HUMAN RESOURCE MANAGEMENT-I UNIT-IV

COMPENSATION
CONCEPT:
 It is one of the most important jobs of HRM.
 It is the most difficult functions of HRM.
 It is not only complex but the most significant.
 It includes areas like job evaluation, surveys of wage and salaries, analysis of relevant
organizational problems, development and maintenance of wage structure,
establishing rules for administering wages, wage payments incentives, profit sharing,
wage changes and adjustments, control of compensation costs and other related items.
MEANING:
 Compensation is any form of payment given to employees in exchange for work they
perform.
 Compensation is the recompense, reward, wage or salary given by an organization to
a person, persons or a group of persons in return to a work done, service rendered, or
a contribution made towards the accomplishment of organizational goals.
DEFINITION:
 It can be defined as the direct remuneration paid to an employee compensating his
services to an organization.
OBJECTIVES OF COMPENSATION:
1. To Acquire Qualified and Competent Personnel.
2. To Retain the Present Employees.
3. To secure internal and External Equity.
4. To Ensure Desired Behaviour.
5. To keep Labour and Administrative costs in line with the ability of the organisation to
pay.
6. To comply with the wage legislation framed by the government of India.
7. To pay according to content and difficulty.
8. To simplify collective bargaining procedures and negotiations.
9. To promote organization.
10. To facilitate pay roll.
11. To enable the employee to earn a good and reasonable salary or wage.
12. To pay equitable sums to different individuals avoiding differences.
13. To reward and encourage high quality work and output.
14. To encourage employees to develop better methods of working and their acceptance.
15. To discourage wastage of materials or equipment.
16. To encourage employees to use their initiative and discretion.
17. To discourage overtime working unless it is very essential.
FACTORS AFFECTING COMPENSATION:
1. Firm’s Ability to Pay
 It means having better financial position to pay the compensation.
 It is one of the principal considerations at the time of fixing salary or wages.
 In the short run, if firms pay wages and salary according to its ability to pay may be
nil but in long run it is quite influencing factor.
 Paying capacity of an organisation is decided by taking into consideration of
profitability, expenses that the company has to incur in future and prices of
products/services that are charged by the organisation.
 In addition, total cost of employees (salaries, allowances, cost of fringe benefits, etc)
should be taken into consideration to determine the ability to pay.
 Trade union demand higher wages when company’s financial position is sound but
they may not accept reduction in wages when financial position is not good.

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 Thus, the management has to decide the firm’s ability to pay with great care.
2. Government Regulations
 In order to protect the working class from wage exploitation by strong employers, the
government enacts various laws and judicial decisions.
 Such laws and regulations affect compensation management.
 Because, they emphasize on minimum wage rate, overtime rate, working hours, equal
pay for equal work, payment of bonus, etc.
 So, an organization has to design its pay system as per the government rules and
regulations.
3. Equity Considerations
 Equity considerations hold the philosophy that the compensation system should be
fair and equitable.
 It means the compensation system should be similar for the same type of work within
the organization (internal equity).
 Similarly, it should be fair relative to what other people get for the similar job in
another organization (external equity).
 It is important because any imbalance between what the employees contribute and
what they obtain as return would lead to greater job dissatisfaction, employee
turnover and absenteeism.
4. Union Pressure
 Labour unions or trade union is the group of employees that work in the interest of the
workers.
 They stop or reduce the exploitation of employees by the company.
 Sometimes a firm may exploit the employees by paying less salary or compensation
as compared to the work done by employees.
 At that time trade union play major role to stop this type practices.
 Such unions may pressurise the management for the formulation of fair compensation
plans.
 These organized unions can ensure better wages for employees.
5. Job Evaluation
 Job analysis is a method through which necessary information about the contents and
the contexts of the job is made available to determine the value of each job.
 The job evaluation is a process of determining the value/worth of a job so that a
payment system can be specified.
 Job evaluation determines the relative worth of job on the basis of which
compensation is fixed.
 Hence, it is regarded as an important factor of compensation management.
6. Cost Of Living
 Costs of living mean the costs which are required by an individual to sustain his or her
life as well as his or her family too.
 Compensation is concerned with an overall return that an employee obtains from the
organization for rendering contributions towards organization objectives.
 Therefore, the payment should be adequate to maintain the cost of living of the
employees.
 Hence, the employer should manage compensation viewing the cost of living of each
individual.

7. Productivity of Workers
 Another factor of compensation management is the productivity of workers.
 Productivity means the ratio between input and output.

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 At the time of performing the job the productivity of workers may be different.
 Some may use more input for the given output as compared to other employees.
 This is the new concept of linking pay with employee performance.
 Under it, if the workers are highly productive, they get high compensation as
compared to less productive workers.
 Productivity is a key factor as it enhances organization's image and status.
8. Supply and Demand of Labour
 Whenever the compensation level is fixed by the employer for the employees, supply
and demand of particular type of labour should also require to be considered.
 If the demand of particular type of labour is more but at the same time that type of
labour is not available as per the demand then level of compensation would be more
for that labourer and labourer having less demand and more supply will get lower
compensation.
 For example, students having degree of Chartered Accountants as well as Company
Secretary having more compensation as compared to students having degree of
graduation in commerce stream.
9. Prevailing wage rate
 Prevailing wage rate or going wage rate of compensation is that wage rate which is
paid by the similar organisation in the industry.
 It means whatever the level of compensation paid by the other competitors in the
industry is required to be followed in the organisation.
 Otherwise, employees may leave the present organisation and join the competitors to
get higher wages.
TYPES OF WAGES:
1. Nominal Wage: -
 It is the wage which is paid or received in monetary terms after making all deduction
like insurance premium, tax, etc.
 It is also known as money wage.
2. Real Wage:
 Real wage is the amount of wage remains left after discounting nominal wage by
living cost.
 It represents purchasing power of money wage.
3. Minimum Wage:
 Minimum wage is a compensation to be paid by an employer towards the work of
employees irrespective of ability of an organisation to pay.
 It is the amount of that wage which is enough for satisfying normal needs of an
average employee living in a civilised society.
 It means the wage must provide not only basic necessity that is food, shelter and cloth
but also the two additional needs that is education for employees and medical
requirement.
4. Statutory Minimum Wage:
 It is the amount of wage which is fixed by Minimum Wage Act, 1948.

5. Need Based minimum Wage:

 It is the amount of remuneration which is fixed at the 15th session of the Indian labour
conference held at Delhi in July 1957.
 Following points were considered at the time of deciding need based minimum wage.

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 Consider earning of one person (man)

 Earning of women, children and adolescent are excluded.
 Food requirement
 Cloth requirement
 Housing
 Fuel, lighting and other miscellaneous expenses
6. Living Wage:
 It is the highest amount of remuneration required by citizen living in a modern
society.
 Living wage are capable for satisfying food, cloth, shelter needs as well as other
additional needs like, education for children, medical expenses, social needs,
insurance expenses, etc.
7. Fair Wage:
 Fair wage is above the minimum wages and below the living wage.
 The lower limit of fair wage is obviously the minimum wage; the upper limit is set the
ability of the industry to pay.
 The concept of fair wage is essentially linked with the capacity of an industry to pay.
 The fair wage depends on the consideration of different factors like, productivity of
workers, the prevailing wage rate, etc.
8. Incentive wage:
 It is over and above normal wage paid to employees for increased efficiency.

PERFORMANCE APPRAISAL
CONCEPT
 Appraisal of Performance is widely used in Society.
 Parents evaluate their children, teachers evaluate their students and employers evaluate their
employees.
 However, formal evaluation of employees is believed to have been adopted for the first time
during First World War.
 During 1920-1930 hourly-paid workers in industrial units were evaluated on the basis of
rating scores.
 This early appraisal system was called merit rating.
 In the early fifties, performance appraisal techniques began to be used for technical,
professional and managerial personnel.
 Since then tremendous change have taken place in the concept, techniques and philosophy of
employees appraisal.
MEANING
 Performance Appraisal is the process of assessing the performance and progress of an
employee on a given job and his potential for future development.
DEFINITIONS
1. According to 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.”
2. According to Newstrom, “It is the process of evaluating the performance of employees,
sharing that information with them and searching for ways to improve their performance.”
PROCESS
1. Setting the Performance Standard:
 The first step in the process of performance appraisal is setting up of the standards
which will be used as a benchmark to compare actual performance of the employees.
 Before determining the standard performance, it is required to decide the criteria to be
used for evaluation the overall performance of each employee.

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 These criteria vary with the employee to employee.

 For example, criteria used for an employee working in a production department may
be number of units produced per day, unit of raw material wasted, whether he has
maintained quality of finished goods or not, etc. while criteria used for salesman
might be no.
 Of unit sold per day, minimum price to be charged for each unit, etc. the standard
settled down for each and every employee should be clear and measurable.
 Unclear standard: - Salesman has to sale maximum units of product.
 Clear standard: - salesman has to sale 100 units of product per day by charging Rs.
50 per unit.
2. Communicating the Standards:
 There are two parties involved in the performance appraisal and they are appraiser
and appraisee.
 The appraisal is the one who is going to evaluate the performance of employee while
the appraisee is the one whose performance is evaluated.
 So, the standards decided by the management and not by the employees.
 Management expect from the employee to achieve the standard performance set by
them.
 So it is required to communicate whatever standard fixed by the management for each
and every employee which enables employees to achieve that standard.
3. Measuring the actual performance:
 It is the most difficult and time consuming part of performance appraisal.
 It means to measure the actual work done by an employee during a specific period of
time.
 It is the continuous process which involves monitoring the performance throughout
the whole year.
 At this stage it is required to select an appropriate techniques for performance
appraisal as per need as there are many techniques are available to evaluate the
performance.
4. Comparing actual performance with desired performance:
 At this stage, actual performance is compared with the desired / standard
performance.
 After making comparison, two situations will be arrived at.
 First situation is that actual performance may be more than standard performance and
second situation is that actual performance may be less than standard performance.
 It includes evaluate the data regarding both of standard as well as actual performance
of an employee.
5. Providing feedback:
 Result of the appraisal is communicated and discussed with the employees on one-to-
one basis.
 Result, problems and possible solutions are discussed under this stage.
 The feedback should be given to the employees with positive attitude.
 One should not rebuke an employee for the small deviation between standard and
actual performance as it will directly affect the performance of employee in future.
 The purpose of meeting should be to solve the problems and motivating employees to
improve the performance in future.
6. Taking Corrective Actions:
 This is the last step in the process of performance appraisal.
 At this stage different corrective decisions like transfer, promotion, demotion, etc. are
taken on the basis of evaluated performance of an employees.

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TRADITIONAL METHOD
1. PAIRED COMPARISON: -
 This method is relatively simple.
 Under this method, the appraiser (the person who measures perform of an employee)
gives rank to the employees by comparing one employee with all other employees in a
group at one time.
 In this method, list of total number of an employees to be appraised are first of all
written in a separate paper.
 There after each employee is compared with other employees on one- on one basis.
 The appraiser puts a tick mark against the employee who is better between two
employees while making each paired comparison.
 Then the total number of times the each employee is considered better than other
employee will be calculated.
 On the basis of this calculation, rank is given to each employee.
 The employee who is considered highest number in terms of better performance will
be given first rank while the employee who is considered lowest number will be given
last rank.
 The main disadvantage of this method is that this method can be used only where
there is less number of employees while the number of employees is too much this
method is time consuming.
 Another limitation of this technique is that employees are simply compared with each
other on total performance basis rather than using specific criteria.
2. CHECKLIST METHOD: -
 The check list is the simple rating technique in which list of number of statements or
words are given to the supervisor and asked to check (put tick mark) those statements
which are applicable to that particular employee.
 There are two types of checklist method; simple checklist method, weight age
checklist method and force choice method.
2.1 Simple Checklist Method
Checklist Method 2.2 Weighted Checklist Method
2.3 Forced choice Method
2.1 Simple Checklist Method: -
 In this method, checklist consist a large number of statements concerning an
employees.
 For each statement rater has given two options.
 It may be a Yes / No or Positive / Negative.
 The employees performance is measured on the basis of number of times employee
has given tick mark on Yes or positive.
 The negative / No answers are not taken into consideration in this method.
 A difficulty often arises because the statement may appear to be virtually identical in
describing the employee.
 The words or statements may have different meaning to different rater.
2.2 Weighted Checklist Method: -
 The weighted checklist method involves weighting different items in the checklist,
having a series of statements about an individual, to indicate that some are more
important than others.
 It means the basic difference between these two method is that in simple checklist
method numbers and type of statements remain same for each and every employee
while in weighted checklist method type and number of statements may vary from

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one employee to another employee as it is prepared on the basis of the job that
particular employee have performed.
 Here an appraiser is expected to look into the questions relating to the behaviour of an
employees, the attached scale (or simply positive or negative statements where such a
scale is not provided) and tick those traits that closely describe the employee
behaviour.
 Often the weights are not given to the appraiser who complete the appraisal process
but are computed and tabulated by someone else.
 In this method, performance rating is done by multiplying the each statement point
with the weight given to that statement.
 It is very difficult to design weighted checklist as it involves different statements as
the job differs. This may prove time consuming.
2.3 Forced choice Method: -
 The forced-choice method is developed by J. P. Guilford at the end of Second World
War.
 Under this method a large number of statements are prepared in a group.
 Each group consists of four statements concerning employee behaviour.
 Two statements are positive (favourable) while two statements are negative
(unfavourable) for the employees.
 Sometimes there may be a five statements in a one group out of which one would be
neutral.
 The actual weight of statements is kept secret.
 The appraiser is asked to select one statement from the two unfavourable statements
and one statement from favourable by force.
 The basic intention of this method is that to reduce the personal bias as well as reduce
the tendency of assigning all high or low rating.
Examples of positive statements are:
1. Gives good and clear instructions to the subordinates.
2. Can be efficient to complete any job assigned.
A pair of negative statements may be as follows:
1. Makes promises beyond his limit to keep these.
2. Inclines to favour some employees.
MODERN METHOD
1. 360 DEGREE METHOD: -
 In this method, the appraiser may be more than any one person who has through
knowledge about the job content, contents to be appraised, standard of contents and
who observes the employees while performing the job.
 The possible appraisers under this method are supervisors, peers, subordinates,
employees themselves and users of service and consultants.

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Supervisors: -
 Supervisor include immediate superior of an employees, other superior having
knowledge about work of the employees and departmental head or manager.
 General practice is that immediate superiors appraise the performance which in turn is
reviewed by the departmental head/manager.
Peers / Colleagues: -
 Peers of particular employee mean employees who are working with him or her.
 Such peers can also be appraisers if they have been working with that particular
employee for a long time and interact continuously.
Subordinates: -
 Sometimes the performance of superiors is also appraised or measured by his / her
followers.
 This method has been used in most of the organisation especially in developed
countries.
Self-appraisal: -
 Self appraisal method is differs from other methods in the sense that in other methods
of performance appraisal appraiser and appraisee both are different person while in
this method one person is appraiser as well as appraisee too.
 If an individual having knowledge of well defined standard as well skill of measuring
and comparing actual performance with standard performance can become self
appraiser.
Users of Service / Customers: -
 Employee performance in service organisations relating to the behaviour, promptness,
speed, accuracy, etc. in doing job can be better judged by the customers or users of
service.
 For example, performance of teacher is better judged by the students or doctor is
judged by patients.

Consultants: -

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 Sometimes consultant may be engaged for appraisal when employees or employers do

not trust supervisor appraisal and the management does not trust self-appraisal, peers
appraisal or subordinate appraisal.
 In this situation, consultants are trained and they observe the employee at work for
sufficiently long time for the purpose of appraisal.
2. MANAGEMENT BY OBJECTIVES (MBO): -
 This method is also known as Management by Result.
 The term MBO was developed by Peter Drucker in his book “The Practice of
Management” in 1954.
 The concept of MBO as was conceived by Drucker, can be described as a “process
whereby the superior and subordinate managers of an organization jointly identify its
common goals, define each individual’s major areas of responsibility in terms of
results expected of him and use these measures as guides for operating the unit and
assessing the contribution of each its members”.
 In other words, stripped to its essentials, MBO requires the manager to goals with
each employee and then periodically discuss his or her progress toward these goals.
 The major emphasis is on what must be accomplished and by whom rahar than how it
is to be accomplished.
 An MBO programme consists of four main steps.

1. Goal-setting: -
 Goals are set for each and every individual, so as to attain them.
 The superior and subordinate jointly establish these goals.
 The goals refer to the desired outcome to be achieved by each individual employee.
2. Performance standards: -
 In this step standards are set for the employees as per the previously arranged time
period.
 When the employees start performing their jobs, they come to know what is to be
done, what has been done and what remains to be done.
3. Comparison: -
 In the third step the actual level of goals attained are compared with the goals agreed
upon.
 This enables the evaluator to find out the variation between the actual and standard
performance of the employees.
 Such a comparison helps to decide whether training is required devise for employees
or not.
4. Periodic review: -
 Finally, in the periodic review step, corrective measure is initiated when actual
performance deviates from the slandered established in the first step-goal-setting
stage.
 Consistent with the MBO philosophy periodic progress reviews are conducted in a
constructive rather than punitive manner.

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 The main advantages of MBO is that it will improve the satisfaction as well as
morale of an employees as they have been consulted or allowed to take participation
at the time of setting goal for them.
 The major disadvantage of MBO is that it requires lot of paper work and also time
consuming.
 Sometimes it is not possible to set clear cut objectives for each department or each
employee for example research and development department.

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