Question Bank with Answers

Q1.Define Compensation.

Compensation Management – Concept
An organization’s goals or objectives can be achieved when its employees put in their best efforts in the right
direction. Hence, they should be nurtured properly and paid well for their work, performance, services, etc.
Besides wages or salaries, organisations provide different kinds of incentives, benefits and services to their
employees.
Compensation Management refers to the establishment and implementation of sound policies,
programmes and practices of employee compensation. It is essentially the application of a systematic and
scientific approach for compensating the employees for their work in a fair, equitable and logical manner.

Compensation Management Objectives
A well-developed remuneration system should aim at achieving the following objectives:
1. To attract competent and qualified persons towards organization by offering fair wage and incentive.
2. To retain present employees by paying competitive remuneration.
3. To establish fair and equitable remuneration so as to avoid pay disparities.
4. To improve production, productivity and profitability of the organization.
5. To improve and maintain good human relation between employer and employee through a process of
payment of bonus, profit sharing and other fringes benefits.
.
Q2. What are the responsibilities of a compensation manager?
Main Responsibilities of Compensation & Benefits Manager are-

 Define a fair, equitable and competitive total compensation and benefits package that fits and is aligned to our
company’s strategy and business goals
 Participate in salary and labour market surveys to determine prevailing pay rates and benefits
 Differentiate pay systems to invest in the segments of workforce that contribute the most value
 Deploy effective communication strategies and success metrics
 Conduct ongoing research into emerging trends, issues and best practices
 Conduct periodic audits and prepare reports.

Q3. Discuss the importance of compensation management.

Importance of Compensation Management
A good compensation is a must for every business organization, as it gives an employee a reason to stick to
the company.
 It tries to give proper refund to the employees for their contributions to the organization.
 It discovers a positive control on the efficiency of employees and motivates them to perform better and
achieve the specific standards.
  It creates a base for happiness and satisfaction of the workforce that limits the labor turnover and confers
a stable organization.
 It enhances the job evaluation process, which in return helps in setting up more realistic and achievable
standards.
 It is designed to abide with the various labor acts and thus does not result in conflicts between the
employee union and the management. This creates a peaceful relationship between the employer and the
employees.
 It excites an environment of morale, efficiency and cooperation among the workers and ensures
satisfaction to the workers.

Q4. Write short note on Strategic compensation system.

A compensation strategy is a plan that discusses how much, and when, to pay employees in an organization.
However, it may change over time as the needs of the business shift. Although a major part of the plan focuses
on staff financial compensation associated with their roles, skills and education, it also includes benefits and
perks. It also supports a company's plan and its overall business goals by helping companies recruit and
maintain efficient team members.

Objectives of compensation strategy

Human resources teams often use compensation strategies to locate and onboard employees who can provide
the company value. The purpose of a compensation strategy is to:
 Hire qualified employees: Compensation strategy evaluates how much compensation is necessary to
reach qualified employees who can meet the goals and objectives of the business.
 Reward employees for good work: The strategy outlines the rewards an employee receives for meeting
certain objectives.
 Outline the definition of a company's values: It also outlines how a company values compensation,
which can provide consistency in creating compensation packages.
 Improve company morale: Offering a transparent salary with incentive options can help improve
company morale, which can then reduce turnover rates.
Q5.What are the key compensation strategy components?

Base pay
Base pay refers to an employee's salary or hourly pay for their particular job. It's the amount the company and
individual agree upon during the hiring process, which can also be commensurate with their level of education
and skills. When determining the amount of base pay, it's also necessary to decide the frequency. Some
employers may pay weekly, whereas others may pay biweekly or monthly.
Incentive pay
Providing incentive pay can also help encourage employees to complete certain goals or to meet performance
objectives at a set time. It's a type of indirect pay that typically offers additional compensation outside of an
employee's regular job tasks or benefits, such as:

 Referral compensation
 Commission payment
 Bonus payment
 Overtime payment
 Cost of living increase
  Profit-sharing
 Stock options

Employee benefits
Employee benefits are the additional benefits that employees receive besides their base pay, which may include

 Health insurance
 Dental insurance
 Vision insurance
 Short- and long-term disability
 Life insurance
 Retirement contributions
 Company vehicle
 Phone allowance
 Gym memberships
 Travel benefits

Time off
Time off refers to a company program that compensates employees when they're not at work. Most companies
require employees to work for the organization for a specific time period before being eligible for this type of
compensation. They may also require that the employee work a specific schedule, such as full-time
employment. Time off may include

 Paid time off

 Vacation time
 Personal leave
 Maternal or paternal leave

Q6. Describe the economic theories related to compensation

Theories of Compensation

1. Reinforcement and Expectancy Theory: This theory is based on the assumption that, the reward-earning
behavior is likely to be repeated, i.e. an employee would do the same thing again for which he was
acknowledged once.
Similarly, in the case of Expectancy Theory, given by Vroom, the employee is motivated to do a particular
thing for which he is sure or is expected that performance will be followed by a definite reward or an outcome.

2. Equity Theory: According to this theory, there should be equity or the uniformity in the pay structure of an
employee’s remuneration. If the employee feels he is not being paid fairly for the amount of work he does in a
day will result in lower productivity, increased turnover and high absenteeism. The remuneration system should
comply with three types of equity:
2.1 Internal Equity: The employee perceives the fairness in different pay for different jobs based on the nature
of work involved

2.2 External Equity: The employee should feel the fairness in what they are being paid is in line with what
other players in the same industry are paying to their employees for the same kind of job.

2.3: Individual Equity: The employee perceives the pay differentials among the individuals who are performing
the same kind of a job and within the same organization.

3.Agency Theory: This theory states that both the employer and the employee are the stakeholders of the
company, and the remuneration paid to the employee is the agency cost. The employee will try to get an
increased agency cost whereas the employer will try to minimize it. Hence, the remuneration should be decided
in such a way that the interest of both the parties can be aligned.

Q7. Explain the process of designing of compensation system.

Compensation System –Design

The key in designing any compensation is to develop the understating of the forms, vision and direction. A
guideline for designing a compensation plan begins at the top by examining the better strategy and ends with a
model that is ready to be implemented. There are various steps that help as organization to design a
performance based compensation strategy and prepare the organizations design .
1. Focusing on the Strategy Objectives:
The most important goal in designing a compensation system is supporting the strategic objectives of the
organization and ensuring the system that fit in with the organization structure and strategy.
There are various questions which should be focused before designing compensation strategy such as:
i. Why does it exist?
ii. What are the strategic goals and objectives for the next five years?
iii. Whether current employees have the skills to meet these objectives?
iv. What is the organization’s strategy?
v. Do employees work individually or in teams?
2. Ensuring Commitment through Communication and Participation:
An organization must plan for making change to its compensation system. A compensation review committee
could help identifying current issues with compensation, job clarification or salary administration. It could
contribute ideas and feedback provides valuable advice.
3. Analyzing Job Functions:
A job analyst develops a current and thorough understanding of the work that is being formed by the employee.
It is important to undertake a job analysis before making changes to the compensation plan as job analysis
provides a collection of relevant information on the type, scope and responsibility of each job.
4. Writing Job Description:
Once the information is collected through the job analysis process, it can be used for preparation of job
description. A job description summarizes the important component like the general nature of the work, specific
tasks, responsibilities and outcome competence required to perform the job. A written job description should be
considered a final document. Before it is finalized, it should be received and accepted by both the employee and
the supervisor.
5. Determining Internal Pay Equity:
It determines fairness within the organization. Fair pay is pay that employees generally view as equitable.
Internal equity is determined by job evaluation techniques such as whole job ranking method and factor
comparison technique.
6. Determining External Pay Equity:
It is the perceived fairness in pay relative to what other employees are paying for the same type of labour.. For
maximum flexibility, using market pricing is recommended to that of market competitive pay rates. Market
competitiveness is more flexible and adaptable than other methods.
7. Designing Salary Structure:
Once collection of market data and determination of a hierarchical ordering of position, is done a salary
structure can be designed. Salary structure consists of jobs of equal value that are grouped into grades with
competitive salary ranges. Pay ranges are the rates from the minimum to maximum of each grade. Positions are
assigned to grades and pay ranges based on job content, marketing or external equity and internal equity. Each
salary range includes minimum, midpoint and maximum salaries, with the midpoint representing the market or
going rate for the job.

Q 8 . W h a t a r e t h e f a c t o r s i n f l u e n c i n g E m p l o y e e C om p e n s a t i o n .
Internal Factors
These factors include the following:
Employee Numerous employees related factors also influence his or her compensation. These include the
following:
Performance
It is always rewarded with pay increase and as a result it motivates the workers to do better in future.
Experience
Generally experience candidate perform the job without need of training which is time consuming and deals
with matter of cost to company. Hence the experience candidates demand more pay than an unexperienced
candidate.
Seniority
In today's environment seniority of employee making difference in payment of compensation compared to Jr
employees. Naturally senior employees demands for more salary than fresher because of their hold on related
job and its functions.
 Potential
Firms also pay their employees, especially young ones on the basis of their potential. software companies are
very good example for this, IT graduate just who completed his education having potential in the subject can
gain a good job with high payment anywhere in the world.
Job requirements
Wages are also influenced by the requirements of a job such as physical and mental requirement. Jobs, which
demand more skill, responsibility, efforts and are of hazardous in nature, will carry high wage tag with them.
Job evaluation
Job evaluation establishes a consistent and systematic relationship among base compensation rates for all jobs.
In other words, it establishes the satisfactory wage differentials.
Organisation's strategy
The organisation's strategy regarding wages also influences employee compensation.

2. External Factors
These factors include the following:
Laws and Regulations
Laws and regulations impact the remuneration of employees in many areas, such as:

 Work hours and compulsory time-off (paid and unpaid)
 Minimum wage
 Overtime
 Compulsory bonuses
 Employment at will
Labour market

 Official laws on wage and salary, labour contract, payment time, wage payment delay, working
insurance, and so on.
 People are standard of living in the areas where the offices of the company are.
 People’s living and consuming customary.
 The average wage rate in the labour market of similar work.
Economy
The state of economy also influences the wage and salary-fixation. Wage rates will be different in a stable
economy than in a depressed economy. In case of depressed economy there may be increase in supply of labour
and these results in the fixation of lower wage rates.
Inflation
Increase in the prices of commodities and decrease in value of the money is called as inflation. The causes of
inflation are many which are raising costs, fall in the currency value in international markets, raising taxes by
government and stagnation in the development of economy, etc.
Technological changes
Technological changes also influence the fixation of wage levels. Due to the advancements in the technology
there may be shortage of skilled manpower in that area. So, the organisation will provide high wages for skilled
personnel.
Academic Institutions
Having good academic qualifications from Reputed and standard educational institution influence the
compensation of the potential candidate in their recruitment in companies.

Q9.Define the concept of performance management.

PERFORMANCE APPRAISAL
Performance appraisal or Performance evaluation is a method of evaluating the behaviour of employees
in a work place, normally including both the quantitative and qualitative aspect of job performance.
Performance here refers to the degree of accomplishment of the tasks that makeup an individual’s job. It
indicates how well an individual fulfilling the job demands. Performance is measured in terms of results.

According to Edwin Flippo, “Performance appraisal is the systematic, periodic and an impartial
rating of an employee‘s excellence in matters pertaining to his present job and his potential for a better
job.”
According to Cummings, “The overall objective of performance appraisal is to improve the
efficiency of an enterprise by attempting to mobilise the best possible efforts from individuals employed
in it.”

Q10.Describe the steps involved in Performance management process.

The steps in the performance management process can be broken down into four broad categories: Planning,
coaching, reviewing and rewarding. Each step is equally important, and together form the backbone of a
company’s performance management process.

1. Planning-The first step of the performance management process is Planning.

1.1 The defining stage

The performance management process begins with the planning stage.

HR and management need to define the job itself, including a comprehensive description, long and short-term
goals, identify key objectives and develop a clear metric for how those objectives and goals will be assessed.

1.2 The feedback stage

Once management has completed the defining stage, employees should have the opportunity to give input on
this material. They are the one doing their job and will have a key insight into what skills, competencies and
goals will best assist the company to achieve organizational goals

1.3 The approval stage.

By making this first step of the performance management process collaborative, management sets the stage for
the process as a whole to be collaborative, and the employee feels that they are involved in goal setting - an
important thing, as evidenced by the Gallup study.
2. Coaching

2.1 Organize meetings on a timely, regular basis

Once the parameters of the job and objectives for the future have been set, the next step of the performance
management process begins. The coaching process is extremely important and must be done on a regular basis.
Meetings should be at least quarterly, although monthly meetings are the ideal.

2.2 Provide necessary training, coaching and solutions

These meetings should focus on solutions and coaching opportunities, rather than punitive measures for
lackluster performance. If accountability is made into a negative, then employees will avoid it rather than being
honest about where they are struggling.

2.3 Solicit feedback on both sides

Management should be able to give - and receive - honest feedback and work with employees rather than
adopting a combative stance. The ability to give actionable feedback is important here.

2.4 Revisit objectives as necessary

As the performance management process continues, management should revisit objectives to see if adjustments
should be made, as well as pay attention to career development opportunities for their employees.

This step involves reviewing the overall performance of the employee, how well the process itself worked, and
it also includes the reward - which is an extremely important part of the overall process.

3. Reviewing

3.1 Reviewing employee performance

At the end of the yearly performance management cycle, there should be an employee review, which is
sometimes also called a performance appraisal. Typically, these are held once a year, to look at how well the
employee performed over that span of time.

There should be a clear record from previous check-ins to show the employee’s progress throughout the year.
The monthly check-ins are to help the employee with problem-solving, adjusting goals and other future-looking
tasks. This performance review is the only step that looks backward, to assess the behavior of the past year.

3.2 Reviewing the performance management process

At this stage, it is important for both management and employees to look over the previous year and see how
well the performance management process worked.

Questions that can be asked are:

 Were personal and organizational objectives met? If not, why?

 What challenges did the employee face?
  What training would help the employee perform better?
 How did management feedback help? If not, why?
 How could the process be made better?
 Was the time spent on this process effectively?

3.3 Reviewing overall goal completion

Of course, one of the main questions to answer is ‘did the employee reach their goals?’ How well did the
employee succeed at the tasks given to them throughout the year?

It is important to look at both smaller and larger goals, as this can give an indication to problem areas where
training or interventions can be applied.

3.4 Giving actionable feedback

A key part of the review is to give and receive feedback.

Management should give actionable feedback for the employee so that they know areas where they can improve
future performance.

The employee should also be invited to give feedback on the process, and how management can do better on
their end.

4. Action

The last step in performance management process is Action.

4.1 Reward and recognition

The last step of the performance management process is the reward and recognition.

This step is absolutely key - employees will not stay motivated if they are given no reason to. This does not
necessarily have to be monetary, although it likely will include monetary compensation. Other rewards could be
new projects, company-wide recognition, time off, or leadership opportunities.

4.2 Setting the stage for next year’s performance management cycle

The end of the performance management cycle gives management and employees one last chance to offer
feedback on the process as a whole and asks for thoughts and feedback for the planning stage for the next year’s
cycle.

Q11.What is External and Internal Pay Equity in compensation management?

External equity and internal equity make up the two halves of fair pay. Both are key toward attracting and

retaining top talent, but they require substantially different approaches to manage.

External equity
Salary competitiveness versus the market. It is impossible to ensure fair pay without using industry and

regionally-specific market data to establish appropriate salary ranges for each position.

Internal equity
Equal pay for equal work within the organization. When organizations leverage market data to establish pay

ranges, they incorporate that data into their overall salary structure. Jobs of comparable value are assigned to the

same grade range, and the range of pay is the same for those jobs, which promotes equity. This assures that

employees within an organization are paid fairly versus each other.

Q12.Describe the Components of Compensation Management – Wages and Salary, Incentives, Fringe
Benefits, Perquisites and Non-Monetary Benefits
INCENTIVES
Incentives are monetary benefits paid to workers for recognizing of their outstanding
performance. According to the National commission on labour -Wage incentives are extra financial
motivation. They are designed to stimulate human effort by rewarding the person over and above the time
rated remuneration for improvements in present or targeted results.
Types of Incentive payments:
Organization can for an effective incentive plan from the various alternatives available:
1. Piece rate: This incentive is given to the employees based on the number of units
produced.
2. Commission: It is given to employees on a pre-established goal or criterion.
3. Bonuses: Bonuses are given to employees on a pre-established goal or criterion.
4. Merit Rises: Merit rises are given on the basis of predetermined policies.
5. Standard hour pay: Provides incentives to employees based on the time saved by them
during the job course.
6. Maturity Curves: Considers the experience and performance of an employee for giving
out the incentives.
7. Gain sharing: Plans undertake those employees who give outstanding performance and
provide for cost saving measures.
8. Profit sharing: Incentive plans are practiced in retail and FMCG sectors. If refers to giving
out the share of profits, the organization earned to all the employees.
FRINGE BENEFITS
“Fringe” benefits are those monetary and non-monetary benefits that are given to the employees
during and post-employment period, and are connected with employment but not with the employee’s
contribution to the organization.
The term ‘fringe benefit’’ covers bonus, social security measures, retirement benefits like
provident fund, gratuity, pension, workmen’s compensation, housing, medical, canteen, cooperative credit,
consumer stores, educational facilities, recreational facilities financial advice and so on. Thus, fringe
benefits cover a number of employee services and facilities provided by an employer to his employees
and in some cases to their family members also. Welfare of employee and his family members is an
effective advertising and also a method of buying the gratitude and loyalty of employees.
 Wage or Salary:
Wage:
The term wage refers to the remuneration paid to the workers appointed on hourly, daily or weekly basis in
return for the service rendered.It varies according to physical and mental requirement of the job. Wage may be
minimum wage, fair wage and living wage.

i. Minimum Wage:
It is that wage which is sufficient to meet the basic need of a worker and his family. This minimum wage has to
be paid to the worker irrespective of the capacity of the industry to pay. The Committee on fair wage has
defined minimum wage as – “the wage must provide not only for the bare sustenance of life, but for the
preservation of the efficiency of the workers. For this purpose, minimum wage must provide some measures of
education, medical requirements and amenities”.

ii. Fair Wage:

According to committee on fair wage “fair wage is the wage which is above the minimum wage but, below the
living wage”. It is fixed between the minimum wage and capacity to pay by the industry. The lower limit of the
fair wage is the minimum wage; the upper limit is set by the capacity of the industry to pay.

Fair wage depends on several factors like:

(a) The productivity of labour
(b) The prevailing rates of wage in the same or neighboring localities.
(c) The level of national income and its distribution.
(d) The place of industry in the economy of the country.
Thus, fair wage is determined on the basis of capacity of the industry to pay and region in which industry is
located.

iii. Living Wage:

It is the wage that provides some of the comforts of life. It provides certain amenities considered necessary for
the well-being of the worker. According to Fair Wage Committee “the living wage should enable the male
earner to provide for himself and his family not merely the bare essentials of food, clothing and shelter but also
a measure of frugal (using only as much money or food as is necessary) comfort including education for
children, protection against ill health, requirements of essential social needs and measure of insurance against
the more important mis-fortunes including old age”.

Salary:
The term salary refers to remuneration paid to the employees appointed on monthly or annual basis in return for
the service rendered. Thus it refers to monthly rate of pay irrespective of number of hours put in by employees.

Take Home Salary:

It is the net amount of salary received by an employee after making all the deductions towards the payment of
income tax, LIC premium and contribution to P.F. etc.

2. Dearness Allowance (DA):

 Under section 3 of the Minimum Wages Act, DA is described as cost of living allowance. It is given to protect
the real wages of workers during inflation. In India it has become integral part of the wage system.

Along with DA other allowances like City Compensatory Allowance (CCA), House Rent Allowance (HRA),
Medical Allowance (MA), Education Allowance (EA), Conveyance Allowance etc., also form the part of
compensation package.

However, inclusion of all these allowances in the compensation depends on nature and type of job, contents of
job, place of job, terms and condition of appointment, capacity of employer etc.

Perquisites (Perks):
Perquisites also called perks are the special benefits made available only to the top executives of an
organisation. These may include company car, furnished house, stock option scheme, club membership, paid
holidays etc. 

Q13. Describe the components of executive compensation system..

Definition: The Executive Compensation refers to the financial payment and other non-monetary rewards

given to the top executives in exchange for their services to the organization.

In other words, the executive compensation is the remuneration package given to the higher management of the
firm for their work on the behalf of the organization. The kind of employees that are entitled to the executive
compensation are corporate presidents, vice-presidents, chief executive officers, chief financial officers and
other senior executives.
Often the key elements in the executive pay are:

 Base Salary
 Executive Bonuses
 Long-term incentives, such as stock options
 Retirement packages
 Deferred compensation
 Executive perks
 Other benefits and perquisites.
Q14.What are the objectives of executive compensation policy?

The following are the main objectives of executive compensation policy:

 The manager should be incentivized so that they adopt those strategies, investments, and actions that result in
the increase in the shareholder value..
 The remuneration package should be designed such a way that it motivates the executives to work harder, take
risks and take unpleasant decisions such as termination or retrenchment, aimed at increasing the shareholder’s
wealth.
 The executive compensation is often designed with the intent to retain the executives during the bad times
caused due to the adverse market and industry factors.
 The cost of the executive pay must be limited to the extent where the shareholder’s wealth does not get affected
and, in fact, maximizes.

Q15. Define Employees Provident Fund Act.

Employees Provident Fund is established in 1952 and hence the act is named as Employees Provident Fund &
Miscellaneous Provisions Act, 1952, which extend to the whole of India except Jammu & Kashmir. Employee
Provident Fund (EPF) Provident fund is a welfare scheme for the benefits of the employees. Under this scheme
both the employee & employer contribute their part but whole of the amount is deposited by the employer.
Employer deducted the employee share from the salary of the employee. The interest earned on this investment
is also credited in pf account of the employees. At the time of retirement, the accumulated amount is given to
the employees, if certain conditions are satisfied. Applicability of the Act It is applicable: a) Every factory
engaged in any industry specified in Schedule 1 in which 20 or more persons are employed; b) Every other
establishment employing 20 or more persons or class of such establishments which the Central Govt. may
notify; c) Any other establishment so notified by the Central Government even if employing less than 20
persons. Every employee, including the one employed through a contractor (but excluding an apprentice
engaged under the Apprentices Act or under the standing orders of the establishment and casual laborers), who
is in receipt of wages up to Rs.6,500 p.m., shall be eligible for becoming a member of the funds. The condition
of three months’ continuous service or 60 days of actual work, for membership of the scheme.

Q16. Describe Workmen' S Compensation Act, 1923

In this Act and for the purposes thereof the expression" monthly wages" means the amount of wages deemed to
be payable for a month' s service (whether the wages are payable by the month or by whatever other period or at
piece rates), and calculated] as follows, namely:--

(a) where the workman has, during a continuous period of not less than twelve months immediately preceding
the accident, been in the service of the employer who is liable to pay compensation, the monthly wages of the
workman shall be one- twelfth of the total wages which have fallen due for payment to him by the employer in
the last twelve months of that period;

(b) 4 where the whole of the continuous period of service immediately preceding the accident during which the
workman was in the service of the employer who is liable to pay the compensation was less than one month, the
monthly wages of the workman shall be 5 the average monthly amount which, during the twelve months
immediately preceding the accident, was being earned by a workman employed on the same work by the same
employer, or, if there was no workman so employed, by a workman employed on similar work in the same
locality];

(c) in other cases[ including cases in which it is not possible for want of necessary information to calculate the
monthly wages under clause (b)]], the monthly wages shall be thirty times the total wages earned in respect of
the last continuous period of service immediately preceding the accident from the employer who is liable to pay
compensation, divided by the number of days comprising such period. 3 Explanation.-- A period of service shall,
for the purposes of 4 this 5 section]] be deemed to be continuous which has not been interrupted by a period of
absence from work exceeding fourteen days. 6
 Q 17.Describe Wage Boards in Compensation Management

Wage boards are set up by the Government, but in selection of members of wages boards, the government
cannot appoint members arbitrarily. Members to wage boards can be appointed only with the consent of
employers and employees. The representatives of employers on the wage boards are the nominees of
employers’ organization and the workers’ representatives are the nominees of the national center of trade unions
of the industry concerned.The composition of wage boards is as a rule tripartite, representing the interests of
labor, Management and Public. Labor and management representatives are nominated in equal numbers by the
government, with consultation and consent of major Central Organizations. These boards are chaired by
government nominated members representing the public. Wage board function industry-wise with broad terms
of reference, which include recommending the minimum wage differential, cost of living, compensation,
regional wage differentials, gratuity, hours of work etc.

The main objectives of wage boards are;

1. To work out wage structure based on the principles of fair wages as formulated by the Committee on Fair
Wages.
2. To work out a system of payment by results.
3. To evolve a wage structure based on the requirements of social justice.
4. To evolve a wage structure based on the need for adjusting wage differentials in a manner to provide incentives
to workers for advancing their skill.

Q18.What is Performance Based Pay?

When the pay is based on whether the target /objectives are achieved by the employee, it is said to be a
performance based pay.
This was successfully implemented by Jack Welch in General Electric, where, based on a performance matrix,
the employees were rewarded based on their relative position in the matrix. The top performers were rewarded
handsomely, the middle rung compensated adequately and the poor performers targeted for elimination. This
caused people to work harder for the fear of being at the bottom drove them constantly.
Therefore, it is highly important to establish quantifiable and measurable objectives, based on which an
employee can be rewarded adequately.
Employers generally use this method to evaluate how well the employee works and thus they set the salary for
that particular position. Standard based methods have been in fact used for many years now among the
commission based sales employees. Salespersons receive more for selling more and low performing
salespersons are not able to earn enough.