Long-term incentives: an incentive-based scheme that compensates executives based on the

company’s strategic goals and objectives.
 Compensation: Compensation is the act or state of paying someone for their service or making up
for someone’s loss, damage or harm.
 Remuneration: Remuneration is a sum of money given to someone in exchange for their services.
 Supplementary Contributions: Supplementary Contribution refers to pre-tax, after-tax or a mix of
these contributions selected by the Employee under Article 3.
9.15 CASE STUDY: PROMOTING LONG-TERM INCENTIVES PLAN
Case Objective
The purpose of this case study was to motivate the workers to grow and increase the productivity of
employees.
The Automobile company ABC ltd, which is located in Chennai, has 107 outlets across the country. With
increasing inflation, enhanced competition and slowing-down of economy, it became difficult for the
company to maintain profit level high. This forced the CEO to think about its company’s culture and
encourage staff to work as partners. The company decided to plan new long-term incentive plan with
an objective of increasing profits in the company. Therefore, after this move company has realised the
profits increased by 37% and price of share by 89%.
Questions
1. What are some long-term incentive examples?
(Hint: Appreciation vehicles (stock options and stock appreciation rights), time-vested full value
vehicles (restricted stock) and performance-vested vehicles are all examples of long-term incentives.)
2. What are long-term incentive schemes and how do they work?
(Hint: A long-term incentive plan (LTIP) is a corporate programme that compensates employees for
achieving certain objectives that boost shareholder value. In a typical LTIP, the employee, who is
generally a senior executive, is required to meet a number of criteria or requirements.)
1. Define designing long-term incentives.

2. Describe the deferred compensation plan.
3. Explain the concept of qualified deferred compensation arrangement.
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4. Discuss the retirement plan.
Hints for Essay Type Questions

1. Long-term incentives account for the majority of CEO compensation, accounting for more than 60%
for the median Sample 500 corporation. The long-term incentive is intended to reward executives
for achieving the company’s strategic goals, which will increase shareholder value. Stock-based
remuneration, such as stock options, restricted equity, performance shares, cash or stock-settled
performance units may be used to give these benefits. Refer to Section Introduction
2. A portion of an employee’s income is placed away for subsequent distribution as deferred
compensation. In most cases, taxes on the profit are deferred until after it is distributed. Insurance
schemes, contingency plans and stock option plans are all examples of deferred compensation.
Refer to Section Deferred Compensation Plan
3. Deferred compensation allows the most valuable employees to save more money for retirement
than is allowed under traditional pension schemes. Deferred compensation accounts, like 401(k)
and similar plans in the United States, are tax-free. Before being paid out in retirement, the money
will have grown tax-free, and borrowers will be in reduced tax bands by then. It is no surprise that
delayed executive compensation is commonplace. Refer to Section Deferred Compensation Plan.
4. A retirement plan is intended to assist you to plan for your post-retirement years and living a stress-
free existence. A retirement savings plan, for example, can help you build your money and provide a
steady income for the rest of your life. These programmes let you put money down for your
retirement while you are still working. Refer to Section Retirement Plan
 https://www.investopedia.com/terms/l/long_term_incentive-plan.asp
 https://execcomp.org/Issues/Issue/executive-compensation-plan-design/long-term-incentive-
plans
 Discuss with your friends about the benefits of long-term incentive.
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UNIT
10 Rewarding the Special Groups
Names of Sub-Units
Rewarding Directors and Senior Executives, Rewarding Sales Staff, Rewarding Customer Service Staff,
Rewarding Knowledge Workers, Rewards for Expatriates, International Reward Strategy
Overview
The unit starts by explaining the meaning of rewarding the special groups. Further, it discusses the
rewarding directors, senior executive, sales staff, customer service staff, knowledge workers and
expatriates. It also explains international reward strategy.
Learning Objectives

 Explain the meaning of rewarding the special groups
 Discuss rewarding directors and senior executives
 Describe rewarding sales staff
 Express rewarding customer service staff
 Explain rewarding knowledge workers
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Learning Outcomes

 Evaluate rewarding sales staff
 Analyse the reward of customer service staff
 Examine the reward of knowledge workers
 Analyse rewarding of expatriates
 Identify international reward strategy
 https://www.arjhss.com/wp-content/uploads/2020/02/A320109.pdf
 https://www.researchgate.net/publication/321309408_Global_Reward_Management
10.1 INTRODUCTION
The strategies, rules and procedures that guarantee that people’s contributions to the business are
acknowledged through both financial and non-financial ways are referred to as reward management.
It is all about creating, implementing and maintaining reward systems (reward processes, practises
and procedures) that are tailored to the organisation’s and stakeholders’ needs. The ultimate purpose
is to compensate individuals fairly, equitably and consistently in proportion to their contribution to the
business to help the organisation accomplish its strategic goals.
Many firms have a single compensation system that applies to all levels of employees below the CEO.
Others, on the other hand, believe that varied reward strategies are important to respond to the demands
of specific types of employees. This is known as ‘reward segmentation,’ and it is commonly employed for
directors and senior executives, knowledge employees, sales and customer service representatives and
physical labour.
10.2 REWARDING DIRECTORS AND SENIOR EXECUTIVES

Basic pay, short and long-term bonus or incentive plans, share option and share ownership schemes,
perks and service contracts are the key components of directors’ and senior executives’ remuneration.
Basic Pay
Decisions on the base compensation of directors and senior executives are frequently based on highly
subjective assessments of the persons’ market value. Negotiation is typically used to determine
compensation when entering the firm, and it is frequently subject to the approval of a remuneration
committee. Then, based on market movements and success as defined by firm performance, basic pay
is reviewed. Base wage decisions are significant not just in and of themselves, but also because the level
may impact senior and middle management pay decisions. Bonuses are often calculated as a percentage
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of base income, stock options may be calculated as a specified multiple of basic pay and pensions are
typically calculated as a percentage of final compensation.
Bonus Schemes
Almost all big businesses in the UK (90%) implement yearly incentive (bonus) systems for senior
executives, according to recent polls by groups such as Monks and Hay. Bonus plans pay out cash to
directors and executives depending on corporate and, in many cases, individual success metrics. Bonus
payments are typically tied to the attainment of profit and/or other financial milestones, and they
are occasionally ‘capped,’ meaning that the maximum amount payable is limited. Aspects relating to
reaching specific goals and individual achievement may also be included. Bonuses are often significant
- up to 70% of the base compensation. Bonuses are meant to inspire directors to enhance the company’s
performance. There is not any proof that this happens.
A more prevalent motive for bonuses, albeit it is not usually mentioned, is to guarantee that a competitive
pay package is available: ‘Everyone else is doing it, therefore we should do it as well.’
Long-term Bonuses
On the basis that yearly incentives place too much emphasis on short-term achievements, cash bonus
systems might be extended for more than one year. Share ownership plans, are the most prevalent
technique to provide longer-term benefits for Rewarding Directors and Senior Executives 411.
Deferred Bonus Schemes
Some organisations have implemented deferred bonus plans, in which a portion of an executive’s yearly
bonus is postponed for a period of time, such as two years. On the condition that the executive stays
employed by the firm after the deferral term, the delayed element is converted into shares, each of
which is matched with an extra, free share. A programme like this is meant to reward employees for
their hard work and dedication to the organisation.
10.3 REWARDING SALES STAFF

Sales agents are more likely than other employees to be eligible for commission payments or bonuses
since their sales success is dependent on, or at least improved by financial incentives. Many businesses
think that the unique nature of selling and the sort of individual they need to recruit for their sales team
necessitates the payment of a bonus or commission. Sales incentive plans are more likely to fulfil the
line-of-sight criteria (i.e., that there should be an obvious relationship between effort and performance)
than incentive plans for other employees, such as managers and administrators, due to the nature of
their work. Salespeople, notably those in retail, are frequently paid spot rates with a commission based
on sales.
Other Means of Rewarding Sales Representatives
Financial incentives are often significant for salespeople, but there are other ways to recognise
accomplishment. Prizes and non-monetary forms of recognition (‘sales representative of the month,’
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for example) are among them, as are other elements of the complete compensation package, such as
possibilities for advancement.
Methods of remunerating salespeople in terms of money The following are some ideas for rewarding
salespeople:
 Salary only: When sales staff have little influence over sales volume, when representing the company
and generally promoting its products or services are more important than direct selling, and when
the company wants to encourage sales staff to build good and long-term relationships with their
customers, the emphasis being on customer service rather than high-pressure selling, companies
may adopt a salary-only (no commission or bonus) approach. Salespeople who operate in highly
seasonal sectors with substantial revenue fluctuations, as well as enterprises whose regular orders
for food and other consumer items provide the limited potential for innovative selling, may be paid
merely a basic pay.
 Basic salary plus commission: Salary plus commission plans pay a percentage of total earnings
in commission, while the balance is paid in the form of a set salary. The commission is based on
a percentage of the total sales value. The percentage of commission varies a lot. It is greater in
general when results are dependent on individual aptitude and effort, or when non-selling tasks
are less important. Most sales managers assume that a commission component will not inspire
their employees unless they have a reasonable chance to earn at least 20% of their basic pay. The
commission might be a predetermined proportion of all sales, with a ‘cap,’ or maximum profits.
Alternatively, at higher levels of sales, the commission rate might rise on a sliding scale to motivate
sales reps to put in even more effort.
 Basic salary plus bonus: Bonuses in cash may be paid in addition to the standard wage. They are
based on the attainment of sales volume, profit or ‘contribution’ objectives or quotas (sales revenue
minus variable expenses). They are distinct from commission payments, which are based only on
a proportion of whatever sales are made. In a bonus system, targets or objectives might be set not
just for sales volume, but also for specific characteristics of the outcomes that can be obtained by
salespeople that are seen to be important to encourage. These might include sales of higher-margin
or more lucrative items or services to encourage employees to focus on them rather than merely
striving for volume with low-margin products.
 Commission only: Salespeople who work in the ‘hard’ end of the industry (for example, double
glazing) may only be paid a straight commission based on a percentage of the sales value. There is
no basic remuneration.
Additional Non-cash Rewards
While money may be the primary drive for a normal salesperson, there are a variety of additional useful
non-cash motivators to consider, as outlined here:
Other Forms of Reward
Gifts and vouchers
Gifts and vouchers are a practical way to recognise accomplishments. They can be tied to the attainment
of certain goals, but they should not be limited to super sales reps. The solid, trustworthy salesperson,
too, has to be motivated by the recognition that such incentives bring. Income tax is levied on gifts.
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Competitions
Individuals or teams can be rewarded for outstanding sales accomplishments, such as bringing in new
business. Competitions, on the other hand, can demotivate individuals who do not win awards, thus
they should be arranged such that everyone who is performing well believes they have a strong chance
of winning.
Cars as perks
If salespeople are extremely successful, they may be driven by the prospect of getting a bigger and
better automobile. If the car’s high performance is maintained, it may be kept for a set amount of time
before being made accessible again.
Non-financial Motivators
Salespeople are often highly motivated by performance, but they still want to be acknowledged and
given the chance to put their skills to greater use in more demanding (and remunerative) jobs. Both
public and private thank-you is crucial.
10.4 REWARDING CUSTOMER SERVICE STAFF

Customer service representatives work mostly at retail stores and call or customer contact centres.
Their incentives should match the nature of their responsibilities, such as improving customer service
while still selling.
Professor Michael West and a team from Aston University were commissioned by the Chartered
Institute of Personnel and Development and the Institute of Customer Service to explore how customer
service personnel were employed and rewarded. The study took 18 months to complete and involved
15 firms and 22 customer service sites. They represented a wide range of businesses and industries,
including banks, building societies and insurance companies, as well as utilities, telecommunications
corporations, merchants and local and federal government agencies and services.
The number of people working at each site ranged from 37 to over 1,000. 432 Special groups reward
management, the researchers gathered data on pay and HR regulations, conducted interviews with
managers and conducted a poll of employees’ opinions and experiences. They worked in a variety of
situations, including contact centre customer service agents and technical support positions, charity
workers, financial advisers and branch personnel, hotel receptionists, restaurant and bar staff and
leisure centre and library employees. The 580 employees participating demonstrated that not all front-
line customer service personnel fit the youthful, female and transient stereotype.
Seventy percent were women, with an average age of 34 years and a six-year service period. Eighty
percent were full-time employees, while just 9% were on temporary contracts. Their regular working
atmosphere and circumstances also did not fit the stereotype of a “sweatshop.” While HR and
compensation methods differed, working circumstances were generally favourable, and employees
gave their managers, as well as their co-workers and the amount of teamwork, high marks. Employee
perks such as firm pension plans and sick pay programmes, as well as a variety of training courses,
were standard.
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The majority of employees in the firms studied had the chance to advance their basic pay based on
their performance or competence, either through a pay range, up a pay spine or between job grades/
levels. For service positions in call centres and retail stores, such arrangements have largely replaced
spot rate’ pay rates. Shop employees at Boots the Chemists, for example, can move through a variety of
pay levels based on their performance and competence - from entry level to experienced, advanced and
expert/specialist. Employees at House of Fraser are assigned to one of four competency bands: training,
bronze, silver or gold, with employees being evaluated for a ‘promotion’ every six months.
10.5 REWARDING KNOWLEDGE WORKERS

Peter Drucker (1) described a knowledge worker as someone “who understands more about his or
her work than anybody else in the company.” Knowledge workers are now commonly thought of as
those whose jobs need a high level of skill. Their task is characterised by the skills they require to do it.
Academics, accountants, HR experts, IT specialists, attorneys, media workers and researchers are all
included in the phrase. Organisations are increasingly relying on knowledgeable employees.
According to the Government’s Occupational Employment Trends and Projections, UK 1982–2012,

knowledge workers will account for almost half of all occupations by 2012, up from around a quarter of
20 years ago. In the year leading up to March 2005, 90,000 new employment were generated in both the
finance/business services and education/health/public administration sectors in the United Kingdom.
Because of the value of knowledge workers’ contributions, special consideration must be given to how
incentive systems and practices may be designed to attract, retain and motivate them while taking into
account their unique demands.
This unit analyses the need to assess how knowledge workers should be paid, beginning with a study of
what drives them and then moving on to the many techniques that might be used to reward them.
Figure 1 represents a study identified four key motivators for knowledge workers:
Personal growth
Occupational autonomy
Task achievement
Money rewards
Figure 1: Key Motivators for Knowledge Workers

1. Personal growth: the chance for individuals to reach their highest potential;
2. Occupational autonomy: a working environment where knowledge workers may do the tasks that
have been allocated to them;
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3. Task achievement: a sense of success that comes from doing high-quality work that is relevant to
the business;
4. Money rewards: an income that is a fair return for their contribution to the company’s success and
that represents that contribution.
According to the company’s reward is much more than just offering its employees a decent income.’
It created its complete reward package with the understanding that everyone works for the firm for
various reasons and places varied emphasis on the relevance of each of the total reward aspects – there
is no one-size-fits-all solution. It also intends to utilise total compensation to ‘elevate and distinguish’
Bristol-Myers Squibb from competitors, both within and beyond the sector.
The three elements of total reward are represented in Figure 2:
Compensation
Benefits
Work experience
Figure 2: Elements of Total Reward

1. Compensation: salary, performance-based bonus and stock options.
2. Benefits: non-contributory pension, life cover private health care, perks and cars.
3. Work experience: ‘All the components that contribute to providing you with an atmosphere that
allows you to maximise your contribution to the organisation and reach your full potential while
maintaining a balance between your personal and professional lives,’ according to the definition.
These are some of them:
 Acknowledgement, appreciation and recognition
 Balance of work and life
 Culture of Bristol-Myers Squibb
 Employee development
 The working environment
10.6 REWARDS FOR EXPATRIATES

Businesses prefer to transfer a growing number of employees abroad as expatriates as they develop
worldwide. The job may be a short-term one to give direction and expertise. It might also be a two- or
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three-year secondment to an international location. Managing expatriates poses a number of challenges,

including persuading people to work in potentially unpleasant or even dangerous countries, persuading
them that an overseas assignment is a good career move, dealing with issues raised by employees’
partners who do not want their careers or lives at home disrupted and dealing with the fact that, upon
returning to their home country, expatriates frequently discover that their real earnings have fallen.
Remuneration (compensation, perks and allowances) is a particularly complex topic, and the solutions
available are discussed as follows:
Expatriate Remuneration Policies
The following propositions may be used to underpin expatriate remuneration policies:

 Working in another country should not make expatriates better or worse off.
 As far as feasible, living conditions in the home nation should be maintained.
 A higher remuneration should represent greater responsibilities (this may be a notional home
salary).
 A competitive salary package is required.
 When establishing a payment plan, special consideration must be given to the conditions under
which the employee will be working overseas.
 The requirement to ensure as much fairness as feasible in remuneration between expatriates, some
of whom will be from different nations, should be considered.
 Issues that may emerge when ex-pats are paid more than citizens in the country where they work
who work in similar jobs must also be considered.
 The package should be cost-effective, meaning that expatriates’ contributions should be sufficient
to cover the whole cost of keeping them overseas — assignment expenses can be three or four times
those in the home country.
10.7 INTERNATIONAL REWARD STRATEGY

The creation of an integrated approach to developing reward policies and practises across international
boundaries is the focus of the international reward strategy. It should be integrated in the sense that it
considers the parent company’s commercial goals and drives while also tailoring the strategy to diverse
settings and cultures throughout the world. It is necessary to address the question of whether the reward
approach should be centralised or decentralised (convergence or divergence). Certain guiding concepts
should underpin the approach, which may or may not have been specified. It should include every area
of award administration.
Integration
‘Global incentives should not be regarded piecemeal, according to best practise.’ ‘The establishment of
any incentive programme necessitates an integrated strategy in which each aspect of reward reinforces
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the others to promote organisational objectives,’ he adds. A comprehensive rewards approach and a
global rewards philosophy may help integrate an organisation’s rewards with its business strategy,
keep employees focused on the company’s goals and encourage consistent pay practises.’ ‘Different local
market practises, rules, and culture are evidence that a one-size-fits-all solution will not be genuinely
successful,’ he adds.
Convergence or Divergence – General Considerations
The amount to which multinational enterprises’ HR practises, including remuneration, should either
‘converge’ globally to be essentially the same in each site or ‘diverge’ to be varied in response to local
circumstances is a problem that all international firms face. There is a natural inclination for parent
company managerial traditions to impact the form of crucial choices, but there are compelling
justifications for granting as much local autonomy as possible to guarantee that local needs are
adequately addressed.
The term “Think globally, act locally” is frequently used to communicate these points. Organisations must
follow significantly varied HR policies and procedures depending on the relevant stage of international
business growth, as described by Adler and Ghader, domestic, international, multinational and global.
The issue is how distinct operational units throughout the world are to be while yet being integrated,
managed, and coordinated, as Harris and Brewster (8) refer to it as “the global/local paradox.” The
decentralised method, in which HRM duty is outsourced to subsidiaries, and the global approach,
in which the company’s culture predominates and HRM is centralised and generally uniform (an
ethnocentric policy), are suggested as alternatives.
They claim that the following elements influence choice:

 The extent to which local standards are well-defined
 The degree to which a functioning unit is integrated with its surroundings
 The effectiveness of the parent-subsidiary flow of resources (money, information and people)
 The parent’s desire to be in charge
 The industry’s nature: to what degree is it essentially a domestic industry at the local level
 Organisational competencies, such as HRM, that is essential for gaining a competitive edge in a
global economy
Principles for international remuneration under the following policy topics, guiding concepts for
international reward may be found:
 The significance of a comprehensive incentives strategy
 The use of job assessment to ensure internal fairness
 The link between local firm pay levels and market rates
 The degree of flexibility in pay and grade structures
 The potential for advancement in remuneration
 The potential for advancement in remuneration
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 The significance of paying for contributions

 The use of variable compensation in the form of short-, medium- and long-term incentives
 The employment of non-monetary means of acknowledgment
 Employing flexible benefits
 How expatriates and third-country nationals should be compensated
Total reward, job assessment, market price grade and pay structures, contingent pay, perks and
payment of expatriates and third-country citizens are some of the aspects covered by an international
reward plan.
 Reward management refers to the strategies, regulations and procedures that ensure that people’s
contributions to the company are recognised in both financial and non-financial ways.
 It all comes down to designing, implementing and maintaining reward systems (reward processes,
practises and procedures) that are adapted to the needs of the organisation and its stakeholders.
 The ultimate goal is to compensate employees fairly, equitably and consistently in proportion to
their contribution to the company to assist it to achieve its strategic objectives.
 Many companies have a single compensation structure that applies to all employees below the CEO.
 Others, on the other hand, believe that different reward schemes are necessary to meet the needs of
different sorts of workers.
 This is referred to as reward segmentation, and it is typically used for directors and senior executives,
knowledge workers, sales and customer service reps and physical labour.
 Director and senior executive base remuneration decisions are usually based on extremely subjective
judgments of their market value.
 Bonuses are frequently computed as a percentage of base pay, stock options as a multiple of basic
pay and pensions as a percentage of final compensation.
 According to recent studies by Monks and Hay, almost all large organisations in the UK (90 percent)
adopt yearly incentive (bonus) schemes for senior executives.
 Bonus programmes pay out money to directors and executives based on corporate and, in many
cases, individual performance measures.
 Bonuses are frequently linked to the achievement of profit and/or other financial milestones, and
they are sometimes capped, indicating that the maximum amount payable is limited.
 Aspects of achieving specific goals and personal achievement may also be addressed.
 Bonuses are frequently considerable, reaching up to 70% of base pay.
 Some organisations have implemented deferred bonus programmes, in which a portion of an
executive’s annual bonus is postponed for a period of time, such as two years.
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 The delayed element is converted into shares, each of which is matched with an extra, free share,
assuming the executive remains employed by the firm at the end of the deferral term.
 Employees should be rewarded for their hard work and loyalty to the company through programmes
like this.
 Because their sales success is contingent on or at least improved by, financial incentives, sales
agents are more likely than other employees to be eligible for commission payments or bonuses.
 Many companies believe that the particular nature of selling and the type of salesperson they need
to hire demands the payment of a bonus or commission.
 Due to the nature of their work, sales incentive plans are more likely to meet the line-of-sight
requirements (that is, there should be an evident relationship between effort and performance)
than incentive programmes for other employees, such as managers and administrators.
 Salespeople, particularly in retail, are commonly paid spot rates with a sales commission.
 Salespeople who work in highly seasonal industries with large income fluctuations, as well as
businesses with regular orders for food and other consumer goods and little room for creative
selling, may only be paid a basic wage.
 In addition to the standard wage, cash bonuses may be paid.
 They are based on sales volume, profit or ‘contribution’ targets or quotas being met (sales revenue
minus variable expenses).
 They differ from commission payments, which are based only on a percentage of total sales.
 In a bonus system, targets or objectives may be set not only for sales volume but also for certain
features of the results that salespeople can achieve that are deemed desirable to encourage.
 It is possible that the role will be a short-term one to provide direction and knowledge, or it may be a
two- or three-year secondment to an international location as businesses develop globally.
 A dilemma that all international firms face is the extent to which multinational enterprises’ HR
practises, including remuneration, should either ‘converge’ globally to be essentially the same in
each site or ‘diverge’ to be changed in response to local circumstances.
10.9 GLOSSARY
 Compensation: Money that someone who has suffered inconvenience, loss or suffering seeks from
the person or organisation that caused it, or from the government
 Segmentation: To the division of the market into pieces, or segments, that are identifiable, accessible,
actionable and lucrative, as well as have growth potential
 Remuneration: Remuneration is a sum of money given to someone in exchange for their services
 Incentive: Something that encourages a person to do something
 Bonus: The amount provided to workers as an extra remuneration for their work
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10.10 CASE STUDY: SUSHMA’S QUANDARY AS A LEADER
Case Objective
This case study discusses how excessive participation by the upper management can lead to the
failure of operations.
Sushma Gupta works at Mega Shopping Arena as an Assistant Manager (AM) of Operations (MSA). MSA
was a well-known store that offered everything from food, clothing and shoes to stationery, furniture,
home goods, electronics and toys. The establishment presented itself as a one-stop shop with everything
a consumer would want. Sushma was pleased to be working for such a reputable and well-established
company.
Sushma was passionate about her profession and had worked hard to advance to the level of AM.
Her life was so consumed by her work that she had to be pushed to take time off or a vacation. Sushma
was looking forward to her performance reviews in March since her superiors were pleased with her
work.
She was sure that she would be promoted. She had excelled at her work in the four years she had been
at the store, and she felt that she deserved to become Manager.
She was certain that she would receive a promotion. She had succeeded at her job over her four years at
the shop, and she believed she deserved to be promoted to Manager.
Sushma was promoted to Manager in March, as she had expected. Her work description had changed;
she was no longer obliged to perform the day-to-day administrative responsibilities that she had
previously performed.
She was also not forced to interact with consumers. Her new job entailed overseeing the supply chain as
well as the store’s an advertising and marketing strategies.
Sushma’s new job required her to manage a team of four AMs, each of whom was responsible for
presenting a daily report to her at the end of each day. The AMs were responsible for administrative
tasks such as interacting with counter employees and handling consumer complaints.
Sushma, on the other hand, was a perfectionist who insisted on making all of the choices herself, even
if they were to be made at the AM level. She had no idea what CI, GI or DI participation theory was. The
AMs lacked a sense of ownership as a result of this. They avoided making judgments, instead deferring
to Sushma and seeking her advice on even little matters.
Sonal Kapoor, a regular client, came in one day to return a pair of wrinkle-free pants she had purchased
a week before. Mrs. Kapoor, a customer loyalty programme member, was furious because the trousers
had shrunk after only one wash and she wanted to return them.
She provided the original bill and requested a full refund, pointing to a poster on the wall that indicated
the store’s return policy, which stated that the client would receive a full refund if the merchandise was
returned within a week along with the original bill.
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Sushma was not in the office at the time since she was attending an off-site conference. Rajeev, the AM
in charge of the case, hesitated to make a ruling because he did not know how to calculate the number
of days from the date of purchase or if he should include it or not. He invited Mrs. Kapoor to see Sushma
the following day. Mrs. Kapoor tried to fight at first but eventually agreed to an exchange.
Rajeev, on the other hand, refused to commit and insisted on seeing Sushma. Mrs. Kapoor became
enraged and escalated her voice, attracting the attention of other shoppers.
She expressed amazement that she could not find a single qualified individual to assist her. Rajeev
attempted to calm her down, but this irritated her even more. She raced out the door, dropping both
the pair of trousers and the loyalty card to the floor and vowed never to return. Rajeev was aware that
the store had lost an important and loyal client, but he did not want to make any choices without first
contacting Sushma. He was irritated and powerless.
Sushma has been working late since she was promoted, sometimes till midnight. However, the majority
of the job she was doing should have been allocated to her juniors. She wanted to perform the task
herself since she lacked confidence in her subordinates.
In reality, just her title had changed; her attitude and emphasis had remained unchanged. She was still
performing the same job she was doing before she got promoted! All of this extra labour, on the other
hand, left her with little time to focus on her duties.
Sushma had an appointment with a senior official from Techtron Electronics who wanted to discuss his
company’s plans to run a promotional event in conjunction with MSA when she overheard a customer
complaining about the quality of fruit and vegetables at the store. She immediately went to the woman
to resolve the issue, forgetting that she had an appointment with a senior official from Techtron
Electronics who wanted to discuss his company’s plans to run a promotional event in conjunction with
MSA.
It was a fantastic chance for Sushma to get new clients. Vishal Anand, Techtron’s marketing manager,
waited 45 minutes for Sushma, but she was preoccupied with calming the woman who had come to
complain. Sushma struggled with the job of considering the situational theory of leadership. Anand
eventually became bored of waiting and left, going to Stop&Shop, MSA’s main competitor.
In the evening, MSA Director Aravind Sinha learned that Techtron had defected to their competitors. So
he phoned Anand to find out why he had changed his mind and joined MSA’s competitor.
“Your store was our first pick,” Anand said, “but it appears your Manager was too busy to meet me.” I
decided to go somewhere else where they would value my time.” Sinha was caught aback by the news.
Sushma was scared that she had disappointed Sinha after knowing what had transpired. Sushma had
gone from being a star performer and everyone’s favourite employee to becoming the one person no one
wanted to work with.
Her juniors thought she interfered too much, while her seniors thought that she was not focused enough.
Sushma was confused. She liked to think of herself as indispensable and thought she was working her
way toward becoming exactly that for her organisation. The way she saw it, she was being helpful to
everyone, working harder and longer than ever and doing more than she was expected to do! What
then, was she doing wrong?
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Questions
1. What is sale motivation?
(Hint: The amount of work a salesman is willing to put in when selling is referred to as motivation
in the sales function. While some salespeople are self-motivated, others require encouragement to
succeed.)
2. What types of incentives do you use to inspire your employees?
(Hint: Which initiatives are most effective at motivating employees? Incentives, both monetary and
nonmonetary, can boost motivation, resulting in increased production and, perhaps, profits. Cash,
gifts and experiences are the top three rewards. Electronics, ride-share credit and gift cards are
examples of presents.)
3. What exactly is a unique sales incentive?
(Hint: A sales incentive is a monetary or other sorts of compensation given to salespeople in exchange
for selling a certain number of products or services. Incentives in the form of money should remain
a part of the equation.)

1. Explain the concept of basic pay.
2. Define deferred bonus scheme.
3. Enlist the monetary benefits that can be provided to the sales staff.
4. Outline the four key motivators for knowledge workers.
5. Discuss how international reward strategy can be formed.

1. Basic pay is the fixed salary given to employees, excluding any additional benefits given by the
employer. Refer to Section Rewarding Directors and Senior Executives
2. Deferred bonus scheme is a program in which an employee receives the reward for their services as
an extra payment, but it does not exceed for a particular financial year. Refer to Section Rewarding
Directors and Senior Executives
3. Salary only, basic salary plus commission, basic salary plus bonus and commission only are the
monetary benefits given to the sales staff. Refer to Section Rewarding Sales Staff
4. Personal growth, occupational autonomy, task achievement and money rewards are the four key
motivators for knowledge workers. Refer to Section Rewarding Knowledge Workers
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5. International reward strategy can be formed using the integration policy or divergence or
convergence policies. Refer to Section International Reward Strategy
 https://alison.com/topic/learn/97776/rewarding-special-groups-lesson-summary
 Discuss with your friends about non-monetary motivation given to employees and its impact on
the performance of concerned employees. Discuss whether monetary or non-monetary benefits
motivate more employees.
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1
Essential Components of Compensation
System
Unit – 11
Dr. Pavithra S
2
Module Overview
• Understanding the essential components of compensation
system
– Basic, Allowance, Incentive, Benefits
• The Concept of Fringe Benefits,
• Types of Fringe Benefits,
• Flexible Benefit plans or the cafeteria plans
3
Compensation system
• Compensation system involves the total rewards that are given to the
employees for the labour and services they provide to the organization.
• Compensation includes direct monetary benefits as well as indirect
monetary benefits.
• Wages and salaries form the direct financial benefits that an employee
receives from his or her company.
• Besides, wages and salaries, bonuses and commissions also form a part
of the direct monetary benefits.
• The indirect monetary benefits include paid absences and other leave
benefits, retirement plans, employee insurance schemes, health plans,
education benefits and other such benefits.
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Basic
• Basic salary is the base income of an employee, comprising of
35-50 % of the total salary.
• It is a fixed amount that is paid prior to any reductions or
increases due to bonus, overtime or allowances.
• Basic salary is determined based on the designation of the
employee and the industry in which he or she works in.
• Most of the other components, like allowances, are based on
the basic salary. This amount is fully taxable.
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Allowance
• Allowance is an amount payable to employees during the course of their regular job duty. It can be
partially or fully taxable, depending on what type it is. Allowances provided and the limits on it will
differ from company to company, according to their policies.
• Dearness Allowance - Dearness allowance is a certain percentage of the basic salary paid to
employees, aimed at mitigating the impact of inflation. It is paid by the government to employees of
the public sector and pensioners of the same.
• House Rent Allowance – A house rent allowance is that component of the salary which is paid to
employees for meeting the cost of renting a home. It offers tax benefits to the employees for the
sum that they pay towards their accommodation every year. Salaried individuals residing in rented
homes can claim this exemption and reduce their tax liability.
• Conveyance Allowance - Conveyance allowance, also known as transport allowance, is a kind of
allowance offered by employers to their employees to compensate for their travel expense to and
from their residence and workplace. Note - In Union Budget 2018, a standard deduction of Rs.
40,000 has been introduced in lieu of transport (Rs 19,200) and medical (Rs 15,000) allowances.
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Allowance
• Leave Travel Allowance - Leave travel allowance is eligible for tax exemption. It is
offered by employers to their employees to cover the latter's travel expense when he or
she is on leave from work. The amount paid as leave travel allowance is exempt from tax
under Section 10(5) of Income Tax Act, 1961. Leave travel allowance only covers
domestic travel and the mode of travel needs to be air, railway or public transport.
• Medical Allowance - Medical allowance is a fixed allowance paid to the employees of an
organization to meet their medical expenditure. Note - In Union Budget 2018, a standard
deduction of Rs. 40,000 has been introduced in lieu of transport (Rs 19,200) and medical
(Rs 15,000) allowances.
• Books and Periodicals Allowance - Books and periodicals allowance is a type of
allowance provided to employees for helping them meet the expenses associated with
purchase of books, periodicals and newspapers. It is tax exempt to the extent of actual
expenditure incurred towards purchase of books and periodicals.
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Gratuity
• Gratuity is a lump sum benefit paid by employers to those
employees who are retiring from the organization. This is only
payable to those who have completed 5 or more years with the
company. The gratuity amount is paid in gratitude for the
services rendered by the individual during the period of
employment. According to the Payment of Gratuity Act, 1972,
gratuity is calculated as 4.81% of the basic pay. Most firms with
a workforce of 10 or more employees come under the Act.
8
Employee Provident Fund
• Employee Provident Fund is an employee benefit scheme
where investments are made by both the employer and the
employee each month. It is a savings platform that aids
employees to save a portion of their salary each month, from
which withdrawals can be made following a month from the date
of cessation of service or upon retirement. At least 12% of an
employee’s basic salary is automatically deducted and goes to
the Employee Provident Fund every month. The contributions
are maintained by the Employees Provident Fund Organization
(EPFO).
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Professional Tax
• Professional tax is a tax levied on the income earned by
salaried employees and professionals, including chartered
accountants, doctors and lawyers, etc. by to the state
government. Different states have varying methods of
calculating professional tax. The maximum amount that is
payable in a year is Rs. 2,500. Employers deduct profession tax
at prescribed rates, from the salary paid to employees, and pay
it on their behalf to the State Government. The revenue
collected is used towards the Employment Guarantee Scheme
and the Employment Guarantee Fund.
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Perquisites
• Perquisites, also referred to as fringe benefits, are the benefits
that some employees enjoy as a result of their official position.
These are generally non-cash benefits given in addition to the
cash salary. Some examples of perquisites include provision of
car for personal use, rent-free accommodation, payment of
premium on personal accident policy, etc. The monetary value
of perquisites gets added to the salary and tax is paid on them
by the employee.
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ESIC
• If a company has 10 or more employees (20 in case of
Maharashtra and Chandigarh) whose gross salary is below Rs.
21,000 per month, then the employer is required to avail ESIC
scheme for such employees. The employer's contribution will be
4.75% of gross salary, whereas the employee's contribution will
be 1.75% of gross salary.
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Incentive
• The term INCENTIVES mean, something which encourages a
person to do something. Or the “extra financial reward/ motivation”.
• Incentives is the performance-link reward to improve motivation &
productivity of the employees.
• Incentives includes all that provide extra pay for the extra
performance in addition to regular wages for the job.
• An Incentive Plan comprises of incentives like
• Profit sharing • Project bonuses • Stock options • Sales commission, etc.
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Why Incentives are Important?
• Incentives are considered beneficial to both employers as well as employees in following
ways.
• Workers are likely to work at their best when they are offered monetary rewards for good
performance.
• Provide opportunity for hard-working & ambitious employees to earn more.
• To improve work-flow, work methods & man – machine relation ship.
• To bring employee involvement to make employee innovative.
• Incentives are the sound technique of improving productivity.
• Help to improve discipline and industrial relation.
• The cost of supervision are reduced.
• To obtain desired result.
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Benefits
15
Fringe Benefits
• Different types of benefits are paid particularly to senior
managers.
• Provident funds, pensions, gratuity, encashment of earned
leave, company house, company car, leave travel concession
(LTC), medical aid, interest free loan, holiday homes,
entertainment, stock options, etc. are examples of such
benefits.
16
Types of Fringe Benefits
17
Flexible Benefit plans or the cafeteria plans
• A flexible benefit plan (FBP) allows your employees to have
more control over their salary and benefits package. They can
restructure components accordingly.
18
Understanding Flexible Benefits Plan
• A flexible benefit plan in India allows employees to structure and
modify CTC components based on the offered benefits like medical
expenses and conveyance.
• Usually, the CTC structure of the employee has multiple components
like dearness allowance, HRA, medical expense, basic, medical
expenses, etc.
• Amongst these components, some are taxable like DA and basic
pay, and others are non-taxable like medical expenses. The non-
taxable components of the salary are received in the form of
reimbursements
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Example for FBP
• James works in an organization. The HR department is offering
HRA, DA, conveyance, and basic pay. However, James owns a
house and doesn’t need to rent a place. This means his HRA is
fully taxable and not useful to him. He would rather
choose leave travel allowance (LTA).
• This freedom to choose is the power of a flexible benefit plan. It
helps employees fulfil their tax requirements.
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Benefits of FBP for employees
• Employees can lower their tax liability with a simple
reorganization. Meal expenditures, cell phone expenses, and
travel expenses, for instance, are not taxed. Incorporating these
elements can assist the worker in distinguishing it on their
paycheck from their fundamental wage, over which taxes are
computed. As a result, the take-home pay is unaffected.
• Understanding that the employer provides reimbursement for
specific costs as a part of the continuous wage, workers budget
and organize their spending for the full year appropriately.
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Benefits of FBP for employers
• Using FBP demonstrates the firm’s worker-friendly attitude. The
flexibility element increases employee retention by making the
staff feel appreciated.
• Organizations have a superior opportunity to attract better
people if they offer competitive pay and a variety of flexible
perks.
• By providing a variety of compensation options for FBP, firms
create a peaceful and positive workplace, which leads to
increased production.
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Flexible Benefits Plan Advantages
• 1. Employee Satisfaction
• Above all, a flexible benefit plan helps you fulfil employee requirements.
• Not every employee is ready to settle for the salary structure an employer
has to offer. Some want to be more responsible for the benefits they
entitled to.
• When you offer your employees this flexibility, you’re essentially giving
them the upper hand to satisfy themselves with the perks they desire.
• Employees feel empowered as you’re taking their inputs and allowing
them to make decisions. It also fosters a better work environment, and
you’ll be seen as being more humane.
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2. Tax Saving
• As elaborated in the example of James, a flexible benefits plan
helps save taxes. Employees not requiring rented
accommodation can benefit a lot if a considerable amount of the
salary doesn’t go towards HRA. This restructuring helps
employees to reduce their tax liabilities to a great extent.
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3. Company Transparency
• By offering a flexible benefit plan, employees can get a
complete breakdown of the perks on offer.
• Additionally, they understand what benefits each perk carries.
• all this fosters positive attitude in your company and renders
your company as being transparent.
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4. Effective Recruitment and Retention
• A flexible benefit plan helps you attract and retain talent as appealing
and competitive benefits are on offer.
• You can also do so much more to attract the cream of the lot. For
instance, your flexible benefit plan could also offer student loan
repayment assistance.
• While there are some drawbacks to this plan such as setting-up
costs and disclosing information on benefits, the end result is quite
impressive.
• Your employees can take home a bigger portion of their salary, which
is obviously extremely beneficial in terms of financial flexibility.
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UNIT
12 Deductions and Illustration of CTC
Names of Sub-Units
Introduction to deductions and illustration of CTC: concept of Contributions (PF, ESI), Gross Salary vs.
Net Salary, Gross Salary vs. Net Salary, Tax-Efficient Compensation Planning, Tax Calculation of CTC
Overview
The unit begins by explaining the meaning of deductions and illustration of CTC. Further, it discusses
the Contributions (PF, ESI). The unit explains the application of Gross Salary vs. Net Salary. It also
discusses the tax-efficient compensation planning.
Learning Objectives

 Explain the meaning of deductions and illustration of CTC
 Describe the contributions (PF, ESI)
 Discuss gross salary vs. net salary
 State the tax-efficient compensation planning
 Explain the tax calculation of CTC
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Learning Outcomes

 Assess the importance of deductions and illustration of CTC
 Appraise the contributions (PF, ESI)
 Evaluate the application of gross salary vs. net salary
 Analyse the tax-efficient compensation planning
 Examine the tax calculation of CTC
 https://static.careers360.mobi/media/uploads/froala_editor/files/Deductions-from-Gross-Total-
Income.pdf
 https://www.pdicai.org/Docs/Circular-No-20-2020_6122020214816638.pdf
12.1 INTRODUCTION
The entire amount that a corporation spends (directly or indirectly) on an employee is referred to as
CTC. It refers to the employee’s overall compensation package. CTC includes monthly elements like basic
pay, different allowances, reimbursements, and so on, as well as yearly elements like gratuity, annual
variable pay, annual bonus, and so on.
The employee’s CTC is never equal to his or her take-home pay. There are several components of the CTC
that are not included in the take-home pay.
CTC = Gross Salary + PF + Gratuity
A person’s basic pay is the amount of money he or she earns on a regular basis. It is a portion of one’s
compensation package that cannot be changed.
A basic pay is determined by the employee’s position as well as the industry in which they work.
CTC = Direct Benefits + Indirect Benefits + Savings Contributions
 Direct Benefits: This is the employee’s take-home or net salary, which is the amount paid to the
employee by the company on a monthly basis and is taxed by the government.
 Indirect Benefits: They are the perks that employees are entitled to without paying them any money.
While the payment by firms is done on the behalf of the employee, they are added to the employee’s
CTC because they are expense to the organisation.
 Savings Contribution: This is the monetary value that is added to an employee’s CTC, such as EPF.
12.2 DEDUCTIONS
Tax deductions are claims made to lower taxable income resulting from a taxpayer’s different
investments and costs. As a result, taking an income tax deduction lowers your overall tax payment.
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UNIT 12: Deductions and Illustration of CTC JGI JAIN
It is a type of tax advantage that allows you to save money on your taxes. The amount of tax you can
save, however, is determined by the sort of tax advantage you claim.
By raising your deductions, you can lower your taxable income. There are a variety of investment
alternatives and expenditures that might help you reduce your taxable income. There are several
provisions for this under the Indian Income Tax Act. A variety of distinct tax deduction alternatives are
shown below.
12.2.1 ESI
Employees State Insurance is a financial plan established by the Employees State Insurance Act of 1948
to guarantee employees’ social and health security. Under the Ministry of Labour and Employment of the
Government of India, an independent organisation named the Employee’s State Insurance Corporation
was founded.
According to the rules, both employer and employee contributions to the ESI fund are calculated as
follows. The contributions are for the wage (Basic + DA), which is restricted to a monthly salary of 21000.
Employees are entitled to medical, sickness, maternity, disability, funeral, and rehabilitation benefits
under this statute. Employees insured by this plan can get medical treatment for themselves and their
dependents at ESIC-affiliated hospitals and clinics.
12.2.2 PF
The Employees Provident Fund (EPF) is a popular savings plan run by the Indian government. In India,
EPF systems are regulated by the Ministry of Labor. The EPF and Miscellaneous Provisions Act, 1952,
governs the primary program. EPFO (Employee Provident Fund Organisation) is in charge of this
savings plan.
This plan attempts to provide an individual with a suitable retirement fund. For paid employees, it instils
the habit of conserving money. Both the company and the employee contribute money to the fund. Every
month, each of them must contribute 12% of the employee’s basic wage (Basic + Dearness allowance) to
this fund.
When an individual retires, they receive the total contribution (from both the employee and the employer)
in one lump amount along with interest. EPFO determines the rate of return that would be earned. Also,
the interest that is earned is tax-free.
The Indian government has required participation in this initiative. As a result, because it is managed
by the government, it is seen as a low-risk investment.
12.2.3 PT
The word ‘professional tax’ may be one of those terminologies that does not fully reflect the true
meaning of the term. It is not, according to its name, a tax imposed just on professionals. It’s a tax
placed on all sorts of professions, trades, and employment, and it’s based on the revenue generated
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by those professions, trades, and jobs. It is imposed on workers, self-employed individuals, freelancers,
professionals, and those who earn more than the monetary level.
According to Article 246 of the Indian Constitution, only Parliament has the authority to create legislation
relating to the Union List, which includes income taxes. Only the Concurrent and State lists provide the
state the authority to enact legislation.
Professional tax, on the other hand, is a type of income tax collected by the state government (not all
states in the country chose to levy professional tax). In spite of having a tax on the income, the State
Government also has the authority to pass legislation pertaining the professional tax under Article 276
of the Indian Constitution, that deals with taxes on professions, traders, callings and employment.
Professional tax is a deductible sum for the purposes of the Income Tax Act of 1961 and can be deducted
from taxable income.
12.2.4 TDS
TDS is the amount of tax deducted from the taxpayer by the employer or detector and deposited with the
Income Tax Department on his or her behalf. TDS rates are determined based on an individual’s age and
income. TDS (Tax Deducted at Source) is a percentage of a payment that is deducted when it is made,
such as a salary, commission, rent, interest, professional fees, and so on. The individual who makes
the payment deducts tax at source, but the one who gets the payment/income owes tax. It reduces tax
avoidance since the tax is collected when the payment is made.
Here are some of the income sources that qualify for TDS:
 Salary
 Amount under LIC
 Bank Interest
 Brokerage or Commission
 Commission payments
 Compensation on acquiring immovable property
 Contractor payments
 Deemed Dividend
 Insurance Commission
 Interest apart from interest on securities
 Interest on securities
 Payment of rent
 Remuneration paid to the director of a company, etc
 Transfer of immovable property
 Winning from games like a crossword puzzle, card, lottery, etc.
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12.3 CONTRIBUTIONS (PF, ESI)
Employee’s Contribution towards EPF

In general, the employee contribution rate is set at 12 percent. The following organisations, however,
have a set rate of ten percent:
 Organisations or businesses with a maximum of 19 employees
 The BIFR has designated several businesses as sick industries.
 Organisations that lose a significant amount of money each year in comparison to their net worth.
 The industries of coir, guar gum, beedi, brick, and jute
 Businesses with a wage cap of ` 6,500 per month
Employer’s Contribution towards EPF

The employer’s minimum contribution is fixed at a rate of 12 percent of ` 15,000 per employee (although
they can voluntarily contribute more). This is the equivalent of ` 1,800 each month. This implies that
both the employer and the employee are required to contribute ` 1,800 each month to the plan. Initially,
this sum was fixed at 12% of ` 6,500, resulting in a total contribution of ` 780 from both the company
and the employee.
 Both parties’ contributions are put in the EPFO (Employees’ Provident Fund Organisation).
 This is a long-term investment fund for participants, allowing them to live independently once they
retire.
As the ESI scheme is a contributory scheme, all workers in the factories or establishments to which the
Act applies must be insured in sync with the Act’s provisions.
In the case of an employee, the contribution payable to the Corporation will be made up of the employer’s
contribution and the employee’s contribution at a certain rate.
The tariffs are updated on a regular basis. Currently, the employee contribution rate is 0.75 percent of
earnings (effective July 1, 2019), whereas the employer contribution rate is 3.25 percent of wages paid/
payable in respect of employees in each wage period.
Employees who earn a daily average income of up to `137/- are excused from contributing. Employers,
on the other hand, will contribute their fair share in the case of these workers.
12.4 GROSS SALARY VS. NET SALARY

Salary is a set sum of money provided by an employer to its workers in exchange for their services. It is
a recurring payment paid by the employer at a certain period of time, usually monthly and specified in
the form of an annual package. Salary is often established by comparing individuals’ wages for similar
roles in the same or other industries. Salary is also divided into two basic categories: gross and net.
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Gross Salary
The term “gross salary” refers to the sum of numerous elements that make up a person’s total
compensation package. It is the pay after deductions for income tax, EPF, and medical insurance, among
other things. The Gross Compensation mentioned in the salary part within a company’s offer letter
includes all required components on an annual or monthly basis like bonuses, overtime pay, holiday pay
along with other differentials. Gross Salary does not cover EPF and gratuity when viewed from a CTC
viewpoint. Furthermore, Gross Salary solely refers to the employee’s pay advantages.
Furthermore, the Ministry of Labour has given the employee the right to withdraw the whole amount of
his or her PF account when he or she reaches the age of 55.
Apart from that, an employee can withdraw funds from their privileged account in a variety of ways,
as shown below.
 Services will be terminated.
 Incurable illnesses or limitations necessitate retirement.
 An employee was unexpectedly relocated to oversees.
Components of Gross Salary
When computing an individual’s yearly package, several fundamental components of gross

compensation are used.
 Basic Salary: This is a significant portion of your gross compensation.
 HRA (House Rent Allowance): Take into account any employee’s house rent and lower their tax
liability.
 Leave Travel Allowance: This component covers an employee’s travel expenses and aids in tax
exemption.
 Conveyance Allowance: This is a component that helps an employee get from home to work and
back.
 Retirals, commonly known as superannuation, are a post-retirement plan that covers an employee
pension.
 Bonuses: Gifts or performance bonuses that are deducted from the gross wage.
Others like Medical allowance, Provident Fund(PF), etc.
Gross Salary Formula Calculation

Gross Salary = CTC(Cost to Company) – EPF(Employee Provident Fund) – Retirals
Net Salary
After subtracting tax provident fund and other similar deductions from the gross income, which is
commonly referred to as Take home salary, the employee’s net compensation is calculated. The net
wage, however, is smaller than the gross income.
6
When income tax is insignificant and the employee’s pay falls below the government tax bracket, it
might be equivalent to the gross wage in some cases.
 Net Salary(or Take Home Salary) = CTC(Cost to Company) – EPF(Employee Provident Fund) –
Retirals – Deductions – Income Tax (TDS)
 Net Salary = Gross Salary – Income Tax (TDS) – Deductions
 Net Salary <= Gross Salary
Key Differences between Gross Salary vs Net Salary
The most significant distinction between gross and net salary is as follows:
 Gross salary is the amount that remains after taxes and benefits are deducted, and net salary is the
amount that remains after taxes and benefits are deducted.
 The gross salary always exceeds the net salary.
 The most important distinction to make between gross and net compensation is that net salary is
always based on gross salary.
 After all adjustments and appropriations, net salary is calculated from guide to gross income.
 Gross salary includes all perks in the employee’s favour that the company pays annually, whereas
net salary is the monthly set amount that the employee receives.
12.5 TAX-EFFICIENT COMPENSATION PLANNING

Many firms set their employees’ salaries for the following financial year (FY) in the first quarter of a new
financial year (FY) based on the previous year’s performance review. Employees are frequently given
the freedom to organise different aspects of their income within the broad confines of the company’s
compensation policy. Employees are free to organise their salaries according to their financial goals,
personal needs, and the need for a retirement fund.
Employees’ taxable salary income and net take-home pay are affected as a result of such wage structure.
As a result, it’s critical that staff understand the requirements of the Income-Tax Act of 1961 (the Act), as
well as the Income-Tax Rules of 1962 (the Rules), for several commonly-used components:
 House Rent Allowance (HRA): Employees who live in leased housing might claim a salary structure
exemption from HRA depending on their rental payments. “The tax-free amount is equal to the
lesser of (a) actual HRA received, (b) 50% of basic income (40 percent if the employee works in a
non-metropolis), or (c) Rent paid - 10% of basic salary. The exemption is contingent on an employee’s
verification of the required supporting papers (such as the lease deed, rent receipts, and so on)
“Partner and Head, Global Mobility Services, Tax, KPMG in India, Parizad Sirwalla explains.
 Leave Travel Allowance (LTA): For the amount spent by the employee on personal travel inside India
for himself/herself and selected family members, an LTA exemption can be claimed. “The exemption
is subject to certain limitations based on the method of transportation (air, rail, or road), and it may
only be claimed twice in a four-year period (current block is from 2014 to 2017). Employees must
provide prescribed papers in support of travel costs, just as they must for HRA “Sirwalla tells.
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 Medical reimbursement: An employee can claim a tax-free reimbursement of up to `15,000 per

year provided he or she can show documentation of medical expenses incurred by him or her and
designated family members.
 Conveyance Allowance: A conveyance allowance of `1,600 per month can be claimed as exempt
without the need to provide any supporting documentation.
 Food Coupons: In the hands of employees, meal coupons issued by the employer that are not
transferable and may only be used at eating establishments up to ` 50 per meal are not taxed.
 National Pension System (NPS): Employer contributions to the National Pension System (NPS) are
exempt up to 10% of the base wage, with no higher limit. Employee contributions of up to `50,000
are deductible against taxable income over and above the `1,50,000 maximum under ection 80C of
the Income-Tax Act.
 Other Tax-Efficient Reimbursements: Telephone reimbursement for both mobile and landline
phone connections can be incorporated into the compensation structure. This is usually calculated
based on the actual bill amount and must fall within a reasonable range set by the employer. Other
factors that can be embedded in the pay system include an automobile, professional activities, and
so on.
12.6 TAX CALCULATION OF CTC

Salary comes from the Roman word “salarium”, that was paid to Roman soldiers, along with their pay
to which those soldiers were entitled to during ancient times. The salary calculator is extremely useful
and important for calculating and understanding an employee’s growth status, as well as estimating
the employer’s compensation increases and deductions. There is a difference between the gross and net
compensation received, and the salary is made up of several components. A pay for an employee can be
arranged in the following way:
 Basic Salary
 House Rent Allowance
 Transport Allowance
 FBP Allowance
 Statutory Bonus
 Provident Fund
 Income Tax
 Insurance
A formula for Salary Calculator is given by:
Salary = Basic + HRA + Transport Allowance + FBP Allowance + Bonus – Provident Fund – Income Tax
– Insurance
The pay component varies depending on the company’s regulations; some firms make additional
deductions in addition to this deduction, while others do not make certain deductions in their salaries.
8
According to Indian labour legislation, we work on a cost-to-company model, which means that if a
person is engaged in the formal sector, there are the greatest reductions in a pay, but informal sector
employees can take their entire wage quota.
12.7 PREPARING CTC

The acronym CTC stands for Cost To Company. The overall cost of an employee to a corporation over
the course of a year. The corporation provides a monthly wage and additional perks to an employee at
a cost to the company. When presenting a job offer, private sector Indian enterprises frequently use the
term CTC package.
All the monetary and non-monetary sums spend on employees are included in the CTC. Below are the
listed items included in the in-hand-wage and therefore are also included in the CTC pay.
They are:
 Basic
 Dearness Allowance (DA)
 Incentives or bonuses
 Conveyance allowance
 House Rent Allowance (HRA)
 Medical allowance
 Leave Travel Allowance or Concession (LTA / LTC)
 Vehicle Allowance
 Telephone / Mobile Phone Allowance
 Special Allowance
Compulsory deductibles make up a significant portion of CTC. Deductions for provident funds, medical
insurance, and other expenses are among them. They are part of the pay system, although they are not
included in the in-hand wage. However, it does enhance the CTC.
CTC = Direct Benefits + Indirect Benefits + Savings Contributions

 Direct Benefits refers to the amount paid to an employee on a monthly basis by his or her company,
which is deducted from his or her take-home pay or net salary and is taxed by the government.
 Indirect benefits are the perks that employees are entitled to without paying them any money. While
the payment by firms is done on the behalf of the employee, they are added to the employee’s CTC
because they are expense to the organisation.
 A savings contribution is a monetary amount made to an employee’s CTC, such as the EPF.
Basic Salary – It is the amount given to an employee before any extras are added or subtracted, such as
salary sacrifice plan reductions or overtime or bonus increases.
Basic Salary Tax Liability – because the basic wage is always taxable, it should not exceed 40% of the CTC.
It should not, however, be maintained too low, as this will result in a reduction in the other components
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of the compensation. When compared to senior-level employees, junior-level employees usually earn a
greater basic income. If an employee’s basic compensation is high, he or she will be required to pay tax
on it.
12.8 RETIREMENT PLANS

Retirement plans are investment programmes that allow you to set aside a portion of your money to
grow over time and provide you with a regular income once you retire. Retirement and pension plans
give you financial stability so that when your professional income starts to dwindle, you may still live
proudly without sacrificing your lifestyle. Retirement planning has become even more vital in light of
the high cost of living and growing inflation. Retirement and pension plans give a steady stream of
income in retirement, thanks to money accumulated throughout one’s working years. Despite growing
living costs, your family can maintain its standard of living without your monthly paycheck.
In addition, proper retirement planning allows you to manage unforeseen needs without stress.
A retirement strategy is a multi-step procedure that changes with time. The steps below will assist you
in creating a retirement strategy:
 Create a budget: Make a list of 30 things in order of importance, dividing them into short, medium,
and long-term objectives. To generate an approximation, divide your current income into equal
halves.
 Assess your existing financial situation: Compare your present financial situation to your financial
goals, and be more proactive about saving, investing, and earning.
 Determine your income sources: Think about all of your income options, including insurance,
investment portfolios, assets, and the possibility of working part-time to supplement your retirement
income.
 Are you running out of time? Reconsider your investment; make catch-up and bite-sized donations
to make up the difference.
12.9 VRS/GOLDEN HANDSHAKE

The term VRS refers to a voluntary retirement program in which an employee is given the option to
leave their job before their retirement date. Companies might use the system to reduce staff strength.
Both the public and commercial sectors can apply it. ‘Golden Handshake’ is another name for VRS.
Employees that have completed 10 years of service or those above the age of 40 are eligible for VRS. It
applies to employees, corporate executives, and/or co-operative society authorities (excluding business/
co-operative society directors). According to the guidelines, voluntary retirement should result in a net
loss in current staff strength, and the vacancy cannot be replaced.
Before granting voluntary retirement, PSUs must first acquire government clearance. Firms can create
their own schemes, but they must follow the requirements set forth in section 2BA of the Income-Tax
Rules. One of the relevant rules specifies that a retiring employee may not work for another company
under the same management.
Employers are not allowed to retrench employees under the 1947 Industrial Disputes Act. In fact, every
proposal to retrench and reduce employees and workforce is met with fierce opposition from labour
10
organisations. As a result, VRS was established as a legal option to overcome this problem. The unions
were not violently opposed to the voluntary retirement programme since it is ‘voluntary’ rather than
mandatory.
 The entire amount that a corporation spends (directly or indirectly) on an employee is referred to
as CTC.
 It refers to the employee’s overall compensation package.
 CTC includes monthly elements like basic pay, different allowances, reimbursements, and so on, as
well as yearly elements like gratuity, annual variable pay, annual bonus, and so on.
 The employee’s CTC is never equal to his or her take-home pay.
 There are several components of the CTC that are not included in the take-home pay.
 A person’s basic pay is the amount of money he or she earns on a regular basis.
 It is a portion of one’s compensation package that cannot be changed.
 A basic pay is determined by the employee’s position as well as the industry in which they work.
 Tax deductions are claims made to lower taxable income resulting from a taxpayer’s different
investments and costs.
 As a result, taking an income tax deduction lowers your overall tax payment.
 It is a type of tax advantage that allows you to save money on your taxes.
 The amount of tax you can save, however, is determined by the sort of tax advantage you claim.
 Employees State Insurance is a financial plan established by the Employees State Insurance Act of
1948 to guarantee employees’ social and health security.
 Under the Ministry of Labour and Employment of the Government of India, an independent
organisation named the Employee’s State Insurance Corporation was founded.
 Employees are entitled to medical, sickness, maternity, disability, funeral, and rehabilitation benefits
under this statute.
 Employees insured by this plan can get medical treatment for themselves and their dependents at
ESIC-affiliated hospitals and clinics.
 When a person retires, they get the total contribution (from both the employee and the employer) in
one lump amount, plus interest.
 EPFO determines the rate of return that will be earned. Furthermore, the interest earned is tax-free.
 The Indian government has required participation in this initiative.
 As a result, because it is managed by the government, it is seen as a low-risk investment.
 The word ‘professional tax’ may be one of those terminologies that does not fully reflect the true
meaning of the term.
 It is not, according to its name, a tax imposed just on professionals.
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 It is a tax placed on all sorts of professions, trades, and employment, and it’s based on the revenue
generated by those professions, trades, and jobs.
 It is imposed on workers, self-employed individuals, freelancers, professionals, and those who earn
more than the monetary level.
 According to Article 246 of the Indian Constitution, only Parliament has the authority to create
legislation relating to the Union List, which includes income taxes.
 Only the Concurrent and State lists provide the state the authority to enact legislation.
 TDS is the amount of tax deducted from the taxpayer by the employer or detector and deposited
with the Income Tax Department on his or her behalf.
 TDS rates are determined based on an individual’s age and income.
 TDS (Tax Deducted at Source) is a percentage of a payment that is deducted when it is made, such as
a salary, commission, rent, interest, professional fees, and so on.
 The individual who makes the payment deducts tax at source, but the one who gets the payment/
income owes tax.
 It reduces tax avoidance since the tax is collected when the payment is made.
 Salary is a set sum of money provided by an employer to its workers in exchange for their services.
 It is a recurring payment paid by the employer at a certain period of time, usually monthly and
specified in the form of an annual package.
 Salary is often established by comparing individuals’ wages for similar roles in the same or other
industries.
 The term “gross salary” refers to the sum of numerous elements that make up a person’s total
compensation package.
 It is the pay after deductions for income tax, EPF, and medical insurance, among other things.
 The Gross Compensation listed in the salary part of the company’s offer letter includes all needed
components on an annual and monthly basis, such as bonuses, overtime pay, holiday pay, and other
differentials.
 Gross Salary does not cover EPF and gratuity when viewed from a CTC viewpoint.
 Many firms set their employees’ salaries for the following financial year (FY) in the first quarter of a
new financial year (FY) based on the previous year’s performance review.
 Employees are frequently given the freedom to organize different aspects of their income within the
broad confines of the company’s compensation policy.
 Employees are free to organize their salaries according to their financial goals, personal needs, and
the need for a retirement fund.
 Retirement plans are investment programmes that allow you to set aside a portion of your money
to grow over time and provide you with a regular income once you retire.
 Retirement and pension plans give you financial stability so that when your professional income
starts to dwindle, you may still live proudly without sacrificing your lifestyle.
12
 Retirement planning has become even more vital in light of the high cost of living and growing
inflation.
 Retirement and pension plans give a steady stream of income in retirement, thanks to money
accumulated throughout one’s working years.
 Despite growing living costs, your family can maintain its standard of living without your monthly
paycheck.
12.11 GLOSSARY
 Deductions: A deduction is an out-of-pocket cost that can be deducted from taxable income to lower
the amount owing.
 CTC: CTC is the total of Direct Benefits (an annual payment provided to an employee), Indirect
Benefits (a yearly sum paid on behalf of the employee), and Saving Contributions (saving schemes
the employee is entitled to).
 Gratuity: Gratuity is a one-time payment made by an employer to an employee as a show of
appreciation for their contributions to the firm.
 Gross Salary: The amount of money an individual earns on a monthly or annual basis before any
deductions are made
12.12 CASE STUDY: CORPORATE INCOME TAX: SMALL BENEFITS, BUT SEZS DEALT
A MAT BLOW
Case Objective
The case highlights that how corporate income tax like SEZs were dealt a MAT Blow.
The corporate fee has been reduced to 5 percent from 7.5 percent. The effective corporation tax rate is
reduced from 33.2 percent to 32.4 percent, which is a welcome, if little, reprieve for Indian businesses.
The new rate will be 30 percent plus a 5 percent surcharge, for a total of 31.5 percent, plus a 3 percent
education cess for a total of 32.4 percent.
However, the Minimum Alternate Tax (MAT), which is imposed on businesses, has been raised from
18 percent to 18.5 percent of book earnings. According to the FM, this was done to compensate for the
decreased fee. MAT is imposed on businesses whose profits under the Income Tax Act are less than those
reported in their accounts under the Companies Act.
As a result, businesses will be required to pay either 18.5 percent of their book profits or the tax imposed
by the Income Tax Act, whichever is higher. However, this tax can be offset against future taxes. That is,
when the firm leaves the tax holiday or any other condition that lowers its tax incidence, it can use the
MAT credit to offset the tax burden. This is similar to an advance tax, in that it reduces the company’s
cash flow while increasing the government’s cash flow.
On various fronts, the Special Economic Zone Act has come under fire. Previously, revenues made by
SEZ developers and units operating within these SEZs were tax-free. Furthermore, the dividend paid by
these SEZ entities was tax-free, but other corporations had to pay a 15% dividend distribution tax. This
13
JGI JAIN
is going to work out. Dividend tax exemption is set to expire in June 2011. This has no effect on their
profitability, but it does lower the amount of money available to distribute to shareholders.
Profits from SEZs will continue to be tax-free, but they will no longer be subject to MAT. They must
now pay a MAT of 18.5 percent on earnings made in 2011-12. Their profitability will suffer as a result.
When previously stated, this is a cash flow and time issue, and they will be able to deduct it from future
earnings as they become taxable.
However, the SEZs may have to wait a long time for this. Units established in SEZs now receive a 100
percent profit tax exemption for the first five years, 50% for the following five years, and thereafter 50
percent of the export profit reinvested in the enterprise. Developers of SEZs may also be eligible for a
tax break for 10 out of 15 years from the time they are announced. That is, their tax burden will increase
significantly only after ten years.
In one fell swoop, the government has insured that it would not lose money (cash flow) as a result of
firms using SEZs for their operations, nor from developers rushing to build residential and commercial
complexes near SEZs that were eligible for tax exemptions.
Questions
1. What is CTC in salary with example?
(Hint: It is computed by multiplying the employee’s pay by the total cost of any supplementary
benefits received during the service year. The CTC is 550,000 if an employee’s income is 500,000 and
the employer pays an extra 50,000 for health insurance. Employees may not get the CTC directly.)
2. What is the CTC structure?
(Hint: Gross Salary, which includes Basic Salary, HRA (House Rent Allowance), Conveyance
Allowance, Entertainment Allowance, Overtime Allowance, and Medical Reimbursements, are
some of the components of CTC. Then there’s the benefit package, which includes PF and medical
insurance.)
3. How is gratuity handled in CTC?
(Hint: The gratuity amount is one-fourth of an employee’s last-drawn basic wage for each completed
six-month period. The amount of retirement gratuity that must be paid is 16 times the base income.
However, there is a limit of `20 lakhs.)

1 What do you mean by deductions?
2. Explain the meaning of ESI.
3. Discuss the term PF.
4. Describe the concept of PT.
14

1. Tax deductions are claims made to lower taxable income resulting from a taxpayer’s different
investments and costs. Refer to Section Deductions
2. Employees State Insurance is a financial plan established by the Employees State Insurance Act of
1948 to guarantee employees’ social and health security. Refer to Section ESI
3. The Employees Provident Fund (EPF) is a popular savings plan run by the Indian government. In
India, EPF systems are regulated by the Ministry of Labor. The EPF and Miscellaneous Provisions
Act, 1952, governs the primary program. EPFO (Employee Provident Fund Organisation) is in charge
of this savings plan. Refer to Section PF
4. The word ‘professional tax’ may be one of those terminologies that does not fully reflect the true
meaning of the term. It is not, according to its name, a tax imposed just on professionals. Refer to
Section PT
 https://www.bankbazaar.com/tax/difference-between-take-home-net-gross-salary-and-ctc.html
 https://cleartax.in/s/salary-calculator
 https://scripbox.com/pf/gross-salary/
 Discuss with your friend about the future benefits of deductions in CTC.
15
UNIT
13 Compensation Management Related

Labour Laws
Names of Sub-Units
Legislations under the Indian Companies Act, Payment of Wages Act, Minimum Wages Act, Equal
Remuneration Act, Payment of Bonus Act
Overview
The unit begins by explaining the meaning of compensation management related labour laws. Further,
it discusses the Legislations under the Indian Companies Act. The unit explains the application of
Payment of Wages Act. It also discusses the Minimum Wages Act.
Learning Objectives

 Explain the compensation management related labour laws
 Describe the legislations under the Indian Companies Act
 Discuss Payment of Wages Act
 State the Minimum Wages Act
 Explain the Equal Remuneration Act
JGI JAIN
DEEMED-TO-BE UNI VE RSI TY
Learning Outcomes

 Assess the compensation management related labour laws
 Appraise the legislations under the Indian Companies Act
 Evaluate the application of Payment of Wages Act
 Analyse the Minimum Wages Act
 Examine the Equal Remuneration Act
 https://www.researchgate.net/publication/352460961_Compensation_Management
 https://www.pdfdrive.com/compensation-management-e34804170.html
13.1 INTRODUCTION
It is vital to understand the philosophy of labour laws in order to comprehend various labour regulations.
In terms of the goal and scope of labour regulations, they have evolved over time. Early labour law was
designed to protect employers’ interests. It was regulated by the laissez-faire philosophy. Modern labour
legislation, on the other hand, strives to safeguard employees against employer exploitation. The rise of
the welfare state theory is founded on the progressive social philosophy, which has rendered the laissez-
faire doctrine outdated. The notion of “hire and fire,” as well as the theory of “supply and demand,”
which had broad application under the previous laissez-faire ideology, are no longer valid.
The goal of labour law is to govern the relationship between an employer and his or her employees.
This law has the broadest reach of any branch of law in that it affects the lives of far more people,
millions of men and women, than any other branch of law. This is one of the aspects that makes it the
most fascinating of all branches of law and the study of this subject has an enormous scope and ever-
changing facets. Since the World War II Philadelphia Charter, established in 1944, which stated that
“Labour is not a commodity” and that “poverty everywhere is a menace to prosperity everywhere,” there
has been a tremendous shift in the approach to labour legislation and industrial relations.
The basic bedrock on which this law is constructed, according to W. Friedmann and others who have
attempted to analyse the key aspects of the legal growth in this field of law, is the employer’s “social-
duty.” The attitude of legislators to the building of a pay packet for the working man in the post-second
World War period, wage fixing and laws pertaining to working conditions, is an example of this. The
Indian Constitution establishes broad rules for the government to follow.
13.2 LEGISLATIONS UNDER THE INDIAN COMPANIES ACT

Welfare, as we all know, refers to everything done for the comfort and betterment of employees that is
supplied in addition to their salary. Employee welfare helps to maintain morale and motivation strong,
2
UNIT 13: Compensation Management Related Labour Laws JGI JAIN
allowing employees to stay with the company for a longer period of time. The welfare measures do not
have to be monetary in nature, but can take any shape or form.
Because of the industrial revolution, the demand for labour regulations and labour welfare groups
arose. Employers exploited the working classes excessively as a result of the industrial society,
taking advantage of the employees’ individual dispensability and seeking maximum return on their
investments. The hire-and-fire rule was common, as was the general law of concern, which was used to
contract the relationship between the employee and the employer, with verbal stipulations.
Employee welfare involves the supervision of working conditions, the establishment of industrial unison
with infrastructure availability for health, industrial relations and insurance for workers and their
families in case of any sickness, accident and unemployment. All of an employer’s operations aimed at
providing specific facilities and services to employees in addition to compensation or salary are referred
to as labour welfare.
The labour sector deals with a wide range of socioeconomic issues that influence worker welfare,
productivity, living standards and social security. A participatory planning process is a necessary
precondition for guaranteeing equity and increasing the economy’s pace of growth. To improve the
living conditions of the workforce and increase production, skill upgradation through appropriate
training is critical. Manpower development is critical for quick socioeconomic development because it
ensures that diverse industries have enough workers with the right skills and qualifications. It is vital to
secure major improvements in labour quality, productivity, skill development and working conditions,
as well as to provide welfare and social security measures, particularly to those in the unorganised
sector, in order to address equality problems in a sustainable way.
One of the primary goals is to create jobs in all areas of the economy. In this context, efforts are being
undertaken in both urban and rural regions to create a climate conducive to self-employment. At the
time of the Ninth Plan period, unwanted practices like child labour and bonded labour were eradicated,
also things like providing worker’s safety and social security, looking after labour welfare and providing
the Notes necessary support measures for solving disputes related to employment of both men and
women workers across multiple sectors.
One of the government’s main goals in terms of social and economic policy is to increase labour welfare
and productivity while maintaining a sufficient level of social security. Through the plan’s programs,
resources have been aimed towards the skill formation and development, supervising the working
conditions and by developing industrial harmony via creating infrastructure for health, industrial
relations and insurance against disease, accident and unemployment for workers and their families.
In the unorganised sector of the economy, surplus labour and employees lead to harmful social
practices such as bonded labour, child labour and poor working conditions. Workmen Compensation
Act was updated in 1999 to compensate employees and their families in the event of death or injury. The
enforcement apparatus for labour laws in the states and at the federal level is working to update laws
that need to be changed, as well as revise rules, regulations, orders and notices.
The Payment of Wages Act of 1936 is a federal law created to govern the payment of earnings to
employees engaged in particular industries and to provide them with a quick and efficient recourse
for unlawful deductions and/or unjustifiable delays in receiving their wages. It covers workers working
3
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directly or indirectly through a subcontractor in a factory, industrial, or other enterprise, or on a railway.

Furthermore, the Act applies to employees earning up to $ 1600 per month. The Act’s enforcement is the
responsibility of the Central Government in railroads, mines, oilfields and air transport services, while
it is the responsibility of the State Governments in factories and other industrial institutions.
The Payment of Wages Act of 1936 governs how wages are paid to employees (direct and indirect). The
statute is intended to protect employees against unlawful employer deductions and/or unjustifiable
wage delays.
Regular Pay
If the number of workers is fewer than 1,000, payment should be paid by the 7th of the month; otherwise,
payment should be made by the 10th. The salary term cannot be more than one month. Only employees
earning less than ` 6,500 per month are covered by the Act.
Mode of Payment
Payment must be paid in monetary notes or coins, according to the statute. Payment by check or credit
to a bank account is permitted with the employee’s written authorisation. (Chapter 6)
Deduction from Wages
Only permissible deductions, as defined by the Act, are permitted by the employer. Fines (Section 8),
absence from duty (Section 9), damages or loss (Section 10), deduction for services (amenities) provided
to the employer (Section 11), recovery of advances and loans (Section 12, 13) and payment to cooperative
societies and insurance are all examples of this (Section 13).
Excessive deduction claims and nonpayment claims
Employers can seek remedy from the authorities (Labour Office) on their own or through a trade union.
(Section 15, 16 and 17)
The basic provisions of the Act are as follows:

1. The person in charge of salary payment determines the wage period for which payment is to be
made. A salary term of more than one month is prohibited.
2. All salaries must be paid in current legal tender, which is coins, currency notes, or a combination of
the two. However, after getting written authorisation from employees, the company may pay wages
via check or by crediting payments to their bank accounts.
3. All wage payments must be paid on a working day. Wages must be paid before the seventh day
following the end of the wage period in railways, factories, or industrial facilities employing less
than 1000 people. Wages must be paid before the tenth day after the final day of the wage period in
all other situations. The pay of a worker whose services have been terminated, on the other hand,
must be paid the next day after the termination.
4
4. Although an employed person’s pay must be provided to him without deductions of any type, the Act
authorises deductions from an employee’s salary for the following reasons:
i. Fines;
ii. Absence from duty;
iii. Loss or damage to things given to the employee specifically;
iv. The employer’s living accommodations and amenities;
v. The recoupment of loans or the rectification of wage overpayments;
vi. The recovery of loans made from any fund established for the welfare of workers, as well as the
interest payable thereon, in line with rules authorised by the State Government;
vii. Contributions to and repayment of, any provident fund advances;
viii. Income-tax;
ix. Contributions to state-approved co-operative organisations or to an insurance system
administered by the Indian Post Office;
x. Deductions made with the employee’s written permission for the payment of a life insurance
premium or the purchase of securities.
13.2.2 Minimum Wages Act

The principle of labour regulations, such as the Minimum Wage Act, is that industry exists for the
benefit of man, not for the benefit of industry. As a result, industry should exist to make living better and
more pleasant. Industry work should be a natural element of happiness. Employers are thus under a
responsibility, whether economic or social, to provide safe, healthy and comfortable living, employment
and working circumstances for their workers. When businesses failed to meet this commitment, the
government stepped in to protect workers’ interests by establishing appropriate laws. This has occurred
all across the globe and the Indian government has recognised its responsibility to enact legislation
to safeguard employees from exploitation. The subject of government action would not have arisen if
firms had provided a fair deal to their employees.
The ideas of equality and social justice are at the heart of the minimum wage notion. “He who works
is entitled to a reasonable compensation, which may enable him to live a life consistent with human
dignity,” the document states. Wages are more than an abstract economic concept; they constitute a
significant societal cost. Wages may represent the price of labour in economic terms, just as interest is
the price of capital and profit is the price of risk taking, but they are special from a social perspective in
that they not only compensate for this effort but also offer a means of survival for those who contribute
it.
Wages and related difficulties have become increasingly important across the world as economic and
social growth has resulted in a bigger proportion of the people earning a living as workers or wage
earners. The same may be said about our country. Though it is mostly agricultural, it has achieved
remarkable progress in the fields of industrial and commercial growth in recent years. As a result, there
5
JGI JAIN
has been a significant expansion in salaried and wage work, resulting in the same labour difficulties,
including pay disparities, as in other developed and developing nations.
The government has already taken a variety of legislative and other steps to address these issues. In
terms of salaries, a good pay strategy is required to assist preserve industrial peace, which is critical for
preserving and boosting the country’s economic progress. One goal of this policy is to establish a wage
floor by establishing a social minimum that is designed to allow a worker and his family to maintain a
certain minimum standard of living, in accordance with modern ideas as they are understood in this
country and as permitted by the state of the economy. In order to achieve this goal, the government
adopted the Minimum Wages Act in 1948, ensuring that workers be paid at least enough to preserve
their health and productivity.
Object of the Act
The purpose of the Act is to enhance worker welfare by establishing minimum pay rates in industries
where labour is not organised and sweated labour is common. The Act aims to avoid worker exploitation
by guaranteeing that they are paid the minimum wage, which will cover their basic needs while also
preserving their efficiency.
When the constitutionality of this Act was challenged in the Supreme Court in the case of Bejoy Cotton
Mills vs. State of Ajmer in 1955, the Court rejected the argument and upheld the Act’s constitutionality,
stating that ensuring a living wage to workers, which ensures not only bare subsistence but also health
and decency, is in the public interest and it is also in accordance with the Directive Principles of State
Policy.
Scope and Coverage of the Act
The Act covers the entire country of India. Initially, it only applied to agricultural work and 12 other
occupations included in the Act’s Schedule (reproduced below). The competent government has the
authority to extend this Act to any other occupation for which it believes that minimum pay rates should
be established under the Act. State governments have taken advantage of this option to bring a slew of
new jobs inside the Act’s umbrella, bringing the total number of covered jobs to over 300.
Minimum Rates of Wages
Minimum rates of wages fixed and revised under this Act may consist of:
i. A basic wage rate and a special allowance that is modified in accordance with changes in the cost of
living index for such workers at such intervals and in such a way as the Government may designate;
or
ii. A base rate of pay, with or without a cost-of-living allowance and the cash value of the concession,
in the case of necessary commodity supply at concession rates where permitted; or
iii. The base rate, the cost of living allowance and the monetary value of the concession, if applicable,
are all factored in. A competent body should compute the cost of living allowance and the monetary
value of the concession at such intervals and pursuant to such directions as may be granted by the
relevant Government. (Chapter 4)
6
13.2.3 Equal Remuneration Act

In 1958, India complied with ILO Convention 100 on equal pay. However, it was not until 1975, the
International Year of Women, that India passed the Equal Remuneration Ordinance, 1975, to put into
effect Article 39 of the Indian Constitution, which mandated, among other things, equal pay for equal
labour for men and women. The Equal Remuneration Act of 1976 superseded the ordinance in 1976.
Scope and Coverage
The statute covers the entire country of India. The legislation went into effect on dates declared by the
Central Government from time to time in respect of certain enterprises or employments, such that the
overall coverage was completed within three years of the Act’s passage, in February 1976. As a result, the
legislation was expanded to include all enterprises, public and private employment, including domestic
service, making it the only labour statute with universal coverage (Sec. 1).
Payment of Remuneration at Equal Rates to Men and Women Workers
Employer’s obligation to provide equal wage to men and women for the same or equivalent labour.
1. No employer shall pay compensation to any worker engaged by him in an establishment or
employment at rates less favourable than those paid to employees of the opposite sex in such
establishment or employment for performing the same or similar task.
2. No employer shall cut a worker’s rate of compensation in order to comply with the rules of sub-
section (1).
3. Where, before the commencement of this Act, the rates of remuneration payable to men and women
workers for the same work of a similar nature differ only on the basis of sex, the higher (in cases
where there are only two rates), or such rates shall be payable to such men and women workers on
and from such commencement:
Provided, however, that nothing in this sub-section will be construed to entitle a worker to a revision of
the rate of payment given to him or her based on work performed before to the commencement of this
Act.
13.2.4 Payment of Bonus Act

The Payment of Bonus Act of 1965 was passed to provide for the payment of bonuses to employees of
certain businesses based on profits or productivity, as well as other concerns.
The Act covers the following:

i. All factories as specified by the Factories Act of 1948; and
ii. Any other business that employs twenty or more people on any given day throughout the fiscal year.
The Government may, however, make the Act applicable to any factory or enterprise employing less
than twenty but not less than ten people after providing two months’ notice in the Official Gazette.
7
JGI JAINDEEMED-TO-BE UNI VE RSI TY
The Central Industrial Relations Machinery is in charge of enforcing the Act (CIRM). The Chief Labour
Commissioner (Central) [CLC(C)] Organization, which is a connected office of the Ministry of Labour, is
also known as CIRM. The Chief Labour Commissioner is in charge of it (Central).
The idea of an annual profit bonus has a long history. Originally, a bonus was thought to be a gift or an
ex-gratia payment made by an employer to his employees in cash or kind during key festivals such as
Diwali, Durga Puja and Onam to stimulate their efforts. Before the First World War, certain European
companies used to give out free Dhotis and other home items at festivals, but Indian companies provided
cash and in-kind bonuses. There was a system in Bengal that paid bonuses regardless of profit or loss
during Durga Puja.
Extra payments, referred to as bonuses, were paid in major corporations. During the First World War, a
genuine bonus system was established. The textile industry in Bombay and Ahmedabad offered a 10%
salary raise in 1917, dubbed a war bonus, which was extended to 15% in 1918. When some companies
stopped giving bonuses after the war, others followed suit. Workers declared it to be a right and went
on strike as a result. In February 1924, the subject was brought to a committee chaired by the Chief
Justice of Bombay. The employees had not established any actionable claim, whether customary, legal,
or equitable, according to the Committee. Workers at profit-making companies, on the other hand,
continued to earn bonuses as an ex-gratia payment. Due to the economic downturn in the years that
followed, bonuses ceased to be a key labour relations issue.
Bonuses became a hot topic again during WWII, when industries began to make extraordinary profits.
Despite the fact that some companies paid bonuses freely, many bonus issues were brought to ad hoc
Industrial Courts of Tribunals under the Defence of India Rules for adjudication. Some of these cases
got all the way to the Supreme Court. Profits were made possible, according to the adjudicators, by the
combined efforts of capital and labour.
As a result, the latter had a claim to a portion of the increased revenues. This stance remained unchanged
until the Bombay High Court ruled that workers may seek Bonus as a right, i.e., a payment provided by
the employer as additional recompense for work performed by employees under a contract, stated or
implicit (India Hume Pipe Company. v. E.M. Nanavutty 48 Bombay L.R., 551)
Following are the objectives of this Act:

 To increase the legal obligation to give bonuses for good performance in the event of profits or
losses.
 To establish a bonus calculation formula.
 To choose a minimum and maximum bonus %
 To give a means for turning off/on
 To establish a method for redress
 It is vital to understand the philosophy of labour laws in order to comprehend various labour
regulations.
8
 In terms of the goal and scope of labour regulations, they have evolved over time.
 Early labour law was designed to protect employers’ interests. It was regulated by the laissez-faire
philosophy.
 Modern labour legislation, on the other hand, strives to safeguard employees against employer
exploitation.
 The rise of the welfare state theory is founded on the progressive social philosophy, which has
rendered the laissez-faire doctrine outdated.
 The notion of “hire and fire,” as well as the theory of “supply and demand,” which had broad
application under the previous laissez-faire ideology, are no longer valid.
 The goal of labour law is to govern the relationship between an employer and his or her employees.
 This law has the broadest reach of any branch of law in that it affects the lives of far more people,
millions of men and women, than any other branch of law.
 This is one of the aspects that makes it the most fascinating of all branches of law and the study of
this subject has an enormous scope and ever-changing facets.
 Since the World War II Philadelphia Charter, established in 1944, which stated that “Labour is not a
commodity” and that “poverty everywhere is a menace to prosperity everywhere,” there has been a
tremendous shift in the approach to labour legislation and industrial relations.
 The basic bedrock on which this law is constructed, according to W. Friedmann and others who
have attempted to analyse the key aspects of the legal growth in this field of law, is the employer’s
“social-duty.”
 Welfare, as we all know, refers to everything done for the comfort and betterment of employees that
is supplied in addition to their salary.
 Employee welfare helps to maintain morale and motivation strong, allowing employees to stay with
the company for a longer period of time.
 The welfare measures do not have to be monetary in nature, but can take any shape or form.
 Because of the industrial revolution, the demand for labour regulations and labour welfare groups
arose.
 Employers exploited the working classes excessively as a result of the industrial society, taking
advantage of the employees’ individual dispensability and seeking maximum return on their
investments.
 The hire-and-fire rule was common, as was the general law of concern, which was used to contract
the relationship between the employee and the employer, with verbal stipulations.
 Employee welfare include the monitoring of working conditions, the establishment of industrial
harmony via infrastructure for health, industrial relations and insurance for workers and their
families against sickness, accident and unemployment.
 All of an employer’s operations aimed at providing specific facilities and services to employees in
addition to compensation or salary are referred to as labour welfare.
9
JGI JAIN
 One of the primary goals is to create jobs in all areas of the economy. In this context, efforts are
being undertaken in both urban and rural regions to create a climate conducive to self-employment.
 At the time of the Ninth Plan period, unwanted practices like child labour and bonded labour were
eradicated, also things like providing worker’s safety and social security, looking after labour welfare
and providing the Notes necessary support measures for solving disputes related to employment of
both men and women workers across multiple sectors.
 One of the government’s main goals in terms of social and economic policy is to increase labour
welfare and productivity while maintaining a sufficient level of social security.
 Through the plan’s programs, resources have been aimed towards the skill formation and
development, supervising the working conditions and by developing industrial harmony via
creating infrastructure for health, industrial relations and insurance against disease, accident and
unemployment for workers and their families.
 The Payment of Wages Act of 1936 is a federal law created to govern the payment of earnings to
for unlawful deductions and/or unjustifiable delays in receiving their wages.
 It covers workers working directly or indirectly through a subcontractor in a factory, industrial, or
other enterprise, or on a railway. Furthermore, the Act applies to employees earning up to $ 1600
per month.
 The Act’s enforcement is the responsibility of the Central Government in railroads, mines, oilfields
and air transport services, while it is the responsibility of the State Governments in factories and
other industrial institutions.
 The Payment of Wages Act of 1936 governs how wages are paid to employees (direct and indirect).
 The statute is intended to protect employees against unlawful employer deductions and/or
unjustifiable wage delays.
 The principle of labour regulations, such as the Minimum Wage Act, is that industry exists for the
benefit of man, not for the benefit of industry.
 Employers are thus under a responsibility, whether economic or social, to provide safe, healthy and
comfortable living, employment and working circumstances for their workers.
 When businesses failed to meet this commitment, the government stepped in to protect workers’
interests by establishing appropriate laws.
 Wages and related difficulties have become increasingly important across the world as economic
and social growth has resulted in a bigger proportion of the people earning a living as workers or
wage earners.
 The same may be said about our country. Though it is mostly agricultural, it has achieved remarkable
progress in the fields of industrial and commercial growth in recent years.
 The government has already taken a variety of legislative and other steps to address these issues.
 In terms of salaries, a good pay strategy is required to assist preserve industrial peace, which is
critical for preserving and boosting the country’s economic progress.
10
 One goal of this policy is to establish a wage floor by establishing a social minimum that is designed
to allow a worker and his family to maintain a certain minimum standard of living, in accordance
with modern ideas as they are understood in this country and as permitted by the state of the
economy.
 In order to achieve this goal, the government adopted the Minimum Wages Act in 1948, ensuring
that workers be paid at least enough to preserve their health and productivity.
13.4 GLOSSARY
 Legislation: Local, state and national legislatures draught and implement legislation
 Revolution: An overthrow or repudiation of an existing government or political system by the
governed, followed by a complete replacement of that government or political system
 Regulation: The act of regulating is known as regulation
 Investment: An asset or object purchased with the intention of generating income or appreciation
is referred to as an investment
13.5 CASE STUDY: THE RAILWAY REMUNERATION
Case Objective
The case highlights a legal dispute between The Divisional Engineer, G.I.P. Railway v. Mahadeo Raghoo
and Anothers.
Respondent was a gangman in the employ of the Central Railway Act at the time and his pay were ‘18
per month + dearness allowance’ in the matter of the Divisional Engineer, G.I.P. Railway v. Mahadeo
Raghoo and Others. The Railway Board, under the Ministry of Railways of the Government of India,
implemented a plan of compensating (city) allowance and housing rent allowance at rates mentioned
in their memorandum, with effect from November 1, 1947.
The Railway Board’s letter changed this arrangement. Particular railway personnel stationed at certain
headquarters were qualified for the aforementioned stipend at certain defined rates as a consequence
of this plan. As a result, the first respondent was entitled to a monthly payment of ten dollars. As a result,
the government gave him a rent allowance, which he declined. The subject of whether a deduction may
be taken for the dwelling allowance was raised for discussion.
The Court determined that Section 7 of the Act pertains to deductions from an employee’s pay as
specified by the Act. Section 7’s sub-section (2) comprehensively lists the types of deductions that may
be made legally from pay. This sub-clause section’s (d) refers to “deductions for home accommodation
provided by the employer,” and section 11 states that such a deduction must be made only if the employee
accepts the house accommodation and must not exceed the amount comparable to the value of the
accommodation.
The value of dwelling lodging referred to in sections 7 and 11 as mentioned is likewise excluded from
the Act’s definition of “wages.” In the definition of “wages,” the legislature has used the phrase “value
11
of any housing accommodation” to denote anything that can be deducted from “wages.” The one is
incompatible with the other. As a result, the value of any dwelling lodging provided by the employer to
the employee cannot be included in the definition of “pay” under the Act; otherwise, it would not be a
legally allowed deduction from wages.
It is also clear that the value of any residential accommodation referred to in the Act is not the same
as the house rent allowance, which may be included in “wages” in certain situations. As a result, the
1st respondent’s contention that the aforementioned rule 3(i) is incompatible with the requirements of
sections 7 and 11 of the Act is without merit. As a result, the appeal was granted.
Questions
1. What are the most important provisions of the Wage Payment Act?
(Hint:
1. Employers are prohibited from withholding money received by employees or making
unauthorised deductions from their pay.
2. Payments must be made before the salary period’s designated pay day.
3. Only those actions of omission that have been sanctioned by the competent authority are subject
to fines.)
2. What is the value of labour if it is not compensated?
(Hint: Any job that does not get direct payment is referred to as “labour without pay.” Volunteering
to undertake charitable work for which no reward is expected is an example of unpaid labour)
3. What are the penalties under the Wage Payment Act?
(Hint: If a person fails or intentionally neglects to pay an employed person’s wages on or before the
date set by the authorities, he faces an extra fine of up to seven hundred and fifty rupees (` 750)
every day that the failure or omit persists)

1. What do you mean by legislations under the Indian companies act?
2. Explain the Payment of Wages Act.
3. Discuss the Minimum Wages Act.
4. Describe the Payment of Bonus Act.
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1. Welfare, as we all know, refers to everything done for the comfort and betterment of employees that
is supplied in addition to their salary. Refer to Section Legislations under the Indian Companies Act
2. The Payment of Wages Act of 1936 is a federal law created to govern the payment of earnings to
for unlawful deductions and/or unjustifiable delays in receiving their wages. Refer to Section
Legislations under the Indian Companies Act.
3. The principle of labour regulations, such as the Minimum Wage Act, is that industry exists for the
benefit of man, not for the benefit of industry. Refer to Section Minimum Wages Act
4. The Payment of Bonus Act of 1965 was passed to provide for the payment of bonuses to employees
of certain businesses based on profits or productivity, as well as other concerns. Refer to Section
Payment of Bonus Act
 https://www.mondaq.com/india/employee-benefits-compensation/627708/laws-relating-to-wages-
in-india
 https://www.whatishumanresource.com/compensation-management
 https://study.com/academy/lesson/compensation-benefits-laws-regulations.html
 Discuss with your team about the uses of labour laws.
13
UNIT
14 Government and Legal Issues in

Compensation
Names of Sub-Units
Wages, Pay Commission, Collective Bargaining, Arbitration and Adjudication
Overview
The unit begins by explaining the government and legal issues in compensation and wages. Further, it
discusses the main branches of wages which are theories of wages and wage boards. The unit explains
the application of collective bargaining and arbitration and adjudication for decision making. It also
discusses the basic problems of wage policy.
Learning Objectives

 Explain the government and legal issues in compensation
 Describe the pay commission
 Discuss main branches of wages
 State the importance of arbitration and adjudication
 Explain the problems of collective bargaining
JGI JAIN
Learning Outcomes

 Assess the importance of government and legal issues in compensation
 Appraise the tools and concepts of collective bargaining
 Evaluate the pay commission concepts
 Analyse the problems of wage policy
 Examine the opportunity arbitration and adjudication
 http://www.dspmuranchi.ac.in/pdf/Blog/unit%203%20p1.pdf
 https://www.shrm.org/certification/educators/Documents/09-0185-LegalIssuesinHRM-IM-FNL.pdf
14.1 INTRODUCTION
Compensation management encompasses more than simple payment of salary and keeping up with the
inflation. Employee performance with respect to organisational goals is utilised to gauge remuneration
in multiple organisations. Human resources departments tackle issues in effective compensation
management, whether due to economic constraints, technological developments, or other business
considerations.
Employees receive compensation in the form of a package of valued items in exchange for their efforts.
Employees are often compensated with money in the form of an hourly rate or salary. Benefits, stock
options, bonuses, profit sharing, commissions, allowances, and other perks are offered by certain
companies in addition to compensation.
It is highly normal for labour to be an organisation’s top cost. As a result, mechanisms are put in place
to try to guarantee that no money is wasted and that the money invested achieves the greatest possible
levels of output from the finest people. Compensation management is the term for these systems.
Employees that are paid well enough in a compensation management system are driven to accomplish
their best and desire to stay with the company. New talent will be attracted to the organisation in part
due to the fact that its employees are adequately rewarded.
Those who do not perform well will be paid less than their productive colleagues and will eventually quit
the company to create place for more brilliant people.
14.2 WAGES
Wages and salaries are those sources of income that are earned via human labour. They technically
consist of all remunerations paid to workers for their physical and mental contributions, but they do not
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UNIT 14: Government and Legal Issues in Compensation JGI JAIN
showcase self-employment revenue. Total labour expenses might involve infrastructure like cafeterias or
meeting spaces that are maintained for the convenience of the employees, therefore they are not similar
to pay and compensation expenses. Wages and wages frequently consists of compensations like paid
leaves, holidays, vacations, sick leaves as well as extra perks like pensions or employer-sponsored health
insurance. Bonuses and stock options, many of them are linked to individual or group performance, can
be awarded as additional remuneration.
14.2.1 Theories of Wages

There Are 7 Theories of Wages:
 Wages Fund theory
 Subsistence theory
 The surplus value theory of wages
 Residual claimant theory
 Marginal productivity theory
 The bargaining theory of wages
 Behavioral theory of wages
 Wages Fund Theory: Adam Smith is the author of this hypothesis (1723-1790). His thesis was founded
on the premise that employees are given salaries from a pre-determined wealth fund. He dubbed this
money the “wage fund” since it was generated as a result of savings. According to Adam Smith, the
size of the salaries fund influences labour demand and wage rates. As a result, trade unions cannot
boost wages for the whole labour class, according to this idea. Trade unions’ efforts to improve
salaries are in vain. Because the pay budget is set and trade unions have no control over population,
if they succeed in boosting wages in one trade, it can only be at the expense of another.
 Subsistence Theory: David Ricardo proposed this hypothesis (1772-1823). “The labourers are paid
to enable them to exist and maintain the race without increase or decline,” according to this view.
“Subsistence wages” is another name for this payout. If employees are paid less than subsistence
pay, the number of workers will decline due to poverty, malnutrition, sickness, and other factors,
and many will not marry. Wage rates would then rise to subsistence levels once more. This idea is
also known as the “Iron Law of Wages” since wage rates tend to be at or near subsistence level in all
instances. It is assumed that if they were paid more than the subsistence level, they would be able to
enjoy themselves, resulting in a rise in their numbers and a low wage rate.
 The Surplus Value Theory of Wages: Karl Marx is the author of this concept (1849-1883). This idea is
founded on the premise that, like any other commodity, labour is a commodity that can be acquired
for a price, i.e. wages. According to Karl Marx, this payment is at a subsistence level that means that
it is less than the proportionate tome labour takes to make products. According to him, the surplus
goes to the owner. Karl Marx is well-known for his labour-supporting activism. Labour, according
to Marx, is an item or commodity that can be acquired for a price. The cost of a thing is defined
by the amount of time and effort required to manufacture it. The labourer is not compensated in
proportion to the amount of time done, and the surplus is given to the management to cover other
costs.
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 Residual Claimant Theory: Francis A. Walker is responsible for the formulation of this hypothesis
(1840- 1897). Land, labour, capital, and entrepreneurship, according to Walker, are the four
components of production or commercial activity. He believes that once the other three variables
have been rewarded, what is left is paid to employees as pay. As a result, worker is the residual
claimant, according to this view. This hypothesis acknowledges the possibility of higher salaries as a
result of increased staff efficiency. It is an optimistic theory in this respect, whereas the subsistence
theory and the wages fund theory were gloomy ideas. Wages, according to Walker, are the leftovers
after all of the other production factors have been paid.
 Marginal Productivity Theory: Phillips Henry Wick-steed (England) and John Bates Clark (United
States of America) proposed this notion. Wages are decided according to this idea based on the
productivity produced by the last worker, i.e. marginal worker. His or her work is referred to as
“marginal productivity.” According to this idea, under perfect competition, every worker in a
particular category with the same ability and efficiency will be paid the value of the marginal
product of that type of labour. The value of marginal net product of labour may be defined as the
amount by which output would be raised if one additional worker were hired together with the
proper addition of other production components.
 The Bargaining Theory of Wages: This hypothesis was proposed by John Davidson. Wage fixing,
according to this view, is based on the negotiating power of workers/trade unions and employers.
Wages tend to be higher when employees are more powerful in the negotiation process. If the
employer plays a larger role, salaries are likely to be low. According to this idea, pay rates have
an upper and lower limit, and the actual rates between these limitations are set by the employers’
and workers’ negotiating strength. The pay and hours of Labour were ultimately decided by the
relative negotiating strength of the employers and employees, according to John Davidson, the first
proponent of the bargaining theory of wages.
 Behavioural Theories of Wages: Some behavioural scientists have established wage theories
based on research investigations and action programs completed. Employee acceptance of the
wage level, prevalent internal wage structure and employee consideration of money or wages and
salaries as motivators are all factors in their beliefs. Many behavioural scientists, mainly industrial
psychologists and sociologists like Marsh and Simon, Robert Dubin and Eliot Jacques have presented
their viewpoint on wages and compensation based upon their research and action plans.
14.2.2 Wage Boards

The wage boards are tripartite in nature, with workers, employers, and independent members
participating in and finalising the recommendations. The usefulness of such boards in today’s
environment is questionable. A wage board is a government-created statutory body tasked with
resolving disputes between employers and employees.
A Wage Board is a three-part group that includes representatives from management, labour, and the
government, and is chaired by an independent individual appointed by the government. The Board is
obligated to set salaries in line with wage fixation principles.
4
For over two decades after independence, the organised labour sector was in an embryonic stage
of growth, with insufficient unionisation. Trade unions were not as dominant as they are now, and
negotiating power was limited. Because of the challenges that develop in the area of pay fixation owing
to a lack of negotiating power, the government established numerous wage boards.
The wage boards are tripartite in nature, with workers, employers, and independent members
participating in and finalising the recommendations. The usefulness of such boards in today’s
environment is questionable. All other wage boards are non-statutory in nature, with the exception of
the statutory wage boards for journalists and non-journalist newspaper and news-agency staff. As a
result, the recommendations issued by these pay boards are not legally binding.
As a result, the role of non-statutory pay boards has waned over time, and no non-statutory wage boards
have been established since 1966, with the exception of the sugar industry, where one was established
in 1985. Because these industries’ trade unions have risen in power, they are now capable of negotiating
their pay with management. This pattern will very certainly continue in the future.
A wage board is a government-created statutory body tasked with resolving disputes between employers
and employees. The Royal Commission on Labour recommended establishing Wage Boards to determine
wages in 1931.
The first Wage Board for the cotton textile sector was established in March 1957, and it was later followed
by others. Wage boards were established for the sugar, cement, tea, coffee, rubber plantation, iron and
steel industries, and so on.
A wage board’s structure consists of a Chairperson, an equal number of employer and employee
representatives (two members each), and two additional independent members (an economist
and a consumer representative) appointed by the Board. The Chairman would be nominated by the
Appropriate Government in consultation with the Chief Justice of the High Court concerned or, as the
situation may be, the Supreme Court of India. A competent person who is, has been, or is eligible to be
appointed as a High Court Judge qualifies for the position of Chairman.
It has long been customary to choose a Member of Parliament to represent the interests of consumers and
the general public. Members representing employees will be nominated by the Appropriate Government
on the proposal of the most representative employee organisations to continue the process.
14.2.3 Wage Policy

Pay policy refers to legislation or government action aimed at regulating wage levels or structures, or
both, in order to achieve specified social and economic policy objectives. Wage policies serve as a guidance
for businesses when making wage-related choices. Wage policies are developed at the organisational
level, taking into account numerous legislative obligations as well as the organisation’s own plans.
Wages account for around 9% of total input costs in India’s organised manufacturing sector. Another
reason for studying wage policy is that pay rates and jobs are not precisely the same as other pricing
and quantities. Pay policy refers to legislation or government action aimed at regulating wage levels
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or structures, or both, in order to achieve specified social and economic policy objectives. It refers to
the government’s systematic efforts to control the levels or structures of wages and salaries in order to
achieve the government’s economic and social objectives through a national wage and salary system,
legislation, and other meansThe passage of the Payment of Wages Act, 1936, was the first step in the
evolution of wage policy. The Act’s major goal is to prevent employers from delaying or withholding
wages that are legally owed to their employees. The Industrial Issues Act of 1947, which authorised all
state governments to establish industrial courts to investigate compensation disputes, was the next step.
The passage of the Minimum Wages Act in 1948 was another significant event that influenced pay policy.
The Act’s objective is to establish minimum pay rates for workers in sweated businesses such as woollen,
carpet, flour mills, tobacco manufacture, oil mills, plantations, quarrying, mica, agriculture, and other
similar sectors. The Act has been revised multiple times in order to make it more applicable to a growing
number of industries. The Equal Compensation Act of 1976 was then passed, prohibiting discrimination
in areas of remuneration based on religion, geography, or sex. The Indian Constitution requires the
government to develop a wage strategy. In addition, successive five-year plans have paid close attention
to the necessity for a wage strategy.
The Indian government established pay boards for key industries in response to the recommendations
of the First and Second Plans. A wage board is a three-part group that includes representatives from the
government, business owners, and workers. Pay boards can only provide recommendations in theory,
and wage rules are usually imposed by persuasion despite the existence of laws, tribunals, and boards,
pay and salary discrepancies continue.
On both social and economic considerations, a sensible wage strategy is vital. Without it, there is a
risk of unjustified exploitation of workers, which will lead to unhappiness, which will inevitably lead to
discord between workers and management. As a result, in the interests of employees, companies, the
government, and the country, a solid wage strategy is required.
Three Concepts of Wages
The Fair Wages Committee described three ideas of wages that are widely used in wage policy discussions:
1. Minimum wage: A minimal wage is defined as a pay that is sufficient to meet the basic requirements
of a thrifty and consistent worker. According to the Committee on Fair Wages, the minimum wage is
an amount that is considered irreducible or required for the worker’s and his family’s basic survival
as well as the preservation of his or her productivity at works.
2. Living wage: It is a salary that should motivate employees to work hard and create enough in quantity
without losing quality, so that the industry can justify paying such a rate. A worker’s livable salary
should cover not just his or her own expenses but also the costs of maintaining his or her family.
3. Wage Equity: While a livable wage is the desired outcome and ultimate objective, a fair salary is a
step in the right direction. A pay rate is fair in the limited meaning if it is equal to the rate in the same
area and industry. In a broader sense, a fair pay is the standard rate for equivalent professions and
vocations across the country or across all industries.
These are mostly determined by the requirements of employees and the ability of businesses to pay, as
well as the country’s overall economic situation.
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14.3 PAY COMMISSION

The Government of India established the Pay Commission in 1947 to facilitate recommendations on
improving the wage structure of its workers.
First Pay Commission
Shri Srinivasa Varadacharia was the head of the first pay commission, which was established in 1946.
The first pay commission was founded on the principle of paying employees “living wages.” In 1946, the
proposals were adopted and put into action.
The minimum monthly basic wage for Class IV employees has been increased from ` 10 to ` 30 and
for Class III employees from ` 35 to ` 60. The Commission set a minimum pay of ` 55/- (` 30 + ` 25 as
Dearness Allowance) and a maximum compensation of ` 2000/-.
The commission got the notion for living wages from the Islington Commission’s findings. “The Islington
Commission’s standard is only to be generously interpreted to meet the requirements of the current
day and to be tempered by the provision that no man’s income should be less than a livable wage,” the
commission said.
The Government of India established the Pay Commission to facilitate recommendations on improving
the wage structure of its workers. Seven pay commission was established on a continuous basis since
the independence of India in order to analyse and provide suggestions on the workings and payment
structure of all civil and military divisions of the Indian government. Former Finance Minister P.
Chidambaram declared that the 7th Pay Commission had been authorised by then-Prime Minister
Manmohan Singh and will be implemented by January 2016. However, due to a number of roadblocks,
the Seventh Pay Commission’s recommendations were not implemented by the stipulated deadline.
7th Pay Commission
AK Mathur, the chairman of the Seventh Pay Commission, gave a report to Finance Minister Arun
Jaitley in July 2016. Government employees’ salaries and allowances will be increased by 23.55 percent,
according to the article. Government employees will receive a wage raise and other perks if the 7th
pay commission is adopted. The Indian government intends to implement the recommendations of the
7th Pay Commission by January 2017. The 7th Pay Commission has already been authorised in Uttar
Pradesh, and it will be implemented by January 2017.
14.4 COLLECTIVE BARGAINING

Industrial conflicts between employees and employers may also be resolved by conversation and
negotiation between the two sides to reach an agreement.
This is also known as collective bargaining since all sides eventually agree to follow a conclusion reached
after much debate and negotiation.
“Collective Bargaining” is focused with the relationships between unions reporting employees and
companies, according to Beach (or their representatives).
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It entails the process of employee unionisation, negotiations, and interpretation of collective bargaining
agreements addressing pay, hours of work, and other working conditions, as well as contending in
concerted economic activities dispute resolution procedures.”
“Collective Bargaining is a procedure in which representatives of labour organisations and

representatives of business organisations gather and seek to negotiate a contract or agreement that
determines the nature of the employee-employer union relationship,” according to Flippo.
“Collective bargaining is a method of determining employment conditions through negotiations between

an organised group of employees and an employer or group of employees acting through authorised
representatives.” Bargaining amongst interested participants, rather than from outside parties, is the
core of collective bargaining.”
Collective Bargaining Involves:

i. Negotiations
ii. Drafting
iii. Administration
iv. Interpretation of documentation prepared by employers, employees, and union officials
v. Open-minded organisational trade unions
Main Features of Collective Bargaining:

1. It is a Group Action: In contrast to individual activity, collective bargaining is a group action. The
settlement parties are both represented by their respective organisations. Employees are represented
by their trade union, while the employer is represented by its delegates.
2. It is a Continuous Process: Collective bargaining is an ongoing process that does not culminate in a
single agreement. It provides a method for management and trade unions to maintain a consistent
and organised relationship. It’s a 365-day-a-year procedure.
3. It is a Bipartite Process: The process of collective bargaining is a two-party affair. Both parties—
employers and employees—take action cooperatively. There isn’t a single third-party involved. It is
a mutual give-and-take strategy of resolving a conflict rather than a take-it-or-leave-it approach.
4. It’s a Process: Collective bargaining is a process in the sense that there are several processes involved.
The first phase is for employees to propose a charter of demands, and the last step is for them to
achieve an agreement, or a contract, that will serve as the primary legislation controlling labour-
management interactions in a business over time.
5. It is Flexible and Mobile and not Fixed or Static: It is fluid in nature. When it comes to establishing
an agreement, there are no hard and fast rules. There is a lot of room for negotiation. Unless a
definitive agreement acceptable to all sides is achieved, a spirit of give-and-take works.
6. It is Industrial Democracy at Work: The notion of industrial democracy underpins collective
bargaining, in which the labour union represents the employees in talks with the employer or
employers. The governance of labour with the permission of the governed—the workers—is known
as industrial democracy. In industry, the notion of arbitrary unilateralism has given way to the
8
principle of self-government. Collective bargaining isn’t just about gathering around a table and
signing a contract providing seniority, vacations and salary increases.
7. It is Dynamic: It is a fresh notion that is developing, extending, and changing. It was emotive, volatile,
and romantic in the past, but it is now scientific, factual and methodical.
14.5 ARBITRATION AND ADJUDICATION
Arbitration
Arbitration is a confidential procedure, but it may be costly. The arbitrator’s time is paid for by the
parties involved, unlike that of a court, and there are few grounds to challenge the final verdict. The
arbitrator can also require expenses to be paid.
Arbitration is frequently used in cross-border business contracts since it allows the parties to agree on
a neutral forum.
Adjudication
Adjudication is typically used to resolve construction disputes since the parties to a construction
contract cannot bargain out of it. It is sometimes referred to as a “pay now, debate later” approach.
Adjudication usually takes 28 days, however this can be extended if one party serves a notice to
commence the procedure. Unless the parties have agreed otherwise, an adjudicator cannot award costs.
Most importantly, adjudication awards are upheld by the courts.
Adjudication is intended to protect businesses’ cash flow by preventing one party from withholding
payments from the other for an extended length of time. However, adjudication is only the beginning
of the narrative. If the adjudicator’s ruling is not accepted, it might proceed to arbitration or litigation
until the project is completed.
 Compensation management entails more than just paying a salary and keeping up with inflation.
Employee performance in relation to organisational goals is used to determine remuneration in
many organisations.
 Wages and salaries are those sources of income that are earned via human labour. They technically
consist of all remunerations paid to workers for their physical and mental contributions, but they
do not showcase self-employment revenue.
 There Are 7 Theories of Wages: Wages Fund theory, Subsistence theory, The surplus value theory of
wages, Residual claimant theory, Marginal productivity theory, The bargaining theory of wages and
Behavioral theory of wages.
 The wage boards are tripartite in nature, with workers, employers, and independent members
participating in and finalizing the recommendations.
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 The wage boards are tripartite in nature, with workers, employers, and independent members
participating in and finalising the recommendations.
 Pay policy refers to legislation or government action aimed at regulating wage levels or structures,
or both, in order to achieve specified social and economic policy objectives.
 The Government of India established the Pay Commission in 1947 to provide recommendations on
improvements to the wage structure of its workers.
 “Collective Bargaining” is focused with the relationships between unions reporting employees and
companies, according to Beach (or their representatives).
 Arbitration is a confidential procedure, but it may be costly. The arbitrator’s time is paid for by the
parties involved, unlike that of a court and there are few grounds to challenge the final verdict.
 Adjudication is typically used to resolve construction disputes since the parties to a construction
contract cannot bargain out of it. It is sometimes referred to as a “pay now, debate later” approach.
14.7 GLOSSARY
 Compensation: Compensation is money that someone who has suffered inconvenience, loss, or
suffering seeks from the person or organisation that caused it, or from the government
 Remuneration: A sum of money given to someone in exchange for their services
 Wages: A monetary payment made for labour or services on an hourly, daily, or piecework basis,
generally in accordance with a contract
 Commission: The act of committing or giving supervisory control or authority to a person, group,
or other entity
14.8 CASE STUDY: STEEL AUTHORITY OF INDIA (SAIL)
Case Objective
The case highlights that how compensation law impact total compensation and what is compensation
management with respect to PSUs like SAIL.
In recent decades, the Supreme Court has regularly encouraged government agencies to be model
employers, particularly prior to the liberalisation wave. However, one area where public sector
undertakings (PSUs) struggle to be role models is the use of contract labour. Various stratagems are
used by private firms to get away with their outsourcing policies. PSUs, on the other hand, are unable to
establish such loopholes since they are assumed to constitute the “state” in the sense of the Constitution,
and the courts anticipate better labour standards from government employees.
In recent years, the Supreme Court has adjudicated a number of appeals concerning the status of
contract workers and the demand for their absorption, made by either employees or employers.
Though the constitution bench ruling in the Steel Authority of India (SAIL) case in 2001 was thought to
have resolved the issue, the last word has yet to be spoken, since the decision remains one of the most
misinterpreted, leading to several appeals.
10
In two recent Supreme Court judgments, the Supreme Court demonstrated the misunderstanding
surrounding employees in the context of the Contract Labour (Regulation and Abolition) Act, the
Industrial Disputes Act, and the SAIL judgement. The union representing the workers of a Mumbai
cafeteria won their appeal in the first case, Sarva Shramik Sangh versus Indian Oil. They claimed
that the corporation’s contract with the canteen contractor was a farce, and that their demand for
absorption should be taken to an industrial tribunal.
The central government has been directed by the Bombay High Court to examine their motion for a
referral. The motion was denied because “the workers were not selected by the corporation’s management
but were employed by the contractor holding a lawful and legal contract.” As a result, they took their
case to the Supreme Court. The government was requested to rethink its decision.
In this case, the most important question was whether the workers were contract labourers or not. The
tribunal should have made a decision on this issue. The administration, on the other hand, addressed
this question without sending it to the tribunal for a merits ruling. This was against the law. If the
government refuses to submit a dispute to the tribunal as required by Section 10(1) of the Industrial
Disputes Act, the court has the authority to order the government to do so.
The Supreme Court outlined four circumstances in which it can require the government to make a
referral:
1. When the government cites non-essential and irrelevant factors
2. When it makes a pre-judgment on the merits of a case
3. The rejection is erroneous
4. When the government disregards the conciliation officer’s failure report
Despite the widely misinterpreted SAIL decision, contract employees have at least three options, which
are cited in the Indian Oil decision. It states that if the workers’ position is that the contract was forged,
they have the right to seek that they be designated direct employees of the major employer. Second, if
that argument fails and the contract is judged to be lawful, they can still request that the government
consider their representation for contract labour abolition. Third, workers might seek remedy under the
Industrial Disputes Act if they believe the contract between the major employer and the contractor was
only a ruse to deny them the advantages of the labour laws.
After seven rounds in the Madras High Court and the Supreme Court, the employees lost their almost
two-decade-old dispute, IAAI versus International Air Cargo Workers’ Union. The contractors had
changed and the conditions had altered throughout the years. The Supreme Court, on the other hand,
found that the
i. The contract labour agreement between IAAI and the society that hired the cargo handlers was “not
sham, nominal, or a camouflage,” and the contract labourers were not IAAI’s direct employees; (ii)
the Industrial Disputes Act was not violated; and
ii. The contract labourers were not IAAI’s direct employees.
iii. The labourers were not entitled to absorption since there was no notification under Section 10 of the
Contract Labour Act forbidding the use of contract labour in the airport.
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Contract employees have almost stopped bringing cases to the courts as a result of these complicated
legal interpretations. Only the most financially and organisationally strong unions can litigate a case
for more than a decade while its members go hungry. If this is the case in government agencies, one can
only image how low morale is in the private sector.
Questions
1. Which laws have an impact on total compensation?
(Hint: The Fair Labour Standards Act (FLSA) is the most significant piece of compensation law in
the United States. This statute, which has been changed numerous times over the years, covers
five primary compensation regulations controlling minimum wage, overtime pay, equal pay,
recordkeeping requirements, and child labour)
2. What is the definition of legal compensation law?
(Hint: Workers’ Compensation is an example of a monetary remedy that is provided to an individual
who has been injured in order to compensate the loss produced by the accident. Wages or, more
broadly, fees, salaries, or allowances paid to an employee)
3. What is the definition of compensation management? Why don’t you talk about the problems with
compensation management?
(Hint: Compensation arrangements are a major concern for HR departments in businesses of all
sizes. The issue takes on greater relevance in a small organisation because most small business
budgets are restricted, and so pay packages may be constrained as well)

1. Describe the Wage Boards?
2. What do you understand by Wage Policy?
3. What is pay commission, explain 7th pay commission?
4 What is collective bargaining, explain he main features of collective bargaining?

1. The wage boards are tripartite in nature, with workers, employers, and independent members
participating in and finalizing the recommendations. The usefulness of such boards in today’s
environment is questionable. Refer to Section Wage Boards
2. Pay policy refers to legislation or government action aimed at regulating wage levels or structures,
or both, in order to achieve specified social and economic policy objectives. Refer to Section Wage
Policy
3. The Government of India established the Pay Commission in 1947 to facilitate recommendations on
improving the wage structure of its workers. Refer to Section Pay Commission
12
4. Industrial conflicts between employees and employers may also be resolved by conversation and
negotiation between the two sides to reach an agreement. Refer to Section Collective Bargaining
 https://slideplayer.com/slide/10652329/
 https://www.vskills.in/certification/tutorial/legal-issues/
 https://guides.newman.baruch.cuny.edu/c.php?g=188231&p=1244552
 Discuss more about the legal issues in compensation with your team
13
UNIT
15 Issues in Compensation Management
Names of Sub-Units
Pay Secrecy, Managing Global Pay, Pay Compression, Pay Inversion, Compa-Ratio, Green Circle and
Red Circle Jobs, Disparate Top-Down Salary, Control Salary Level, Pay as a Change Agent
Overview
The unit begins by explaining issues in compensation management and its problems. Further, it
discusses pay secrecy. The unit explains the application of and tools in business decision making. It
also discusses the basic problems of a disparate top-down salary.
Learning Objectives

 Explain the issues in compensation management
 Describe the pay secrecy
 Discuss disparate top-down salary
 State the importance of managing global pay
 Explain the problems of pay as a change agent
JGI JAIN
Learning Outcomes

 Assess the issues in compensation management
 Appraise the tools and concepts of pay secrecy
 Evaluate the application of compa-ratio
 Analyse the problems of pay as a change agent
 Examine the opportunity disparate top-down salary
 http://vadyba.asu.lt/24/15.pdf
15.1 INTRODUCTION
Regardless of the size of the organisation, managing pay is one of the most difficult components of
being an HR professional. HR compensation experts have challenges in selecting the appropriate salary
and benefits to recognize and reward workers for their contributions to the firm.
The processes and processing might consume a significant amount of time. It is distinctively noticeable
in firms with a workforce range across multiple locations. Smaller firms face multiple issues; most
are restricted monetarily, so the amount they can approach to hire new talent across the competitive
market environment while being responsible financially is constrained and limited.
Let’s take a look at some of the most prevalent compensation management difficulties and how to
overcome them.
We live in a very competitive environment where companies are prepared to pay top price for the best
employees. Your firm must design a pay plan that is competitive with other companies in the same
sector and area in order to recruit and retain talent.
Several market studies have been conducted to determine the appropriate remuneration for various
occupations. If you’re on a tight budget, you may be creative by giving enticing vacation time off, child
care and other incentives that don’t break the bank.
When determining the wages of top executives, the various complexities of compensation management
come into play. This is especially essential for public firms who are required to disclose the pay of their
top five employees, which may be unpopular with shareholders and the broader public. Even if this isn’t
the case, pay packages must find a balance between recruiting top personnel and being affordable.
2
UNIT 15: Issues in Compensation Management JGI JAIN
15.2 PAY SECRECY

Compensation secrecy is a frequent company regulation that bans workers from discussing their pay
with one another. Many employee handbooks, implicitly or expressly, may enforce such a policy. Some
bosses tell their staff not to talk about their pay. However, the National Labor Relations Act of 1935 made
discussing salary in the workplace permissible in the United States. Even if an employee signs a non-
disclosure agreement with his or her company, he or she has the legal right to talk about compensation
with coworkers and others. As a result, enforcing pay secrecy policies or punishing employees for
discussing salary is theoretically prohibited.
Employers who desire to avoid wage negotiations are severely limited by the National Labor Relations
Act, generally known as the Wagner Act. Many employers prefer that their employees do not discuss
their salaries with coworkers and follow a tight pay secrecy policy. When pay data becomes public,
managers are concerned that employees may get envious or believe they are being underpaid. They
contend, however, that two employees with comparable job responsibilities but differing incomes can be
adequately paid. These employees may be unaware of how their own performance, job responsibilities,
and personal experiences and educations influence their pay calculations.
Despite these grounds against permitting employee wage talks, companies that breach the NLRA’s pay
secrecy restrictions may face fines from the National Labor Relations Board.
Employees are prohibited from discussing their earnings with other employees under pay secrecy or
pay confidentiality regulations, often known as PSC rules. These guidelines can be written, spoken, or
inferred.
Workers with access to other employees’ remuneration data, such as HR employees, are likewise
prohibited from sharing such information with other employees.
15.3 MANAGING GLOBAL PAY

Employee pay plans must be developed in accordance with a company’s global business strategy for
international operations. Companies that define a clear global pay philosophy and build compensation
systems to match are in the greatest position to implement their strategy. A well-thought-out global
compensation plan ensures pay consistency and supports worldwide employee mobility.
The compensation program’s effectiveness depends on the establishment of norms and processes, as
well as regular transmission of essential information.
Despite multinational companies’ efforts to globalise their compensation methods, the most frequent
approaches to worldwide pay are still local and regional.
Compensation for international assignments involves a lot of moving factors and is difficult to regulate.
Many factors impact an expatriate’s remuneration, including assignment type and duration, locality,
family requirements (if any), along with perks. Base pay, cost-of-living modifications, housing allowances,
domestic leaves, school support for dependents and premium payouts are the major compensation
elements for expatriates.
3
JGI JAIN
15.4 PAY COMPRESSION

You may be involved in pay compression if you pay employees about the same amount despite disparities
in their abilities, experience and expertise. When a new employee is paid almost the same as or more
than a longer-serving employee in the same function, this is known as pay compression. For example,
a new hire with minimal experience gets more than an employee who has been with the firm for years
(for the same position). Alternatively, a new recruit and a long-term employee may have equal skill sets,
but the new hire’s compensation is just slightly lower.
If you pay a lower-level employee almost the same as or more than their manager, you may be
participating in pay compression (or supervisor). For instance, an exempt-salaried manager (who is not
eligible for overtime) earns less than a nonexempt-hourly direct-report employee (who does qualify for
overtime).
Pay Compression’s Causes
Pay practises that are out of date and do not reflect current market realities. For example, the market
rate for the position has risen and you’ve adjusted the pay range for the new recruit to reflect that
change. Longer-serving workers in the same position, on the other hand, continue to be paid at the
previous market rate.
When an employee with more experience is promoted, he or she is given additional responsibilities, such
as leadership responsibilities. Despite the promotion, they are paid less than a direct report or a fresh
employee in a similar position. Increases in the minimum wage, this might result in a new worker being
paid the same minimum wage as someone who has worked for the firm for several years.
In a tight labour market, there’s a lot of pressure to find individuals with in-demand talents. The firm
gives a greater salary to entice the candidate in, ignoring the possible impact on current employees in
the same position.
Pay freezes are a result of the economic slump. Candidates may want better pay after the economy
improves, outpacing the stagnant salary of existing employees.
When the firms engaged in a merger or acquisition have differing remuneration practises, for example.
Providing disproportionately higher remuneration, such as in the form of overtime pay, stipends and
bonuses. Excessive overtime, for example, might result in a nonexempt direct-report earning more than
their boss.
15.5 PAY INVERSION

Consider the person who has put in 20 years of hard work and earned excellent reviews, only to be
replaced by a fresh, less experienced and less competent employee who is paid more. Pay inversion is an
undesirable issue that occurs in many businesses (particularly during recessionary periods).
Workers who are equally or less competent than current employees are paid more for the same job,
however pay inversion does not include paying new hires more because they have more experience or
skills or clearly demonstrate the ability to exceed current employees quickly.
4
15.6 COMPA-RATIO
Compa ratio (or compensation ratio) is a simple formula that compares an individual’s actual income to
the midpoint of a set wage range in its original use. HR and compensation specialists have discovered a
plethora of new applications during the last few decades. As a result, it’s arguably the most useful ratio
for calculating salary and compensation.
To detect disparities across groups, analysts can compare the average ratio of each subgroup to the group
average. Identifying such outcomes can aid in ensuring equity inside and among your organisation’s
groupings.
To assess external competitiveness, you might, for example, use the group compa ratio and other data
to compare wages in job groups to those in other firms.
Don’t make judgments only on the basis of compa-ratio. Instead, think about it in terms of the industry,
geography, size of the company and other aspects.
What is Compa Ratio?

The general formula for compa ratio is:
Compa Ratio = Actual Rate of Pay / Reference Point of Pay
Where the real rate of pay might be for a single person, a group or the whole workforce and the pay
reference point is:
 The wage that falls in the middle of a specific salary range.
 The average market rate, often known as the market middle,
 An average of a number of different pay rates.
15.7 GREEN CIRCLE AND RED CIRCLE JOBS
Green Circle Jobs
A green circled employee is one who is paid less than the pay that has been established for the position
in issue. It’s one of the most serious issues in compensation management, along with the red-circled
employee, who is the polar opposite and hence a cost to the company.
There are various reasons why an employee’s name is ringed in green. The most typical reason is that he
was employed at a wage that was far lower than the market rate for the position. Otherwise, there are
times when individuals are promoted directly from low-level positions and management is hesitant to
give the employee a significant rise, which is generally in the range of 30% or more. This suggests that
such personnel are assigned positions or titles that represent their advancement, despite the fact that
their pay reflects the opposite.
If the issue spirals out of hand, green circled personnel might become a liability for the organisation.
If such employees are members of a labour union or a protected group and the pay ranges are already
clearly defined in terms of a collective agreement, it might be viewed as evident discrimination and the
employee may seek legal assistance.
5
JGI JAIN
Red Circle Jobs
Those with red circles have a current basic wage that is higher than the proposed pay grade or range’s
maximum. Their new substantive pay rate is typically (but not always) regarded to be the maximum
of the proposed new pay scale and the rest of their present compensation is protected on an individual
basis.
A worker whose salaries are at the top of the salary range for her job position is red-circled. Employees
who are red-circled can distort the wage structure and have a negative impact on employee morale.
Employees who advance through the ranks and obtain well-deserved raises may ultimately show
indications of complacency after they reach their current job’s maximum pay.
15.8 DISPARATE TOP-DOWN SALARY

There are two types of compensation agreements. Both are contingent on the company’s choice of how
to break and shape its CTC (Cost to Company). In India, there are several distinct sorts of employee wage
structure formats:
1. Top-Down Salary structuring: To calculate each component of revenue and add them together to
arrive at the gross wage, this way of storing pay information requires calculating each component
of income and adding them together.
For Example: The Basic salary is X and Allowances add up to Y. Gross salary will be X+Y.
2. Bottom-up salary structuring: This way of organising compensation is the polar opposite of the
aforementioned structure, since it entails computing gross salary and then dividing and calculating
each component from the overall amount.
For Example: The gross salary is A. The Basic salary and Allowances are calculated at 70% and 30%
respectively. The basic Salary will be A x 70% and Allowances will be A x 30%.
15.9 CONTROL SALARY LEVEL

Pay Level is a fundamental level in an organisation’s pay hierarchy that is used to signify compensation
differences owing to the smallest conceivable change in job specifications. Pay levels tend to grow in
tandem with an organisation’s structure.
The salary is decided by the job’s amount of responsibility, accountability, position and experience,
among other factors.
15.10 PAY AS A CHANGE AGENT

A change agent, often known as a change agent, is someone who encourages and facilitates change
within a group or organisation.
A change agent in business is someone who promotes and supports a new way of doing things within
a company, whether it’s via the application of a new process, the adoption of a new management
structure, or the transition of an old business model into a new one.
6
A change agent is sometimes known as a change agent or a change advocate. Change agent and
champion are frequently used interchangeably, however others see differences in the roles they play
in promoting change, with a change agent having greater obligations and accountability for ensuring
that change is effective than a champion.
Change Agents’ Roles and Responsibilities
To achieve such goals, a change agent often takes on a variety of duties, which should begin as soon
as leadership chooses to launch a project. As a result, a change agent may help with the initiative’s
implementation strategy and decision-making.
Furthermore, by appointing a change agent at the outset of the effort, the project plan may include the
change agent’s objectives, duties and success indicators.
An agent of change can be assigned to a variety of duties, including:

 Defining why change is occurring and who will be impacted, promoting the change project,
disseminating information
 Outlining the possible advantages and disadvantages of suggested projects
 Identifying and analyzing possible areas of conflict or disruption
 Creating plans to address possible areas of conflict or disruption
 Gathering feedback to share with management and relaying answers
 Acting as a point person to listen to others’ problems, thoughts, and questions
 Advising stakeholders and those who would be impacted
 Resolving conflicts through mediation
 Keeping track of and maintaining the project’s goals for the change agent
A change agent is an individual or group who is responsible for initiating and managing change in
an organisation. Internal change agents might include supervisors or staffs who have been assigned
to oversee the change process. Managers and staff in many creative firms are being taught to gain
the necessary abilities to handle change (Tschirky, 2011). External change agents, like consultants from
outside the company, can also be used.
 HR compensation experts have challenges in selecting the appropriate salary and benefits to
recognise and reward workers for their contributions to the firm.
 Compensation secrecy is a frequent company regulation that bans workers from discussing their
pay with one another.
 Many employee handbooks, implicitly or expressly, may enforce such a policy. Some bosses tell their
staff not to talk about their pay.
 Employees are prohibited from discussing their earnings with other employees under pay secrecy or
pay confidentiality regulations, often known as PSC rules.
7
JGI JAIN
 Employee pay plans must be developed in accordance with a company’s global business strategy for
international operations.
 Companies that define a clear global pay philosophy and build compensation systems to match are
in the greatest position to implement their strategy.
 You may be involved in pay compression if you pay employees about the same amount despite
disparities in their abilities, experience and expertise.
 When a new employee is paid almost the same as or more than a longer-serving employee in the
same function, this is known as pay compression.
 A green circled employee is one who is paid less than the pay that has been established for the
position in issue.
 Those with red circles have a current basic wage that is higher than the proposed pay grade or
range’s maximum.
 A change agent, often known as a change agent, is someone who encourages and facilitates change
within a group or organisation.
15.12 GLOSSARY
 Pay Compression: Is the situation in which an organisation has negligible differences in pay between
people who have differing skill sets
 Inversion: Situation in which something is changed so that it is the opposite of what it was before,
or in which something is turned.
 Pay Secrecy: A common work place policy that prohibits employees from discussing their pay
 Global Pay: Global payments take place when the issuing and the acquiring bank behind the
transaction are situated in different countries
15.13 CASE STUDY: SHRUNKEN PAY CHEQUE
Case Objective
This case highlights the issue faced by Sushma with respect to her salary and pay raise.
It was payday, and Sushma was eagerly anticipating her pay check. She’d finally be able to get the
colour television set she’d been saving for. When she opened the envelope, however, she was unpleasantly
startled. The check was for a lower amount than normal. Sushma was aware that she was being paid
more than the amount indicated in the contract for her classification, but this higher rate had been
awarded to her due to certain specific work she had previously completed. Sushma received notice on
her pay sheet that she would now be paid at the contractual rate.
Sushma reported the notification to her Union Secretary, who urged her to submit a grievance as soon
as possible. “Why am I being demoted?” During the next day’s grievance meeting, Sushma inquired of
the HR Manager. The HR Manager said, “You’re not being demoted.” “The corporation has always had
entire discretion in granting and removing merit raises.”
8
The Union brought the case before mediation. A section that specifies that “the Company shall continue
to exercise its right to pay any employee salaries or other remuneration in excess of the minimum
amounts hereby stipulated” backed up both the Company and the Union’s claims.
Questions
1. Is Sushma eligible for a raise on her categorised salary?
(Hint: Analyse the case appropriately and understand the position of Sushma with respect to her
contract)
2. Is it proper for management to abruptly end the higher rate of pay? Justify your actions.
(Hint: Accordingly, there should be a proper justification and communication)
3. Is there a legitimate labour dispute in this case?
(Hint: Analyse the case to understand the threshold for any legal dispute)

1. What do you understand by pay secrecy?
2. What is green circle and red circle jobs explain?
3. Explain pay compression?
4. Discuss about disparate top-down salary?

1. Compensation secrecy is a frequent company regulation that bans workers from discussing their
pay with one another. Many employee handbooks, implicitly or expressly, may enforce such a policy.
Refer to Section Pay Secrecy
2. A green circled employee is one who is paid less than the pay that has been established for the
position in issue. It’s one of the most serious issues in compensation management, along with the
red-circled employee, who is the polar opposite and hence a cost to the company. Refer to Section
Green Circle and Red Circle Jobs
3. You may be involved in pay compression if you pay employees about the same amount despite
disparities in their abilities, experience and expertise. Refer to Section Pay Compression
4. There are two types of compensation agreements. Both are contingent on the company’s choice
of how to break and shape its CTC (Cost to Company). In India, there are several distinct sorts of
employee wage structure formats. Refer to Section Disparate Top-Down Salary
9
 https://bizfluent.com/list-6828678-challenges-compensation-management.html
 https://www.jdsupra.com/legalnews/top-10-compensation-and-benefits-issues-14947/
 https://www.slideshare.net/HRM751/compensation-issues
 Discuss the issues in compensation management with friends.
10

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UNIT

01 Introduction to Reward Management

In this unit, you will learn to:

At the end of this unit, you would:

Pre-Unit Preparatory Material

1.2 EMPLOYEE REWARD AND COMPENSATION

1.2.1 Aims of Reward Management

1.3 ELEMENTS OF A REWARD SYSTEM

1.4 FACTORS AFFECTING REWARD MANAGEMENT POLICY AND PRACTICE

Factors affecting the strategic reward system

Internal factors External factors

Area wage rates

PAY Cost of living

Employer’s ability to pay Legal requirements

Figure 1: Factors affecting the Strategic Reward Policy and Practice

1.5 INTERNAL ENVIRONMENT AND THE EXTERNAL ENVIRONMENT

Internal Environment External Environment

Figure 2: Internal and External environment

1.6 DEVELOPMENT OF REWARD MANAGEMENT

 Opportunity for personal growth

1.7 TYPES OF WAGES

1.7.1 Minimum Wage

1.7.2 Fair Wage

1.7.3 Living Wage

Conclusion 1.8 CONCLUSION

1.10 CASE STUDY: REWARD MANAGEMENT IN BALAJI ENTERPRISES

1.11 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

5. Explain types of wages.

1.12 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

@ 1.13 POST-UNIT READING MATERIAL

1.14 TOPICS FOR DISCUSSION FORUMS

In this unit, you will learn to:

At the end of this unit, you would:

Pre-Unit Preparatory Material

2.2 STRATEGIC REWARD MANAGEMENT

2.2.1 Guiding Principles of Strategic Reward Management

Train & Engage

Review & Modify

Figure 1: Process for developing a reward strategy

Implementing new reward strategies is accompanied by challenges of managing change in the

2.3 BEST PRACTICE VS. BEST FIT OPTIONS

2.4 TOTAL REWARD

2.4.1 Significance of Total Reward

Intrinsic Development Climate

Figure 2: Extrinsic and Intrinsic Reward types

2.4.2 Benefits of Total Reward

2.4.3 Model of Total Reward

Total Rewards Strategy

Figure 3: Model of Total Reward

2.5 TRANSACTIONAL REWARDS

2.6 RELATIONAL REWARDS

2.7 TYPES OF COMPENSATION

2.7.1 Financial Remuneration

2.7.2 Non-Financial Remuneration

Conclusion 2.8 CONCLUSION

2.10 CASE STUDY: BELLA CLEANING PRIVATE LTD.

2.11 SELF-ASSESSMENT QUESTIONS

A. Essay Type Questions

2.12 ANSWERS AND HINTS FOR SELF-ASSESSMENT QUESTIONS

A. Hints for Essay Type Questions

@ 2.13 POST-UNIT READING MATERIAL