Module 3

Organising
Organisation
• It is the backbone of management.
• It brings together men, machines, materials and money to achieve
common objectives.
• Concerned with grouping activities , allocation of work and assignment of
duties & responsibilities.
• In static sense- it is a structure manned by individual who work together
towards a common goal
• In dynamic sense- it is a process of welding together a from work of
positions to achieve the objectives of an enterprise.
Nature of Organisation
1. Division of work
2. Co-ordination
3. Accomplishment of Objective
4. Authority & Responsibility
5. Communication
6. Continuous Process
7. Structure of Relationship- formal & Informal
Purposes
1. Focus attention on objectives
2. Help people work effectively to attain the objectives
3. Establish healthy relationship between position.
4. Responsibilities between position should be clearly defined
5. Combine & co-ordinate individual and group activities
6. Facilitate (help) attainment of objectives
7. Help management to have control over various business functions
8. Help employees to contribute their best to increase productions
9. Ensure co-operation and team sprit among the employees.
Importance of Organisation
1. Facilitates enterprise growth by increasing efficiency
2. Encourages specialisation
3. Ensures diversification of activities
4. Promotes technology improvement
5. Help innovation
6. Encourage optimum use of resources
7. Motivates workers through decentralisation
8. Stimulates creative thinking and initiative among workers
9. Provides training facilities and chances of initiative among the workers
10. Creates team sprit among workers
11. Develop healthy human relations in the enterprise
Principles of Organisation
1. Unity of Objectives
2. Specialisation- division of work
3. Definiteness – power, responsibilities and duties should be clear.
4. Efficiency- attain organisation objectives, individual satisfaction &
social needs at minimum cost.
5. Span of Control- the manageable number of subordinates of a superior.
The bigger the number of the subordinates a manager controls, the
broader is her/his span of control.
6. Functional Definition-
7. Scalar Principle- authority & responsibility should flow in a clear
unbroken line from the highest executive to lowest.
8. Balance- authority, funds and staff must be in balance manner.
9. Unity of Command- receive orders from one superior and be
accountable to that superior alone.
10. Simplicity- easily understood by all
11. Authority & Responsibility- should be clearly define
12. Flexibility – changes as per new conditions
13. Exception Principle- complicated problems should be referred to top
management day-to-day problems should be solved by lower
management
14. Departmentation - grouping of activities
15. Delegation of Authority-
16. Co-ordination- unifying activities of groups
17. Decentralisation-
Formal and Informal Organisation
Formal organisation
• It is “a system of well-defined jobs, each bearing a definite measure of authority,
responsibility and accountability, the whole consciously designed to enable the people of
the enterprise to work most effectively together in accomplishing their objectives.”
• It is built by the management to realise the objectives of an enterprise.
Features
1. Deliberately created structure
2. Job-oriented
3. Division of work
4. Departmentation
5. Formal authority
6. Delegation
7. Coordination
8. Principles of organising
Informal Organisation
• They arise out of common interests of people.
• They represent non-planned, unofficial, social interactions amongst people working in
formal structures.
• They arise because of inevitable social and personal needs of individuals which cannot
be satisfied by the principles of formal organisation.
Features
1. Unplanned structure
2. Social needs
3. No formal structure
4. Informal leaders
5. Informal communication system
6. No rules and regulations
7. No fixed tenure
Sr.No Basis Formal Organisation Informal Organisation
1 Origin Created deliberately- by Spontaneously- socio-psychological
management
2 Purpose Achieve organisation Objectives For social and psychological satisfaction
3 Size Large Small
4 Nature Stable and continues Unstable
5 Structure Definite both mechanical and Structureless, impersonal and emotional
rational
6 Behaviour of Members Governed by formal rules & Governed by norms, beliefs and values
regulations of the group
7 Communication Flows through prescribed chain of Informal which may have many forms
command
8 Abolition Management can abolish it at any Management has no control over it
time
9 Leadership Vested in management Not associated with management
Organisation Structure
• An organizational structure outlines how certain activities are directed
to achieve the goals of an organization.
• Successful organizational structures define each employee's job and
how it fits within the overall system.
• A centralized structure has a defined chain of command, while
decentralized structures give almost every employee receiving a high
level of personal agency.
Types or Forms of Organisation
1. Line Organisation
2. Functional organisation
3. Line and Staff Organisation
4. Project Organisation
5. Matrix Organisation
6. Committee Organisation
Line Organisation
•  It is the oldest and simplest form of organization
• Also, authority flows from the top-most person in the organization to
the person in the lowest rung. This type of an organization is also
called a military organization or a scalar-type organization.
• The chain of command and each department head has control over
their departments. The self-contained department structure can be seen
as its main characteristic.
• Independent decisions can be taken by line officers because of its
unified structure.
Advantages
1. Directness
2. Fixed Responsibility
3. Simplicity
4. Discipline
5. Prompt decision
6. Flexibility
7. Co-ordination
8. Unified Control
Disadvantages
1. Overloading- too much expected from person having authority
2. Discouraging co-operation- importance given only to one person
3. Lack of Specialisation- no scope due to complex business nature
4. Scope for Favouritism-
5. Lack of Communication- no communication from lower ranks to
higher
Functional Organisation
• It is a structure used to organize workers. 
• They are grouped based on their specific skills and knowledge.
• It vertically structures each department with roles from the president
to finance and sales departments, to customer service, to employees
assigned to one product or service. 
Advantages
1. Specialisation- division of labour
2. Separation- mental and manual function
3. Efficiency
4. Mass production
5. Co-operation
Disadvantages
1. Lack of Disciplines- coz workers works under different bosses
2. Lack of all round executives
3. Lack of speed
4. Conflict- among foremen of equal rank
5. Lack of definite responsibility-
6. Lack of co-ordination- at lower level
7. Complication in Operation-
Sr.No Basis Line Organisation Functional Organisation
1 Nature Vertical- Scalar chain Functional or diagonal
2 Specialisation No scope Maximum scope
3 Burden Overburden on top executives Less burden on top executives
4 Unity of Subordinates receives orders from Subordinates receives orders from line
Command his boss only boss and functional bosses

5 Discipline Strick and effective Loos and ineffective

6 Suitability For small scale operation For large scale operation
7 Responsibility Easy to fix responsibility Difficult to fix responsibility
Line and Staff Organisation
Line Relationship
• is a decision maker
• Which is responsible for the actual performance of the work.
Staff personnel
• are an advisor.
• Which is responsible for planning
According to Allen, “Line refers to those positions and elements of
organisation, which have the responsibility and authority and are
accountable for the accomplishment of primary objectives. Staff
elements are those which have responsibility and authority for providing
advice and service to the line in the attainment of objectives.”
Advantages
1. Specialisation
2. Expert Advice
3. Individual Responsibility
4. Opportunity for Promotion
5. Training Ground
Disadvantages
1. Confusion
2. Ineffective
3. Too much Reliance
4. Misinterpretation
5. Objection of Line Officers
Sr.No Basis Line Organisation Line & Staff Organisation
1 Meaning Position responsible for Having responsibility of providing advice
achieving objectives as service

2 Experts no experts There are experts know as staff

3 Conflict No scope of conflict Risk of conflict
4 Discipline Strick discipline Planned specialisation
5 Specialisation Not based on planned Based upon planned specialisation
specialisation

6 Quick action It facilitate quick action Does not facilitate quick action
7 Better decisions No better decision due Lack of Better decision due to expert knowledge
experts
Project Organisation
• Adopted when an organisation has to execute large projects of long
duration.
• Project manager co-ordinates the activities of different persons.
• He is responsible for the successful completion of the project.
• When a project is completed the project division undertakes a new
project.
Advantages
1. Concentrate attention on complex projects
2. Use specialised knowledge and skills
3. Greater flexibility in handling specialised projects
4. Facilitates better co-ordination of organisational resources
5. Enables fixation of individual responsibility for results and makes
for meaningful control
6. Unity of command is maintained.
Disadvantages
1. As project managers has to deal with specialist having different
approaches and interest there arises some uncertainty in projects.
2. Project manager job becomes very difficult due to lack of clearly
defined responsibility, lack of clear communication pattern, and lack
of standards of performance for various professionals.
3. Decision- making is very difficult due to unusual pressures from
specialists and time-limits for completion of the project
4. It is difficult for the project manager to motivate and control the
specialist as conflicts arise quite often among the specialists.
Matrix Organisation
• A matrix organisation is a structure in which there is more than one
line of reporting managers. Effectively, it means that the employees of
the organisation have more than one boss!
• It is a combination of functional department organisation and project
organisation structure. employees usually have dual reporting
relationships - generally to their functional manager as well as the
project manager
Advantages
1. It focus attention and resources on a single project which facilitates
better planning and control
2. It helps in completion of projects in time
3. Very flexible and so can be applied usefully to an organisation
involved in small and large projects
4. it provides motivation to the personnel engaged in a project
5. It also improves communication and co-ordination by facilitating
direct contact between the project managers and the functional group
6. It helps to utilise the services of professional as it stresses authority of
knowledge rather than status.
7. It help to maintain high technical standards.
Disadvantages
1. May result in power struggle and conflict due to lack of unity of
command
2. Creates confusion among personnel
3. Difficult to co-ordinate personnel from different functional
departments.
4. Not easy to take joint decision and sharing resources
5. Administrative costs are very high under it.
Committee Organisation
• A committee is a group of people who work collectively, discuss,
decide and recommend solutions to the problems (of a concern) which
possibly cannot be solved by an individual.
• According to Allen’
“A committee is a body of person appointed or elected to meet an
organised basis for the consideration of matters brought before it.”
Advantages
1. Pooling of knowledge and experience
2. Motivation through participation
3. Tool of co-ordination
4. Representation of diverse interest groups
5. Management development
6. Effective communication
7. Consolidation (bring together) of authority
8. Check against misuse of power
9. Avoiding action
Disadvantages
1. Expensive
2. Slow Decision
3. Compromise decision
4. Evasion (avoiding )of responsibility
5. Misuse of committees
Organisation Chart
• It is a graphic record which clearly pictures the formal organisation
structure.
• It is a blueprint of company organisation, its functions, line of
authority and key position.
• is a diagram that displays a reporting or relationship hierarchy
Characteristics
1. It is a diagrammatical presentation
2. It shows principal lines of authority in the organisation
3. It shows the interplay of various functions and relationships.
4. It indicates the channels of communication.
Advantages
1. Shows key positions in the managerial hierarchy
2. Gives adequate information merely at glance
3. Shows what activities are performed and who does them
4. Defines scope and limits of the job and explains tasks to be
performed at each positions.
5. Serves as a guide for new personnel
6. Shows inter relationship of all position
Disadvantages
1. It may be out dated
2. Cannot represent precise human relationship between boss and
subordinate
3. Updating disturb entire set-up
4. Cant reveal real relationship in formal organisation.
Organisational Manual
• It is a handbook maintained in hard cover, in loose-leaf form
containing information about policies, operations, rules and
regulations, objectives, procedures, departmental details etc.
• It consist of records of top management decisions, standard practices,
procedures and description of various jobs, duties, responsibilities of
each units.
Advantages
1. Settles misunderstanding
2. Relieves the mangers from repeating same information
3. Provides uniformity
4. Helps in training of new employees
5. Avoids overlapping of authority
6. Enables quick decision
Limitation
7. Expensive to prepare
8. Little scope for individual imitative
9. Puts on records relationships which no one likes to see exposed
Authority
• It refers to the powers and rights entrusted to a person to perform a
work delegated.
• It is a legal or rightful(to make decision) power, a right to command or
to act.
• Without it a manager ceases to be a manger.
• It is a basis for responsibility and the binding force in organisation.
Characteristics of Authority
• Existence of right in authority
• Legal and legitimate
• Authority is formal
• Making decision
• It has limit
• Relationship between superior and subordinates
• Key to managerial decision
• Achieve organisational goal
• Use to determined personality of possessor
• Control negative aspects of behaviour
• Can be delegated
Responsibility
• Responsibility refers to an obligation to perform certain functions in
order to achieve certain results.
• When a superior assign duties to his subordinates, the latter have the
responsibility to perform the assigned task.
• It is an obligation of a sub-ordinate to perform assigned duties. It is
always bonded between superior and sub-ordinate. When superior
assigns any duty or work to sub-ordinate by his authority it becomes a
responsibility on the part of sub-ordinate to perform that duty.
Concept
• Responsibility as a duty or a task
• Responsibility as an obligation
Features
1. Assigned to human being not to any machines or mechanism
2. Arises from superior- subordinate relationship.
3. It many be continued or confined to single function
4. May be defined in term of functions or targets or goals.
5. It is absolute and cannot be delegated.
6. Moves always upward .
7. It is a derivative of authority.
8. Creates accountability
9. Subordinates are obliged to perform the duties.
Sr.No Basis Authority Responsibility
1 Meaning Right of manager to command Represent duties or task assigned
his subordinates and use to a subordinate by his boss
organisational resources

2 Position Arises due to formal position Arises From superior- subordinate

in the organisation relationship
3 Delegation Can be delegated to Cannot be delegated
subordinates
4 Flow Always flows downward Always moves upward as
subordinates are answerable to his
superior
Accountability
• Accountability is the obligation to carry out responsibility and
exercise authority in terms of performance standards established.
• Answerability to the superiors regarding completion of the job in
conformity with the directions is called accountability.
• Responsibility arises from authority, while accountability arises from
responsibility.
• Every delegation creates accountability.
• Accountability cannot be delegated.
Features
1. Cannot be delegated/ not transferred
2. Always upwards
3. Unitary/ unity of command
4. Accountability standards- specific standards for judging
5. Reporting to the superior
Delegation of Authority
• The process of assigning duties and authority to others is known as
delegation.
• When authority is also entrusted to the subordinate along with the
work, it is known as delegation of authority.
• The process of dividing and entrusting work to other is known as
delegation.
• Delegation is assigning of work to other and giving them authority to
do it.
Elements of Delegation
1. Determination/ defining of results expected- from subordinate
2. Assignment of Duties or Responsibility- basis on qualification,
experience and aptitude of the subordinate.
3. Granting of Authority- helps subordinates to make decision
4. Creation of Accountability- subordinates are answerable to the
delegator for work assigned to them
Importance of Delegation
1. Sharing of work-load
2. Quick decision making
3. Motivation- job satisfaction
4. Training- future executives
5. Expansion of business
6. Specialised knowledge
7. Efficient functioning
8. Better performance
9. Better relation- understanding among manager & subordinates
Principles of Delegation
1. Functional Definition- define objectives of each task and its relationship
with other task
2. Delegation by Results Expected
3. Clarification of Limits of Authority
4. Parity of Authority and Responsibility
5. Absoluteness of Accountability- accountability can not be delegated
6. Authority Level Principle- certain decision managers at all levels can
take themselves
7. Unity of Command
8. Scalar Chain
9. Effective Communication- subordinates can seek clarification if needed
 Obstacles to Delegation
Reluctance of the superior
•Perfectionism
•Autocratic attitude
•Lack of ability to
direct
•Lack of confidence in
the subordinates
•Absence of control
•Conservative and
cautious temperament
•Fear of competition
Reluctance on part of Difficulties on part of
subordinates organisation
• Inadequate planning
•Easier to ask • Splintered( separate into
•Fear of criticism small unit) authority
•Lack of information • Lack of unity of command
and recourses • Lack of effective control
•Overwork- avoid technique
overburden • Non-availability of competent
•Fear of failure managers
•Lack of self-confidence • Unclear authority-
•Lack of incentives responsibility relationship
• Environment of internal
distrust
• Defective organisation
structure
Steps for Successful Delegation
1. Establish clear and definite goal
2. Developing an attitude of tolerance of human mistakes
3. Developing faith in subordinate ability
4. Determining what to delegate
5. Defining clearly the authority and responsibility of each subordinate
6. Motivating subordinates through incentives and encouragement
7. Providing training to subordinates in accepting delegation
8. Delegating compete job to subordinate and making him take responsibility
9. Establish control to enable subordinate to know, measure and evaluate his own
performance
10. Creating a work environment free from fear and frustration
11. Providing free and open lines of communication
Decentralisation of Authority
• It refers to delegation of authority to lower levels of management and
to all departments of the organisation.
• It is an extension of delegation.
• It means scattering of authority throughout the organisation.
• According to Louis Allen
“Decentralisation is the systematic effort to delegate to the lowest levels
of authority except that which can be exercised at central points.”
Factors Determining the Degree of Decentralisation
1. Costliness of Decision
2. Uniformity of policy- where there is no need of uniformity
3. History of the Enterprise- developed a set of departments
4. Management Philosophy – have faith in decentralisation
5. Desire for independence- to motivate lower level
6. Availability of managers
7. Control Techniques- subordinates performance can be measured
8. Decentralised performance
9. Business dynamics- business grows decentralisation becomes
necessary.
Benefits of Decentralisation
1. Reduces the burden to top executives
2. Facilitates diversification- without decentralisation departmentation
is impossible
3. Improves motivation
4. Secures better Co-ordination
5. Ensure effective control
6. Develops the quality of managers- opportunities for better training
& develop talents
7. Flexibility- prompt and spot decision
Difficulties of Decentralisation
1. High cost of operation- specialist in every department
2. Lack of uniformity- each manager will design its own way
3. Unsuitable for small firms
4. Reliance on the manger
5. Self centred attitude- ignored broader interest of other department
Sr. No Basis Delegation Decentralisation
1 Definition Transfer of authority Distributing of authority
2 Scope Transfer of power to lower level End result of delegation of authority
3 Control Exercise control over the Control may be delegated to the lower
subordinates level
4 Compulsion Compulsory Optional
5 Relationship Between superior and subordinate Between top management and various
departments
6 Philosophy Technique of management to get It tis philosophy of management and a
things done through other technique
7 Dependence It can take place without It cannot take place without delegation
decentralization
8 Applicable It is present in every firm It is done in big firm
Centralisation of Authority
• Centralization refers to that organizational structure where decision-
making power is confined to the top management, and the
subordinates need to follow the instructions of their seniors.
• majority of the decisions regarding the work are taken only at higher
levels and not by those who actually performs the work.
• Henry Fayol defines it as
• “everything that goes to increase importance of the subordinate’s role
is decentralisation, everything which goes to reduce it is
centralisation.”
Factors determining Centralisation
1. Personal Leadership
2. Integration- individual efforts
3. Uniformity of Action
4. Handling Emergencies
5. Improving Efficiency
Advantages
1. Uses top leader talents effectively
2. Integration of operation
3. Develop strong co-ordinated top management
4. Uniformity of policies and plans
5. Minimises duplication
Disadvantages of Centralisation
1. Slower in executing of orders as decision making is done by top
management
2. Does not motivate subordinate
3. Does not delegate responsibility and authority
4. It makes fortunes of the enterprise depended on the health and
vitality of top executives
5. Minimises number of division or department in organisation
structure
Sr. No Basis Decentralisation Centralisation
1. Establishment of Establish several Minimises numbers of departments
departments departments
2 Delegation of Authority Involves delegation Does not delegate

3 Uniformity No Uniformity in policy Uniformity in policy and action

and action
4 Close Control No close control Enables close control

5 Decision Making Faster decision making and Time consuming in executing and
action on sport without reporting
consulting
6 Motivation of Subordinates Motivates Does not motivates
Staff
• Staffing is regarded as a separate function under a separate department
called personnel department.
• It is the process of identifying, assessing, placing , evaluating and
developing individuals at work.
• Dale Yoder “ it is the determination of manpower requirements and the
discovery, requirement, selection and placement of appropriate
manpower.’
Nature/Features of Staffing
1. Basic function of management
2. Concerned with HRM
3. It’s a universal function
4. It is dynamic function
5. It’s a continuous function- guide, train, evaluation
6. Optimum utilisation of HR and employee satisfaction
7. It’s a wide scope where all the department are involved
8. Its diffrent from other department as it deals with human being
Importance of Staffing
1. Discover and obtain competent person
2. Placing right person on the job
3. Keep space with new development and changes as competent person
are employed
4. Improves job satisfaction and morale of employee.
5. Optimum utilisation of HR minimises cost
6. Ensure continuity and growth of organisation through development
of managers
7. Help cope with shortage of executives talent.
Recruitment
• The term ‘recruitment’ applies to the process of attracting potential
employees to the organization.
• It is the act of attracting, engaging, assessing, and on boarding talent
for work. It involves the identification of the skills and qualifications
demanded. In other words, is the process of actively seeking out,
finding and hiring candidates for a specific position or job.
• The stages of recruiting are job analysis, sourcing talent, assessing
talent, and engaging talent.
• Flippo defined, “Recruitment as the process of searching for
prospective employee and stimulating them to apply for jobs in the
organization.”
 Sources of Recruitments

Internal External
1. Direct Recruitment
2. Unsolicited Applications
1.Transfer 3. Advertisement
2.Promotion 4. Employment Exchanges
5. Educational Institutions
3.Present Employees 6. Labour Contractors
7. Casual Callers
8. Recommendations
9. Personal Consultants
10.Leasing
Selection
• Selection is the process of picking or choosing the right candidate,
who is most suitable for a vacant job position in an organization. In
others words, selection can also be explained as the process of
interviewing the candidates and evaluating their qualities, which are
required for a specific job and then choosing the suitable candidate for
the position.
• The selection of a right applicant for a vacant position will be an asset
to the organization, which will be helping the organization in reaching
its objectives.
• Dale Yoder has defined, “Selection is the process by which candidates
for employment are divided into two classes those who will be offered
employment and those who will not”
Selection Procedure
I. Receipt and Scrutiny (inspect/ Examination) of Applications
II. Preliminary Interview
III. Blank Application Form
IV. Test
V. Interview
VI. Checking Reference
VII.Preliminary and Final Selection
VIII.Physical Examination
IX. Placement and Orientation
Sr.No Basis Recruitment Selection
1 Object Is to attract applicants Is to eliminate unsuitable persons
2 Nature Positive Negative
3 Meaning Identification of potential Selection from among the qualified
employee and encouraging applicants
them to apply
4 Starting Before selection After recruitment
5 Classification As internal and external No such classification
sources
6 Restriction No restriction Restricted to number of person
employed
7 Process Simple Complex and lengthy
Training
• It is concerned with developing a particular skill to a desired standard
by instruction and practice.
• Training is a highly useful tool that can bring an employee into a
position where they can do their job correctly, effectively, and
conscientiously. Training is the act of increasing the knowledge and
skill of an employee for doing a particular job.
• According to Edwin Flippo, ‘training is the act of increasing the skills
of an employee for doing a particular job’.
Benefits
• Help employee to acquire the skills to do job within short period of time
• Increase in quantity and quality of output
• Reduce need for detailed and constant supervision
• Avoids all wastages which leads to less cost of production
• Increase morale of employees
• Creates feelings of confidence in the minds of workers
• Leads to higher remuneration and benefits to employees.
Methods and Types of Training
1. On-the-Job Training
2. Vestibule Training
3. Classrooms Training or Special Courses
4. Induction or Orientation Training
5. Refresher Training
6. Apprenticeship Training
Job Analysis
• It refers to the process of identifying and determining the duties,
responsibilities, and specifications of a given job.
• Job analysis is the process of gathering and analysing information
about the content and the human requirements of jobs, as well as, the
context in which jobs are performed.
• It may be describe as the study of the job, its nature and components.
It is known as job study.
Benefits
1. Determine type of people requires
2. Inform duties & responsibility of each job
3. Describe s kills and qualification required for each job
4. Forms basis of recruitment of staff to a concern.
Job Evaluation
• Job evaluation differs from job analysis – the latter is the process of
gathering information about a job, whereas job evaluation goes a stage
further by placing a relative value on a job so that a fair and suitable pay
framework can be produced.
• It is evaluating of the job.
Job evaluations may be carried out in order to help businesses:
• Produce a fair pay framework
• Reduce inefficiencies in remuneration e.g. two people on the same ‘level’
with different salaries
• Compare remuneration with other companies
• Design new jobs, departments and functions
• Rework their pay framework after a company re-organisation
Compensation or Wage and Salary Administration
• It is any form of payment given to employee in exchange for the work they perform.
• According to Benham, “Wages are a sum of money paid under contract by an
employer to a worker for services rendered.”
• Financial payment made at or near the place where work is performed is called
“direct compensation”.
• Direct compensation is also known as basic or primary compensation.
Direct compensation involves monetary payments to employees for time worked or
results obtained.
Indirect compensation involves expenditures made by an employer on behalf of all
employees and is typically referred to as "fringe benefits." Intangible compensation
involves non-monetary rewards such as.... 
Direct Compensation Components
• Base salary
• Premium payments (overtime, shift differentials, longevity pay.)
• Contingent programs (incentive plans or achievement award, merit
pay)
Indirect Compensation Components
• Protection programs (Social Security, Worker's Compensation,
Unemployment Compensation, pension plans, health, dental, vision,
life, accidental death and long term disability insurance.)
• Paid Leave (vacations, holidays, jury duty, sick leave, military leave.)
Objectives of Compensation
1. To establish fair and equitable system of remuneration
2. Attract competent personnel
3. Retain present employees
4. Improve productivity by motivating employee with additional
incentives
5. Control administrative and labour cost
6. Establish promotion policy
7. Improve relations with trade union
8. Better public image of company
Principles of Compensation
1. Compensation policy should be in interest of employer, employees,
customers and society.
2. Policy should be in writing
3. Compensation plan should be flexible
4. Compensation plan should agree with objectives and policy of company
5. Policy should be prepared in joint efforts of management and employees
6. Wages and salary plans should be simple enough to administer
7. Adequate database should be maintained for future reference.
8. Wages and salary structure should be review and revised periodically.
Factors Influencing Compensation Levels
1. Demand and supply of labour
2. Bargaining capacity- trade union and employees
3. Ability to pay- by organisation
4. Cost of living allowance
5. Prevailing wage rate
6. State and central govt regulations
Methods of Wages Payments
Time wages
• Based on time worker spent in organisation without taking output into
account
• In this method the quantity of output produced is not considered for
calculating remuneration.
• Its also know as ‘day work’ system of wages.
• The wage rates are fixed for an hour, a day, week, a month or even a
year
Wages are calculated in the method as follows:
Earnings = T x R where T stands for time spent and R is rate of pay.
• For example, a wage rate of Rs. 70 per day is fixed in an industrial
unit. Two workers A and B attend work for 28 and 16 days
respectively. The wages as per time wage system will be Rs. 1960 and
1120 for A and B respectively. This method of wage payment does not
give weight age to the quantity of goods produced by the workers.
Piece Wage System
• wages are based on output and not on time. There is no consideration
for time taken in completing a task. A fixed rate is paid for each unit
produced, job completed or an operation performed. Workers are not
guaranteed minimum wages under this system of wage payment.
• This method s also known as payment by result.
• Here, one unit od output is considered as one piece and the specified
rate of wage is paid per piece.
The wages to be paid to a worker can be calculated as follows:
• Quantity produced = output x piece rate
Performance Appraisal
• A performance appraisal is a regular review of an employee's job
performance and contribution to a company.
• Companies use performance appraisals to determine which employees
have contributed the most to the company’s growth, review progress, and
reward high-achieving workers.
• PA is considered as the Crux (root/core) of HRM.
• Alford and Beatty have defined it as – “the evaluation or appraisal of the
relative worth to the company of a man's services on his job”.
• Edwin B. Flippo (1984), a prominent personality in the Human Resource
field said “performance appraisal is the systematic, periodic and an
impartial rating of an employee's excellence in the matters pertaining to
his present job and his potential for a better job”.
Features of Performance Appraisal
1. A systematic process and tries to evaluated performance in the same
manner using the same approach.
2. Provides an objective description of the relevant strengths and
weaknesses of an employee’s job
3. It tries to find employee job performance and establish a future plan
for improvement
4. It is carried out periodically, according to definite plan
5. It may be formal or informal
Objectives of Performance Appraisal
1. To make systematic judgements for increasing of salary, change of
job, promotion, transfer, demotion and termination.
2. Employees can know his performance and get needed suggestion for
improving his performance.
3. To reveal the causes of good and poor employee performance.
4. Act as a basis for superiors in giving coaching and counselling to the
employees.
5. To serve as a guide for formulating suitable training and
development programmes for the employees
6. To motivate employees by indicating their performance levels.
Advantages of Performance Appraisal
1. Basis for judging performance
2. To determine fair rats of pay
3. Identify employees who have special abilities
4. Basis for transfer, promotion and demotion
5. To distinguish between good and inefficient workers
6. To develop a sense of completion in performance with fellow workmen
7. To get an idea about the difficulties faced by workmen
8. To identify training and development needs
9. To facilitate future manpower planning
10. To create a positive work environment
Limitation of Performance Appraisal
1. Leniency Error-
• Leniency error is when a raters’ tendency is to rate all employees at the
positive end of the scale (positive leniency) or at the low end of the
scale (negative leniency).
• This can happen when a manager over-emphasizes either positive or
negative behaviours.
What is the horns effect and halo effect? It is a cognitive bias that causes
you to allow one trait, either good (halo) or bad (horns), to overshadow
other traits, behaviours, actions, or beliefs.

This is more visible when a rater’s overall positive or negative

impression of an individual employee leads to rating him or her the same
across all rating dimensions.

This is when a manager really likes or dislikes an employee and allows

their personal feelings about this employee to influence their performance
ratings of them.
3. Similarity Error-
• This errors arises when evaluators rate other people in the same way
that the evaluators perceive themselves.
4. Consequences of a low rate appraisal-
• It will affect the employees' chances for promotion, salary hike, bonus
and other incentives.
• 5. General tendency to give an average rating- for average and poor
performers
6. Inappropriate tendency to give an average rating-
• In a situation where uncontrollable factors affect the performance, it is
difficult to evaluate efficiency using any performance appraisal.
7. Inadequate training and biases on the part of evaluators-
8. Influences of the factors relating to the appraisal forms-
9. Time gap between appraisal and feedback- untimely feedback
10. Dissatisfied employees and evaluation-