MASTER OF BUSINESS ADMINISTRATION – MBA SEMESTER I

(Fall 2010)

Subject Code - MB0043

Subject Name – Human Resource Management
Assignment Set – 2 (60 marks)

Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Explain Wage Administration policy. What are the ways by which wages and salaries are
managed in India?

The term compensation management, or alternatively, wage and salary administration revolves
around designing and managing policies and methods of disbursing employee compensation.
Traditionally it includes such areas as job evaluation, maintenance of wage structures, wage
surveys, incentives administration, wage changes and adjustments, supplementary payouts, profit
sharing, control of compensation costs, and other related pay items.

Salaried often implies a status distinction, because those who are on salary are generally white-
collar, administrative, professional, and executive employees, whereas wage-earners are
designated as hourly, non-supervisory, or blue-collar. Wage-earners in some organizations do
receive full wage if they are absent for such reasons as sickness, whereas salaried employees,
especially at the lower levels, often receive overtime pay when they work over the standard work
week.

Compensation/ salary systems are designed to ensure that employees are rewarded appropriately
depending on what they do and the skills and knowledge (intellect) required for doing a specific
job. It must therefore provide for the following key factors in order to be effective: The
following factors may be helpful to raise the effectiveness of employees

— Signal to the employee the major objectives of the organizations – therefore it must link to the
overall goals and objectives of the company. For example if doing a quality job is critical for the
company its compensation system has to ensure that this is adequately rewarded. On the other
hand if a company values productivity and units produced, the compensation system would be
designed such that productivity is rewarded.
— Attract and retain the talent an organization needs – the need to benchmark salaries to the
prevalent market standard for that job /skill so that the company is able to attract the right talent.
If a enterprise pays a salary lower that what the market does for that job/responsibilities, the
probability that suitable candidates would take the job offer and join the company. Even if they
do join subsequently when they find that the market pays more for that job they would quickly
find a more remunerative job and leave the company.

— Motivate employees to perform effectively – as discussed at the outset, money is a key

motivator and it often might be the only motivator for most employees, therefore ensuring that
compensation is appropriately disbursed need to be taken care of while designing the
compensation system. Jobs in the brick and motor, production setups would focus on higher
incentive policies that would motivate the employee to produce more while the base-salary
would be low.

— Create the type of culture the company seeks to engender – compensation systems play a
critical role as sponsors for the organizations culture. A performance driven culture would build
compensation policies that clearly and significantly reward performance. A company that
rewards loyalty would reward employees who stay longer in the company with significantly
better incentive programs.

Hence we see how compensation systems are reflective of the organizations over all philosophy
of what its goals and objectives are and how this can be linked to salary payout.

The main purpose of wage and salary administration is to establish and maintain equitable wage
and salary programs. The secondary objective is to design and implement an equitable labour-
cost structure. Therefore payout cannot be out-of-sync with the organizations ability to pay it
needs to be able to satisfy the employees as well as employers, profits maximised and conflicts
minimised.

Wage and salary administration is concerned with the financial aspects of needs, motivation and
rewards. Managers, therefore, analyse and interpret the needs of their employees so that reward
can be suitably designed to satisfy these needs. We will now review a few of the important
theories that support the design of wage systems.

The word ’salary’ is defined in the Oxford Dictionary as ‘fixed periodical payment to a person
doing other than manual or mechanical work’. The payment towards manual or mechanical work
is referred to as wages. The word pay refers to the payment for services done which would
include salary as well as wages.

Wages are commonly understood as price of labour. In ordinary parlance, any remuneration paid
for services is etymological wage. Benham defines wage as “‘a sum of money paid under
contract by an employer to a worker for services rendered.”

Labour was always looked upon as a commodity governed by the law of supply and demand.
Certain theories were propounded for determination of wages but these could not stand the test
of time. A few theories are discussed below:
Subsistence theory: This theory, also known as ‘Iron Law of Wages’, was propounded by David
Ricardo (1772-1823). According to this theory, wages tend to settle at a level just sufficient to
maintain the workers and his family at minimum subsistence levels. The theory applies only to
backward countries where labourers are extremely poor and are unable to get their share from the
employers.

Standard of living theory: This theory is a modified form of subsistence theory. According to
this theory, wages are determined not by subsistence level but also by the standard of living to
which a class of labourers become habituated.

Residual claimant theory: Francis A. Walker (1840-1897) propounded this theory. According to
him, there were four factors of production/ business activity viz., land, labour, capital and
entrepreneurship. Wages represent the amount of value created in the production which remains
after payment has been made for all these factors of production. In other words, labour is the
residual claimant.

The wage fund theory: According to this theory, after rent and raw materials are paid for, a
definite amount remains for labour. The total wage fund and the number of workers determine
the average worker’s share in the form of wages.

Demand and supply theory: According to this theory, wages depend upon the demand and
supply of labour.

Marginal productivity theory: This is an improved form of demand and supply theory. Wages
are determined by the value of the net product of the marginal unit of labour employed.

Purchasing power theory: According to this theory the prosperity, productivity and progress of
industry depend on there being sufficient demand to ensure the sale of its products and pocketing
of reasonable profits. A large pact of the products of industry is consumed by workers and their
families and if wages are high, demand will be good. However, if wages and the purchasing
power of the workers are low, some of the goods will remain unsold; output will go down, which
will result in unemployment.

The bargaining theory of wages: John Davidson propounded this theory. According to him,
wages are determined by the relative bargaining power of workers or trade unions and of
employers. When a trade union is involved, basic wages, fringe benefits, job differentials and
individual differences tend to be determined by the relative strength of the organization and the
trade union.

The Tribunals and Wage Boards have generally followed the-principles laid down in the Fair
Wages Committee’s Report on fixing wages. The Committee, in its report, has focused on wage
differentials and has identified the following factors for consideration for fixation of wages:

1. The degree of skill.

2. The strain of work.

3. The experience involved.

4. The training involved.

5. The responsibility undertaken.

6. The mental and physical requirements.

7. The disagreeableness of the task.

8. The hazard attendant on the work, and

9. The fatigue involved.

Classification of wages: The International Labour Organization (ILO) in one of its publications,
classified wages as under:

1. The amount necessary for mere subsistence;

2. The amount necessary for health and decency; and

3. The amount necessary to provide a standard of comfort.

In India, wages are classified as below :

a. Minimum wage

b. Fair wage; and

c. Living wage

Minimum wage: A minimum wage has been defined by the Committee as "the wage which must
provide not only for the bare sustenance of life, but for the preservation of the efficiency of the
worker. For this purpose, the minimum wage must provide for some measure of education,
medical requirements and amenities". In other words, a minimum wage should provide for the
sustenance of the worker’s family, for his efficiency, for the education of his family members,
for their medical care and for some amenities. It is very difficult to determine the minimum wage
because conditions vary from place to place, industry to industry and from worker to worker.
However, the principles for determining minimum wages were evolved by the Government and
have been incorporated in the Minimum Wages Act, 1948, the important principle being that
minimum wages should provide not only for the bare sustenance of life but also for the
preservation of the efficiency of the workers by way of education, medical care and other
amenities.

Fair Wage: According to the Committee on Fair Wages, "it is the wage which is above the
minimum wage but below the living wage." The lower limit of the fair wage is obviously the
minimum wage; the upper limit is set by the "capacity of the industry to pay". Between these two
limits, the actual wages should depend on considerations of such factors as:

i) The productivity of labour;

ii) The prevailing rates of wages in the same or neighbouring localities;

iii) The level of the national income and its distribution; and

iv) The place of industry in the economy.

Living Wage: This wage was recommended by the Committee as a fair wage and as ultimate
goal in a wage policy. It defined a Living Wage as "one which should enable the earner to
provide for himself and his family not only the bare essentials of food, clothing and shelter but a
measure of frugal comfort, including education for his children, protection against ill-health,
requirements of essential social needs and a measure of insurance against the more important
misfortunes including old age". In other words, a living wage was to provide for a standard of
living that would ensure good health for the worker, and his family as well as a measure of
decency, comfort, education for his children, and protection against misfortunes.

Generally, ascertaining wages and deciding who to pay what is a activity undertaken in the
beginning when a organization is set up. Thereon it is annual reviews to make corrections per the
country’s economic and market/industry trends. The management considers the state of the
labour market and takes into account of what he can afford to pay and the value of the worker to
him. The workers’ willingness for employment at the rate offered implies that they agree to work
at that rate, though they have had no part in fixing it.

1. Collective Bargaining: Collective bargaining is still in the initial stage in India. Although it is
a desirable development in the relations between management and labour, it cannot be imposed
upon either side by compulsion and should evolve naturally from within.

2. Voluntary Arbitration: In voluntary arbitration, both parties agree to refer their dispute to
mutually agreed arbitrator and his award becomes binding on the parties.

3. Wage Legislation: Wages are fixed according to law in some industries. The Central
Government and State Governments may fix minimum wages under the Minimum Wages Act of
1948 for industries in which workers are exploited or too unorganized to protect their own
interests. In order to advise them in the matter of fixing minimum wages, the Governments
appoint Minimum Wages Committees and the Advisory Boards. The Committees and the
Advisory Boards consist of equal number of workers and employers representatives and also
independent members whose number should not exceed one- third of the total number of
members.

4. Conciliation: The Industrial Disputes Act, 1947, provides for consideration in case of disputes
between employers and workers. If an agreement is reached in the course of conciliation
proceedings, it becomes binding on the parties and takes effect from the date agreed upon or
from the date on which it is signed by the two parties. In case no agreement is reached, the
Conciliation Officer sends a full report of the proceedings. On receipt of this report, the
government may decide to refer the case to Industrial Tribunal for award.

5. Adjudication: Labour courts and Industrial Tribunals are set up under the Industrial Disputes
Act, 1947. On studying the awards one gets the impression that the adjudicators are attempting to
justify their decision in social and ethical terms. At the same time, there is a desire to satisfy both
parties to the dispute, and therefore, economic factors such as capacity to pay, unemployment,
profits, condition of the economy or welfare of the industry concerned, are given due
prominence.

6. Wage Boards: The boards are appointed by the Government and usually consist of seven
members – two representatives of management, two of labour, two independent members and a
chairman. The board is expected to take into account the needs of the specific industry in a
developing economy, the special features of the industry, the requirements of social justice, and
the necessity for adjusting wage differential in such a manner as to provide incentives to workers
for advancing their skill. Its recommendations may be accepted by the Government either
completely or partly, and may be statutorily imposed on the industry in question, or may be
rejected.

In a nutshell, wages are influenced both by social and economic factors. In one case, economic
factors may play a major role, whereas in another, social factors may be predominant. Thus,
wages are product of both social and economic factors.

Q.3 Define competency. How competency is linked to Human resource system.

First popularised by Boyatiz, competency is defined as “A capacity that exists in a person that
leads to a behaviour that meets the job demands within parameters of organizational and that in-
turn bring about the desired results”; “An underlying characteristic of a person results in
effective and/or superior performance on the job”.

Competency can be thought of a as a tool that can be used to map ‘best-in-class’ performance the
best performer is always called the competent performer. Competencies are based
on Knowledge – information accumulated in a particular area of expertise, Skills – the
demonstration of the expertise, Motive – the recurrent thought that drives behaviour, Attitude-
self-concept, value and self image, Traits – a general disposition to behave in a particular way.

There are two sets of competencies: Threshold competencies – they are the characteristics that
any job holder needs to have to do that job effectively, but do not differentiate between average
and superior performer; Differentiating competencies – are characteristics which superior
performers have but is not present in average performers. This thinking holds the key to

differentiate employees based on competencies they possess and there compensation and growth
within the companies in modern companies.
There are therefore competency frameworks that define the competency requirements that cover
all the jobs in an organization. These consist of the both work specific as well as behavioural
competencies. Each job in the organization is profiled for the competencies needed and these are
then placed on to a common framework. Depending on the value of that competency, the number
of competencies, the proficiency level of the competency and the competency’s’ uniqueness, the
job worth can be assessed in a comparative manner.

Organizations need to invest significantly and usually outsource the activity of competency
mapping. But done it remains relevant and in active use for the next 4-5 years unless there is a
significant change in the way the company conducts its business and its operating practices.

Once established a competency framework helps:

1. One universal set of competencies for all positions and employees in these positions

2. Builds a common language and frame of reference for everyone

3. Merit of each positions / individual

4. Makes it easier to compare positions and employees across the job functions in the
organization

5. It helps align everyone towards a common culture and can support any culture change process

Linking Competency to HR Systems –

One of the key benefits of the competency based management approach is its usage to build all
of the other HR systems such as recruitment, performance management, training and
development, career development, compensation management and Succession planning. Let’s
study them one by one.

Recruitment and selection: The Competency profile for a job serves as the reference for the
candidate hunt for the position. It is used at multiple stages in the recruitment and selection
process

· Job Description and competency profile shared with the recruitment consultant as well as
hosted on the company intranet and internet site for prospective applicants to view

· Use the competencies to design the appropriate selection tests and other methods

· Assessment forms for interviewers to contain the competency list and specify the desired
proficiency levels

Performance Management: Increasingly the focus in most organizations using competency

frameworks is to build competency based performance assessment processes. The employees’
performance is assessed on the core tasks and results as well as on the competencies required for
the job he/she is doing. If there are gaps between the desired proficiency and the current
proficiency of the employee the employee is reviewed for development initiatives to improve the
competency. If the employee has competencies above the desired proficiency he is potential
talent and needs to be nurtured for other roles and higher responsibilities.

Training Needs: as explained above the information on gaps in competencies are collated for
employees across the organizations and suitable training interventions are designed. The
methodology used for competency improvement is usually action learning based. Focus is on
internalising the learning by ensuring workplace application projects and activities. Manager
support in making competency training useful is important.

Career Planning: Competency assessments are popularly used for helping an employee discover
his strength competencies and therefore serve as effective means for the employee to identify
what roles/jobs can be best for the competencies the employee possesses. Most career planning
assessment and activities are built on enhancing the employee’s strength areas and indentifying
jobs that match the strengths.

Compensation philosophy: while there is significant work done in researching competency based
compensation, the practical application of competency based compensation system is not as easy.
The competency framework provides a common benchmarking of all jobs across the
organization on the competencies required and the proficiency level for the competency. This
framework is then mapped to levels or grades that create a job to level mapping. The levels have
ranges of compensation that can be paid for any job at a specific level. For example if there are
25 job clusters in a company. Each job cluster can have anywhere between 5 to 17 jobs. Each job
in the job cluster is mapped to a level in the company. So if a particular job cluster has 5 jobs
each job has a set of competencies and proficiency and this determines the level of the job and let
us assumes it maps to Level 42 in the compensation system. All Level 42 jobs are mapped to
compensation range with a Minimum salary of Rs.45,000 and a maximum salary of Rs.1,20,000.
This range specifies the recommended salary range for a employee in this job. Ideally a new
employee being hired to this job should be paid not less than the minimum specified for this job.
A employee doing a extremely good job in the role and has been in the role for close to
3 years should be getting a salary closer to the maximum in the range.

Succession Planning: competency based management is most effective in succession planning

initiatives. Competency assessment is a widely used to identify and nurture talent in
organizations. Most succession planning decisions use the competency assessment data for the
employee and this along with the career planning data are used to ascertain employee readiness
and inclination for new roles and responsibilities in the critical roles identified for succession
planning.

Q.4 Think of a situation in which an employee is to be dismissed from the organization, what
will be the fair steps of dismissal followed by the organization?

The following steps are followed for dismissal of an employee:

a) Charge Sheet is Framed and Issued:

The first step in the procedure is to have in-place a written complaint against the employee in
question, and which contains details of the offence with which he is charged, policy breach and
the allegation of misconduct made against him, and indicating the time limit within which a reply
to the charge sheet should be submitted to the due authorities. The employee is called to put forth
his case why a disciplinary action should not be taken against him.

The contents and implications of the complaint/charge sheet may be explained to him in his own
language and in the presence of some reputable witness, before a copy of it is handed over to
him. If he refuses to accept it, it should be sent to his residential address "registered post with
acknowledgement due". If the employee refuses to take delivery of the registered letter, or when
it has been returned undelivered, it should be published in a local paper to ensure its wide
publicity.

b) Explanation Receipt:

The employee provides his explanation within the scheduled time allotted. He can also ask for an
extension of time for its submission, all in good faith.

c) Issue of Notice of Enquiry:

Upon receipt of the explanation from the employee it is reviewed. If found unsatisfactory, a
notice of enquiry, mentioning the time, date and place, has to be given to him in which the name
of the person or officer conducting the enquiry would also be mentioned. The employee is
required to be present at the appointed time and place, together with his witness, if he has any.

d) Conducting the Enquiry:

On the appointed day and at the appointed place and time, the enquiry is held by the Enquiry
Officer in the presence of the employee. The contents of the charge sheet and an explanation of
the procedure to be followed at the enquiry are communicated to the worker. If he pleads his
innocence, the enquiry proceeds; but if he pleads guilty, unconditionally and in writing, the
enquiry is dropped.

e) Sharing Findings:

Once the enquiry is over, the Enquiry Officer has to give his findings, which should invariably
contain the procedure which was followed, the employee’s statements, all of the documents
produced and examined, the charges made and the explanations given and the evidence
produced. The officer should then record his own findings on each of the charges and the
grounds on which he has come to a particular conclusion. He should specifically mention which
charges have been proved and which have not been proved. He then submits his findings to the
authorities empowered to take the disciplinary action against the employee. He, however, is not
required to make any recommendations.

a) On receiving the report, the executive authorized to take a decision thereon passes an order of
action
b) Communication of the decision

A copy of the orders is then handed over to the employee.

In terminating the employment of a employee the following conditions must necessarily be

complied with for misconduct.

a) The misconduct of the employee is of such a nature as to indicate that his discharge or
dismissal would be an appropriate punishment and that this kind of punishment has been
provided in the companies policies or per statute

b) A fair and open enquiry must be held by the employer into the misconduct which an employee
has been charged with.

c) The enquiry should be held in such a manner as to ensure that it would be fair and proper and
in conformity with the principles of natural justice. The employee must be given an adequate
opportunity to defend himself and to present witness in support of his contention or case.

d) The person holding the enquiry should not be someone who’s known to be biased has
personal/vested interest or was in anyway associated with the misconduct.

e) The order must be sensitively communicated to the employee against who it has been passed.

Q.5 Suggest few measures to improve employee morale.

There are a number of measures which can be used to control the warning signals of low morale.
The following are the positive measures to be taken to bring job satisfaction to the employees
and reconcile individual interests with the interests of the organization.

1. Creation of whole jobs – Under this method, complete jobs are assigned to the employees. The
complexity of a job should be increased so that it may appeal to their higher needs.

2. Job enrichment – Job enrichment tries to deal with dissatisfaction by increasing job depth.
Under this, individual employees may be given responsibility for setting their own work pace,
for concerning their own errors, and/or for deciding on the best way to perform a particular task

3. Building responsibility into a job – Employees should be encouraged to participate and if

possible be held responsible for taking decisions. Some delegation of responsibility from the
manager tot he employee could be useful in improving employee ownership

4. Managerial effectiveness – This can be achieved by:

i) Developing work groups;

ii) Improving the social contacts of the employees- time away from work in team building and
fun activities;

iii) Managerial coaching discussed above

iv) Employee stress management activities

5. Flexing working hours – Flex time / work from home provisions allow employees to arrange
their work hours to suit their personal needs and life-styles. This is particularly suited to
situations with fluctuating workloads. Flex time employees are responsible for co-ordinating
their functions with other employees and thereby have more responsibility and autonomy.

6. Rotation of jobs – This reduces employee’s boredom which arises out of the monotonous
nature of his work.

7. Incentive and Profit-sharing plans- Morale can be improved by effective incentive and profit-
sharing schemes. Incentive schemes are effective in improving workplace morale. They need to
carefully designed (preferably by experts) well communicated and implemented to be effective.
In addition to its economic aspects, profit-sharing has also psychological aspects relating to
friendly move by the management in providing the employees an opportunity to participate in the
profits.

Morale can also be improved by adapting several other measures such as employee contest,
special recognition and awards to long service employees and training the managers in how to
manage people.

Q.6 Explain Victor Vroom’s Expectancy theory of motivation.

Victor Vroom’s Expectancy Theory of Motivation

The model is built around the concept of valence, instrumentality and expectancy and is
commonly called the VIE theory.

The ‘effort’ an individual puts into a task or a activity depends on 3 key factors: a) the effort ->
performance (E->P) expectancy, b) performance -> outcome (P->O) expectancy and c) the
outcome valences (V). This therefore impacts motivation. If any of the 3 is low the motivation is
low. The E->P Expectancy indicates the employees’ perception that his or her effort will result
in a particular level of performance. Its best represented as a probability and ranges from 0.0 to
1.0. When the employee perceives that probability that he/she can do a task well the effort
expended is high and conversely when he/she perceives that the probability that he/she cannot
deliver the desired performance the effort expended is far lower. The P->O Expectancy is the
perceived probability that a specific performance or behaviour will result in a specific outcome.
When an employee perceives that the performance will benefit him with a desirable outcome he
will expand the effort directed towards the performance that will get him/her the desired
outcome. The Outcome Valances is the third element in the expectancy theory. It indicates the
feeling of satisfaction/dissatisfaction that an employee feels towards the outcome. It is impacted
by the perception about how much the outcome will interfere or fulfil the person’s needs and
drives. It ranges from negative to positive, –1 to +1. It also is influenced by our personal values.
For example a company has newly implemented a work from home policy for a particular team.
If one of the employees’ in the team is a extrovert and his need for affiliation is very high, hence
there is positive outcome valence for group activities and other group events that fulfil this need.
As a result of the change in policy the employees’ E->P expectancy relationship and the P->O
expectancy drops and as a result the performance drops. There is no longer a positive valance
towards working in this team and the employee will begin to look for a alternative opportunity
wherein the outcome valence is positive and he can apply the effort and performance to meet that
outcome.