Compensation,

Performance Management
& Appraisal

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email: doc.office@manipal.edu
 Compensation

▪ Employee compensation includes all forms of pay or rewards going to

employees and arising from their employment .
▪ Two main components are 1. Direct financial payments – in the form of
wages, salaries, incentives , commissions and bonuses. 2.Indirect
financial payments- in the form financial benefits such as employer paid
insurance
▪ Compensation is an integral part of HRM which helps in motivating the
employees and improving organizational effectiveness

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Components of compensation have to be devised in such a way
that, it focuses on the growing demands of employees while
retaining the competitiveness and profitability of the company

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Objectives of Compensation Planning

▪ Important objectives of any pay system is fairness or equity

The terms equity has three dimensions
1. Internal Equity –refers to how fair the job’s pay rate is when
compared to other jobs within the same company
2. External Equity- refers to how a job’s pay rate in one company
compared to the job’s pay rate in other companies

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
3.Individual Equity – refers to the fairness of an individual ‘s pay as
compared with his or her coworkers earning for the same or similar
jobs within the company , based on each person’s performance

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Components of a Compensation Package

1. Base pay structure (Fixed component)

2. Variable pay programs
3. Benefits

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Base Pay Structure

▪ Basic Component
- Normally 40% of the base pay is basic and rest of the base pay
falls under various other categories . This breakage is governed
by the tax laws of the land.
▪ HRA (House Rent Allowance)
- Calculated as a percentage of basic. If a company pays HRA
component then it must collect proofs of rent-paid from the
employee
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ DA ( Dearness Allowance)
- The payment of dearness allowance, which may be a fixed
percentage on the basic wage , enables the employees to face the
increasing prices.
▪ Leave Travel Allowance, Mobile Expenses Medical
Allowance/Reimbursement, etc

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Basic Factors in Determining Pay Rates

▪ Several factors influence an organization’s pay plan’s design and

they are
1. Aligning Total Rewards with Strategy
- Creating an compensation package that produces the employee
behaviors the firm needs to achieve its competitive strategy.

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
2. Equity and its impact on Pay Rates
- External equity, Internal equity , individual equity and procedural
equity are the equity issues in compensation
- Managers use various means to address the equity issues
3. Legal Considerations in Compensation
- Employers do not have free reign in designing pay plans.
- Various laws specify things like minimum wages, benefits etc

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
4. Union Influences on Compensation Decisions
- Union and labor relations law also influence pay plan design
5. Pay Policies
- Pay policies can influence the employers performance and profitability
- Managers need pay policies on range of issues like whether to
emphasize seniority or performance , distinguishing high performers
and low performers, how to award salary increase , promotion

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Job Evaluation Methods
Employers use two basic approaches to set the pay rates
1. Market based approaches
2. Job evaluation methods
▪ Market based approaches
- Smaller firms use market based approach
- It Involves conducting formal or informal salary surveys to
determine what others in relevant job markets are paying for
particular jobs.

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Job Evaluation
- It is a formal and systematic comparison of jobs to determine the
worth of one job relative to another
- Basic principle of job evaluation is - job that requires greater
qualifications , more responsibilities , more complex duties
should receive more pay than jobs with lesser requirements

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Combining the information from the job evaluation and from the
salary survey , one can create market – competitive pay plan –
where your pay rates are equitable both internally and
externally
▪ The job evaluation committee evaluates the worth of each job
using compensable factors.
▪ These compensable factors includes elements of the job such as
skills, effort , responsibility etc

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Job Evaluation Methods-

1) Ranking- simplest & easiest method of job evaluation that

involves ranking each job relative to all other jobs based on overall
factor like “job difficulty”
1. Obtain job information-job description of each job are prepared
2. Select and group jobs-the usual procedure is to rank jobs by
department or in clusters
3. Select compensable jobs

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
4. Rank jobs-each rating person gets a t of index cards, each of
which contain brief description of the job.
5. Combine ratings-usually, several raters rank the jobs
independently. Then the rating committee or the employer can
simply average the rater’s rankings
6.Compare current pay and what others are paying based on salary
survey
7. Assign a new pay scale

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
2) Job Classification
Job classification is a simple, widely used job evaluation method in
which raters categorize jobs into groups. All the jobs in each group
are of roughly the same value for pay purposes.
These groups are called as classes if they contain similar jobs
And they are called as grades if they contain jobs that are similar in
difficulty but otherwise different

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
3) Point Method
It identifies several compensable factors for the jobs , as well as the
degree to which each factor is present in each job
4) Computerized Job Evaluations
- They have two main components
1. Structured questionnaire
2. Statistical models which allows to price the jobs , by assigning
points based on the questionnaire response
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Competency-based Pay
- Here the company pays the employee for the skills and
knowledge he or she is capable of using rather than for the
responsibilities or title of the job currently held.
- It is also referred as knowledge or skill based pay
- The competence are based upon demonstrable personal
characteristics like skills , knowledge and personal behaviors like
leadership
- They encourage employees to get and to use the skills required to
rotate among jobs
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
- Most such pay programs contain five elements.
1. Employer defines specific required skills for the job
2. They choose a method for basing the person’s pay on his or her
skills
3. A training system lets employees acquire the skills
4. Formal competency testing system are used to assess
5. The work is designed so that employees can easily move among
jobs of varying skill levels
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Money’s Role in Motivation

▪ Financial incentives – financial reward paid to the workers whose

production exceeds some predetermined standards
▪ This was popularized by Fredrick Taylor in late 1800s
▪ Taylor made three contributions
1. Fair day’s work – formulated precise output standard for each
job
2. Scientific management movement – improving work through
observation and analysis
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
3. Incentive pay- reward employees who produce more than the
standard.
 Incentive pay plan
- All incentive pay plans are pay for performance plans .
- Profit sharing plans (Variable pay )- Incentive plan that ties a
group’s or teams’ pay to some measure of the firms or unit’s
overall profitability
- Variable pay as a term is also used to include incentive plans for
individual employees
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Motivation and Incentives
- Several motivation theories have relevance to designing the
incentive plans.
1. Herzberg theory
- He says that best way to motivate someone is to organize the job
so that it provides the challenge and recognition we all need to
help satisfy “Higher level “ needs for things like accomplishment.

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
- Doing things to satisfy a worker’s “lower level” needs for better
pay and working conditions just keeps the person from becoming
dissatisfied
- He says that Hygiene factors that satisfy lower level needs are
different from those Motivation factors that satisfy higher level
needs
- If hygiene factors are inadequate , employees become dissatisfied

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
- However adding more of these hygiene factors to the job is an
inferior way to motivate employee because lower level needs are
quickly satisfied.
- Managers inclined to create motivated workforce should
emphasize on the “ Job Content “ or motivational factors
- They need to make the job intrinsically motivating
- Intrinsic motivation means that just doing the task provides
motivation
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
- Herzberg points out that relying exclusively on financial
incentives is risky . Employers should provide recognition and
challenging work to their employees
2. Demotivators and Edward Deci theory
- He proposed that extrinsic rewards could at times detract from the
person’s intrinsic motivation
- Hence incentive plan for highly motivated employees should be
cautiously devised
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
3. Expectancy Theory and Victor Vroom
- He says that a person’s motivation to exert some level of effort
depends on three things
1. The person’s expectancy that his or her effort will lead to
performance
2. Instrumentality – the perceived relationship between successful
performance and obtaining reward
3. Valence- perceived value the person attaches to the reward

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Motivation = E x I x V
E - expectancy
I – Instrumentality
V- Valence
If E or I or V is zero there will be no motivation

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Implications of this theory are
- Managers must ensure that their employees have the skills to do the
job , and believe they can do the job. Thus, training, job descriptions,
support are important in using incentives.
- Employees must believe that successful performance in fact will lead
to getting reward
- The reward itself must be of value to the employee. Mangers should
consider individual performance into account

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
4. Behavior Modification and B.F Skinner
- Behavior modification means changing behavior through rewards
or punishment
- Managers need to apply this behavior modification principles
- Behaviors that appears to lead to a positive consequences
(rewards ) tend to be repeated and that leads to negative
consequences (punishment ) tends not to be repeated.

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Employee Incentive & Recognition Program

Incentives for Individual Employees

 Piecework
A system of pay based on the number of items processed by an individual
worker in a unit of time, such as items per hour or items per day.
▪ Standard hour plan
- A plan by which a worker is paid a basic hourly rate but is paid an extra
percentage of his or her rate for production exceeding the standard per
hour or per day.

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Advantage
- Simple to calculate and easily understood by the employees
- Incentive value can be powerful since they tie pay directly to the
performance
▪ Disadvantage
- Employers may raise the production standards whenever they found
their workers earing “excessive wages”

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
- Employees become preoccupied with producing the number of units
needed that they may become less focused on quality and may resist
switching jobs
- Attempts to introduce new process may more likely fail as they require
adjusting engineered standard
- Equipment maintenance tend to decline as employees focus on
maximizing quality

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Merit Pay
- Salary increase awarded to an employee based on his or her individual
performance
- It becomes part of the employee’s base salary hence it is different from
bonus

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
Incentives for Professional Employees
- Incentive pay decisions for professional employees is challenging
- Employers need to maintain competitive incentives for professionals
- Dual career ladders are another way to manage professionals’ pay.

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
Nonfinancial and recognition based awards
- Recognition program refers to formal program like employee of the
month, star of the team
- Social recognition program refers to informal manager-employee
exchanges such as praise, approval or appreciation for job well done
- Performance feedback provides qualitative or quantitative information
on task performance so as to change or maintain performance

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
Incentives for Managers and Executives
- Managers get short term or long term incentives in addition to salary
- Shot terms incentives are usually provided in cash . And long term
incentives are offered as stock options
Short term incentives and the annual bonus
- Most organizations are shifting away from long term incentives to put
more emphasis on short term performance and incentives

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
- Firms have annual bonus plans for motivating managers
- Three factors influence one’s bonus- eligibility , fund size and
individual performance
- Stock options- right to purchase a specific number of shares of
company stock at a specific period. Executives and managers thus hope
to profit by exercising his or her option to buy shares in the future but at
today’s price

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Performance Appraisal & Management
▪ Performance appraisal is evaluating an employee’s current and / or past
performance relative to his or her performance standards
▪ Performance appraisal involves three- step process
1. Setting working standard
2. Assessing the employee’s actual performance relate to those standards
3. Providing feedback to the employee with an aim of helping employee to
eliminate the performance deficiencies

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Performance Management is the continuous process of identifying , measuring
and developing the performance of individuals and team and aligning their
performance with organization’s goals.
▪ Six basic elements of Performance Management are
1. Direction sharing- communicating to all employees the company’s goals and
then translating these into achievable departmental , team and individual
goals.
2. 2. Goal Alignment – having a method that enables managers and employees
to see the link between the employees goals and those of their departments
and company
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
3. Ongoing performance monitoring – measuring the team’s and employee’s
progress toward meeting performance goals
4. Ongoing feedback- providing face to face and computerized feedback
5. Coaching and developmental support
6. Recognition and rewards- to provide the incentives to keep employee’s goal
directed performance on track

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Why appraise the performance ?

▪ Employees base pay , promotion and retention is based on the appraisal

▪ It plays important role in performance management process
▪ Appraisal lets manager and subordinate develop a plan for correcting any
deficiencies
▪ It provides an opportunity to review the employee’s career plans
▪ It enables the manager to identify if there is a training need and the remedial
steps required

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Who should do the Appraising ?

▪ Appraisals by the immediate supervisor/ manger are still the most preferred in
the appraisal process
▪ However relying only on supervisor's appraisals isn’t advisable – there is a
danger of bias for or against the employee
▪ If so, managers have several options
1. Peer Appraisal – appraisal ‘ by one’s peers / colleagues are increasingly
becoming popular
2. Rating Committees- a rating committee usually consists of the employee’s
immediate supervisor and three or four other supervisors. Using multiple rates
is advantageous to cancel out problems such as
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
Bias on the part of individual raters
3. Self-Rating- some employers obtain employees’ self ratings along with the
supervisor’s ratings
4. Appraisal by subordinates – many employers have their subordinate rate their
managers, usually for developmental purpose. Managers view the upward
feedback positively and studies suggest that it improves their performance
5. 360-degree feedback – In this process the employer collects performance
information all around an employee – from his or her supervisors, subordinates ,
peers and internal or external customers – generally for developmental rather than
pay purposes.

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
- This is the most preferred approach however study has concluded that
multisource feedback led to “generally small “ improvements in subsequent
ratings by supervisors , peers and subordinates.
- One need to make sure that the feedback the person receives is productive ,
unbiased and development oriented

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Techniques for Appraising Performance

▪ Graphic Rating Scale method

- A scale that lists a number of traits and a range of performance for each. The
employee is then rated by identifying the score that best describes his or her
level of performance for each trait.
▪ Alternate Ranking Method
- Ranking employees from best to worst on a particular trait, choosing the
highest , then lowest, until all are ranked.

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Paired comparison method
- Ranking employees by making a chart of all possible pairs of the employees
for each trait and indicating which is the better employee of the pair.
 Forced Distribution method
- This is similar to grading on a curve , predetermined percentage of ratees are
placed in various performance categories
Eg- GE used top 20%, middle 70% and bottom 10%

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Critical Incident Method
- Keeping a record of uncommonly good or undesirable examples of an
employee’s work related behavior and reviewing it with the employee at pre
determined times.
 Behaviorally Anchored Rating Scale (BARS)
- An appraisal method that aims at combing narrative critical incidents and
quantified ratings by anchoring a quantified rating scale with specific narrative
examples of good and poor performance .

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Mixed Standard scales
- Here the employer mixes together sequentially the good and poor behavioral
example statements when listing them .

 Management by Objectives
- MBO requires the manager to set specific , measurable , organizationally
relevant goals with each employee and then periodically discuss the employee’s
progress towards these goals.

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ Electronic Performance Monitoring
- Allows manager to monitors their employee’s rate, accuracy and time spent
working online.
▪ Computerized web based performance appraisal
This technique combines several appraisal told for appraising the performance.

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Dealing with Rater Error Appraisal Problems

▪ Unclear Standards- an appraisal that is too open to interpretation

▪ Halo effect- the problem that occurs when a supervisor’s rating of a
subordinate on one trait biases the rating of that person on other traits
▪ Central tendency- a tendency to rate all employees the same way , such as
rating them all average
▪ Strictness or Leniency- problem that occurs when a supervisor has a tendency
to rate all subordinates either high or low
▪ Recency effects- Recency means letting what the employee has done recently
blind you to what his or her performance has been over the year

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
 Managing the Appraisal Interview

▪ Supervisors face 4 types of appraisal situations , each with its unique

objectives
1. Satisfactory-promotable
2. Satisfactory-not promotable
3. Unsatisfactory but correctable
4. Unsatisfactory and not correctable

Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email:
▪ How to conduct the appraisal interview :
- Talk in terms of objective work data
- Don’t get personal
- Encourage the person to talk
- Get agreement
 How to handle defensive subordinate
- Recognize the defensive behavior
- Never attack the person’s defense
- Postpone action
Department of Commerce, New Management Block, MAHE, Manipal, 576 104, Karnataka, India, Ph. No: 0820 25342 Email: