COMPENSATION MANAGEMENT

COMPENSATION MANAGEMENT (MBA)

COURSE OVERVIEW

Accurate and updated information is the primary need of any management practice. Study offers
one such means of gathering realistic information. A detail Study of such information and its
accuracy presents the usefulness of the information. The study of essentials of management thus
forms the basis of all organization designs and is one singular most important subject of study
for all managers. It also develops an understanding of the built-in errors of common practice.

The aim of this subject is to develop students’ understanding of the concepts of management
and practice. In particular the subject is designed to develop the underpinning knowledge and skills
required to perform complex management functions and the roles. This subject introduces the
student to the basics of management. It familiarizes the students with the practice of various
management techniques and it’s expected results. The learner is apprised about the basic principles
of management, organization design and structure, strategic management, the theory of leader-
ship, control, decision-making and various aspects of human resource etc.

The students on completion of the course shall develop the following skills and competencies:
a. Should know the nature and scope of management
b. Knowledge about Planning and Strategic Planning
c. Appraisal of the different types of organization structure
d. Practice of controlling in organizations
e. The role of human resource function
f. Role of leadership in organizations

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11.622.1 i
COMPENSATION MANAGEMENT
SYLLABUS
Unit : Compensation
Management
Unit Value: 4 credits
Unit Level: S4
Unit Code: MBAHRM-(ii)
Description of Unit
This module will develop a conceptual framework and the
issues related to Compensation Management. It reviews the
benefits given to the employees and highlights the latest trends
in Compensation Management.The module is aimed at
developing a greater understanding of its importance in today’s
dynamic human resource management environment.
Summary of Outcomes
To achieve this unit a student must:
• Examine concepts and issues in employee compensation
• Explain essential elements of a sound compensation
structure.
• Summarise principles of external and internal
differentials of compensation
• Analyse latest trends in compensation on national and
international level
Contents
Concept and Issues
Role of compensation and rewards in the organisation,
objectives of compensation and rewards in the organization,
framework of compensation policy, labour market characteristics
and pay relatives.
Essential Elements
Compensation structure and differentials: compensation,
reward, wage levels and wage structures, wage determination
process, wage administration rules, factors influencing wage and
salary structure, principles of wage and salaries administration,
theory of wages; subsistence theory, wages fund theory, surplus
value theory, residual claimant theory, marginal productivity
theory, bargaining theory, behavioural theories, minimum and
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ii
fair living wage, basic kinds of wage plans, wage differentials,
elements of a good wage plan, , institutional mechanism for
wage determination, legalistic framework for wage determina-
tion, importance of wage differentials, executive compensation,
components of remuneration.
Job evaluation and internal equity: nature and objectives of
job evaluation, principles of job evaluation program, procedure
of job evaluation, basic job evaluation methods, systems,
packaged point plans, implementation of evaluated job
structure.
Principles of External and Internal Differentials
Rewards and incentives: determinants of incentives, classifica-
tion of rewards, incentive payments, objectives of wage
incentive schemes, wage incentives in India, types of wage
incentive plans, prevalent systems, guidelines for effective
incentive plans, non monetary incentives, cafetaria style of
compensation, problems of equity; bonus, profit sharing and
stock options.
Fringe benefits: features of fringe benefits, objectives of fringe
benefits and services programme, history and growth factors,
coverage of benefits, employee services, fringe benefits in India,
benefit programmes for management, administration of
benefits and services.
Latest Trends in Compensation
Compensation surveys, introduction and methodology, uses
of compensation surveys, planning compensation for execu-
tives and knowledge workers, tax planning, comparative
international compensation, downsizing and voluntary
retirement scheme, pay restructuring in mergers acquisitions.
11.622.1
Outcomes and Assessment

COMPENSATION MANAGEMENT
Academy of Management Executive, Industrial Relations
Criteria Journal, International Journal of Manpower, California
Outcomes Assessment criteria Management Review, Sloan Management Review, Administra-
To achieve each outcome a student tive Science Quarterly, Journal of Strategic Information Systems,
must demonstrate the ability to:
1 Examine concepts and Define key concepts related to International Labour Review, Journal of European Industrial
issues in employee compensation in a given
compensation organisation Training, Human Relations, British Journal of Management,
Distinguish between the economic and
behavioural issues related to Journal of Management Development, Journal of Managerial
compensation Psychology
Compare compensation policies of two
different organisation A variety of videos, which may be useful in covering business
Define key elements of compensation communication topics. The business press can be a significant
2 Explain essential structure
elements of a sound source of information. Companies such as Video Arts How-
compensation structure Relate job evaluation to ‘internal equity’
ever, one of the best sources for information is the World Wide
Analyse the role of regulatory bodies Web sites that can be used for providing information and case
associated with wage determination
studies (eg http://www.bized.ac.uk/ which provides business
Explain the effect of ‘external equity’ on
3 Summarise principles employee compensation in business case studies appropriate for educational purposes). Others are
of external and internal organisations
differentials of http:// www.businesscases.org/ www.hrmguide.net.
compensation Analyse determination of incentives paid
to employees Suggested Reading
Design performance-linked reward system
for service organisation Armstrong, M, Reward Management, Kogan Page Ltd., U.K.
Explain effect of tax planning on Bergman.T.J, Scarpello.V.G, and Hills.F.S., Compensation Decision
4 Analyse latest trends in compensation administration
compensation on Making, Dryden Press (1998)
national and international Analyse socio -economic implications of
level current compensation trends Bungess, L.R., Wage and Salary Administration, Charles E.Merril
Assess role of M&A on compensation
revisions in MNCs Pub.Co.Columbus (1984)
David.B.W, Wage and Salary administration, Prentice Hall,
Eaglewood Cliffs (1972)
Guidance
Dunn, J. D., & Rachel, F. M. Wage and Salary Administration:
Generating Evidence
Total Compensation Systems. New York: McGraw-Hill. (1971)
Evidence of outcomes may be in the form of written or oral
assignments or tests. The assignments may focus on real Englewood Cliff, New Jersey: Prentice Hall.(1989)
problems or case studies. Learning and assessment can be across Henderson, R, Compensation Management: Rewarding Performance,
units, at unit level or at outcome level. Evidence could be at Prentice Hall (1996)
outcome level although opportunities exist for covering more Henderson, R. I. Compensation Management Rewarding Performance,
than one outcome in an assignment. 5th Ed.
Links Kanungo, R N & Mendonca, M, Compensation: Effective Reward
The unit is part of personnel pathway and forms a direct link Management, 2nd ed., John Wiley & sons (1997)
with other HRM units in the MBA programme, such as, Mamoria.C.B., Gankar.S.V., Personnel Management Text and Cases,
Essentials of Management, Organisational Behaviour, HRM , Himalaya Publishing House (2002)
and other specialisation modules..
Martocchio, J. J. Strategic compensation: a human resource manage-
Links are also to be found with labour laws ment approach.
Resources Milkovich, G. T., & Newman, J.M. Compensation, 6th Ed.
Journals are a valuable source of information, such as: McGraw- Hill. (1999)
Harvard Business Review, Human Resource Management New Jersey: Prentice-Hall. (2000)
Journal, Journal of Management Studies, Personnel Review,
Delivery
International Journal of Human Resource Management,
A mixture of lectures to cover basic theory and case studies for
Organisational Dynamics, Journal of Management Sciences,
class discussion will be used as reinforcement of key concepts

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11.622.1 iii
COMPENSATION MANAGEMENT

RBS COMPENSATION MANAGEMENT (MBA) 11.622.1

CONTENT
Unit No. Lesson No. Topic Page No.
Lesson Plan vi
Course Requirments ix
1
Lesson 1 Introduction to Compensation and Rewards 3
Lesson 2 Objectives of Compensation and Rewards 7
Lesson 3 Introduction to framework of Compensation Policy 12
Lesson 4 labor market characteristics and pay relatives 20
2
Lesson 5 Introduction To Compensation, Rewards, Wage
Levels and Wage Structures 30
Lesson 6 Introduction to Wage Determination Process
and Wage Administration Rules 34
Lesson 7 Introduction to Factors Influencing Wage and Salary Structure
and Principles of Wage and Salaries Administration 45
Lesson 8 Introduction to the Theory of Wages 54
Lesson 9 Introduction To Minimum, Fair And Living Wage 57
Lesson 10 Introduction To The Minimum Wage 63
Lesson 11 Introduction To Basic kinds of Wage Plans 66
Lesson 12 Introduction to Wage Differentials & Elements of a
Good Wage Plan 71
Lesson 13 Introduction to Institutional Mechanism
for Wage Determination 76
Lesson 14 Legalistic framework for wage determination 82
Lesson 15 Introduction to the Importance of Wage differentials
and Wage Differentials in India 92
Lesson 16 Introduction to Executive Compensation
and Components of Remuneration 99
Lesson 17 Introduction To Nature and Objectives of Job Evaluation 104
Lesson 18 Introduction to Principles and Procedure of
job evaluation program 111
Lesson 19 Introduction to Basic Job Evaluation Methods/Systems
& Packaged Point Plans 119
Lesson 20 Introduction To Implementation of Evaluated Job 128
Lesson 21 Introduction To Determinants Of Incentives 133

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iv 11.622.1
 COMPENSATION MANAGEMENT
RBS COMPENSATION MANAGEMENT (MBA) 11.622.1

CONTENT
Lesson 22 Introduction to Classification of Rewards,
Incentive payments and it’s Objectives 138
3
Lesson 23 Introduction to Wage incentives in India 146
Lesson 24 Introduction to Types of Wage Incentive Plans 154
Lesson 25 Introduction to Prevalent systems & Guidelines
for Effective Incentive Plans 162
Lesson 26 Introduction to Non-Monetary Incentives 168
Lesson 27 Introduction to Cafetaria Style of Compensation 174
Lesson 28 Introduction to Problems of Equity & Bonus 178
Lesson 29 Profit Sharing and Stock Options 183
Lesson 30 Introduction To Features of fringe benefits, Objectives
of fringe benefits and Services Programme 188
Lesson 31 Introduction to History and Growth Factors,
Coverage of Benefits 193
Lesson 32 Introduction to Employee services & Fringe Benefits in India 197
Lesson 33 Introduction to Benefit Programs for Management
& Administration of Benefits and Services 203
Lesson 34 Introduction to Compensation surveys and Methodology 211
Lesson 35 Introduction to Planning Compensation for Executives
and Knowledge Workers 216
4
Lesson 36 Introduction to Tax Planning 222
Lesson 37 Comparative International Compensation 228
Lesson 38 Introduction to Downsizing 236
Lesson 39 Voluntary Retirement Scheme 243
Lesson 40 Pay Restructuring in Mergers and Acquisitions 249

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11.622.1 v
 RAI UNIVERSITY
COMPENSATION MANAGEMENT

RAI BUSINESS SCHOOL

LESSON PLAN
Program: MBA Session Year Semester
2 3

Subject Title : Compensation Management

Reference Remarks
Number of Hours
Daily Name of the topic as A
Lesson Schedule given in RU Syllabus L ss Title
T
O ig L* T* P G S T Name of the Book &
n. * D Author
L
Page no.

1
Personnel Management
Role of Compensation
by
Lesson 1 and Rewards in the 1 1.5 CB Mamoria/ SVGankar
organisation
432, 433, 459, 490 & 491
Objectives of
Lesson 2 Compensation and 1 1.5
Rewards
Introduction to
Lesson 3 framework of 1 1.5 Course Pack
Compensation Policy
2
Labor Market
Lesson 4 Characteristics And Pay 2 1.5 -
Relatives
Introduction To Personnel Management
Compensation, Rewards, by
Lesson 5 1 1.5
Wage Levels and Wage CB Mamoria/ SVGankar
Structures Pg 432-458
Introduction to Wage
Determination Process
Lesson 6 1 1.5 -
and Wage Administration
Rules
3
Introduction to Factors
Influencing Wage and
Lesson 7 Salary Structure and 2 1.5 -
Principles of Wage and
Salaries Administration
Lesson 8 Introduction To The 1 1.5 -
Theory of wages
Introduction To
Lesson 9 Minimum, Fair And 2 1.5 -
Living Wage
4
Lesson 10 Tutorial Activity 1 1.5 -
Introduction To Basic
Lesson 11 2 1.5
kinds of Wage Plans
Introduction to Wage
Lesson 12 Differentials & Elements 2 1.5 -
of a Good Wage Plan

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vi 11.622.1
 COMPENSATION MANAGEMENT
Reference Remarks
Number of Hours
Daily Name of the topic as A
Lesson Schedule given in RU Syllabus Title
L ss T
P G Name of the Book &
O ig L* T* S T
* D Author
n. L
Page no.

5
Introduction To
Lesson 13 Institutional mechanism 2 1.5 Course Pack
for wage determination
Legalistic framework for
Lesson 14 2 1.5 Course Pack
wage determination
6
Introduction to the
Importance of Wage
Lesson 15 2 1.5 -
differentials and Wage
Differentials in India
Introduction to Executive
Compensation and
Lesson 16 2 1.5 -
Components of
Remuneration
Personnel Management
Introduction To Nature
by
Lesson 17 and Objectives of Job 2 1.5
CB Mamoria SVGankar
Evaluation
Pg 403-431
7
Introduction to Principles
Lesson 18 and Procedure of job 2 1.5
evaluation program
Introduction to Basic Job
Evaluation
Lesson 19 2 1.5 -
Methods/Systems
&Packaged Point Plans
Introduction To
Lesson 20 Implementation of 2 1.5 -
Evaluated Job Structure
8
Introduction To
Lesson 21 Determinants Of 2 1.5 -
Incentives
Introduction To Personnel Management
Classification of Rewards, by
Lesson 22 3 1.5
Incentive payments and CB Mamoria SVGankar
it’s Objectives Pg 459-489
9
Introduction To Wage
Lesson 23 3 1.5 -
incentives in India
Introduction To Types of
Lesson 24 3 1.5 -
Wage Incentive Plans
Introduction To Prevalent
Lesson 25 systems & Guidelines for 3 1.5 -
Effective Incentive Plans
10
Introduction To Non-
Lesson 26 3 1.5
Monetary incentives
Introduction To Cafetaria
Lesson 27 3 1.5 -
style of compensation
Introduction To
Lesson 28 Problems of Equity & 3 1.5 - Course Pack
Bonus
11
Profit sharing and Stock
Lesson 29 3 1.5 - -
options
Introduction To Features
of fringe benefits,
Lesson 30 Objectives of fringe 3 1.5 - Course Pack
benefits and Services
Programme

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11.622.1 vii
COMPENSATION MANAGEMENT

Reference Remarks
Number of Hours
Daily Name of the topic as A
Lesson Schedule given in RU Syllabus Title
L ss T
O P G Name of the Book &
ig L* T* S T
* D Author
n. L
Page no.

Lesson 31 Tutorial 3 1.5

12
Personnel Management
Introduction To History
by
Lesson 32 And Growth factors, 3 1.5
CB Mamoria/ SVGankar
Coverage Of Benefits
Pg 490-502
Introduction To
Lesson 33 Employee services & 3 1.5 -
Fringe Benefits in India
Introduction To Benefit
Programs For
Lesson 34 Management & 3 1.5 -
Administration Of
Benefits And Services
13
Lesson 35 Tutorial 4 1.5 -
Introduction to
Lesson 36 Compensation surveys 4 1.5
and Methodology
Introduction To Planning
compensation for
Lesson 37 4 1.5 Course Pack
executives and knowledge
workers
14
Introduction To Tax
Lesson 38 4 1.5 -
Planning
Comparative International
Lesson 39 4 1.5 -
Compensation
15
Introduction To
Lesson 40 4 1.5 -
Downsizing
Voluntary Retirement
Lesson 41 1.5 -
Scheme
Handbook of Reward
Management
Pay Restructuring in
Lesson 42 1.5 By Michael Armstrong & -
Mergers and Acquisitions
Helen Murlis
Pg 520-524
16 -
Lesson 43 Tutorial 1.5 -
Lesson 44 Revision 1.5 -
Lesson 45 Revision 1.5
17 1.5
Lesson 46 Revision 1.5
18 Preparatory Leave
19 End term exams

-L* = Lecture
P* = Practical/Studio Hours
Hours T* = Tutorials Hours

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viii 11.622.1
 COMPENSATION MANAGEMENT
COURSE REQUIREMENTS

Class Participation
It forms the backbone of the system of Continuous evalua- d. Students may furnish additional data / information
tion. The students are expected to have gone through the downloaded from the Internet/other literature and put up
diverse views away from to syndicate solution.
pre-study material and come prepared for discussion. We
e. Each student is required to make self and peer evaluation in
visualize that the quantum and quality of learning through
accordance with a format. This is a confidential document
discussion would be much superior to simple delivery of the between the students submitting the assignment and the
course material in the classroom. The process is intended to faculty member.
identify the following aspects in a student:
a. Commitment to learning. Group Presentation
b. Regularity to attend classes.
Most professional courses train their students in developing
c. Desire to studiously go through the study material and
presentation skills. All the members of the syndicate are
research books, Net, etc. to gain significant knowledge.
expected to share the presentation of the assignment executed
d. Ability to present his point view systematically/logically.
by them. They shall be prepared to answer queries raised by the
e. Ability to take criticism.
students as well as the faculty members. The students may
f. Approach adopted to find solution to a given problem.
correct the error committed by them while submitting the
g. Communication skills.
assignment at the presentation stage.

Syndicate
It refers to the group of students who are assigned same tasks
to be performed. In our system the assignments are executed
by the Syndicates. This helps in inculcating the culture of team
work. It also helps those who are not as good in the subject as
some of their other colleagues are. The Syndicate accomplishes
the assignment as under:
a. Initial discussion to identify the job description.
Completion of the assigned job within the allocated time
frame.
b. Integration of the inputs to an unified Syndicate solution
Assignments
Each student is expected to submit two assignments per
subject during the semester. The system of assignment follows
the procedure given below:
a. Different assignment is given to different Syndicate.
b. Each member of the Syndicate is expected to participate
equally to solve the given problem.
c. All students of the syndicate are expected to submit the
assignment individually. While they are expected to present
common solution, they have the opportunity to express
themselves as individuals and demonstrate their exceptional
ability. They may recommend deletion/modification/
addition to the syndicate solution.
Group Project
This activity is also aimed at developing the culture of team-
work. The team members shall get together to decide at the
share of the work. Each member of the team gathers the
desired data, which is integrated together to form the project.
The project report is evaluated for the following:
a. Statement of the problem / issues (correctness / quality).
b. Research on existing practices, if any, and their critical analysis,
highlighting their advantages and defects.
c. Suggested Solutions, analysis, correctness, practicability, use
of technology and application of statistical tools.
d. Presentation, clarity of concept, quality of presentation (Slide
/ Power point presentation / OHP Film), ability to respond
to queries, etc.
e. Recommendation.
The evaluation is made on the basis of the project report and
presentation.
End Semester Examination
These examinations are conducted in the usual manner. Each
student is expected to meet the attendance requirement of 75%
in aggregate.

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11.622.1 ix

INTRODUCTION
Human Resource Management
The most important “products” in today’s economy are services
provided by people; there is, therefore, considerable interest in
the field of human resources. Indeed, it has been called the
“last frontier” of management. By gaining an understanding
of appropriate principles and procedures, strategies can be
developed to meet the human resource management challenge
presented by reinvention initiatives.
In this endeavor it is well to remember that managing human
resources is both a science and an art; there are accepted ap-
proaches to the subject, but no single right way. Those looking
for neat answers to complex questions are likely to be disap-
pointed by any source they consult.
This course will be an integrative learning experience by
emphasizing two related goals:
First, scholastic goals which include the acquisition of a set of
human resource concepts and their application to contemporary
issues; and
Second, personal career goals which encompass the develop-
ment of the human resources of this class as well as individual
career plans.
This is an exciting and dynamic topic area that encompasses
such issues as workforce diversity, drug testing, video display
terminals, secondary smoke, AIDS, lie detectors, sexual
harassment, total quality management, comparable worth,
whistle blowing as well as more traditional management
concerns.
Subjects such as these will be briefly addressed in this course
and examined in greater detail in “Issues in Human Resource
Management” next year.
Our objective will be to examine a framework for understand-
ing the management of human resources. The cognitive map
which we will jointly pursue has several critical areas:
(1) the managerial environment,
(2) the acquisition, allocation, development, and sanction of
human resources, and
(3) change and the future.
Accordingly, we will initially address the professional, historical,
and work context within which human resources are managed.
Next, in the single largest portion of the class, personnel
management will be explored as the performance of systemic
functions in organizations (acquisition, allocation, develop-
ment, and sanction). Finally, change and the future of human
resource management in government will be probed.
Do we all need rewards and incentives to be
motivated for work?
Ask teachers and parents what role rewards and incentives
would play in the ideal teaching situation and most of them
would admit that ideally they wouldn’t need them at all: that
their students would be so motivated to learn and so excited by
the process that rewards would be entirely beside the point.
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11.622.1
COMPENSATITION MANAGEMENT
The music itself would provide more than enough satisfaction.
So most of us who use rewards do so with a hint of reluctance,
regret or guilt. We wish they weren’t necessary. And, in addition,
some of us worry about the message we are sending with our
rewards.
Are we reducing the enjoyment of the music and the learning
process by distracting our students with extrinsic rewards? Are
the children going to become more interested in the reward
than the musical task undertaken to earn it? Are we turning
everything, even the wonderful gift of music-making, into a
carefully measured economy where every effort and accomplish-
ment is purchased with a sticker?
There is good reason to be wary of the role rewards and
incentives are used. Recently good studies, articles and books
have been published which call into question even our most
accepted uses of incentives. But by thoughtfully considering the
way in which we use rewards, we can avoid many of the most
common pitfalls. First, we should think about the why we are
using our reward.
The most obvious, though arguably the most risky reason, is to
provide a supplementary motivating drive for a student to do a
particular task. We could also use rewards to express respect for
the child and our appreciation of exceptionally good work. We
might use a reward to publicly recognize or draw attention to
good work.
It might be that we wish to draw the student’s own attention
to the magnitude of what he has accomplished, as though he
has scaled a mountain and we are encouraging him to enjoy the
view. And we might use a reward system to make tangible, or
objectify, the process of learning.
These all seem like perfectly reasonable reasons to consider
rewarding a student. However, it is important to realize that the
message we intend to send with our reward and the message
which is actually received by the student might be very different.
For instance, if we use a reward to supplement motivation,
what we mean to say is “this task is so important that I am
giving you something special to ensure that you do it”.
But it is very easy for the child to get the message that “this task
is not worth doing on its own merit; some bonus must be
included to make it worthwhile”. And similarly, if we use a
reward (say, a graduation award) to call public attention to an
accomplishment, what we want to say is “this student has
accomplished something wonderful”. But what might be
understood by the student and others is “students who have
not completed this repertoire are not doing anything worthy of
recognition”.
If we use a sticker-chart to quantify progress as a beginning
student polishes up her first “Twinkle Variation”, we are
hoping to show the student that although daily improvement
might be too slight to see, as the stickers add up real learning is
taking place and long-term progress will result. Instead, the
1
 student may get the idea that the repetition and the accumula-
COMPENSATITION MANAGEMENT
tion of rewards is the primary objective, rather than the learning
that this is symbolizing.
Probably the easiest way to avoid sending the wrong message is
to be aware of the possibility. We need to be receptive to the
student’s possible misinterpretation of our goals in giving
rewards. If we find ourselves bargaining with the student about
the reward, or if we find that interest is primarily in the reward
rather than the process which earns it, we need to change tactics
quickly!
And it certainly wouldn’t hurt to be quite open and up-front
with students about why we are using a reward. Even young
students can benefit from the explanation that although they
will receive a Book 1 graduation ribbon at the recital, what you
are most proud of is not that they have finished Book 1, but
that they struggled to overcome the difficulties they were having
with tone, worked very hard at this, and can now play with a
beautiful legato style.
Or it might very well help a seven-year-old to hear that a proper
bow-hold is SO important to you, and to his ultimate progress
on the instrument, that you would be willing to pay him for it
for a couple of weeks.
This tells him why you are using the reward, prevents any
misunderstandings, and encourages him to stay focused on the
skill in question, rather than the gimmick used to achieve it.
In the remainder of this newsletter we will look at some of the
controversies involved in the use of rewards, the ways in which
many of us are using rewards and incentives, and examples and
comments concerning individual experiences. Read on!
Do companies really motivate their employees in
the real sense for target achievements? If yes then
how ?
Beware of the Employee of the Month Programs
Many Companies use employee-of-the-month awards. This
award may include a photograph of the honoree with an
engraved nameplate in the lobby of the business, perhaps a
reserved parking place and/or a small cash bonus.
Variation on employee-of-the-month programs are almost
endless. At Acapulco Restaurants in Long Beach, CA, the
honoree also gets a paid day off. At Gregson’s Foods, a retail
grocery chain in Cadlsden, AL, the employee receives a silver
name tag inscribed with the title, month and year of the award
to wear as long as he/she works for the company.
As popular as these programs are, they may not be the best for
motivating today’s employees.
What’s Wrong with Them?
It’s difficult to motivate employees through a “program”.
Programs are often too distant and formal to get excited about.
Motivation is very personal and stems primarily from the
interaction between an employee and his or her manager. What
is motivating to an individual also varies from person to
person.
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2 11.622.1
The best motivation comes from daily positive reinforcement
by management of desired performance with as many employ-
ees as possible - not something that occurs once a month for a
single employee.
When new, an Employee of the Month program can stimulate
much excitement, hovever, over time much of the thrill is often
lost. Oftentimes the selection criteria for the program aren’t
clear, and overheard are such things as “Let’s give it to someone
in Accounting-they never get it” or “Sally can’t get it - she already
received it earlier this year”.
In other instances the program reaches a saturation point where
so many employees have received the award that it no longer
seems special.
A program’s reputation can also be tarnished. In one company I
consulted with, management was seeking to improve the
employee-of-the-month award, which many felt was ineffective.
By talking with employees, I quickly learned that some employ-
ees who received the award were not considered deserving by
other employees, I also learned it was a great administrative
burden for managers to nominate someone for the program -
and a humiliating experience for both the manager and
employee if “corporate” subsequently rejected the application.
Getting More from a Program
If you have to have an employee-of-the-month program, there
are some things that can help it be more successful. They are as
mentioned below-
First, make sure other things are systematically being done to
recognize employee performance in the workplace on a daily
basis.
Second, employee-of-the-month programs can be improved if
nominations are open to everyone, not just management. This
keeps the program from being biased to favor employees who
have greater visibility with management.
Third, a program can be further improved if it’s not limited to
being given one a month - so as to seem like a quota - whenever
that happens.
Fourth, for best results, strive to keep the program fresh and
flexible, and make changes in the program as it begins to feel
stale to targeted employees.
In summary, there are more effective ways to improve employee
motivation, morale, and initiative than are typically obtained
from employee-of-the-month programs. But if used in
conjunction with other techniques - and with an awareness of
the potential pitfalls - employee-of-the-month programs still
have a place in motivating today’s employees.

LESSON 1:
INTRODUCTION TO COMPENSATION
AND REWARDS
Learning Objective
• Understand the meaning of Compensation and Rewards
• Know the role of Compensation and Rewards
• Types of Compensation and Rewards
• Importance and purpose of Compensation and Rewards
management in organisations
In a layman’s language the word Compensation means
something, such as money, given or received as payment or
reparation, as for a service or loss. On the other hand, the word
Reward means something given or received in recompense for
worthy behavior or in retribution for evil acts.
The word Compensation may be defined as money received in
the performance of work, plus the many kinds of benefits and
services that organizations provide their employees.
On the other hand, the word Reward or Incentive means
anything that attracts an employees’ attention and stimulates
him to work. An incentive scheme is a plan or a programme to
motivate individual or group performance.
An incentive programme is most frequently built on monetary
rewards (incentive pay or monetary bonus), but may also
include a variety of non-monetary rewards or prizes.
Compensation or rewards (incentives) can be classified into:
1. direct compensation and
2. indirect compensation.
Money is included under direct compensation (popularly
known as basic salary or wage, i.e. gross pay) where the indi-
vidual is entitled to for his job, overtime-work and holiday
premium, bonuses based on performance, profit sharing and
opportunities to purchase stock options.
While benefits come under indirect compensation, and may
consist of life, accident, and health insurance, the employer’s
contribution to retirement (pensions), pay for vacation or
illness, and employer’s required payments for employee welfare
as social security.
While French says, the term “ Incentive system” has a limited
meaning that excludes many kinds of inducements offered to
people to perform work, or to work up to or beyond acceptable
standards. It does not include:
1. Wage and salary payments and merit pay;
2. Over-time payments, pay for holiday work or differential
according to shift, i.e. all payments which could be
considered incentives to perform work at undesirable times;
and
3. Premium pay for performing danger tasks.
It is related with wage payment plans which tie wages directly or
indirectly to standards of productivity or to the profitability of
the organization or to both criteria. Compensation represents
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11.622.1
UNIT I
by far the most important and contentious element in the
COMPENSATITION MANAGEMENT
employment relationship, and is of equal interest to the
employer, employee and government.
1. To the employer because it represents a significant part of
his costs, is increasingly important to his employee’s
performance and to competitiveness, and affects his ability
to recruit and retain a labor force of quality.
2. To the employee because it is fundamental to his standard
of living and is a measure of the value of his services or
performance.
3. To the government because it affects aspects of macro-
economic stability such as employment, inflation,
purchasing power and socio – economic development in
general.
While the basic wage or pay is the main component of compen-
sation, fringe benefits and cash and non-cash benefits influence
the level of wages or pay because the employer is concerned
more about labor costs than wage rates per se. The tendency
now is towards an increasing mix of pay element of executive
compensation has substantially increased in recent years.
Basic purpose for establishment of a sound Compensation
and Reward administration
The basic purpose of establishment of a sound compensation
and reward administration is to establish and maintain an
equitable compensation structure.
Its secondary objective is the establishment and maintenance of
an equitable labor-cost structure, an optimal balancing of
conflicting personnel interests so that the satisfaction of
employees and employers is maximized and conflicts mini-
mized.
A sound wage and salary administration tries to achieve
these objectives:
1. For employees: Employees are paid according to
requirements of their jobs, i.e., highly skilled jobs are paid
more compensation than low skilled jobs. This eliminates
inequalities.
2. The chances of favoritism (which creep in when wage rates
are assigned) are greatly minimized.
3. Job sequences and lines of promotion are established
wherever they are applicable.
4. Employees’ morale and motivation are increased because a
wage
programme can be explained and is based upon facts.
b. To employers:
1. They can systematically plan for and control their labor
costs.
3
 2. In dealing with a trade union, they can explain the basis of
COMPENSATITION MANAGEMENT
their wage programme because it is based upon a systematic
analysis of job and wage facts.
3. A wage and salary administration reduces the likelihood of
friction and grievances over wage inequities.
4. It enhances an employee’s morale and motivation because
adequate and fairly administered wages are basic to his
wants and needs.
5. It attracts qualified employees by ensuring and adequate
payment for all the jobs.
According to Beach, wage and salary programmes have four
major purposes:
i. To recruit persons for a firm;
ii. To control payroll costs;
iii. To satisfy people to reduce the incidence of quitting
grievances, and fractions over pay and
iv. To motivate people to perform better.
Tutorial Activity 1.1
Discuss the role and importance of Compensation and
Rewards.
Tutorial Activity 1.2
What is the basic purpose behind the establishment of a
sound Compensation and Reward administration system in the
organizations?
Tutorial Activity 1.3
Knowledge of the importance of compensation management
makes you in becoming a hard core Human Resource manager.
Throw light on the validity of this statement with the help of a
corporate example.
Tutorial Activity 1.4
Let us study the role of the Supervisor in Compensation
Supervisors must be actively involved in discussing the
institution’s compensation program with employees. The
supervisor’s role in compensation encompasses the following:
Ensure employees know their job title, salary range and
responsibilities. Respond to employee questions to clarify and
resolve issues quickly and efficiently.
Conduct a formal performance review once a year. In addition,
you should communicate your expectations when employees
are promoted or transferred into a new job.
Remain knowledgeable of your employees’ salaries, skills and
experience.
Ensure the job descriptions are current and accurate. Develop
desk or departmental job descriptions to more clearly define
what is done in your particular area, unless the generic job
description is a very close match. The education and experience
requirements of the job description must match the generic job
description.
Review your staff’s salaries at least once every fiscal year in order
to determine and make salary changes. Use the Job Changes/
Salary Actions and Merit Program guidelines for assistance.
Familiarize yourself with non-base salary benefits such as paid
leave, insurance, retirement, recreational facilities, and flex
schedules. Direct your questions to the Benefits Department.
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4 11.622.1
Reward employees with non-monetary rewards such as sincere
praise, thanks for a job well-done, and lunches, pizza parties,
cakes, etc., for achieving milestones.
When a job changes significantly or you need to develop a new
job, a compensation analyst can assist you to determine if an
existing job title/description is suitable.
Tutorial Activity 1.5
Let us understand from the case below the role of Compensa-
tion and Rewards management with regard to HEALTH CARE
PROVIDERS.
The National Environmental Education & Training
Foundation’s (NEETF) Health & Environment Program
provides environmental education and training for health
professionals to improve health care and public health, with a
special emphasis on protecting children and other populations
disproportionately effected by environmental pollutants. Given
current trends in the American health care system, we believe it
is also critical to form partnerships with managed care organiza-
tions to incorporate environmental measures into mainstream
health care delivery systems. To further protect children’s health,
in addition to working with health care providers, NEETF has
initiated a healthy schools program to reduce environmental
pollutants in schools.
NEETF’s Health & Environment Programs are designed to
integrate environmental health into health care provider
education and practice settings (e.g. medical and nursing
schools, continuing education programs, private health care
organizations) and improve environmental health conditions in
the United States, with an emphasis on children’s environment.
“Health Care Providers: The Role of Compensation and
Incentives”, in Disease Control Priorities in Developing
Countries, second (DCP2)
Charles Hongoro and Charles Normand
Section 1.0: The Nature and Role of Health Care Providers in
Disease Control
This section will focus on the following issues:
1.1 A brief description of health care providers and their role in
health systems
Health care provider problems. These will be analysed at three
levels:
1. Individual health worker level-issues related to morale/
motivation, productivity, informal activities, internal capacity,
remuneration, work environment, etc;
2. Organisational level (including independent individual
providers)-issues related to funding methods, level of au-
tonomy, referral hierarchy (role), accountability structures, etc;
and
3. Health system level-issues related to the level of
decentralisation, funding arrangements, regulations, system
capacity, etc.
Health care system’s response to health care provider problems-
health sector reforms? Common solutions to disparate issues?
Where are we getting it wrong?
Section 2: Health care provider incentives
What are Incentives?
This will address definitional issues based on a thorough review
of literature. The focus will be on developing a common view
and understanding of the meaning of incentives at both
theoretical and operational levels.
Formal classification of incentives: to include health system,
organisational and individual incentives. The distinction
between monetary and non-monetary incentives will be made
for each of these categories. The links between types of
incentives and disease control priorities will be explored%
incentive and objective alignment. The need for aligning health
system, organisational and individual incentives, and the
problems associated with doing so will be highlighted.
Contextual issues: The context is defined here from an indi-
vidual and /or organisational view point. This will include
issues on working culture, norms and regulations, health
systems organisation
Incentives in practice: This section will draw on empirical
evidence of what matters to health care providers in developing
countries. The source of information will be published and
unpublished material, and a technical paper focusing on a
country (Bangladesh) or region. This will include a box
highlighting a success story or failure in using incentives.
Section 3: Health care provider compensations
The section will include a description of health care provider
compensations in developing countries focussing on individu-
als (public health workers), organisations (public, NGOs, and
private) and independent individuals (e.g. General Practitioners,
and traditional healers)
3.1 Current practices on health care provider compensations:
types of payments for individuals and organisations or
independent private practitioners% fee-for service, capitation,
case payments (e.g. DRGs, per diem, flat rate (bonus payment),
salary, global budget.
The interplay of mechanisms and incentives will be discussed.
Problems associated with each method will be highlighted for
example paying for group effort (will draw on concepts of co-
operative behaviour, and the “prisoner’s dilemma”)
This section will highlight what seems to work and what does
not -and why using specific examples from both developing
and developed countries where appropriate. The dimensions of
analysis will include rationale, design, implementation, impact
on incentives (incentive alignment issues) and ultimately health
care provider behaviour. Two boxes highlighting a success story
and a failure will be included in this section.
Vertical versus integrated programmes. The key question to be
addressed here is how the design of a diseases control
programme influences health care provider incentives and
behaviour particularly looking at effects of compensation
methods, management regimes, work environment, account-
ability, input procurement (as a micro-system analysis of the
system), etc.
Examples of vertical and integrated programmes that intro-
duced innovative compensation and incentive structures will be
used to demonstrate possible effects of programme design and
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11.622.1
implementation on health care provider behaviour and draw
COMPENSATITION MANAGEMENT
implications for disease control.
Performance related compensations: This section will be
devoted to an analysis of health care compensation methods
based on some form of contractual arrangement. Theoretical
and practical arguments for and against use of such methods
will be discussed.
Compensation methods and sustainability issues. A discussion
of health system’s capacity to sustain different types of
compensation methods- funding arrangements, relationship
with other public sector workers, labor migration etc.
Formal classification (based on theory and evidence) provider
compensations, predicted and observed behaviour. Material
from this section will draw from literature.
Example
Type of Rationale Design Incentives Empirical
compensatio evidence
n
E.g. bonus Increase Based on Increase E.g.
payments productivity quantitative volume of confirmatory
outputs activity and evidence but
not quality risk of
opportunistic
4.0 Is there an optimal combination of health care provider
compensation and incentives for DCs? This section will focus
on the following issues:
Cross cutting issues: linking compensation to performance,
managerial autonomy over health care providers, markets or
hierarchies for what types of disease control activities,
National issues: diversity of perceptions of incentives coloured
by contextual issues such as norms, culture, customs, religion,
regulations, politics and the economy.
The notion of different compensation and incentive packages
for different contexts. Each package should include the core
elements (see cross-cutting issues) for promoting desired
performance behaviour.
What Governments Must do and not do
To adapt and not to imitate:
To put health care provider compensation and incentives to the
fore in designing disease control strategies and programmes,
emphasis on strengthening health system incentives that
promote appropriate health care provider behaviour.
The health system should on one hand be able to support the
attainment of positive outcomes of organisational and
individual incentives, and on the other suppress negative or
unintended outcomes. For example, promoting dual practice as
an incentive to public health workers in a poorly monitored or
regulated system might not help achieve public health goals.
Implications of increased demand for health workers in the
context of scaling up to MDGs
Need for different approaches for different contexts, and the
cost implications of suggested solutions to current provider
compensation and payment problems.
5
 The R & D Agenda
COMPENSATITION MANAGEMENT

Based on the literature review and analysis above, this section

will devoted to highlighting areas where information is absent
or incomplete. The foregoing will form the basis for suggesting
a research agenda that will help further our understanding of
the role of health care provider compensation and incentives in
disease control in developing countries.
Questions:
(1) Discuss the case analysis with respect to compensation and
Rewards management.

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6 11.622.1

LESSON 2:
OBJECTIVES OF COMPENSATION AND REWARDS
Learning Objective
• Objectives of Compensation and Rewards
• Determinants of Incentives
Introduction to Objectives of
Compensation and Rewards
After having discussed in the first Chapter the role of compen-
sation and rewards, ij this chapter we will study the objectives
of rewards. Compensation and Rewards determination may
have one or more objectives, which may often be in conflict
with each other. The objectives can be classified under four
broad headings.
Objectives of Compensation
1. The first is equity, which may take several forms. They
include income distribution through narrowing of
inequalities, increasing the wages of the lowest paid
employees, protecting real wages (purchasing power), the
concept of equal pay for work of equal value compensation
management strives for internal and external equity.
Internal equity requires that, pay be related to the relative
worth of a job so that similar jobs get similar pay.
External equity means paying workers what comparable
workers are paid by other firms in the labor market. Even
compensation differentials based on differences in skills or
contribution are all related to the concept of equity.
2. Efficiency which is often closely related to equity because the
two concepts are not antithetical. Efficiency objectives are
reflected in attempts to link to link a part of wages to
productivity or profit, group or individual performance,
acquisition and application of skills and so on.
Arrangements to achieve efficiency may be seen also as being
equitable (if they fairly reward performance) or inequitable
(if the reward is viewed as unfair).
3. Macro economic stability through high employment levels
and low inflation, of instance, an inordinately high
minimum wage would have an adverse impact on levels of
employment, though at what level this consequence would
occur is a matter of debate.
Though compensation and compensation policies are only
one of the factors which impinge on macro-economic
stability, they do contribute to (or impede) balanced and
sustainable economic development.
4. Efficient allocation of labor in the labor market. This
implies that employees would move to wherever they
receive a net gain, such movement may be form one
geographical location to another or form on job to another
(within or outside an enterprise). The provision or
availability of financial incentives causes such movement.
For example, workers may move form a labor surplus or
low wage area to a high wage area. They may acquire new
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11.622.1
COMPENSATITION MANAGEMENT
skills to benefit form the higher wages paid for skills. When
an employer’s wages are below market rates employee
turnover increases. When it is above market rates the
employer attracts job applicants. When employees move
from declining to growing industries, an efficient allocation
of labor due to structural changes takes place.
Other Objectives of Compensation:
1. Acquire qualified personnel – compensation needs to be
high enough to attract applicants. Pay levels must respond
to the supply and demand of workers in the labor market
since employers compete for workers. Premium wages are
sometimes needed to attract applicants already working for
others.
2. Retain current employees- Employees may quit when
compensation levels are not competitive, resulting in higher
turnover.
3. Reward desired behaviour- pay should reinforce desired
behaviors and act as an incentive for those behaviors to
occur in the future. Effective compensation plans reward
performance, loyalty, experience, responsibility, and other
behaviors.
Control costs- a rational compensation system helps the
organization obtain and retain workers at a reasonable cost.
Without effective compensation management, workers
could be over paid or under paid.
4. Comply with legal regulations- a sound wage and salary
system considers the legal challenges imposed by the
government and ensures the employer’s compliance.
Facilitate understanding- the compensation management
system should be easily understood buy human resource
specialists, operating managers and employees.
5. Further administrative efficiency- wage and salary programs
should be designed to be managed efficiently, making
optimal use of the HRIS , although this objective should
be a secondary consideration compared with other
objectives.
Objectives of Rewards
The use of Incentives or Rewards assumes that people’s
actions are related to their skills and ability to achieve important
longer-run goals. Even though many organizations, by choice,
or tradition or contract, allocate rewards on non-performance
criteria, rewards should be regarded as a “payoff” for perfor-
mance.
An Incentive Plan has the Following Important
Objectives
1. An incentive plan may consist of both ‘monetary’ and ‘non-
monetary’ elements.
2. Mixed elements can provide the diversity needed to match
the needs of individual employees.
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 3. The timing, accuracy and frequency of incentives are the very
COMPENSATITION MANAGEMENT
basis of a successful incentive plans.
4. The plan requires that it should be properly communicated
to the employees to encourage individual performance,
provide feedback and encourage redirection.
Determinants of Incentives
These feature are contingencies, which affect the suitability and
design of incentives to varying degrees. The effective use of
incentives depends on three variables-the individual, work
situation, and incentive plan.
(I and Ill) The Individual and the Incentives: Different
people value things differently. Enlightened managers realize
that all people do not attach the same value to monetary
incentives, bonuses, prizes or trips. Employees view these
things differently because of age, marital status, economic need
and future objectives.
However, even though employee reaction to incentives vary
greatly, incentives must have some redeeming merits. For
example, there might be a number of monetary and non-
monetary incentive programmes to motivate employees.
Money, gift certificates, praises, or merit pay are of the continu-
ous parade of promotion.
(ii) The Work Situation: This is made up of four important
elements:
Technology machine or work system, if speed of equipment
operation can be varied, it can establish range of the incentive.
(b) Satisfying job assignments, a workers’ job may incorporate a
number of activities that he finds satisfying. Incentives may take
the form of earned time-off, greater flexibility in hours worked,
extended vacation time and other privileges that an individual
values.
Feedback, a worker needs to be able to see the connection
between his work and rewards. These responses provide
important reinforcement.
Equity, worker considers fairness or reasonableness as part of
the exchange (or his work)
Incentives, in general, are important motivators. Their effective-
ness depends upon three factors: drives, preference value, and.
satisfying value of the goal objects.
Misra says: “Beyond subsistence level, becoming needs (self-
actualization needs) possess greater preference value and are
more satisfying than deficiency needs (which are necessary for
survival). Below the subsistence level, however, the reverse
holds true.” He makes the following generalizations:
i. Incentives, whether they are monetary or non-monetary,
tend to increase the level of motivation in a person.
ii. Financial incentives relate more effectively with basic
motivation or deficiency needs.
iii. Non-financial incentives are linked more closely with higher
motivation, or becoming needs.
iv. The higher the position of a person in an organization’s
hierarchy, the greater is his vulnerability to non-financial
incentives.
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8 11.622.1
“While budgetary restrictions and’ temporary improvements in
performance place a limit on the potency of money as a
motivator, non-financial incentives involve only human
ingenuity as investment and also insure a relatively stable
acceleration in output.
Monetary incentive imply’ external motivation, non-monetary
incentives involve internal motivation. Both are important. It is
a judicious mix-up of the two that tends to cement incentives
with motivation. “
Tutorial Activity 1.1
1. Discuss the objectives of compensation and Rewards.
2. Discuss the determinants of compensation and Rewards.
Tutorial Activity 1.2
Let Us Study The Reason That Why Doesn’t Pay Motivate?
Most companies have some form of incentive plan. However,
one of the most frequent comments heard is that “my
employees aren’t performing any better with the incentive plan
than they were before. Am I wasting my money?” Chances are
you are.
To provide effective motivation, incentives must:
1. Flow from the business process
2. Provide sufficient opportunity to retain attention
3. Directly link actor and the action
4. Be timely
Most plans out there violate at least one, and often all four of
these rules:
1. Business Process
Whether it is manufacturing the proverbial widget, processing
credit card charges or overseeing a multi-product line business,
those creating the compensation system must understand the
customer chain, the work process, and how and where employ-
ees add value.
Failure to do so results in a “one size fits all” mentality where all
employees are treated similarly, or where we base our pay on
what everyone else is doing. Although this may be seen as
“administration savings” or “being competitive in our indus-
try”, it really means we are accepting a competitive disadvantage -
we are actively forgoing a tool of competitive advantage.
2. Pay Opportunity
Although people talk about competitive pay based on scope of
job, or number of salary points, the ultimate determinant of
the pay opportunity is the value created by the job. To the extent
a job does not create value, employees are a drain on capital.
The extent to which value is added (or lost) should be shared
with employees to provide motivation. How much is to be
shared is a company-by-company (or business-unit-by-
business-unit) judgment based on three factors:
a. What is the minimum amount of opportunity that must be
paid to attract and retain employees both in boom and bust
times?
b. How much compensation is necessary to provide a meaning-
ful link between the employee and the business goals?
c. How much of the value added can we afford to share while
maintaining a viable business with adequate shareholder return?
An example of how incentives have consistently worked to the
good is the steel maker Nucor. Base pay for most employees is
less than “competitive” market levels. However, because of
variable pay systems linked to the value created by the system,
Nucor’s employees are both paid above the “market” and
receive constant feedback as to their, and their company’s
performance.
3. Link the Employee and the Action
By tying compensation directly to these the controllable
employee actions we provide a critical feedback link. For
example, a work group which is rewarded based on the number
of units shipped, less a holdback for defective widgets returned
will (ideally): seek ways to speed throughput and shipping;
provide feedback to earlier teams to eliminate defects and, seek
product improvements which will increase demand.
If these are in line with the business process and the goals of
the business are communicated, then, the feedback will reinforce
the actors to align with the business.
If there is no clear linkage—no “line of sight” - the money
spent is, at best, sub optimized, at worst, wasted. This is the
flaw in program such as all employee stock options or company
wide profit sharing plans. There is no direct, meaningful,
measurable link between, for example, the actions of a soda
truck driver and the price of the company’s stock.
4. Timeliness
As Pavlov demonstrated, timeliness is critical to rewards. As
results become measurable, feedback pay should follow, with a
minimum of administrative delay. In many broad-based
incentive plans, payout happens quarterly, monthly, or even, as
at Nucor, weekly. This provides rapid reinforcement feedback.
As a rule of thumb, the longer the delay, the less useful the
reward.
In come situations, this rapidity is not possible because the
process is both uncertain and long – for example a researcher
working on a new drug. In these cases, feedback can still be
provided on a milestone basis – rewards linked to clinical trials,
FDA approval, sales past a profitability milestone, etc.
Unfortunately, the area where there is historically the least
timeliness is executive pay. Executive pay is historically focused
on “annual incentives: requiring executives to categorize their
performance into discrete, one-year segments, regardless of
business cycle. Depending upon the structure of the plan, this
results in executives either setting goals which do not clearly
relate to adding value, but which are measurable in a one-year
time frame (e.g., “by November create a training program for
1995 implementation.”), or measuring financial results without
regard to product cycles (e.g., we release a new edition of the
product every six months, with a six month life. An annual
award cycle eliminates the opportunity to provide feedback on
every edition of the product.)
Conclusion
Pay has the potential to drive performance – in the best
companies, it does. However, too often, pay is designed in a
vacuum, without focus on either the underlying objectives of
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11.622.1
the company or the actions employees can actually control to
COMPENSATITION MANAGEMENT
achieve those goals. Compensation must be seen as part of the
total business process to be successful.
Ted Buyniski is a Principal with iQuantic, Inc., a compensation
and strategic HR consulting firm headquartered in San Francisco.
He manages the East Coast practice from Chester, NJ.
Theodore R. Buyniski
Tutorial Activity 1.3
From the case below let us understand the Reward system of
this organization:
The Employers’ Organization
Company Background
The Employers’ Organisation for local government’s (EO) role
is to help councils achieve the high standards of people
management needed to ensure the continuous improvement of
services.
We offer a range of services to local authorities, from free
telephone advice and specialist guides to tailor made consultancy
services.
Essex – Our Approach to Pay Progression
Essex County Council has been going through radical change.
Some of that change has been structural but the more impor-
tant aspect of the change is cultural. We are seeking to move the
organisation to a much more customer focused and facing
organisation.
Situation
One of the mechanisms to support this move has been our
approach to pay strategy. We also wanted to implement the
Single Status Agreement, which removes the employment
conditions divide between some of our staff. The Agreement
and the approach we used affected our 9,000 staff.
The cornerstone of our approach was to develop the Essex
Competency Framework. This sets out the skills and abilities
that our staff need to deliver best quality services for the
Council. We then incorporated this into our individual perfor-
mance management system. This formed the foundation on
which we could build our new approach. The principles of the
approach are:
1. It is simple and consistent
2. A member of staff meeting the objectives of their job and
their competency statements can expect pay progression
3. It fits with the service planning cycle
4. Development opportunities are available
5. Staff at their maximum pay point undergo performance
review and competency development so that further
development opportunities can be explored.
Process
The new system for these staff moves away from automatic
service based increments, although it still uses the national pay
spine up to point thirty-four. It is based on four Broad Band
Grades that have been determined by using the National Job
Evaluation Scheme.
Within each Band the first increment is automatic, then
performance is assessed against delivery of objectives - i.e. what
9
 needs to be delivered - and the demonstration of competencies
COMPENSATITION MANAGEMENT
- i.e. how it needs to be delivered. Objectives come from the job
profile for the individual and the service objectives for the
service area.
Around six objectives are required for each job and they need to
be constructed in a way that is easily measurable. We provide
guidance and training for managers and staff on how to do this
effectively. The objectives are set at the beginning of each review
year and can be reviewed and amended. We also use statements
from the appropriate four Competency Headings from the
Competency Framework plus the Technical Professional
Competency.
A statement from the Competency Framework sets out what
needs to be demonstrated by the individual in their role. An
example is: “Seeks regular feedback from customers about
services provided and uses this to recommend continuous
improvements to the service”. This statement comes under the
Competency Heading 2 “Customer/Client Orientation” and is
the appropriate statement for spinal column point twenty two.
Each of the generic competencies has a defined and prescribed
statement for every spinal column point. A few of the state-
ments remain the same at all spinal column points; for
example, those around equality and diversity, but most become
more demanding the higher the spinal column point.
The selection of the Competency Headings from the Essex
Competency Framework may be for individual posts where
there are no other similar posts but job families have com-
monly agreed Competency Headings across the organisation in
order that we have consistent levels of service delivery for that
function.
There is also a Competency Heading entitled Professional and
Technical so that job specific competencies are included e.g. social
workers. This framework is flexible enough to cover all jobs and
roles within the Council including the Member role. For jobs
above spinal column point thirty-four and for Members the
Competency Framework is used in a different way.
Each year, the manager will identify the spinal column point for
their member of staff as at the first of April. A database will
produce all of the appropriate statements under the selected
Competency Heading for that spinal column point. These will
be recorded on the appropriate form for the individual together
with their agreed objectives for the year. The professional
technical statements are not prescribed because they relate
directly to the area of work and the manager will draft these
with the individual, although there is general guidance in place
to assist the process.
Questions:
(1) What do you understand by the term People Management.
(2) What is pay progression and discuss it’s relevance to this
case.
Tutorial Activity 1.4
Let us understand the rewarding strategy of another company
below-
© Copy Right: Rai University
10
Front Range Solutions
Company Information
Founded in 1989, FrontRange Solutions Inc. is a privately held
company, delivering software that facilitates extraordinary
relationship solutions. An international leader in business
relationship software for nearly 15 years, FrontRange Solutions
employs more than 500 people worldwide.
FrontRange Solutions’ products address the needs of customer
service and support (help desk), sales force automation (SFA),
knowledge management and customer relationship manage-
ment. FrontRange’s expertise lies in delivering the highest value,
industry-specific, integrated software solutions for the complete
lifecycle of business relationships.
And FrontRange puts its knowledge into practice by providing
outstanding customer service to the over 100,000 customers
and one million plus users. One result: HEAT, the service and
support solution from FrontRange, has a 98% customer
satisfaction rating as indicated by an independent survey.
We have a reputation for providing big-company solutions at
prices that don’t exclude small organizations. FrontRange has
earned more than 60 major industry awards, including: Software
Magazine “Hot 500,” Windows Magazine “Win 100,” Call Center
CRM Solutions Magazine Editor’s Choice, RealWare Award for
CRM, WinMag.com WinList Award, Entrepreneur Magazine Best
Software, Call Center Solutions Product of the Year, and
InformationWeek Top 50 Application Service Providers.
Rewarding Strategy of FrontRange
FrontRange Solutions rewards its employees…
FrontRange Solutions’ Total Rewards Strategy contains four key
components to attract, motivate and retain the best talent
available in the marketplace:
Compensation
FrontRange Solutions offers its employees a competitive pay
package that provides:
• Compensation for satisfactory work (base salary, merit pay);
• Short and long-term incentives for achieving strategic
business objectives;
• Rewards for specific individual or team achievements
(bonuses, awards).
• Total compensation for an individual employee is
determined by
four considerations: Internal value of an individual’s position,
as determined through the position evaluation process. To
ensure internal equity, positions of similar or equal responsibil-
ity will be grouped in the same salary range or band. External
competitiveness, as established through market surveys of
companies we compete with for customers and talent.
Individual performance, as measured by the annual Perfor-
mance Development Process (PDP), which identifies
individuals who should be considered for higher levels of
responsibility and pay.
Business performance, as measured through strategic business
goals, such as earnings per share, profit or cash flow. Local
11.622.1
programs should complement FrontRange Solutions overall

COMPENSATITION MANAGEMENT
pay philosophy and avoid duplication of global initiatives.
Benefits
FrontRange Solutions aims to provide private benefits pro-
grams that supplement or enhance mandatory plans available in
the various locations where we do business. Our programs
serve two main objectives:
1. To protect employees from risks (sickness, accidents,
disability) that may result in substantial economic loss; and
2. To provide employees with retirement benefits (pension
plans, savings plans, retiree health care) that offer economic
security after employment.
Our goal is to give employees a variety of benefits choices and
to deliver these benefits in a tax-effective, economical manner.
Development
We believe in helping employees develop to their utmost
potential. Given the unique nature of FrontRange Solutions’
business, we cannot rely on external recruiting as a primary
source of talent- so we have developed those critical skills
internally.
Workplace Environment
FrontRange Solutions is committed to creating an environment
that attracts and rewards talented, ambitious people. Employ-
ment with our company is an enriching experience that enables
employees to achieve their highest potential. To that end, we
will recognize and reward teamwork, excellence and innovation,
and will provide opportunities consistent with these contribu-
tions.
We also foster diversity among our employees and value the
broad spectrum of thought and skills each person brings to
FrontRange Solutions. Performance is measured in ways that
encourage reasonable risk-taking, foster an awareness of
personal accountability, and support standards and competen-
cies consistent with FrontRange Solutions’ basic values.
Overall, the relationship between our company and our
employees is governed by respect for the individual and a sense
of personal integrity. FrontRange Solutions recognizes that only
when a company truly values people can it expect to be prized as
an employer.
To the extent permitted by applicable law, FrontRange Solu-
tions retains employees on an at-will basis. Nothing in this
website is intended to alter an employee’s at-will status, or create
an offer or contract of employment.
Questions:
1. Discuss the Rewarding Strategy of FrontRange.
2. Discuss on the nature of pay package offered by
FrontRange.
3. What do you understand by the term employee benefits
and throw light on the nature of benefits provided by
FrontRange to it’s employees.
4. Discuss the importance of Workplace Environment with
regard to reward management.

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11.622.1 11
COMPENSATITION MANAGEMENT
LESSON 3:
INTRODUCTION TO FRAMEWORK OF COMPENSATION POLICY
Learning Objective
• Introduction to the concept of Framework
• Understanding the Framework of a Compensation Policy
Introduction to Compensation Framework and
Classification
A compensation framework that supports a long term strategic
vision for compensation and implements new initiatives, will
provide the needed direction, changes will involve moving
towards solving special salary problems using innovative
concepts.
The way we do compensation is undergoing major change
towards a more flexible and timely corporate compensation
systems. The new system will have increased delegation to
managers and will be driven by the business needs of Govern-
ment and ministries. It will be faster, more efficient and
eliminate duplication, focus on a long term approach to
compensation management.
Move from being highly centralized to a decentralized approach
whereby deputy ministers and senior mangers will have
increased authority to make decisions.
Integrate compensation with the other areas of human resource
management. And
Emphasize transparency, monitoring, reporting and account-
ability.
The vision for compensation will assist the pubic service in
attracting and retaining key employees.
Managers will have more accountability for the compensation
of their employees, and will be profiled with the required tools,
systems and support. Senior mangers will approve, within the
framework, exceptional compensation changes, based on sound
business decisions. Senior managers will also have authority to
approve the classification levels of pre-identified jobs within
their organization.
Tutorial Activity 1.1
What do you understand by the term Framework of Compen-
sation Policy and discuss the variables determining the
framework of a compensation policy.
Tutorial Activity 1.2
Achieving Fair financial and Non-Financial Rewards
Employee motivation and performance management depend
on good systems that offer both financial and non-financial
rewards (non-monetary rewards). This performance manage-
ment article applies to all organisations. Constant change and
high expectations are taking their toll in some organisations, as
well as in industry and government generally. Sometimes this is
shown in employee turnover.
© Copy Right: Rai University
12
Sometimes it is hidden because of job insecurity.Many employ-
ees make a New Year’s resolution to seek other employment.
Many are also seeking more balance in their life. Rewards and
remuneration must be scrutinised. Employee motivation and
performance are critical. Non-monetary rewards can be as
important as monetary rewards.In some organisations, a
multitude of different salary and pay arrangements exist. It is
time to bring these different systems into a new framework.
Employees at all levels need to have confidence in the salary
administration system. Employees want the rewards to be
shared fairly and equitably. If they are not, dissatisfaction can
cause severe morale and performance problems. If they haven’t
done so already, leading organisations will need to establish an
improved salary administration structure. It is possible to
develop a simple structure that overcomes the difficulties of the
past, yet is simple enough for everyone in the organisation to
understand. This structure can be tied to a completely new
performance management approach, including better perfor-
mance appraisal mechanisms. Some industry’s remuneration
systems have been dominated by the industrial relations
system. Enterprise bargaining and local area work agreements,
individual performance based contracts, and the effect of
competition on organisational structures, have had a big impact.
A good rewards and remuneration system ensures that each
person receives appropriate financial and nonfinancial recogni-
tion to account for the personal contribution they are making
and the overall value of their position to the organisation. This
includes: Creating and maintaining an organisational structure
and culture that facilitates both employee and organisational
performance. Recognising and rewarding individual and team
performance, financially and otherwise, in relation to the overall
contribution made. Implementing compensation systems that
fairly treat and recognise all employees, regardless of their level
within the organisation. This is the equity issue. It involves
matching remuneration with the contribution made, particularly
where job requirements can change rapidly. The best perfor-
mance appraisal system in the world will not work if it is linked
to a rewards and remuneration system that employees do not
trust or support. A motivated employee will achieve a great deal.
A demotivated employee will be slow, prone to error and not
likely to achieve.Motivation influences performance. It also
suggests that the ‘lack of’, ‘promise of’, or receipt of either
financial or non-financial rewards may also influence motiva-
tion. A feedback loop between motivation and performance
exists, with each potentially impacting the other. Remuneration
is a component of both financial and non-financial reward;
financially, in terms of cash and benefits received; non-financially
in terms of recognition, status and esteem, e.g. the status of
full private use of a motor vehicle. Job evaluation is a process to
determine the contribution of a position to an organisation. It
needs to be seen by both the employee and organisation as fair
and equitable. Good salary administration requires that
11.622.1

employees should receive financial recognition for the contribu-
tion that they make, and that positions of equal value should
be entitled to equal compensation. If organisations handle this
incorrectly, or manipulate it in some way, the impact on the
employee is significant. Past pay systems often paid little
attention to incentives. It is only in recent years that some
systems have provided for differentiation based on
performance.The concept of fair incentives should be on the
agenda.An integrated system is required such as the following
diagram represents. Perception is the reality. If the current
system is not working as intended, then the organisation has a
real problem. Some key questions: Does the documentation
give a full, comprehensive description of each position? Is the
evaluation system used soundly based and rigorously applied?
Is consideration given to market competitiveness in setting the
remuneration range? Is the performance appraisal system well
designed and accepted by all employees? Is the review process
conducted fairly and within agreed time limits? As well as
checking goal achievement, does the review reconsider the job
and changes that may have occurred? Are non-financial rewards
© Copy Right: Rai University
11.622.1
considered along with financial rewards? The system
COMPENSATITION MANAGEMENT
should not be bureaucratic, but it has to be perceived as
fair. It also has to be actually administered fairly. Where do
you rate your system on a scale of 1 to 10? 1 Employees
are showing their total disenchantment by leaving as
quickly as they can. Morale and motivation are non-
existent. 2 Employees are unhappy and grumble frequently
about the non-existence of a remuneration system. They
openly talk about the problems instead of getting on with
their work. 3 Employees are unhappy and comment
frequently about the remuneration system that is supposed
to be in place but doesn’t work. However, a work ethic
exists and they do some work. 4 Employees believe that
‘management’ controls and manipulates the system. They
continue on regardless, but they do not like it. 5 Employ-
ees are aware of a remuneration system but do not see it
working for them. It causes some dissatisfaction. 6
Employees believe the remuneration system only works
for ‘management’. 7 Some employees believe the remu-
neration system is working, others believe it could be
better targeted to their particular situation. 8 A comprehen-
sive system is in place. Position value and remuneration is
fairly evaluated and most are well compensated. Areas for
improvement are recognising individual and team contri-
butions fairly. The system is reviewed regularly. 9 A
comprehensive system is in place. Position value and
remuneration is fairly evaluated and nearly all are well
compensated. Individual and team contributions are
recognised. Higher achievement will come from better
implementation. 10 Everyone from the CEO down
believes that the remuneration system is working well and
being equitably administered. Individual and team
contributions are recognised and rewarded accordingly.
Although some would like more pay, no one is unhappy
with the system. They are motivated and productive.
Derek Stockley
Tutorial Activity 1.3
Let us study the case below with regard to framework of
compensation policy at University at Minnesota.
University of Minnesota
Approved by the : Faculty Senate on February 18, 1993
Accepted and Implemented by the: Administration on April 26,
1993
Action by the: Board of Regents - no approval required
Faculty Compensation Policy
Background On Compensation At The University Of Minne-
sota
Faculty are compensated for their contributions to teaching and
advising, research and scholarship, and service to the institution
and the state/region/nation/other nations, as well as their
professions. Total compensation includes annual base salary
plus fringe benefits, including retirement, health and dental
coverage, and life and disability insurance. In some instances,
annual base salary is augmented through internal sources, such
13
 as overload teaching, or from external sources in the case of
COMPENSATITION MANAGEMENT
approved external consulting.
Initial annual base salary is negotiated at the time of hire, with
floors establish for the instructor and assistant professor ranks
only. Increases to annual base salary for faculty occur in the
following ways: through annually determined merit increases;
through acceptance of a retention offer that includes an increase;
in conjunction with a promotion in rank and/or the awarding
of indefinite tenure; through an augmentation attached to an
administrative title or a set of administrative duties.
For many faculty, annual base salary is supplemented with
summer school or other internal summer employment, such as
grant research. Annual base salary may also be supplemented
internally during one’s contract period through means such as
extension teaching. Normally, new salaries go into effect for A
base faculty on July 1 and for B base faculty on September 16 of
each year.
The salary determination process must provide an objective
unbiased evaluation of each faculty member following a
thorough review of his/her work. The process must encourage
continued good or improved performance, which in turn,
should be rewarded by the compensation system.
Criteria for Annual Salary Increases and Promotion
Any salary determination process at the University of Minne-
sota must be nondiscriminatory. Initial salary offers, periodic
increases, and retention offers may not be based on consider-
ations related to the race, color, creed, religion, national origin,
sex, sexual preference, marital status, public assistance status,
veteran status, or age of the person being considered.
The criteria for determining salary increases must be similar to
those used for promotion and tenure. The tenure and promo-
tion regulations of the University, adopted in 1985, provide the
following instructions which form the framework within which
salary decisions must be made:
General Criteria
The basis for awarding indefinite tenure is the determination
that the achievements of an individual have demonstrated the
individual’s potential to continue to contribute significantly to
the mission of the University and to its programs of teaching,
research, and service over the course of the faculty member’s
academic career.
The primary criteria for demonstrating this potential are
effectiveness in teaching and professional distinction in research;
outstanding discipline-related service contributions will also be
taken into account where they are an integral part of the mission
of the academic unit. The relative importance of the criteria may
vary in different academic units, but each of the criteria must be
considered in every decision.
Faculty Involvement
Faculty input into the discussions surrounding criteria and
procedures for salary increase determination is essential to
maintaining an equitable and collegial environment. With the
administrator of each unit, the faculty must have the opportu-
nity to develop the criteria for, and the format of, the process
through which annual salary increases are determined.The
documents that describe these criteria, formats, and processes
© Copy Right: Rai University
14
shall be shared with the college dean, the appropriate vice
president, and finally the Senior Vice President for Academic
Affairs.
This process must include the provision that the department
chair (unit leader) meet with each faculty member individually, at
least once per year, to review his or her performance. The
sessions shall review the past year’s performance and offer
suggestions for enhancing productivity, where appropriate.
Units may choose to conduct more in depth evaluations on a
periodic basis (e.g. 4 or 5 years) that would include outside
evaluations.
Allocation Format
Each year the annual salary increase pool for meritorious
performance received by the unit will be distributed based on
the criteria specified in the University’s Regulations Concerning
Faculty Tenure and appropriate departmental faculty evaluation
documents.
Unsatisfactory performance, which shall be documented and
communicated to the individual involved, shall serve as
justification for withholding an individual’s increase.
Promotion Increases
Beginning with the 1993-94 salary year, promotion from
assistant professor to associate professor will be accompanied
by an extraordinary $1,500 increase in base salary and promotion
from associate professor to professor will be accompanied by an
extraordinary $2,000 increase in base salary. It is intended that
these promotional increments will be in addition to the annual
salary increase award related to meritorious performance.
The dean will set aside, from those funds provided to his/her
unit for salary increase distribution, sufficient funds to cover
these promotional increments. It is understood that the dean
may also set aside funds from this overall pool to address
special merit or retention purposes. It is intended that this
promotion increment will receive inflation-related increases in
future years.
Other Recommendations
A standing administrative and faculty compensation committee
(including representatives of the Senate Faculty Affairs Com-
mittee) will examine and make recommendations on policies
such as salary levels in the University as a whole, salary disparity
among units, minimum salary levels for associate and full
professors, and salary compression.
Tutorial Activity 1.4
Calipers”
Let us analyse the Executive Compensation Framework policy
with regard to the organization CALIPERS’.
Company Background
The purpose of CalPERS’ policies on executive compensation
is to raise the level of accountability of Boards and Compensa-
tion Committees to shareowners. CalPERS feels it will benefit
shareowners in the long-term if shareowners can provide an
enhanced level of oversight in relation to Compensation
Committee actions. This results in more shareowner friendly
compensation programs.
11.622.1
Compensation programs are one of the most powerful tools
available to companies to attract, retain and motivate key
employees, as well as align their interests with those of
shareowners. Poorly designed compensation packages may have
disastrous impacts on the company and its shareowners by
incentivising short-term oriented and self -interested behavior.
Conversely, well-designed compensation packages may help
align management with owners and drive long-term superior
performance. Since equity owners have a strong interest in long-
term performance and are the party whose interests are diluted
by stock option plans, CalPERS believes shareowners should
provide stronger oversight of executive compensation pro-
grams.
In recognition of this, CalPERS’ believes that companies
should formulate executive compensation policies and seek
shareowner approval for those policies on a periodic basis. Since
SEC’s Release #34-48108, adopted on June 30, 2003 as listing
standards, for the NYSE and NASDAQ, companies must give
shareowners the opportunity to vote on all equity compensa-
tion plans and material revisions (with limited exemptions).
The ability to vote on these plans provides the checks and
balances on the potential dilution resulting from earmarking
shares for equity-based awards.
With this in mind companies should design executive compen-
sation policies to be comprehensive enough to provide
shareowners with oversight of how the company will design
and implement compensation programs, yet broad enough to
permit the Compensation Committee flexibility in implement-
ing the policy. CalPERS does not believe that it is optimal for
shareowners to approve individual contracts at the company
specific level.
CalPERS developed a model policy guideline designed to assist
companies in formulating executive compensation policies. This
also provides a framework by which interested parties may
gauge the quality of company specific executive compensation
programs and practices.
General Policy Guidelines
Executive compensation programs should be designed and
implemented to ensure alignment of interest of management
with the long-term interest of shareowners.
Executive compensation should be comprised of a combina-
tion of cash and equity-based compensation. Direct ownership
should be strongly encouraged.
Executive compensation policies should be transparent to
shareowners. The policies should contain, at a minimum,
compensation philosophy, the targeted mix of base compensa-
tion and “at risk” compensation, key methodologies to ensure
alignment of interest, and parameters for guidance of employ-
ment contract provisions, including severance packages.
Companies under new SEC guidelines must provide
shareowners the opportunity to vote on any material revisions
to these plans.
Executive contracts should be fully disclosed, with adequate
information to judge the “drivers” of incentive components of
compensation packages.
© Copy Right: Rai University
11.622.1
Executive Compensation Policies
COMPENSATITION MANAGEMENT
In particular, executive compensation policies should contain, at
a minimum, the following components:
1. The company’s desired mix of base, bonus and long-term
incentive compensation.
This section should include adequate detail to shareowners
regarding the company’s philosophy of base pay components
versus “pay at risk” components of the program. Details
should include reasonable ranges based on total compensation
within which the company will target base salary as well as other
components of total compensation. Overall targets of total
compensation should also be provided.This section should
also provide an overview of how the company intends to
structure the compensation program, such as how much of
overall compensation is based on peer relative analysis and how
much of it is based on other criteria. The policy should clearly
articulate how the company ensures optimal alignment of
interests with shareowners through the design and implemen-
tation of its executive compensation program.
2. The company’s intended forms of incentive and bonus
compensation, including what types of measures will be used
to drive incentive compensation.
In addition to the relative mix of base salary and any form of
incentive compensation, the company should provide a
breakdown of the types of incentive compensation and
reasonable ranges based on total compensation targets for each
type of incentive compensation within the program. The policy
should include the company’s philosophy related to the major
components of incentive compensation, including the
strengths and weaknesses of each and how the overall incentive
component of the plan provides optimal alignment of
interests with shareowners.CalPERS believes that in the case of
option plans and restricted stock, a significant portion of the
overall program should consist of performance-based plans.
These include index-based options, premium-priced options
and performance targets tied to company-specific metrics.
Performance-based plans should be constructed to reward true
out-performance, and should include provisions by which
options will not vest if hurdles are not obtained. Time-
accelerated vesting is not considered a meaningful
performance-based hurdle.The policy should include the specific
drivers the company will use in constructing the performance-
based components of the plan. CalPERS suggests using
metrics such as Return on Invested Capital (ROIC), Return on
Assets (ROA), and Return on Equity (ROE), and the relative
mix of how performance metrics will be weighted. CalPERS
believes that optimal plan design will utilize multiple perfor-
mance metrics in a fashion that will tie small portions of
vesting to individual metrics or larger portions of vesting to
multiple metrics. CalPERS believes that if metrics are used in
combination, the plan should require that each component be
satisfied to achieve vesting as opposed to one of several that
must be achieved.
3. The company’s intended distribution of equity-based
compensation
15
 The policy should include the company’s philosophy related to
COMPENSATITION MANAGEMENT
how equity-based compensation will be distributed within
various levels of the company.
4. The company’s philosophy relating to the dilution of
existing equity owners
In the event that the company uses equity-based tools in its
compensation program, the policy should articulate how the
company will address the issue of dilution. For example, the
company should provide a detailed plan with each option
program addressing the intended life of the plan and the yearly
run rate. If the company intends to repurchase equity in
response to the issue of dilution, the plan should clearly
articulate how the repurchase decision is made in relation to
other capital allocation alternatives. CalPERS does not favorably
view repurchase plans that are simply targeted to mitigate and
obfuscate dilution caused by stock option plans.
5. The parameters by which the company will use severance
packages, if at all.
The policy should include a definitive statement related to how
the company views severance agreements. If the company will
not enter into severance agreements, this should be clearly
stated. In cases where the company will consider severance
agreements, the policy should contain the overall parameters of
how they will be used including:(a) specific detail regarding the
positions within the company that may receive severance
agreements;(b) the maximum periods covered by the agree-
ments; (c) provisions by which the agreements will be reviewed
and renewed; (d) any hurdles or triggers that will affect the
agreements;(e) a clear description of what would and would not
constitute termination for cause; and (f) disclosure of where
investors can view the entire text of severance agreements.
CalPERS is strongly opposed to severance agreements that
allow management to benefit from under performance.The
policy should also include a definitive time frame in which the
company will disclose any material amendments made to
severance agreements.
6. The parameters by which the company will utilize “other”
forms of compensation, if at all.
The policy should provide broad guidelines by which the
company will use alternative forms of compensation, and the
relative weight in relation to overall compensation if “other”
forms of compensation will be utilized.The term and length
for “other” forms of compensation should be disclosed. Other
forms of compensation include but are not limited to pension
benefits, deferred pay, perquisites and loans. In some cases,
other forms of compensation can provide significant value to
executives which are not readily comparable to more basic forms
of compensation such as salary, bonus and incentive. Other
forms of compensation are also more likely to be perceived by
shareowners as not providing meaningful alignment of
interests or incentive value. To the degree that the company will
provide other forms of compensation, it should clearly
articulate its philosophy for utilizing these tools with specific
treatment of how shareowners should expect to realize value
from including these forms of compensation.
© Copy Right: Rai University
16
Executive compensation programs should be designed and
implemented to ensure alignment of interest of management
with the long-term interest of shareowners.Executive compen-
sation should be comprised of a combination of cash and
equity-based compensation. Direct ownership should be
strongly encouraged.
Executive compensation policies should be transparent to
shareowners. The policies should contain, at a minimum,
compensation philosophy, the targeted mix of base compensa-
tion and “at risk” compensation, key methodologies to ensure
alignment of interest, and parameters for guidance of employ-
ment contract provisions, including severance packages.
Companies under new SEC guidelines must provide
shareowners the opportunity to vote on any material revisions
to these plans.
Executive contracts should be fully disclosed, with adequate
information to judge the “drivers” of incentive components of
compensation packages.
Executive Compensation Policies
In particular, executive compensation policies should contain, at
a minimum, the following components:
1. The company’s desired mix of base, bonus and long-term
incentive compensation.
This section should include adequate detail to shareowners
regarding the company’s philosophy of base pay components
versus “pay at risk” components of the program. Details
should include reasonable ranges based on total compensation
within which the company will target base salary as well as other
components of total compensation. Overall targets of total
compensation should also be provided.This section should
also provide an overview of how the company intends to
structure the compensation program, such as how much of
overall compensation is based on peer relative analysis and how
much of it is based on other criteria. The policy should clearly
articulate how the company ensures optimal alignment of
interests with shareowners through the design and implemen-
tation of its executive compensation program.
2. The company’s intended forms of incentive and bonus
compensation, including what types of measures will be used
to drive incentive compensation.
In addition to the relative mix of base salary and any form of
incentive compensation, the company should provide a
breakdown of the types of incentive compensation and
reasonable ranges based on total compensation targets for each
type of incentive compensation within the program. The policy
should include the company’s philosophy related to the major
components of incentive compensation, including the
strengths and weaknesses of each and how the overall incentive
component of the plan provides optimal alignment of
interests with shareowners.CalPERS believes that in the case of
option plans and restricted stock, a significant portion of the
overall program should consist of performance-based plans.
These include index-based options, premium-priced options
and performance targets tied to company-specific metrics.
Performance-based plans should be constructed to reward true
out-performance, and should include provisions by which
11.622.1
options will not vest if hurdles are not obtained. Time-
accelerated vesting is not considered a meaningful
performance-based hurdle.The policy should include the specific
drivers the company will use in constructing the performance-
based components of the plan. CalPERS suggests using
metrics such as Return on Invested Capital (ROIC), Return on
Assets (ROA), and Return on Equity (ROE), and the relative
mix of how performance metrics will be weighted. CalPERS
believes that optimal plan design will utilize multiple perfor-
mance metrics in a fashion that will tie small portions of
vesting to individual metrics or larger portions of vesting to
multiple metrics. CalPERS believes that if metrics are used in
combination, the plan should require that each component be
satisfied to achieve vesting as opposed to one of several that
must be achieved.
3. The company’s intended distribution of equity-based
compensationThe policy should include the company’s
philosophy related to how equity-based compensation will be
distributed within various levels of the company.
4. The company’s philosophy relating to the dilution of
existing equity owners
In the event that the company uses equity-based tools in its
compensation program, the policy should articulate how the
company will address the issue of dilution. For example, the
company should provide a detailed plan with each option
program addressing the intended life of the plan and the yearly
run rate. If the company intends to repurchase equity in
response to the issue of dilution, the plan should clearly
articulate how the repurchase decision is made in relation to
other capital allocation alternatives. Calipers does not favorably
view repurchase plans that are simply targeted to mitigate and
obfuscate dilution caused by stock option plans.
5. The parameters by which the company will use severance
packages, if at all.
The policy should include a definitive statement related to how
the company views severance agreements. If the company will
not enter into severance agreements, this should be clearly
stated. In cases where the company will consider severance
agreements, the policy should contain the overall parameters of
how they will be used including:
a. specific detail regarding the positions within the company
that may receive severance agreements;
b. the maximum periods covered by the agreements;
c. provisions by which the agreements will be reviewed and
renewed;
d. any hurdles or triggers that will affect the agreements;
e. a clear description of what would and would not constitute
termination for cause;
f. and disclosure of where investors can view the entire text of
severance agreements. CalPERS are strongly opposed to
severance agreements that allow management to benefit
from under performance. The policy should also include a
definitive time frame in which the company will disclose any
material amendments made to severance agreements.
© Copy Right: Rai University
11.622.1
6. The parameters by which the company will utilize “other”
COMPENSATITION MANAGEMENT
forms of compensation, if at all.
The policy should provide broad guidelines by which the
company will use alternative forms of compensation, and the
relative weight in relation to overall compensation if “other”
forms of compensation will be utilized.The term and length
for “other” forms of compensation should be disclosed. Other
forms of compensation include but are not limited to pension
benefits, deferred pay, perquisites and loans. In some cases,
other forms of compensation can provide significant value to
executives, which are not readily comparable to more basic
forms of compensation such as salary, bonus and incentive.-
Other forms of compensation are also more likely to be
perceived by shareowners as not providing meaningful align-
ment of interests or incentive value. To the degree that the
company will provide other forms of compensation, it should
clearly articulate its philosophy for utilizing these tools with
specific treatment of how shareowners should expect to realize
value from including these forms of compensation.
Executive compensation programs should be designed and
implemented to ensure alignment of interest of management
with the long-term interest of shareowners.Executive compen-
sation should be comprised of a combination of cash and
equity-based compensation. Direct ownership should be
strongly encouraged.
Executive compensation policies should be transparent to
shareowners. The policies should contain, at a minimum,
compensation philosophy, the targeted mix of base compensa-
tion and “at risk” compensation, key methodologies to ensure
alignment of interest, and parameters for guidance of employ-
ment contract provisions, including severance packages.
Companies under new SEC guidelines must provide
shareowners the opportunity to vote on any material revisions
to these plans.
Executive contracts should be fully disclosed, with adequate
information to judge the “drivers” of incentive components of
compensation packages.
Executive Compensation Policies
In particular, executive compensation policies should contain, at
a minimum, the following components:
1. The company’s desired mix of base, bonus and long-term
incentive compensation.
This section should include adequate detail to shareowners
regarding the company’s philosophy of base pay components
versus “pay at risk” components of the program. Details
should include reasonable ranges based on total compensation
within which the company will target base salary as well as other
components of total compensation. Overall targets of total
compensation should also be provided.This section should
also provide an overview of how the company intends to
structure the compensation program, such as how much of
overall compensation is based on peer relative analysis and how
much of it is based on other criteria. The policy should clearly
articulate how the company ensures optimal alignment of
interests with shareowners through the design and implemen-
tation of its executive compensation program.
17
 2. The company’s intended forms of incentive and bonus
COMPENSATITION MANAGEMENT
compensation, including what types of measures will be used
to drive incentive compensation.
In addition to the relative mix of base salary and any form of
incentive compensation, the company should provide a
breakdown of the types of incentive compensation and
reasonable ranges based on total compensation targets for each
type of incentive compensation within the program. The policy
should include the company’s philosophy related to the major
components of incentive compensation, including the
strengths and weaknesses of each and how the overall incentive
component of the plan provides optimal alignment of
interests with shareowners.CalPERS believes that in the case of
option plans and restricted stock, a significant portion of the
overall program should consist of performance-based plans.
These include index-based options, premium-priced options
and performance targets tied to company-specific metrics.
Performance-based plans should be constructed to reward true
out-performance, and should include provisions by which
options will not vest if hurdles are not obtained. Time-
accelerated vesting is not considered a meaningful
performance-based hurdle.The policy should include the specific
drivers the company will use in constructing the performance-
based components of the plan. CalPERS suggests using
metrics such as Return on Invested Capital (ROIC), Return on
Assets (ROA), and Return on Equity (ROE), and the relative
mix of how performance metrics will be weighted. CalPERS
believes that optimal plan design will utilize multiple perfor-
mance metrics in a fashion that will tie small portions of
vesting to individual metrics or larger portions of vesting to
multiple metrics. CalPERS believes that if metrics are used in
combination, the plan should require that each component be
satisfied to achieve vesting as opposed to one of several that
must be achieved.
3. The company’s intended distribution of equity-based
compensation
The policy should include the company’s philosophy related to
how equity-based compensation will be distributed within
various levels of the company.
4. The company’s philosophy relating to the dilution of
existing equity owners
In the event that the company uses equity-based tools in its
compensation program, the policy should articulate how the
company will address the issue of dilution. For example, the
company should provide a detailed plan with each option
program addressing the intended life of the plan and the yearly
run rate. If the company intends to repurchase equity in
response to the issue of dilution, the plan should clearly
articulate how the repurchase decision is made in relation to
other capital allocation alternatives. Calipers does not favorably
view repurchase plans that are simply targeted to mitigate and
obfuscate dilution caused by stock option plans.
5. The parameters by which the company will use severance
packages, if at all.
The policy should include a definitive statement related to how
the company views severance agreements. If the company will
© Copy Right: Rai University
18
not enter into severance agreements, this should be clearly
stated. In cases where the company will consider severance
agreements, the policy should contain the overall parameters of
how they will be used including:
a. specific detail regarding the positions within the company
that may receive severance agreements;
b. the maximum periods covered by the agreements;
c. provisions by which the agreements will be reviewed and
renewed;
d. any hurdles or triggers that will affect the agreements;
e. a clear description of what would and would not constitute
termination for cause;
f. and disclosure of where investors can view the entire text of
severance agreements. CalPERS are strongly opposed to
severance agreements that allow management to benefit
from under performance.The policy should also include a
definitive time frame in which the company will disclose any
material amendments made to severance agreements.
6. The parameters by which the company will utilize “other”
forms of compensation, if at all.
The policy should provide broad guidelines by which the
company will use alternative forms of compensation, and the
relative weight in relation to overall compensation if “other”
forms of compensation will be utilized.
The term and length for “other” forms of compensation
should be disclosed. Other forms of compensation include but
are not limited to pension benefits, deferred pay, perquisites and
loans. In some cases, other forms of compensation can provide
significant value to executives, which are not readily comparable
to more basic forms of compensation such as salary, bonus and
incentive.
Other forms of compensation are also more likely to be
perceived by shareowners as not providing meaningful align-
ment of interests or incentive value. To the degree that the
company will provide other forms of compensation, it should
clearly articulate its philosophy for utilizing these tools with
specific treatment of how shareowners should expect to realize
value from including these forms of compensation.
Executive compensation programs should be designed and
implemented to ensure alignment of interest of management
with the long-term interest of shareowners. Executive compen-
sation should be comprised of a combination of cash and
equity-based compensation. Direct ownership should be
strongly encouraged.
Executive compensation policies should be transparent to
shareowners. The policies should contain, at a minimum,
compensation philosophy, the targeted mix of base compensa-
tion and “at risk” compensation, key methodologies to ensure
alignment of interest, and parameters for guidance of employ-
ment contract provisions, including severance packages.
Companies under new SEC guidelines must provide
shareowners the opportunity to vote on any material revisions
to these plans.
11.622.1
Executive contracts should be fully disclosed, with adequate

COMPENSATITION MANAGEMENT
information to judge the “drivers” of incentive components of
compensation packages.
In addition to the relative mix of base salary and any form of
incentive compensation, the company should provide a
breakdown of the types of incentive compensation and
reasonable ranges based on total compensation targets for each
type of incentive compensation within the program.
The policy should include the company’s philosophy related to
the major components of incentive compensation, including
the strengths and weaknesses of each and how the overall
incentive component of the plan provides optimal alignment
of interests with shareowners.
CalPERS believes that in the case of option plans and restricted
stock, a significant portion of the overall program should
consist of performance-based plans. These include index-based
options, premium-priced options and performance targets tied
to company-specific metrics.
Performance-based plans should be constructed to reward true
out-performance, and should include provisions by which
options will not vest if hurdles are not obtained. Time-
accelerated vesting is not considered a meaningful
performance-based hurdle.
The policy should include the specific drivers the company will
use in constructing the performance-based components of the
plan. CalPERS suggests using metrics such as Return on
Invested Capital (ROIC), Return on Assets (ROA), and Return
on Equity (ROE), and the relative mix of how performance
metrics will be weighted. CalPERS believes that optimal plan
design will utilize multiple performance metrics in a fashion
that will tie small portions of vesting to individual metrics or
larger portions of vesting to multiple metrics.
CalPERS believes that if metrics are used in combination, the
plan should require that each component be satisfied to achieve
vesting as opposed to one of several that must be achieved.
Answer the questions below based on the above case study:
• What is the purpose behind CalPERS’ policies on executive
compensation?
• Based on the above case study how can you say that
compensation programs are one of the most powerful
tools available to companies?
• Discuss the components of executive compensation.

© Copy Right: Rai University

11.622.1 19
COMPENSATITION MANAGEMENT
LESSON 4:
LABOR MARKET CHARACTERISTICS AND PAY RELATIVES
Learning Objective
• To know Labor Market and Labour theory of value
• To understand Labour Market Characteristics
• To know Labour and Labour Welfare
• To understand Pay relatives
Labor Market
A place where labor is exchanged for wages. These places are
identified and defined by a combination of the following
factors:
1. Geography (local, regional, national, international),
2. Industry,
3. Education, licensing or certification and
4. Function or occupation.
Lead or Lag Policy: follow or exceed the market when adjusting
pay structures.
Labour Market Flexibility
LABOR, One of the FACTORS OF PRODUCTION, WITH
LAND, CAPTIAL and ENTERPRISE. Among the things that
determine the supply of labor are the number of able people in
the POPULATION, their willing ness to work, labor lows and
regulations, and the health of the economy and firms, labor
laws and regulations, as well as the PRICE and supply of other
factors of production.
In a perfect market, WAGES (the price of labor) would be
determined by SUPPLY and demand, but the labor market is
often far perfect. Wages can be less flexible than other prices in
particular, they rarely fall even when demand for labor declines
or supply increases. This wage rigidity can be a cause of
UNEMPLOYMENT.
Labour Theory of Value
The notion that the value of any good or service depends on
how much LABOUR it uses up. First suggested by ADAM
SMITH, it took a central place in the philosophy of KARL
MARX. Some neoclassical economists disagreed with this
theory, arguing that the PRICE of something was independent
of how much labor went into producing it and was instead
determined solely by SUPPLY and DEMAND
A flexible LABOUR market is one in which it is easy and
inexpensive for FIRMS to vary the amount of labor they use,
including by changing the hours worked by each employee and
by changing the number of employees.
This often means minimal REGULATION of the employ-
ment (no MINIMUM WAGE, say) and weak (or no) trade
UNIONS. Such flexibility is characterized by its opponents as
giving firms all the power, allowing them to fire employees at a
moment’s notice and leaving working feeling insecure.
© Copy Right: Rai University
20
Opponents of labor market flexibility claim that labor laws that
make workers feel more secure encourage employees to invest in
acquiring skills that enable them to do their current job better
but that could not be taken with them to another firm if they
were let go.
Supporters claim that it improves economic EFFICIENCY BY
leaving it to MARKET FORCES to decide the terms of
employment. Broadly speaking, the evidence is that greater
flexibility is associated with lower rates of
UNWMPLOYMENT and higher GDP per head.
Pay Relatives
The pay relative for each occupational group in an area expresses
its average pay as a percent of the pay for a comparable occupa-
tion group. The pay relative for the United States as whole
always equals 100.
For example, the pay relative for all occupations in San Francisco
was 119 in 1998, meaning that workers in San Francisco earned
19 percent more than the U.S. average for comparable workers.
The pay relative for Houston was 104, or 4 percent more than
the U.S. average. The pay relatives for each area are expressed in
terms of their relation to the U.S. average.
The nine occupation groups used in pay relatives are:
1. Professional specialty and technical occupations;
2. Executive, administrative, and managerial occupations;
3. Sales occupations;
4. Administrative support occupations, including clerical;
5. Precision production, craft, and repair occupations;
6. Machine operators, assemblers, and inspectors;
7. Transportation and material moving occupations;
8. Handlers, equipment cleaners, helpers, and laborers; and
9. Service occupations
To facilitate pay comparisons among major metropolitan areas,
the Bureau of Labor Statistics has developed pay relatives, or
ratios of pay, for nine groups of occupations (as well as for all
occupations combined) in each of 77 metropolitan areas.
How do the earnings of workers in San Francisco or Houston
compare with those of workers in the United States overall?
The National Compensation Survey (NCS), which was
introduced in 1997, collects earnings and other data on em-
ployee compensation covering 480 detailed occupations in 154
metropolitan and no metropolitan areas. Occupational earnings
from the NCS are published annually for more than 80
metropolitan areas and for the United States as a whole. 1
These estimates are produced by surveying a randomly selected
sample of occupations. In the NCS, samples of employer
establishments and occupations are selected using a “probability
proportionate to size” technique. All establishments and
11.622.1
occupations in the survey are assigned a weight to reflect the
probability of their selection in the sample.
These weights reflect the relative size of the occupation within
the establishment and the relative size of the establishment
within the sample universe. Occupations with lower weights-
such as sailors and deckhands in Phoenix-have less of an impact
on the overall U.S. wage level, while occupations with higher
weights-such as elevator installers and repairers in New York-
have more of an impact on the overall U.S. wage level.
In order to facilitate comparisons of occupation pay levels
across metropolitan areas, BLS has developed pay relatives, or
ratios of pay, for nine groups of occupations (as well as for all
occupations) in each of 77 major metropolitan areas and the
United States as a whole.
The pay relative for each occupational group in an area expresses
its average pay2 as a percent of the pay for a comparable
occupation group in the entire United States. The pay relative
for the United States as whole always equals 100.
For example, the pay relative for all occupations in San Francisco
was 119 in 1998, meaning that workers in San Francisco earned
19 percent more than the U.S. average for comparable workers.
The pay relative for Houston was 104, or 4 percent more than
the U.S. average. The pay relatives for each area are expressed in
terms of their relation to the U.S. average.
The nine occupation groups used in pay relatives are
(1) professional specialty and technical occupations;
(2) executive, administrative, and managerial occupations;
(3) sales occupations;
(4) administrative support occupations, including clerical;
(5) precision production, craft, and repair occupations;
(6) machine operators, assemblers, and inspectors;
(7) transportation and material moving occupations; (8)
handlers, equipment cleaners, helpers, and laborers; and
(9) service occupations. Table 1 presents 1998 pay relatives for
each occupational group in 77 metropolitan areas.
Comparability
There are a number of occupational characteristics that the
National Compensation Survey captures that can influence pay
levels, including the mix of occupations and work levels
studied, differing workweeks, and survey timing. Since the
survey design calls for “probability proportionate to size”
occupational sampling, the occupations selected in one area will
not be the same as those selected in another area.
In addition, occupational work levels as well as scheduled hours
per week will differ between areas. Data for each NCS area are
published once per year, but the publications are produced in
“panels” every 3 months. Thus, the published average reference
dates will usually differ between areas. When calculating pay
relatives BLS tries to decrease the effect of these different factors
as much as possible. Occupations, levels, workweeks, and
reference dates are taken into account in the computation of pay
relatives.
© Copy Right: Rai University
11.622.1
Occupations and Levels
COMPENSATITION MANAGEMENT
The pay relative calculation for each area uses comparable jobs at
both the area and national levels. That is, occupations found in
the national database that are not found in the area database are
not used in the calculation of pay relatives for that area. For
example, if architects are not found in the Denver survey, then
national data for architects are not used in the calculation of pay
relatives for Denver.
Similarly, the working “levels” of incumbents within occupa-
tions are also comparable between the area and the national
database when calculating pay relatives. These levels reflect
knowledge, skills, responsibility, and other factors.3 Levels not
observed within an area’s occupations are not used in the
national database for calculating pay relatives. For example, if
the category level-13 architects are not found in the Denver
survey, then level-13 architects are removed from the national
estimates and are not used in the calculation of pay relatives for
Denver.
Workweeks
In the National Compensation Survey, average rates of pay are
weighted by the number of weekly hours worked. That is, rates
of pay associated with shorter workweeks will not count as
much in the average as rates associated with longer workweeks.
The hourly wages of full-time workers count more than those
of part-time workers.
When determining how area earnings compare with national
earnings, the average rates of pay calculated for comparable
occupations within the nine occupation groups reflect a
comparable composition of occupation workweeks. In order to
maintain comparable workweeks, the average weekly hours of
work calculated for each occupation in the area are also used in
the national calculation of average hourly rates of pay for pay
relative purposes.
For example, if level-13 architects in Denver work an average of
38 hours per week, this will be assumed to be the national
average weekly hours for level-13 architects when calculating pay
relatives.
Reference Month Adjustment
In the National Compensation Survey, data for each area are
collected once per year. The reference date for each area differs
depending on when the data were collected. For example, the
data used to produce the 1998 estimates for the United States as
a whole were compiled from data collected from the 154 NCS
localities between July 1997 and April 1999.
The average reference date for these 154 areas in the United
States was August 1998. Before calculating the pay relatives for
each area, an adjustment was made to the U.S. wage rate to
account for differences between the average reference month for
each area and the reference month of August 1998 for the
United States as a whole. This adjustment was based on
published estimates of wage change from the Employment
Cost Index (ECI).
To calculate the adjustment factor, monthly indexes of wages
were interpolated 4 from the published ECI quarterly indexes for
all occupations and for each of the region occupation groups.
The cumulative change in the wage index between August 1998
21
 and the reference month for a specific area was used to adjust
COMPENSATITION MANAGEMENT
the national wage estimate. The adjusted national wage estimate
was used to calculate the pay relative for the area.
For example, to adjust the national estimate of comparable
wages to reflect Denver’s May reference month, the interpolated
wage index for all occupations in May is divided by the interpo-
lated index for August to estimate wage change over the period.
Thisestimateofchangeistheadjustment,ECI or factor,
applied to the national estimate of comparable average wages.
That is, national average comparable wages are decreased to
reflect what they would have been in May. This adjusted
estimate is used to calculate the pay relative for Denver and for
any area with a May reference month.
Comparing Wages in Four Cities
Chart 1 compares four of the nine major occupational groups5-
professional specialty; executive; administrative support,
including clerical; and service occupations-from four different
metropolitan areas of the United States: Cleveland-Akron,
Ohio; Houston-Galveston-Brazoria, Texas; Orlando, Florida;
and San Francisco-Oakland-San Jose, California. As shown in
chart, earnings in San Francisco were much higher than the
national average for all four occupational groups. (The overall
U.S. rate equals 100.) In Orlando, Florida, on the other hand,
the pay relatives for all four occupational groups were below the
U.S. average.
Differences Between the NCS and Earlier
Surveys
The locality wage data produced from the National Compensa-
tion Survey differ considerably from those of the survey’s
predecessor-the Occupational Compensation Survey. 7 For
example, the NCS covers all workers and provides information
on a much broader range of occupations. Occupations surveyed
for the NCS are selected using probability techniques from a list
of all occupations present in each establishment.
The NCS classification system specifies up to 480 individual
occupations. Data from the Occupational Compensation
Survey, on the other hand, were limited to a preselected list of
38 occupations, which represented only a small subset of all
occupations in the economy. Moreover, the former survey did
not use occupational sampling within an establishment.
In the Occupational Compensation Survey, pay relatives were
calculated, but only when the data collected for preselected
occupations were judged sufficiently representative of all
occupations in the area. The NCS is designed to collect a
representative sample of occupations in each area, and the
calculated pay relatives reflect this. Furthermore, the former
survey collected data for full-time workers only, while the NCS
collects data for both full- and part-time workers.
Limitations
Pay relatives derived from the National Compensation Survey
have certain limitations. For example, they do not take into
account some wage determinants. There are many commonly
recognized determinants of wages, including the effects on
average wage rates from different methods of pay (time versus
incentive), collective bargaining status (union versus nonunion),
establishment size, and industry. The sample sizes in the NCS
© Copy Right: Rai University
22
area survey are too small to permit estimate pay relatives for
each of these determinants.
Another limitation of pay relatives produced from the National
Compensation Survey is that the pay relatives for two different
areas are not strictly comparable. To make precise pay relative
comparisons, the mix of occupations and work levels studied,
the differing workweeks, and the average reference periods
would need to be adjusted.
Currently, such adjustments are made between each area and the
United States as a whole. To compare each area to every other
area would require thousands of additional calculations.
Finally, pay relatives from the National Compensation Survey
do not address nonwage compensation. For example, an
architect in Denver may earn $25 per hour and have a health care
benefit worth an additional $3 per hour, while an architect in
Houston earning similar pay might not receive a health care
benefit. The pay relative only includes the wage compensation.
Parastou Karen Shahpoori
Economist, Division of Compensation Data Estimation,
Bureau of Labor Statistics.
Telephone: (202) 691-6290, E-mail: Shahpoori_K@bls.gov
Notes
1. The data used in this article are from 1998, the most recent
data available when the article was completed. See National
Compensation Survey: Occupational Wages in the United States,
1998, Bulletin 2529 (Bureau of Labor Statistics, September
2000). For more information, see the National
Compensation Survey (NCS) website on the Internet at
http://www.bls.gov/ncs/home.htm.
2. Hourly wages are defined as the straight-time earnings paid
to employees before deductions of any type. They exclude
premium pay for overtime, nonproduction bonuses, and
tips. Average hourly wages also reflect the hours worked by
surveyed occupations.
3. Because the ECI is published quarterly (December, May,
June and September), the estimates for the months in
between have to be interpolated to relate to the reference
month of the area estimates.
11.622.1
Table 1. Pay relatives for major occupational groups in metropolitan areas, National Compensation Survey, 1998 (For each occupa-

COMPENSATITION MANAGEMENT
tional group, average pay for all industries = 100)

Table 1. Pay relatives for major occupational groups in metropolitan areas, National
Compensation Survey, 1998 (For each occupational group, average pay for all
industries = 100)
White collar(1) Blue collar(1)
Metropolitan Machi
Total Profe Transp
area Executiv Sale Admini ne Han Service
ssiona Precision ortatio
e s strative operat dlers
l n
ors
United
100 100 100 100 100 100 100 100 100 100
States(2)
Amarillo,
87 84 89 96 83 92 82 83 92 84
TX
Anchorage,
110 105 109 111 111 123 101 102 119 116
AK
Atlanta, GA 99 99 103 99 101 96 98 96 101 95
Augusta-
Aiken, GA- 94 95 102 93 96 92 98 87 94 85
SC
Austin-San
93 90 96 109 93 96 82 93 95 95
Marcos, TX
Birmingham,
94 89 106 91 92 93 96 79 96 93
AL
Bloomingto
91 91 95 88 91 90 -- 81 92 88
n, IN
Bloomingto
n-Normal, 104 93 -- 95 92 102 117 131 106 106
IL
Boston-
Worcester-
Lawrence, 104 105 98 101 108 103 95 108 108 112
MA-NH-
ME-CT
Brownsville-
Harlingen-
82 90 86 87 78 77 71 78 72 80
San Benito,
TX
Buffalo-
Niagra Falls, 100 97 97 90 101 103 107 102 106 107
NY
Charleston-
North
87 91 88 81 86 81 82 84 87 87
Charleston,
SC
Charlotte-
94 88 98 103 97 93 99 97 98 92
Gastonia-

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11.622.1 23
COMPENSATITION MANAGEMENT

Chicago-
Gary-
107 102 103 105 109 112 114 117 117 110
Kenosha,
IL-IN-WI
Cincinnati-
Hamilton, 95 92 95 95 94 93 94 99 103 99
OH-KY-IN
Cleveland-
103 101 104 105 100 103 107 109 108 104
Akron, OH
Columbus,
96 94 92 93 98 100 95 96 104 101
OH
Corpus
89 89 111 96 82 90 93 75 82 82
Christi, TX
Dallas-Fort
95 94 99 91 98 93 93 95 95 93
Worth, TX
Dayton-
Springfield, 96 94 91 95 93 101 109 102 100 101
OH
Denver-
Boulder- 97 96 99 97 99 93 87 93 102 102
Greeley, CO
Detroit-Ann
Arbor-Flint, 110 110 104 107 108 112 121 116 123 106
MI
Elkhart-
99 99 96 88 98 97 104 112 107 97
Goshen, IN
Fort Collins-
Loveland, 88 92 85 98 86 86 80 85 84 91
CO
Grand
Rapids-
103 107 98 107 97 103 111 97 103 106
Muskegon-
Holland, MI
Greensboro-
Winston- 97 93 102 106 97 93 95 96 99 95
Salem, NC
Greenville,
93 90 97 99 94 91 92 89 98 90
SC
Hartford,
109 115 99 106 110 103 100 106 107 119
CT
Honolulu, 107 104 103 105 109 115 110 97 105 111

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24 11.622.1
 COMPENSATITION MANAGEMENT
Houston-
Galveston- 104 106 113 100 102 104 99 94 97 94
Brazoria, TX
Huntsville,
95 97 101 93 92 91 102 84 92 87
AL
Indianapolis,
99 97 98 106 97 104 103 103 104 98
IN
Iowa City,
92 90 95 88 93 88 96 82 91 95
IA
Johnstown,
89 93 91 82 86 83 85 82 89 97
PA
Kalamazoo-
Battle Creek, 101 99 97 96 102 100 106 100 113 104
MI
Kansas City,
93 93 88 85 92 97 105 100 103 95
MO-KS
Knoxville,
90 91 97 86 87 89 91 81 97 87
TN
Lincoln, NE 88 86 88 85 85 87 89 90 97 91
Los Angeles-
Riverside-
107 111 111 116 108 104 89 93 96 108
Orange
County, CA
Louisville,
99 101 97 97 95 101 107 93 101 95
KY-IN
Melbourne-
Titusville-
86 85 92 82 86 92 80 84 85 85
Palm Bay,
FL
Memphis,
95 91 100 111 94 95 98 93 98 90
TN-AR-MS
Miami-Fort
Lauderdale, 96 95 102 103 97 94 84 99 95 95
FL
Milwaukee-
99 94 95 89 100 102 107 108 108 103
Racine, WI
Minneapolis-
St. Paul, 104 99 97 107 106 106 115 114 114 112
MN-WI
Mobile, AL 89 90 92 96 84 92 90 82 97 86
New
94 99 104 94 89 93 87 88 88 88
Orleans, LA
New York-
Northern 116 120 116 110 117 113 98 111 117 122
New Jersey-

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11.622.1 25
COMPENSATITION MANAGEMENT

Norfolk-
Virginia
Beach-
90 89 99 91 90 89 96 77 82 87
Newport
News, VA-
NC
Oklahoma
92 88 95 97 88 93 103 103 91 85
City, OK
Orlando, FL 88 86 92 91 89 89 84 80 88 87
Philadelphia-
Wilmington-
Atlantic City, 108 109 102 111 108 104 109 108 117 109
PA-NJ-DE-
MD
Phoenix-
96 95 102 110 96 100 88 89 86 95
Mesa, AZ
Pittsburgh,
100 101 99 89 100 98 99 100 110 103
PA
Portland-
Salem, OR- 101 99 98 99 102 104 98 104 102 112
WA
Providence-
Fall River-
103 108 102 97 107 97 92 107 93 106
Warwick,
RI-MA
Raleigh-
Durham-
95 91 100 97 96 92 100 97 94 94
Chapel Hill,
NC
Reading, PA 100 108 91 89 96 96 101 94 105 111
Reno, NV 95 96 87 107 97 101 86 96 91 98
Richland-
Kennewick- 99 94 99 89 103 104 92 110 92 105
Pasco, WA
Richmond-
Petersburg, 93 92 96 89 94 96 96 87 97 90
VA
Rochester,
102 105 101 91 97 97 96 98 107 114
NY
Rockford, IL 96 92 97 95 93 99 106 102 105 95
Sacramento-
105 103 101 120 105 107 99 107 106 107
Yolo, CA
Salinas, CA 108 110 104 121 101 111 100 108 107 113
San Antonio,
92 94 104 96 90 85 86 75 84 90
TX

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26 11.622.1
 COMPENSATITION MANAGEMENT
San Diego,
100 105 99 101 104 97 83 95 94 102
CA
San
Francisco-
119 122 114 111 121 118 100 116 119 124
Oakland-San
Jose, CA
Seattle-
Tacoma-
105 105 96 105 106 107 105 108 104 112
Bremerton,
WA
Springfield,
105 104 103 95 106 94 113 105 103 114
MA
Springfield,
88 87 91 91 81 89 94 92 92 87
MO
St. Louis,
96 94 95 99 93 99 100 96 109 96
MO-IL
Tallahassee,
81 81 84 82 81 78 83 72 77 83
FL
Tampa-St.
Petersburg-
90 89 96 94 89 87 81 84 85 89
Clearwater,
FL
Visalia-
Tulare-
97 105 98 97 93 89 90 88 92 103
Porterville,
CA
Washington-
Baltimore,
103 102 101 101 105 103 106 102 111 103
DC-MD-
VA-WV
Youngstown
-Warren, 98 96 101 100 93 98 106 99 99 101
OH

Footnotes:
1. The full titles for the major occupational groups under the white-collar category are professional specialty and technical; executive,
administrative, and managerial; sales; and administrative support, including clerical. The full titles for the groups under the blue-
collar category are precision production, craft, and repair; machine operators, assemblers, and inspectors; transportation and
material moving; and handlers, equipment cleaners, helpers, and laborers.
2. This survey covers all 50 States. Collection was conducted between July 1997 and April 1999. The average reference period was
August 1998.
Note: Dashes indicate that no data were reported or that data did not meet publication criteria.

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11.622.1 27
 Tutorial Activity 1.1 Sales role definitions
COMPENSATITION MANAGEMENT

We all know that the nature of compensation and rewards Factors that drive sales role changes
depends upon the nature of job.So with regard to this state-
Measuring cost of a sales contact
ment let us analyse the latest compensation Package with regard
to Sales position. Customer segmentation
Customer value – The Engine of Change
Latest Incentive Compensation Strategies for Sales
Positions Types of selling and sales strategy
How to Build Effective Pay for Performance Plans For Your Defining new sales roles
Direct Sales Force and Other Emerging Customer-Facing Service Sales Performance Measurement
Positions
Why performance measurement is critical to sales success
If you are currently paying your sales reps straight commission,
Key sales compensation design factors
this is an obsolete approach to sales compensation. If you are
paying your sales reps a straight salary, you are also using an old Criteria for effective measurement of sales performance
approach that is likely costing your company business sales. Traditional forms of measurement
Over the last decade, many factors have transformed the nature Defining performance measures
of selling. Markets have changed from being stable and Performance measures for new sales roles
predictable to being in constant flux. Mass market product
Designing Customized Compensation Plans to Meet Your
development has given way to customized solutions for more
Needs
demanding customer expectations. Alternate distribution and e-
commerce channels have changed the role of sales. Creating a customized sales compensation model
All in all, it is this new state of affairs that combine to create a Organization of the compensation design team
climate where companies need to take a closer look at sales force Corporate assessment of current plans and future needs
effectiveness and their sales compensation plans. This seminar Establishing guiding principles
will provide participants with the tools, process and solutions
Compensation design factors
to rethink their incentive compensation plans for the evolving
sales and customer facing positions. As well, we will identify Detailed plan design
and describe how to handle a broad range of challenging Plan documentation
incentive compensation issues. The program is ideal for Communication and implementation considerations
business owners, senior sales, marketing executives, HR and
Incorporating sales incentive planning into your business
compensation specialists.
planning process
Content
Design Issues for New or Specialized Sales Roles
Effective Sales Force Management
Emergence of new sales roles
Key drivers of sales force effectiveness
Types of new/specialized sales roles
How to align sales execution components with business
objectives & strategy Compensating new sales roles – plans and measures that work
Sales system execution components Measurement and compensation for team selling
Aligning your company culture and business planning processes Compensating Your Sales Management Team
are with your sales system Types of sales management roles
Sales Compensation Strategies: Determining the Right Options How should sales managers spend their time
The purpose of sales compensation - What it is and what it is Sales manager performance measures
not Handling difficult issues affecting sales management
Characteristics of a dynamic sales incentive plan compensation plans
Why sales compensation plans fail to deliver higher results Challenging Sales Compensation Concepts
Understanding the principles of Target Total Compensation The importance of target setting and tracking
(TTC) and
Pooled pre-set earnings distribution
Setting desired pay Mix (Base Salary vs. Incentive)
Rewarding profitability
Determining the right leverage (upside potential) for your
Dealing with long sales cycles
incentive compensation
Account management plans
Formula – Commission vs. Bonus
Team selling
Determining the plan qualifiers
Customer satisfaction ratings
Linkage Between Sales Roles and Compensation
Call centres
Developing the best sales organization design
Life cycle changes

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28 11.622.1
Competency-based sales compensation

COMPENSATITION MANAGEMENT
Managing e-Sales compensation
What You Will Learn
What are the key drivers and operational components of an
effective sales systems?
What can you reasonably expect from an Incentive Compensa-
tion Plan that is aligned with the corporate objectives, strategies
and the sales operational components?
What are the major design factors for Incentive Compensation
and how are they incorporated into the design process?
How has the traditional role of sales been changing and what
effect is that having on the selling system and compensation?
What is changing in sales performance measurement?
How to manage the redesign of your Incentive Compensation
Plan(s).
What is different about compensating the new emerging
customer ‘facing’ positions related to CRM?
Critical issues in designing Sales Manager compensation.
How to tackle solving your most pressing sales compensation
issue and understand a number of other challenging situations?

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11.622.1 29
 LESSON 5:
INTRODUCTION TO
COMPENSATION, REWARDS, WAGE
LEVELS AND WAGE STRUCTURES
Learning Objective
COMPENSATITION MANAGEMENT
• To further understand the concept of Compensation and
Reward
• To understand Methods of Compensation
• To know the concept of Wage Level and Wage Rate
• To understand the concept of Wage Structure
• Determinants of the wage structure
Introduction
It is extremely important to have a well-designed compensation
system. A properly planned and administered’ salary system is
one of the most important aspects of order management.
Deciding how and what people should be paid is what is
covered under salary administration.
In this unit we shall pay special attention to the process offering
salary levels, and designing salary structures. More dynamic
aspects such as rate ranges, salary progression policies and
procedures will also be examined.
Compensation and Rewards
Compensation may be defined as money received in the
performance of work, plus the many kinds of benefits and
services that organisations provide their employees.
Money’ is included under direct compensation (popularly
known as wages, i.e., gross pay); while benefits come under
indirect compensation, and may consist of life, accident, and
health insurance, the employer’s contribution to retirement, pay
for vacation or illness, and employer’s required payments for
employee welfare as social security.
A ‘wage’ (or pay) is the remuneration paid, for the service of
labour in production, periodically to an employee/worker.
“Wages” usually refer to the hourly rate or daily rate paid to such
groups as production and maintenance employees (“blue-collar
workers”).
On the other hand, ‘Salary’ normally refers to the weekly or
monthly rates paid to clerical, administrative and professional
employees (“white-collar workers”).
Methods of Compensation
The operating companies need to develop a compensation
package for their employees depending on the size and type of
business, employers may choose to compensate their employees
in a number of different ways.
Below is given the different methods of compensation:
Wages and Salaries
Although we use the terms wages and salaries interchangeably,
in payroll accounting, the two terms have different definitions
Wages refers to the earnings of employees whose pay is
calculated on an hourly basis.
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30
UNIT II
Salary refers to the earnings of employees whose pay is calcu-
lated on a weekly, bi-weekly, semi-monthly, or monthly basis.
Commissions
Sales commission plans vary greatly from company to company,
but are generally based on the dollar amount of sales made
during a payroll period. Commission income is considered the
same as wages or salaries for withholding and reporting
purposes. Commissions are usually computed on a certain
percentage or commission rate.
Some commissioned employees may not be exempt from the
minimum wage requirement. The employer must determine the
regular, hourly rate for each non-exempt salesperson during the
week and make sure this rate is at least equal to the current
minimum wage.
Piece-Rate Plan
Workers paid on a piece-rate plan receive a certain amount for
each item produced. Gross earnings equal the rate per item
multiplied by the number of items produced during the payroll
period
Combination Plan
Many businesses pay sales people both a salary and a commis-
sion. Such a combination plan provides some regular income
and offers an incentive for superior sales.
Draws
Draws are often given to salespeople who work only for
commission. A draw is an advance given to a salesperson that
will be collected when future sales transactions are closed. Draws
will be subtracted from a salesperson’s commissions after any
applicable taxes and deductions have been withheld. The draw
is subject to all payroll withholding taxes.
Other Types of Earnings
Bonuses
Businesses offer bonuses in many different ways. Some
bonuses are based on profitable operations of the business and
are paid at year-end. A common type of bonus may be offered
to salespeople for selling a specific item. Another type of bonus
plan, one that may be part of an employment agreement, pays
managers if the yearly sales or profits reach a certain level.
Profit Sharing Payments
A profit sharing plan, like a bonus plan, can be structured in a
number of different ways. An employer may elect to pay cash to
employees, give them stock in the business, or set up a deferred
compensation fund for retirement.
Other Taxable Forms of Compensation
Sometimes other payments to employees are required that are
equivalent to wages. These include non-cash fringe benefits,
reimbursed expenses, sick pay, supplemental unemployment
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benefits, and tips. As with any form of compensation, these
payments are subject to federal taxes.
Non-Cash Fringe Benefits
Non-cash fringe benefits must be included in an employee’s
gross earnings.
Fringe benefits include the following:
• Personal use of company cars
• Free or discounted airline flights
• Vacations
• Discounts on property or services
• Memberships in country clubs or other social clubs
• Tickets to entertainment or sporting events
Reimbursed Expenses
Payments made to employees for travel and other necessary
business expenses are taxable only if:
The employee does not have to substantiate those expenses
with receipts or other documentation. The employer advances
an amount to the employee for business expenses and the
employee does not return any unused amount.
Travel and entertainment reimbursements, or other expense
allowances, paid to an employee under a non-accountable plan
are also included as wages. Under a non-accountable plan, the
employee is given a certain amount of money toward expenses,
but does not have to substantiate them or return any excess
cash.
Under an accountable plan, travel advances paid to the employee
prior to travel in excess of substantiated expenses must be
repaid to the employer within a reasonable and specified period
of time.
Sick Pay
In general, sick pay is any amount paid to an employee because
of illness or injury under a plan providing for such benefits.
The amounts are disbursed by the insurance company or the
employee’s trust, and are referenced as third party payments.
Tips
In certain businesses, employees receive compensation in the
form of gratuities or tips. A tip is an additional amount from a
customer for services rendered. Bartenders and restaurant
servers usually receive tips in addition to wages. Hair stylists and
taxi drivers also depend on tips as a major source of income.
Supplemental Wages
Supplemental wages differ from regular wages only in that they
may be based on a different payroll period, computed on a
different compensation plan or rate, or paid at a different time
than regular wages.
In addition, certain payments are, by their nature or timing,
supplemental wages. Such payments include retroactive pay
increases, severance pay, bonuses, commissions, taxable fringe
benefits, awards and vacation pay on termination.
The distinction between regular and supplemental wages is
important because special rules apply to withholding on
supplemental wages.
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11.622.1
Exempt Payments
COMPENSATITION MANAGEMENT
Compensation not considered wages includes sickness and
injury payments under a workers’ compensation law, and other
payments that are likely to be tax deductible such as qualified
moving expense reimbursements.
Wage Level
We have already discussed before that wages are something
received by a worker or paid by an employer for time on the job;
money received or paid usually for work by the hour, day, or
week, or month; a calculation or statement of money earned for
a period of time from one hour (hourly wage) up to one year
(annual wages). Now let us discuss about wage level.
What is a Wage Level?
The ‘wage levels’ represent the money an average worker makes
in a geographic area or in his organization. It is only an average;
specific markets or firms and individual wages can vary widely
from the average.
How are Wage Levels are Set?
Wage levels are calculated using position importance and skill
required as criteria. Consult your trade association and accoun-
tant to learn the most current practices, cost ratios and profit
margins in your business field. While there is a minimum wage
set by federal law for most jobs, the actual wage paid is entirely
between you and your prospective employee.
What is “Stagnated” Wage Levels?
An add to Housing Woes of Poor. The continuing stagnation
of the income levels for the most disadvantaged ...
The continuing stagnation of the income levels for the most
disadvantaged households is causing serious housing challenges
for people in the lowest 20 percent of the income scale. This is
one of the findings of “The State of the Nation’s Housing
2002,” issued by the Joint Center for Housing Studies at
Harvard University.
Furthermore, the current high home prices, while good for
sellers, work against the lowest income households, driving up
both purchase prices and rents for twenty million families.
“Although the plight of renters receives much attention, the
vast majority of lowest income owners also face severe housing
affordability problems,” said the report. “Overall, some 8.6
million renters and 6.4 million owners in this group pay more
than 30 percent of their limited incomes for housing and/or
live in structurally inadequate or overcrowded homes.”
The 2002 report, based on 2000 census data, indicates a large
disparity between even middle-income and high-income
households. The top category has shot up from slightly below
$100,000 in 1975 to just under $150,000 in 2001, while the
lowest income has stayed constant at below $20,000. Incomes at
the $50,000 level in 1975 have increased but lag far behind the
actual dollar and percentage increases of the highest level.
The report shows that the lowest income households are white,
own their own homes, and are either employed or retired.
A growth in the overall percentage of homeownership some-
what offsets the negative figures. Home ownership continues
to increase, especially among minority groups. Minorities
accounted for 40 percent of the net new owners during the last
31
 five years, the report states. A large part of this may be ac-
COMPENSATITION MANAGEMENT
counted for by the increase of homeowners among immigrant
populations.
An expanding market for low-income borrowers has resulted in
a “dual” mortgage market, according to the Harvard report.
Higher income borrowers continue to use conventional
mortgages keyed to the prime interest rate. Low-income
borrowers turn more toward government-backed and subprime
mortgages and to manufactured homes.
Sub prime rates can be higher than conventional mortgages and
often expose borrowers to greater risks.
What is a Wage Rate?
A wage is an amount of money paid to a worker for some
specified quantity of labor. When expressed with respect to
time, it is typically called the wage rate.
The wage rate is the pre-tax amount of payment, usually
monetary, paid per unit of labor. It is the main monetary item
that the worker and the employer focus on.
Definition and Concept of Compensation Structure
As it has been discussed in the earlier chapters that compensa-
tion is the act of compensating or the state of being
compensated or something, such as money, given or received as
payment or reparation, as for a service or loss.
What is Compensation Structure?
A Histogram of what people earn.
Although money isn’t everything, it certainly is one of the top
issues potential employees look at when interviewing new
companies. (Yes, face it, they are interviewing YOU.) Whether
you’re offering a straight basic salary structure or an incentive-
based pay structure may make or break you in the eyes of top
job candidates.
Compensation structure consists of the various salary grades
and their different levels of single jobs or groups of jobs.
The term wage structure’ is used to describe wage/salary
relationships’ within a particular grouping. The grouping can be
according to occupation, or organization, such as wage structure
of craftsman (carpenters, mechanics, bricklayers, etc.)
The wage structure or ‘grade’ is comprised of jobs of approxi-
mately equal difficulty or importance as determined by’ job
evaluation. If the ‘point’ method of job evaluation is used, the
‘pay-grade’ consists .of jobs falling within a range of points.
If the ‘factor comparison’ plan is used, the grade consists of a
range of evaluated wage rates (or points, if the wage rates are
converted to points). If the ‘ranking’ plan is used, the grade
consists of a specific number of ranks. If ‘classification’ system
is used, the jobs are already categorized into ‘class’ or ‘grades.
So the term Compensation structure means the pattern or the
break up of the salary paid to the employees in their respective
organization.
Please remember that while determining the compensation
structure of employees, it is not only the mathematics but other
subjects such as biology and psychology play a major role in
compensation determination.
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32
Biology, the increase in size or activity of one part of an
organism or organ that makes up for the loss or dysfunction of
another. Psychology, behavior that develops either consciously
or unconsciously to offset a real or imagined deficiency, as in
personality or physical ability.
Hence we can realize that compensation management is an
integral part of the labor market characteristics in order to attract
capable employees by respective organizations.
Determinants of the Wage Structure
Before discussing the wage determination process in detail let us
first discuss the determinants of wage structure.
Economic Determinants
In the labor market there commonly exists, known as Occupa-
tional Wage Differentials.
The reason for it’s existence is that in different occupations
require different qualifications, different wages of skill and carry
different degrees of responsibility, wages are usually fixed on
the basis of the differences in occupations and various degrees
of skills.
Adam Smith explains occupational wage differentials in terms
of :
1. Hardship,
2. Difficulty of learning the job,
3. Stability of employment,
4. Responsibility of the job, and
5. Chance for success or failure in the work. This is a theory of
wage structure. But his standards of worth are equally
useful in explaining the complexity of wage structure
decisions. The market value of an item is the price it brings
in a market where demand and supply are equal. Use value
is the value an individual buyer or seller anticipates through
use of the item. Use value obviously varies among
individuals and over time.
Job Worth
These two concepts of worth and the concept of internal labor
markets combine to explain important differences among
employers in wage structure decisions.
Organizations with relatively open internal labor markets
(organizations in which most jobs are filled from outside) make
much use of market value. They also make much use of wage
and salary surveys in wage structure decisions.
Conversely, organizations with relatively closed internal labor
markets (most jobs are filled from inside) emphasize use value.
Their analysis of job worth relies more heavily on perceptions
of organization members of the relative value of jobs.
Training
Some other wage structure determinants derived from eco-
nomic analysis may be noted. Training requirements of jobs in
terms of length, difficulty, and whether the training is provided
by society, employers, or individuals constitute a primary factor
in human-capital analysis and thus job worth.
The interaction of ability requirements with training require-
ments can yield different job values depending on the scarcity of
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the ability required and the number of people who try to make

COMPENSATITION MANAGEMENT
it in the occupation and fail.
Employee Tastes
Employee tastes and preferences are another economic factor.
People differ in the occupations they like and dislike. In like
manner, occupations have non-monetary advantages and
disadvantages of many kinds.

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11.622.1 33
COMPENSATITION MANAGEMENT
LESSON 6:
INTRODUCTION TO WAGE DETERMINATION PROCESS
AND WAGE ADMINISTRATION RULES
Learning Objective
• To know the Factors Affecting wage determination process
• To understand the Wage Determination Process
• To know the Concept of Wage Surveys
• To understand the Preparation of a Wage Structure
Introduction to Factors Affecting Wage
Determination Process
Individual Wage Determination
From the viewpoint of the employee, the end product of any
compensation program is a paycheck. The decision regarding the
type of salary administration and/or structure system to be
used do not, by themselves, deliver a paycheck to the employee.
The wage determination must be personalized by making a
further set of decisions.
The first compensation decision, the wage level, is an external
organizational decision that determines the organization’s
competitive posture toward its human resources.
The second major compensation decision is an internal
organizational decision involving the structuring of the jobs
within the organization.
Putting these two decisions together in a wage structure
provides the wage or range of wages that the organization
perceives as equitable for each of its jobs. Although pay rates are
determined for jobs, it is people who receive paychecks.
So the next decision to be made is whether all people on a
particular job are to receive the same pay or different pay; and if
different, on what basis and how? These are not trivial ques-
tions.
The great majority of workers are paid through systems that
provide for variable payment for the jobs. Such systems reflect
the realization by management and employees that it is
important to reward more than just minimal performance on
the job.
Thus management seeks to reward performance through merit-
based and incentive pay systems, while employees and their
unions seek to have learning, proficiency and seniority rewarded.
The Decision to Participate
The decision to participate assumes maintenance of an equilib-
rium between the inducements the organization offers and the
contributions the person is asked to make. The organization
must maintain, as a minimum, a balance of these two in the
mind of the person, and, more realistically, a balance in the
person’s favor.
The ideas of J. G. March and H. A. Simon have been translated
into equity theory. Pay system decisions can be regarded as
focusing on individual equity. Equity theory states that a person
compares his or her “inputs” or contributions with the
“outcomes” from participation (I/O ratio).
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34
When this is hard to do directly, the person compares his or her
I/O ratio with some other I/O ratio. Anything the person
perceives as relevant goes into these input and output consider-
ations.
Inputs and Outputs
Compensation decisions often focus upon the value of the job,
both in the marketplace and within the organization. Although
these are critical input factors, neither organizations nor
individuals would be satisfied by making the employment
exchange solely on this basis.
To explain, compensation inputs can be classified into three
general areas:
• Job;
• Performance; and
• Personal.
Pay system decisions must incorporate the performance and
personal factors into compensation, in order to provide a
regular paycheck perceived as equitable to the employee.
Equity as a Cognitive Process
Experiencing equity is a cognitive process. People’s perceptions
determine whether their pay situation is equitable. Not all
individuals within an organization are likely to perceive their pay
situation the same, nor is the organization (through its
management) likely to see the situation the same as the
employees. This makes the creation of equity in the organiza-
tion a difficult and recurring problem, not one that is
determined once and for all.
Influence
Organizations are not powerless in this cognitive process. They
can influence the perceptions of the person in a number of
ways.
First, they can define clearly the inputs required of the person.
This allows the person to accept or decline the exchange in the
way that a student stays or leaves a course after the professor
hands out a syllabus.
Second, organizations can affect (through communication and
influence) the inputs and outcomes the person focuses on.
Third, they can make certain responses to inequity more likely to
occur than others. If an organization wishes to retain people, it
may make quitting an unattractive way to solve feelings of
inequity.
The Decision to Produce
D. Katz claims that organizations seek three things from
employees:
1. Membership,
2. Role behavior and
11.622.1
3. Innovative and spontaneous behavior. Membership appraise whether these outcomes have occurred. In short, the

COMPENSATITION MANAGEMENT
includes remaining with the organization and being present definition of performance is difficult in and of itself.
for work regularly. It provides consistency to the The individual must understand what is requested and see its
organization’s labor force and reduces staffing and training connection with the reward. This, like all understanding based
costs. on communication, is hard to realize perfectly. Most organiza-
Role behavior consists of doing the job as it is described and/ tions claim they have a merit system of pay, but most
or assigned. This is also needed for consistency and coordina- employees do not perceive that merit is the primary basis on
tion of activities within the organization. To the extent that role which pay adjustments are made.
behavior is explicitly spelled out and is seen as the basis for the In some cases this perception is valid in that the organization
person’s input to the organization, this requirement is also says it uses merit but does not; in other cases the organization
covered under the decision to participate. is rewarding merit but is not accurately communicating this fact
However, not all required role behavior is easily spelled out in to the employees.
jobs, and all jobs have areas of discretion that allow the person
The Performance-Effort Connection
freedom in accomplishing tasks.
People must feel that their efforts will affect their performance.
Innovative and spontaneous behavior addresses the This connection may seem obvious but it is not. There are
organization’s need for the person to adapt what he or she is many jobs in which variations in performance are impossible or
doing, and how it is being done, to the constantly changing inconsequential. To try to connect performance to reward in
circumstances within the organization. Clearly this requirement such jobs frustrates the incumbent.
is not covered in the decision to participate.
Also, individual effort is not a useful gauge in the many jobs
The decision to produce, then, moves the person beyond the whose tasks take two or more people to accomplish. Finally, the
minimum required just to maintain membership. It is what effort-performance connection highlights the fact that the
most managers call motivating their employees. A useful person must perceive that he or she can adequately perform the
framework for this decision is provided by expectancy theory. task.
This theory has three basic parts: All of these subjects should be taken into account in designing
1. Valence, a pay system (and will be taken into account in some manner,
2. The performance-reward connection and even if by the default copying of some other organization’s
design and definitions).
3. The performance-effort connection.
The Wage Determination Process
Valence
Usually, the steps involved in determining wage rates are:
In expectancy theory valence means the strength of a reward.
performing job analysis, wage surveys, analysis of relevant
Does the person want the reward the organization is offering?
organizational problems forming wage structure, framing rules
Since our subject is pay, we can be confident that the answer is
of wage administration, explaining these to employees,
yes – but not the same size yes for all people. People differ in
assigning grades and price to each job and paying the guaranteed
how valuable money is to them compared with other things on
wage.
and off the job.
Content theories help us understand how people’s need for
money may be very different. The advantage of pay as reward,
though, is that it is seen as a path to many different types of
need satisfaction.
How much increase or difference in pay does it take to make the
person respond?
This is the difficult question of the proper size of a meaningful
pay increase. The organization must worry not only about
whether pay is a motivator but also about whether it is offering
enough to make it worthwhile for the person to produce
beyond the minimum.
The Performance-Reward Connection
This may be the most important part of the decision to
produce, since if the individual does not see the rewards he or
she wants as being contingent on the behaviors or outcomes Fig.1 Steps Involved in Determination of Wage Rate
the organization wants, then the organization is not likely to
obtain those outcomes.
The Process of Job Analysis
Results in job descriptions which lead to job specifications. A
This connection would seem to be obvious, but in fact it is not. job analysis describes the duties, responsibilities, working
Managers find it difficult to always define the results and conditions and inter-relationships between the job as it is and
behaviors they desire. Also, it is difficult to measure and/or the other jobs with which it is associated.

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11.622.1 35
 It attempts to, record and analyze details concerning the
COMPENSATITION MANAGEMENT
training, skills, required efforts, qualifications, abilities, experi-
ence, and responsibilities expected of an employee. After
determining the job specifications, the actual process of grading,
rating or evaluating the job specifications, the actual process of
grading, rating or evaluating the job occurs.
A job is rated in order to determine its value relative to all the
other jobs in the organization which are subject to evaluation.
The next step is that of providing the job with a price. This
involves converting the relative job values into specific monetary
values or translating the job classes into rate ranges.
Wage Surveys
Once the relative worth of jobs has been determined by job
evaluation, the actual amounts to be paid must be determined.
This is done by making wage or salary surveys in the area
concerned.
Such surveys seek to answer questions like what are other firms
paying?
What are they doing by way of social insurance?
What is the level of pay offered by other firms for similar
occupations? etc, by gathering information about ‘benchmark
jobs’, which are usually known as good indicators.
There are various ways to make such a survey. Most firms either
use the results of “packaged surveys” available from the
research bodies, employer’s associations, Government Labour
Bureaus, etc., or they participate in wage surveys and receive
copies of results, or else they conduct their own.
These surveys may be carried out by Mailed questionnaire,
telephone, or personal interviews with other managers and
personnel Agencies.
A wage survey to be useful, must satisfy these points:
(a) Frequency
Affected by rapidity of changes, current and contemplated. Once
per year is common.
(b) Scope (number of firms)
Influenced by the geographic area from which people are drawn,
the number of units competing for this labor, accuracy require-
ments, and willingness of organizations to share information.
(c) Accuracy
The diversity in job titles and specific job duties is staggering.
The greater the accuracy and detail needed, the greater the
requirements for careful description and specification and
surveyor’s reliance on person-to-person ‘interviewing rather
than mailed questionnaires.
Such wage surveys provide many kinds of useful information
about differences in wage levels for particular kinds of occupa-
tions. This can have a great influence on an organization’s
compensation policy.
Relevant Organizational Problems
In addition to the results of job analysis and wage surveys,
several other variables have to be given due consideration in
establishing wage structure.
For example, whether there exists well-established and well-
accepted relationships among certain jobs which can upset job
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36
evaluation, whether the organization would recruit new
employees after revised wage structure; are the prevailing rates in
industry or community inconsistent with the results of job
evaluation?
What will be the result of paying lower or higher compensa-
tion; and what should be the relationship between the wage
structure and the fringe benefit structure? Belcher has listed 108
variables which can affect levels of compensation and the wage
structure
Preparation of Wage Structure
The next step is to determine the wage structure. For this,
several decisions need be taken, such as:
a. whether the organization wishes, or is able, to pay amounts
above, below, or equal to the average in the community or
industry;
b. whether wage ranges should provide for merit increases or
whether there should be single rates;
c. the number and width of the ‘pay grades’ and the extent of
overlap;
d. which jobs are to be placed in each of the pay grades;
e. the actual money value to be as signed to various pay
grades;
WAGE LINE
WAGE RATES
Plotting jobs on a curve (Some points fall
well off wage line)
f. differentials between pay plans; and
g. what to do with salaries that are out of line once these
decisions have been made.
There are though no hard and fast rules for making such
decisions, and procedure commonly used is the two-dimen-
sional graph on which job evaluation points for key jobs are
plotted against actual amounts paid or against desired levels.
Plotting the remaining jobs then reveals which jobs seem to be
improperly paid with respect to the key jobs and to each other.
In the above figure, wage rates are shown on the vertical axis
while pay grades (in points) along the horizontal axis. The
‘wage curve’ shows the relationship between:
i. the “value” of the job; and
ii. the “average wage rates” of these grades (or jobs).
The following steps are involved in drawing a wage curve:
1. Finding out the average pay rate for each pay grade, for each
pay grade may have several jobs and chances are that each of
these jobs is currently being paid a different rate.
11.622.1
2. Plotting the wage rate for each pay grade.
3. Drawing “Wage Lines” through the points plotted. These
lines may be straight or curved; if the pay grade comprise a
single job cluster, a straight line is usually employed.
4. Pricing jobs: Wages along the “wage line” are target wages or
salary rates for the jobs in each pay grade. It is possible that
some of the plotted points may fall off the wage line. This will
mean that average for that grade is too high (or too low), given
the pay rates for other grade.
If the plot falls below the line, raises for jobs in this pay grade
may be required. Such a raise may be given either immediately or
in one or two steps.7 If the plot falls above the wage line, that
indicates rates are high and the over paid employees are often
called “red circle,” “flagged,” or “overrates.” This will necessitate
either:
i. To freeze the rate paid until general salary increases bring the
other jobs into line with it, or
ii. To transfer or promote the employee to a job where -he can
legitimately be paid his current rate; or
iii. To cut to the maximum in the pay grade.
It is a standard practice to establish ‘pay grades’ or equal width
or ‘point spread,’ i.e., each grade might include all those jobs
falling between 50 to 100 points, 100 to 150 points, 150 to 200
points, and so forth. Since each grade is of the same width, it is
necessary to determine how many grades there should be. In an
industry, the number varies from as few as five to as high as
thirty.
Two points need consideration when deciding the number of
grades. They are mentioned below:
First, the size of the organization, i.e., if there are 1,000 jobs to
be graded, more ‘pay grades’ will be needed, than where the
jobs are few, say 100.
Second, the broadness of the grades. For instance, in the case
of hourly jobs, the maximum of individual pay grades may
vary from 10 to 20% above the minimums; while in case of
salaried employees the maximum of pay grades may vary from
15 to 75% above the minimum.
Some authorities feel that there should be only one comprehen-
sive ‘pay grade’ for each organization. But it is probably more
realistic to have several pay. grades/ranges Several wage.
structures are developed - one for each type of job or “job
cluster
Dunlop describes the cluster concept as follows:
“A job cluster is defined as a stable group of job classifications
or work assignments within a firm... which are linked together
by:
1. Technology,
2. The administrative organization of the production process,
including policies of transfer, lay-off, and promotion, or
3. Social custom that they have common wage-making
characteristics....
“Thus, the employees on a furnace or a mill and the crew of a
train or a plane can constitute a job cluster (technology); so also
may employees in a department (administrative organization),
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11.622.1
or the sales girls in a department store or the stenographers in.
COMPENSATITION MANAGEMENT
an office (Social custom).
Certain job clusters may be more closely related to some rather
than to other clusters. In this sense, clerical rates as a whole may
be closely related to other clerical rates than to managerial or
factory rates...”
Livernash described that: Broad groups may be illustrated
within manufacturing as:
1. Managerial- executive, administrative, professional, and
supervisory;
2. Clerical; and
3. Factory, within each broad group, narrower groups are
obvious.
Within the factory group are maintenance, inspection, transpor-
tation and production. Within production are certain smaller
groups, varying with the nature of the industry.
This indicates the need for having several pay ranges for each
organization. Such a range usually has several advantages:
i. The management can take a more flexible stance with
respect to the labour market.
ii. ‘It makes it easier to attract experienced employees from
other organis9.tions.
iii. It helps to ensure that there is an. overlap between the pay
rates and those prevailing in the labour market.
iv. It also allows the management to provide for performance
differences between employees.
While determining pay ranges the following consideration
should be attended to:
1. It is important to keep in mind that there is an adequate
differential, between superiors and subordinates - whether
they are paid under the same pay plan or under different
ones.
2. When the pay-range of one group is changed, equal
attention must be given to the pay-level of the other.
3. Because of the continuous rise in wage and salary levels, a
rise resulting from a variety of environmental pressures,
considerable attention must be given to handling upward
changes in wage-structure.
Some firms give general percentage or “across the board”
pay increases shortly after wage increases are negotiated.
Others give increases based on merit or length of service.
The sound thing is to make general adjustments in wage
structure according to the price index number.
4. The existing pay structure should be regularly reviewed and
revised. This will make job evaluation programme more
acceptable to employees.
5. Regional differences in wages should invariably be
maintained. Forces that favour regional differences are: low
mobility; lower skill jobs; major cost of living differences
between areas; added sources of income or characteristics
(rural versus urban or industrial); seasonal occupations as in
agriculture versus stable occupations.
However, several forces work to level these differences. The
forces that favour uniformity in wages are: High mobility
37
 between regions and/or employees; access to timely, reliable
COMPENSATITION MANAGEMENT
information, wide spread unionization efforts, (often along
industry/ occupational lines).
Rate Ranges
‘Rate ranges’ can be developed in various ways. The one usually
adopted approach is to use the “Wage Curve.” A maximum
and minimum rate for each grade, such as 15% above and
below the wage line, may be arbitrarily decided. The maximum
and minimum
Setting of Rate Ranges
lines may then be drawn on the curve; the ‘range’ may be
allowed to become wider for the higher pay grades. This reflect
the greater demands (and performance variability) inherent in
jobs in these grades. Most organizations structure their rate
range to overlap a bit. Thus, a person who has been on the job
larger and is more experienced may earn more than a fresh
employee in the next higher pay grade.
The major way in which organizations allow for factors other
than the job to enter into the determination of an individual’s
pay is to develop a range of pay for each job or grade of jobs. A
rate range is a range of pay determined by the organization to
be appropriate for anyone who occupies a particular job.
A rate range consists of a minimum pay rate (the beginning hire
rate), a midpoint (the market or job rate), and a maximum (the
highest rate the organization is willing to pay for the job).
Now let us study further single-rate wage systems, the rationale
for rate ranges, two types of rate ranges, the manner in which a
pay rate is set for individuals within a range, and the dimen-
sions of range rates.
Single-Rate Wage Systems
Before discussing various aspects of rate ranges we should first
consider situation in which there is no range. There a single rate
is paid for the job and the individual receives just that rate. This
pay rate is the market rate and may be paid to either a job or a
pay grade.
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38
This is illustrated in figure 16-1, option a.
Figure 16-1. Alternative types of rate ranges
If a job rate is used, the wage line provides the job rate. The
individual is paid in accordance with the number of points
assigned the job by the job evaluation system, by the competi-
tive value discovered in a review, a salary survey, or by the
competitive value provided by a research analysis product.
Where the grade rate prevails, the individual is paid in accor-
dance with the grade level assigned to the job.
This type of system is useful where performance variation and/
or other personal characteristics are nonexistent or unimportant.
Not all jobs allow for a significant difference in performance.
Some assembly-line positions and lower-level service positions
have very little discretion, so concern with differences in output
or behavior are minimal. Other circumstances that lead to use
of single-rate systems are:
1. a strict technology that controls the output and
2. jobs for which the training time is short a couple of hours
or so hereby making a learning curve inoperative. The
individual in this type of system is paid for his or her time
on the job and for completion of the job as directed.
Single-rate systems are simple to administer: once the pay rate
of a person’s job is identified, no further decisions need be
made as to how much he or she is to be paid. The system can
operate successfully if:
1. there is little variation in output and
2. it is acceptable to the parties involved. Unions often like
single rates because they eliminate judgment-based
differences in pay.
Rationales for Rate Ranges
Any time individuals on the same job differ significantly in
performance or personal characteristics that are perceived as
relevant to either the organization or the person, differentiation
by means of rate ranges may be in order.
One study reported that the rationale for rate ranges in most
large organizations was the need for performance differences,
but in some cases industry practice was a major reason.
Thus labor-market demands may also be a significant factor.
Rate ranges can serve other purposes for organizations.
Retention is one of the most important of these. Experienced
personnel can be made difficult to hire away by paying them
above the market rate for the job. This is seen by the person as a
significant reward for membership.
11.622.1
Where there is a significant quality variation among people on
the job, a rate range may represent an attempt by the organiza-
tion to retain the best employees by paying them on the basis
of quality.
Although performance is the reason most often given for rate
ranges, this rationale should be scrutinized. Is movement in the
range in fact related to performance?
One major study challenged this assumption and found that
performance was a very poor predictor of pay rate. There must
be more than just an actual connection between pay rate and
performance: there must also be a perception by the individual
that this connection exists.
The need for this perception makes communication very
important in pay systems.
A further rationale for rate ranges is employee expectations. Few
people are content to make the same wage and be dependent on
changes in the total wage structure for raises. In particular, they
may see that length of time on the job is an important input
and expect a reward for it. But they may also see a number of
factors other than performance as relevant to movement within
the range.
Personal factors having to do with the job are a good example.
For instance, many employees who are going to school part
time perceive that they should receive something for this.
Employees may also perceive that they should receive more pay
for a variety of non-work-related factors.
Some of these factors, such as the birth of a new baby may be
very important to the person but seen as irrelevant by the
organization. Others, such as the person’s sex, may be illegal to
use as a differentiator of pay. It should also be noted that
although some employees perceive the need for a rate range,
they do not feel that performance should be the basis for this
range.
Another rationale for rate ranges may be collective bargaining. In
contract negotiation the organization may agree to rate ranges or
to an expansion of rate ranges as an alternative to a general
increase. The union is likely to bargain for ranges in terms of
movement within the range by seniority. The connection of
performance and reward is not well served in this case.
Finally, the Internet has produced a wide array of sources by
which employees can gain access to information regarding the
competitive pay for their positions. While in the 1990’s
employees knew little about the competitive value of their jobs,
the plethora of job/career information freely available on the
Internet has changed this.
If there were ever a reason for organizations to have a formal-
ized method of administering salaries, it would be to forestall
the number of hours wasted by management trying to
disprove inflated salary averages reported on free Internet sites.
More importantly, management must protect the organization’s
bottom line by guarding against overpaying employees based
upon the high rates reported by Internet sites focused on
increasing their visitor hits to enhance their IPO values.
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11.622.1
The future challenge of compensation managers is clear for the
COMPENSATITION MANAGEMENT
next ten years – employees walking into their offices with salary
increase requests based upon free data from the Internet.
Types of Ranges
Having made the argument that rate ranges are useful and
expected, we turn to how to develop rate ranges.
Step Ranges
A common form of pay range consists of a series of steps,
usually a specified distance apart, either in percentages or flat
amounts. Step ranges may vary considerably in number of steps
and the total range the steps cover.
Clearly these two in combination will determine the size of each
step. The point is that there are three variables present, and the
determination of any two will decide the third.
Two basic types of step ranges are common:
The first consists of a starting rate and a job rate (assumed to
be the market rate), as in the single-rate system. New employees
are brought in at the starting rate and then moved up to the job
rate in a series of steps. If done properly, this movement
corresponds with the learning curve of the job.
The market rate is the maximum, since it is assumed that once
the person has learned the job, performance differentials are
minimal. This kind of system is illustrated in figure 16-1,
option b. In this situation there would be a number of steps,
most commonly three, between the starting rate and the job
rate. This type of step system is most common in semiskilled
blue-collar jobs.
The second type of step system places the market rate not at the
top of the range but in the center of it. Other places, such as the
one-third point or the two-thirds point, are also possible, but
the middle is the most common.
Employees are hired at the starting rate, as in the other step
system, and progress to the midpoint over time is on the basis
of learning job proficiency. Thus, a person at the midpoint of
the range is assumed to be a satisfactory performer. Movement
above the midpoint is assumed to be for performance, or other
characteristics beyond the normal or average.
This type of system is illustrated in figure 16-1, option c. It is
used in a wide variety of office nonexempt jobs and lower-level
exempt jobs where performance is important but not critical.
These two types of rate ranges are not mutually exclusive in an
organization. Lower-level pay grades may have the type of range
that ends at the midpoint, while higher grades have ranges
extending beyond. The rationale for such a system is that the
discretion in higher-level jobs in the organization allows for
performance differences not permitted in lower-level jobs.
Movement within grades will be discussed later, but one point
should be made here. A person who is moved from one step
to the next usually retains the new step even when the overall
wage structure is changed. In this way, adjusting the wage
structure to meet labor-market changes automatically becomes a
general increase for employees in a step system.
There is a further consequence of this type of system: all people
tend to move to the top of the grade over time. Even if
movement is by performance, a person can eventually reach the
39
 top and stay there regardless of future performance. This
COMPENSATITION MANAGEMENT
phenomenon in turn has a dramatic effect on the total wage bill.
In a period of normal growth and turnover the average wage
for the job classification will probably match the market rate as
people start to climb the ladder while others leave. But in a low-
turnover, no-growth situation the organization may soon be
paying above market rate even if it sets the midpoint of the
range at the market, because all the employees in the job are in
the top steps.
Open Ranges
In order to focus more clearly on performance and to avoid the
problems of step ranges, more and more organizations are
using an open-pay range. In this system the organization
defines the midpoint, the maximum and the minimum of the
range. Any one employee may be paid anywhere within this
defined range.
The function of the midpoint, as in the second type of step
system, is that the average performer would be paid at this rate.
Also as in the second step system, new employees would start
at the bottom and move to the midpoint as they learned the
job and became average performers. Payment above the
midpoint can be reserved for above-average performance.
Unlike the second step system, the person’s wage is not
automatically adjusted when the wage structure is adjusted. At
this point, the person’s performance is reviewed and adjust-
ment is made in relation to that performance.
Figure 16-1, options d and e, illustrate two types of open pay
ranges. Option d has a series of steps up to the midpoint and
an open range above the midpoint; option e has an open range
from minimum to maximum.
With the increased emphasis on performance in organizations,
open-range systems are becoming more popular. They provide
more flexibility than a step system in granting pay increases and
are more resistant to automatic increases. Finally, open ranges
not only may make it easier to reward performance but are also
useful when criteria other than performance are to be used.
Dimensions of Ranges
Any wage structure has a number of rate ranges and pay grades.
This number can be a matter of the policy of the organization.
Small organizations tend to have a small number of pay grades
accompanied by wide pay ranges, broad definition of job titles,
a great deal of movement within pay grades, little overlap
between grades and limited promotion to higher grades. Some
organizations have many grades, which tends to create an
opposite set of characteristics.
When examining pay ranges we can determine the total wage
structure with the help of three characteristics: the breadth of
the rate range, the number of pay grades and the overlap (see
figure 16-2). If one knows the bottom and top of the wage
structure, the slope of the pay line, and any two of the three
characteristics just cited, the third will be determined.
Range Breadth
The breadth of the rate range is the distance from the top to the
bottom of the range a to b in figure 16-2. It is the vertical
dimension of the range. The breadth may be stated in dollar
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40
amounts or in percentages. The latter is more common and will
be used here. The breadth of the range should vary with the
criteria for movement within the range.
Assuming that performance is the criterion, the breadth would
represent the opportunity for performance differences in the
job. Where ranges are narrow, the assumption is that perfor-
mance differences are narrow and vice versa. In practice, hourly
jobs have ranges of 10 to 20 percent, office jobs 15 to 35
percent, and managerial jobs 25 to 100 percent.
Fig. 16.2 Parts of a wage structure
Factors other than potential performance differences may also
affect range breadth. Organizations that promote intentionally
fast encourage narrow ranges, since people do not stay within
one grade very long. A wide range is encouraged if adjustments
need to be large to be noticed by employees.
Higher grade levels tend to have broader ranges for this reason.
Broad ranges can accommodate a wide variety of jobs, as well as
variable starting rates among jobs. These broad ranges indicate
that the process of determining the market rate is not a precise
one.
Establishing range maximums is particularly difficult. There is
some logical maximum value for any job, regardless of how
well it is performed. Ideally when this point is reached the
person is promoted, either to a new job or by upgrading the
tasks of the present job.
Unfortunately, this may not be possible at the appropriate time.
Realistically the person should be told that this is as high as he
or she can go in the rate range and that any further salary
adjustments will come from general increases.
Some organizations provide steps beyond the maximum of the
range. There are usually two rationales for this – seniority and
recruiting. Long-term employees who will never be promoted
and whose performance remains good are sometimes granted
longevity increases beyond the maximum of the range.
These usually take place after five or ten years at the top of the
grade. Trouble in recruiting and retaining professional and
11.622.1
managerial employees can be ameliorated by starting these
people quite a ways up in the rate range; in order to retain them
the organization must go beyond the maximum to provide any
significant movement in grade.
Number of Grades
The total number of pay grades in the wage structure can be a
result of other calculations (mainly range breadth and overlap)
or a conscious decision that forces the other two variables to
adapt.
The number of pay grades is reflected in the horizontal
dimension of figure (a to c). At one extreme, a structure with
a single pay grade would have a minimum and maximum
embracing the total wage structure and would include all jobs.
At the other extreme, each job evaluation point on the horizon-
tal axis would constitute a separate pay grade.
In the latter circumstance two jobs would occupy the same pay
grade only if they had identical job evaluation points a situation
that would assume a very accurate job evaluation plan.
A large number of pay grades often coincides with a narrow
range, permitting a large number of promotions and multiple
classifications in job families in the organization. A small
number of pay grades allows for flexibility, in that it assigns
people to a wide range of jobs without changing their pay
grade.
Not surprisingly, number of pay grades is associated with size
and number of levels in the organization. It also seems
reasonable that organizations with a fluid, organic structure
would have a minimum of pay grades whereas more structured
and bureaucratic ones would have more.
Clearly there is no optimum number of pay grades for a
particular job structure. In practice, the number of pay grades
varies from as few as 4 to as many as 60. But 10 to 16 seems to
be most common. With few grades there are many jobs in each
grade and the increments from one grade to another are quite
large. The presence of many grades has the opposite characteris-
tics.
A number of considerations help to determine the appropriate
number of grades. One is organization size: the larger the
organization, the more pay grades. A second is the comprehen-
siveness of the job structure. A structure that covers the whole
organization will tend to have more pay grades than one that
deals only with one job cluster. Third, the type of jobs in a
structure makes a difference. Production jobs whose pay policy
line is relatively flat will tend to have fewer pay grades than a
managerial structure that has a steep slope.
The last determinant is the pay-increase and promotion policy
of the organization. A large number of pay grades allows for
many promotions but entails narrow ranges and a narrow
classification of jobs. A small number of pay grades, accompa-
nied by wide ranges was traditionally thought of as
unreasonable in that cost control of salary administration
would be lost. In the late 1980’s, this reasoning was badly
shaken.
Overlap
The final pay range determinant is the degree of overlap
between any one pay grade and the adjacent grade (c to d in
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11.622.1
figure 16-2). Overlap allows people in a lower pay grade to be
COMPENSATITION MANAGEMENT
paid the same as or more than those at a higher grade.
The rationale for such a phenomenon is that a person at a lower
pay grade whose performance is very good is worth more to the
organization than a new person at the higher pay grade who is
not yet performing effectively. This reasoning seems to work:
seldom are there complaints about overlap.
As with the number of grades, overlap can be either a determin-
ing variable or the determined variable. Overlap will work well
where there are many wide pay grades. A conscious decision to
keep overlap to some maximum (such as 50 percent) will reduce
one of the other two variables.
Some overlap is desirable, but there are problems. The main
one comes about in promotions. A person high up in a rate
range who is promoted may start in the new rate range higher
than the job rate of the new grade. But not to give the pro-
moted person a pay raise is hardly to have promoted him or
her.
Organizations generally set some policy that any promotion be
accompanied by some specified minimum increase, such as one
step in the new rate range or a specified percentage. The
designers of career paths in some organizations reduce this
problem by placing the next job in the sequence more than one
pay grade above the present one.
Moving Employees Through Rate Ranges
Rate ranges make possible different pay rates for individuals in
the same job and/or grade level. Operating such ranges calls for
some method that differentiates between employees. Such a
method must provide a decision framework for positioning
each person within the range.
Open rate ranges facilitate a pay-for-performance approach to
individual pay determination. The present section will focus on
movement within grades in a step system. It should be noted,
though, that an open range system can also accommodate the
methods of progression discussed.
Step Rates
Most government and some private organizations divide their
entire rate range into a number of steps. (One should always be
aware of the influence of government systems in compensa-
tion. For example, with half the paychecks in Canada being
written by governmental agencies, one cannot overlook these
step approaches).
This number is a function of the breadth of the rate range, the
time required to achieve proficiency in the job, whether there are
to be steps beyond the market rate, and a determination of the
size of a meaningful pay increase. At least three steps are almost
always used. A general step system is illustrated in option c in
Figure 16-1.
Step rates facilitate the granting of pay increases by determining
the amount that any increase will take. Of course, it may be
possible to move a person two steps, but this is always done in
predetermined amounts. Such increases can be considered a
disadvantage as well as an advantage. Many organizations prefer
to be able to grant a wide variety of increases to better relate pay
to their pay-increase policy
41
 Methods of Progression
COMPENSATITION MANAGEMENT
All methods of progression specify how a person moves from
the bottom of the range to the top of the range. The major
difference among them is the criteria for movement. The major
methods are automatic progression, a combination of merit
and automatic progression and merit progression.
An organization does not have to restrict itself to only one
method; it may use different methods for different jobs or even
different methods for a single job at different parts of the rate
range.
Automatic Progression
This type of progression (sometimes referred to as scheduled
increases) consists of wage increases based automatically on
length of service. In some situations, such as basic industries,
there are a small number of increases often in rapid succession
(every three months) to the maximum rate for the job.
These are jobs in which proficiency can be gained in a short
time. On the other hand, some governmental organizations
may have many steps (five or more) and grant increases once a
year. In these situations longevity on the job leads to higher
proficiency, and the organization wishes to reward continuity of
employment.
A major source of variation in automatic plans is the nature of
the maximum rate – whether it is the market rate or an above-
market rate. Organizations that move only to the market rate
tend to have rate ranges with a small number of steps and a
short time frame for progression. They are interested not so
much in rewarding longevity as in encouraging learning the job.
Organizations that move beyond the market rate are specifically
rewarding longevity on the job; they tend to spread out the
progression to the top of the grade over a long period.
Automatic progression does not have to be totally automatic.
A fully automatic progression plan is actually a variation of the
single-rate or flat-rate system. If all employees can expect to
reach the maximum of the rate range after a given period on the
job, the assumption is that the maximum is the real rate for the
job.
Variation can be introduced in two ways:
First, the time period may vary from step to step. For instance,
some systems move people rapidly to the midpoint and then
much more slowly; the extended steps beyond the midpoint are
clearly tied to longevity.
The second variation introduces a little merit into the system by
either denying movement to the next step for poor perfor-
mance, giving good performers a double-step jump, or
shortening the time period between step increases.
Merit considerations in automatic plans should not be overem-
phasized. The system is designed to be automatic, and
variations are seen as exceptions, not the rule. In most systems
that allow either movement ahead or denial of increases, these
alternatives are rarely used: the problems they pose for adminis-
tration of the workplace are not perceived by supervisors to be
worth the advantages they offer.
Unions commonly accept rate ranges but insist on automatic
progression and encourage maximum rates that are above the
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42
market rate. Organizations make much more use of automatic
progression than might be assumed.
Studies indicate that in most areas of the country and in most
industries, automatic progression is the norm and not the
exception. But this may be changing. The emphasis on produc-
tivity in the United States is translating itself into a search for
ways to make employees more productive. Focusing on
performance instead of longevity is part of this trend.
Combinations of Automatic and Merit Progression
We have just seen that some introduction of merit is possible
even in automatic progressions that focus on longevity. It is
possible also to design progressions that try to balance merit
and longevity. These progressions usually let employees focus
on different criteria at different places in the pay range.
Probably the usual combination is automatic progression to the
midpoint – the market rate – and progression beyond the
midpoint on the basis of merit.
The rationale for this method of progression is that all
employees can be expected to reach average proficiency within a
certain time on the job; this period matches the automatic
movement to the midpoint.
However, not all employees exceed average performance on the
job, and movement from the midpoint on should be based on
performance that is above average. If the organization does a
good job of matching time taken to reach the midpoint with
time taken to reach proficiency in the job, then labor costs are
equalized; if these are out of balance, then labor costs are higher
or lower than is optimum.
The rate range can take one of two forms in this case. The first
looks like option c in figure 16-1, with a series of steps from
bottom to top and the market rate as the middle step. The
distinguishing feature of this form is how movement is
determined after the midpoint has been reached.
In the second form there is a series of steps up to the midpoint
but an open range from that point on with movement of any
degree possible and decided by merit. This form is illustrated in
figure 16-1, option d.
Another method is to combine longevity and merit at all points
in the range. Under this arrangement all employees receive an
automatic adjustment, but those with above-average perfor-
mance receive more, such as a two-step jump. It is also possible
to hold back those who are not performing well. The latter
action is rare but can be effective in probationary situations.
The areas of prevalence of these different methods are hard to
determine. It appears that automatic methods are most typical
of factory jobs and combination methods most typical in office
situations.
Automatic-progression methods are simple to administer since
they are purely mechanical adjustments made by time in grade.
Introducing merit complicates the pay decision by adding a
judgment about how well the person is doing the job. Then a
way must be developed to incorporate this judgment into a
wage increase.
This makes administration more complex and, if the judg-
ments are perceived as arbitrary, raises concerns about the equity
11.622.1
of the system. The advantage is that a connection is made
between performance and reward, and this may be worth the
trouble.
Merit Progression
A pure merit progression employs an open rate range with only
the minimum, maximum, and midpoint defined, as in option e
in figure 16-1. Movement within the range is based strictly on
performance, and there are no adjustments for general increases.
This pay-for-performance system requires an integration of
performance appraisal with pay determination. What we cover
here is movement between steps of a pay grade, as in figure 16-
1, option c, on the basis of merit.
The rationale for merit progressions is that the movement to
proficiency is actually an improvement in performance and
should be treated as such; people differ in their rate of improve-
ment to proficiency, and this should be taken into account; it is
performance that the organization wants and should pay for.
In practice, a merit progression is usually a combination of
merit and longevity. The initial decision to move a person from
say, step 3 to step 4 is based on performance, but from that
time on the person retains step 4 when adjustments to the
wage structure are made, thereby remaining at the same relative
position in the range.
If step 4 is one step above the midpoint, the assumption is
that this person is always above average in performance, but
actually the person needs only to maintain a level of perfor-
mance that will not result in termination.
Further, unless the performance-appraisal system is tied
consistently to the merit pay adjustments, either the system
tends to be seen as arbitrary or supervisors tend to grant the
same increase to all employees and thus destroy the perfor-
mance-reward connection.
In a Bad Economy
In all step systems most employees eventually get to the top of
the pay range. In a merit progression method the good
performer should get there faster than the average or poor
performer. This phenomenon of getting to the top of the
range tends to be hidden when the organization is growing and
times are good.
But when growth stops, then promotions slow up, employees
stay on their current job, movement to the top of the range is
accelerated, and the organization finds that all employees are at
the top of the range.
Labor costs thus become very high at exactly the time the
organization can least afford them. From the employee’s
perspective, the only pay increases received are those that occur
through wage structure adjustments, and these are likely to
decrease in these circumstances. This lack of wage increases
makes the potential for feelings of inequity increase consider-
ably.
Actual Practice
Most organizations and their management claim that they use a
merit progression system. But studies show that up to 80
percent of employees are at the top of their rate range. The
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11.622.1
problem is compounded when management mixes up general
COMPENSATITION MANAGEMENT
pay increases with merit pay.
Granting all employees the same pay increase and announcing it
as a merit increase destroys the concept of merit. Lower-level
supervisors, in particular, find it uncomfortable to deal with
merit pay, which requires him or her to make competitive
distinctions between employees.
For these supervisors it is often cooperation and not competi-
tion that is important. Because of the inflation of the late
1970s, annual pay increases are almost institutionalized in
organizations today.
This makes merit progression something of a misnomer,
especially where organizations simply call all pay adjustments
merit increases.
Rate Ranges and Recruitment
To this point we have assumed that the organization has been
hiring people who are just qualified and moving them up in the
range as they learn the job. But what if it hires a person who can
do the job from the beginning?
Clearly this person should be hired at the market rate (the
midpoint). In actuality, then, people are likely to be brought
into the organization anywhere up to the midpoint of the
range, based upon their qualifications. Thus a system that ends
at the market rate has a flat rate for hiring fully qualified
employees.
The labor market may complicate the rate range when there is a
shortage of applicants. When it is hard to recruit, one way
organizations adjust is to raise the starting pay to wherever in
the range it must go in order to obtain people. This may result
in hiring rates at the top of the rate range or above.
This extreme situation makes any upward movement within
the grade difficult or impossible for the person. A person who
is then expected to stay in the grade for three or more years
before promotion can only look forward to general increases.
Correcting Out-of-Line Rates
The rate range defines the minimum and maximum that a
person may be paid for a given job. For a number of reasons an
individual’s pay may be more or less than the prescribed range.
The organization needs policies for dealing with these out-of-
line rates.
Terms of the trade
Many a new compensation analyst has been tested by manage-
ment with the question.
“Do You Know What a Green Circle Is?”
This question separates the college student from the practitio-
ner. It refers to the case in which a person is paid less than the
minimum of a grade. This occurs, for example, when a person
is promoted into a position in a higher pay grade, but not given
a pay increase (because all increases may have been frozen by top
corporate management).
Underpaid Employees
As stated, a person paid below the minimum of the rate range
for his or her job is said to carry a green-circle rate. This situation
43
 usually occurs when the wage structure is changed upward and the difference between his or her rate and the maximum of the
COMPENSATITION MANAGEMENT

the individual was at the bottom of the rate range. range.

Little question exists regarding the appropriate response: the The employee is given 100 percent of the differential the first
underpaid employee should have his or her pay raised to the year, 75 percent the next year, and so on until there is no
minimum of the range, immediately if possible or in a couple differential. The advantage of the adder is that the top rate for
of steps. If the person is performing adequately, the difference the job is made clear and both the person and the organization
between his or her rate and the minimum of the range should are aware of the exceptional and temporary character of the
be made up by the employer. differential.
Of course it is possible, for a number of reasons, that the Another possible solution is a lump sum payment. For
employee is not worth the minimum of the range. Even so, example, the employee may be paid the difference times 2080
there are usually adjustments that can be made. For instance, if hours and have his or her pay rate brought immediately into
the labor market is very tight and marginal workers must be line. Any solution to overpay involves questions of equity.
hired and retained, a lower classification involving job redesign Overpayment is usually not the fault of employees, and any
to accommodate the person’s skills would be in order. reduction in pay will be seen as unfair by them.
This same reasoning could apply to older and handicapped On the other hand, there is also the perception of equity by
employees who cannot fully carry out their jobs. On the other other employees, so some action is always called for. All the
hand, redesign may be unnecessary where there is already a actions just described try to balance these two perceptions in
lower-level job to which the person can be assigned. Or a trainee arriving at an equitable solution.
rate may be appropriate if the employee is still learning the job. Failure to correct red-circle rates means that range maximums are
Usually there will be a few underpaid employees, and a policy of meaningless; people may be paid more than their job and
bringing their rates into line immediately protects the integrity performance are worth to the organization; and organizational
of the pay system. But if many employees are underpaid, a resources are being diverted into paying these rates rather than
careful review is required not only may the costs of adjustments rewarding others’ good performance.
be high but also equity between the newly raised employees and
Tutorial Activity 1.1
other employees on the job may require a phasing in of
increases. Questions
Also, all underpay situations should be examined for racial or 1. Discuss the factors affecting wage determination.
gender discrimination. 2. Explain wage determination process in detail.
Overpaid Employees 3. What do you understand by rate range? Discuss the types
A person paid above the maximum of the range for his or her of rate ranges.
job is said to receive a red-circle rate. Other names for this 4. Discuss the importance of wage administration rules in
situation are ringed, flagged, or personal rates, red allowances, organizations.
overrates, and personal out-of-line differentials.
The variety of terminology suggests that this is a common
problem in organizations, that it stems from a number of
sources, and that it is more difficult to deal with than the
problem of underpaid employees.
Solutions to overpay vary from doing nothing to reducing the
pay to the top of the range. Both approaches can cause equity
problems, both in others and in the person affected.
The most common solutions are the following:
1. Freeze the pay until general increases catch up with the
current pay;
2. Transfer or promote the person to a job in an appropriate
pay grade;
3. Freeze the pay for a limited period, such as six months.
Then attempt either of the previous strategies. If this is
unsuccessful, reduce the pay at the end of the period. Red-
circle the job and not the person.
Eliminate the differential after a period such as a year or
gradually over time.
A number of less common arrangements also exist. One, the
adder, is a payment to the employee in quarterly installments of

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44 11.622.1

LESSON 7:
INTRODUCTION TO FACTORS INFLUENCING WAGE AND SALARY STRUCTURE
AND PRINCIPLES OF WAGE AND SALARIES ADMINISTRATION
Learning Objective
• To know the Factors Influencing Wage and Salary Structure
• To understand the Principles of Salary Administration
Factors Influencing Wage and Salary
Structure
The wage policies of different organizations vary somewhat.
Marginal units pay the minimum necessary to attract the
required number and kind of labour. Often, these units pay
only the minimum wage rates required by labour legislation,
and recruit marginal labour.
At the other extreme, some units pay well above the going rates
in the labour market. They do so to attract and retain the
highest calibre of the labour market. They do so to attract and
retain the highest caliber of the labour force. Some managers
believe in the economy of higher wages.
They feel that, by paying high wages, they would attract better
workers who will prod use more than the average worker in the
industry. This greater production per employee means greater
output per man hour.
Hence, labour costs may turn out to be lower than those
existing in firms using marginal labour. Some units pay high
wages because of a combination of favourable product market
demand, higher ability to pay and the bargaining power of a
trade union.
But a large number of them seek to be competitive in their
wage programme, i.e., they aim at paying somewhere near the
going rate in the labour market for the vari0us classes of labour
they employ.
Most units give greater weight to two wage criteria, viz., job
requirements and the prevailing rates of wages in the labour
market. Other factors, such as changes in the cost of living, the
supply and demand of labour, and the ability to pay are
accorded a secondary importance.
In the short run, the economic influence on the ability to pay is
practically nil. All employers, irrespective of their profits or
losses, must pay no less than their competitors and need pay no
more if they wish to attract and keep workers. In the long run,
the ability to pay is very important.
During the time of prosperity, employers pay high wages to
carry on profitable operations and because of their increased
ability to pay. But during a period of depression, wages are cut
because funds are not available. Marginal firms and non-profit
organisations (like hospitals and educational institutions) pay
relatively low wages because of low or no profit.
If the demand for certain skills is high and the supply is low,
the result is a rise in the price to be paid for these skills. When
prolonged and acute, these labour-market pressures probably
force most organisations to “reclassify hard-to-fill jobs at a
higher level” than that suggested by the job evaluation.
© Copy Right: Rai University
11.622.1
COMPENSATITION MANAGEMENT
The other alternative is to pay higher wages if the labour supply
is scarce; and lower wages when it is excessive. Similarly, if there
is great demand for labour expertise, wages rise; but if the
demand for manpower skill is minimal, the wages will be
relatively low.
Mescon says: “The supply and demand compensation criterion
is very closely related to the prevailing pay, comparable wage and
on-going wage concepts since, in essence, all of these remunera-
tion standards are determined by immediate market forces and
factors.
This is done for several reasons:
First, competition demands that competitors adhere to the
same relative wage level;
Second, various government laws and judicial decisions make
the adoption of uniform wage rates an attractive proposition;
Third, trade unions encourage this practice so that their
members can have equal pay, equal work and geographical
differences may be eliminated;
Fourth, functionally related firms in the same industry require
essentially the same quality of employees, with the same skills
and experience. This results in a considerable uniformity in wage
and salary rates;
Finally, if the same or about the same general rates of wages
are not paid to the employees as are paid by the organisation’s
competitors, it will not be able to attract and maintain a
sufficient quantity and quality of manpower.
Belcher and Atchison observe: “Some companies pay on the
high side of the market in order to obtain goodwill or to insure
an adequate supply of labour, while other organisations pay
lower wages because economically they have to, or because by
lowering hiring requirements they can keep jobs adequately
manned.
A sound wage policy is to adopt a job evaluation programme
in order to establish fair differentials in wages based upon
differences in job contents. Besides the basic factors provided by
a job description and job evaluation, those that are usually taken
into consideration for wage and salary administration are:
1. The organization’s ability to pay;
2. Supply and demand of labour;
3. The prevailing market rate;
4. The cost of living;
5. Living wage;
6. Productivity;
7. Trade union’s Bargaining power;
45

COMPENSATITION MANAGEMENT
Fig. 16.4 : Criteria for wage Fixation
8. Job requirements;
9. Managerial attitudes; and
10. Psychological and sociological factors;
11. Levels of skills available in the market.
Description in Detail
The Organization’s Ability to Pay
Organization decisions on job and wage structures represent a
balancing of the aforementioned forces. But the strength of
these forces varies by organization type and within organiza-
tions by job clusters.
Organizations made up largely of members of craft unions
have wage structures almost completely determined by the
union. Organizations in construction, printing and publishing,
the railroads, long shoring and maritime work, and entertain-
ment offer examples of union-oriented wage structures.
Organizations whose members come largely from a well-
organized and competitive labor market but are not unionized
have what might be called market-oriented wage structures.
Organizations of this type have only limited choices, because
jobs are easily identified and are quite uniform throughout the
market.
Banks, insurance companies, department stores, and restaurants
are organizations with primarily market-oriented wage struc-
tures. Professionals are groups of employees whose jobs have
been designed largely by the educational process they have been
through. This makes for a commonality between organizations
in the design of professional jobs.
Organizations having many specialized jobs, dealing in labor
markets too disorganized to provide adequate grading and
pricing, and lacking unionization have primarily internally
determined wage structures.
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46
Such wage structures may be influenced by product markets, but
only if labor cost is high relative to total cost. Internally
determined wage structures result from management decisions
and may range from highly rational structures flowing from job
evaluation to a system of personal rates.
Organizations in small towns, isolated locations, or nonunion
communities provide examples, as do unique organizations in
larger communities, and government employment.
Most large, unionized organizations have what might be called
union-and-product-oriented wage structures. In these organiza-
tions, wage structures represent management decisions shaped
and restrained by technology, unions, and cost-price relation-
ships, and the product market.
Technology provides some uniformity in job structures in
organizations engaged in common lines of production.
Unions, through their insistence on traditional relationships,
establish some key jobs and job clusters and provide an upward
thrust to the entire structure.
Cost-price relationships and the product market compel the
organization to resist this upward push and to make changes in
jobs and job relationships in line with such resistance. Low
ratios of labor cost to total cost and inelastic product demand,
however, reduce competitive pressures on organizations.
Organizations in many branches of manufacturing, in mining,
and in some service industries are examples of organizations
with union-and-product-oriented wage structures. Organiza-
tions with this kind of wage structure can eventually get into a
competitive bind.
Organizations with internally determined or union-and-
product-market-determined wage structures leave large portions
of wage structure decisions to management. Wage structure
determination in these organizations follows closely Dunlop’s
theory of key jobs, job clusters, and wage contours.
Key jobs acquire their status from labor markets, product
markets, and comparisons with other organizations, often
fostered by unions. Job clusters come from technologies and
employee skill groupings. Wage contours originate in customary
comparisons with other organizations, again often fostered by
unions. Custom strongly influences all three.
But although organizations can be classified as having wage
structures that are oriented primarily in one of the four ways
just outlined, organizations of any considerable size have job
clusters that fall more comfortably into one or more of the
other categories.
Organizations employing artisans, unless they are members of
an industrial union, are usually forced to develop a union-
oriented wage structure for this job cluster. All organizations
employ clerical workers, and the wage structure of the clerical job
cluster is largely market-oriented.
Professional employees (such as engineers and scientists) have
salary structures that combine market orientation and internal
determination, regardless of the major activity of the organiza-
tion. Managerial salary structures are primarily internally
determined except in very tight labor markets, without regard to
organization type.
11.622.1
Thus the typical organization develops and administers at least
four or five of the following separate wage structures: shop,
clerical, craftsmen and technicians, administrators, engineers and
scientists, sales, supervision, and executives.
Although, obviously, there will be relationships among these
separate wage structures, the strength of these relationships
varies by organization and over time.
Wage increases should be given by those organizations which
can afford them. Companies that have good sales and, there-
fore, high profits tend to pay higher wages then those which
running at a loss or earning low profits because of the high cot
of production or low sales.
In the short run, the economic influence on the ability to pay is
practically nil. All employers, irrespective of their profits. or
losses, must pay no less than their competitors and need pay no
more if they wish to attract and keep workers. In the long run,
the ability to pay is very important.
During the time of-prosperity, employers pay high wages to
carry on profit9ble operations and because of their increased
ability to pay. But during a period of depression, wages are cut
because funds are not available. Marginal firms and non-profit
organisations (like hospitals and educational institutions) pay
relatively low wages because of low or no profits.
Supply and Demand of Labour
The labour market conditions or supply and demand forces
operate at the national, regional and local levels, and determine
organizational wage structure and level.
If the demand for certain skills is high and the supply is low,
the result is a rise in the price to be paid for these skills. When
prolonged and acute, these labour-market pressures probably
force most organisations to “reclassify hard-to-fill jobs at a
higher level” than that suggested by the job evaluation. The
other alternative is to pay higher wages if the labour supply is
scarce; and lower wages when it is excessive. Similarly, if there is
great demand for labour expertise, wages rise; but if the
demand for manpower skill is minimal, the wages will be
relatively low.
Mescon says: “The supply and demand compensation criterion
is very closely related to the prevailing pay, comparable wage and
on-going wage concepts since, in essence, all of these remunera-
tion standards are determined by immediate market forces and
factors.”
Fig. 16.5 : Factors Affecting Compensation Plans
© Copy Right: Rai University
11.622.1
Please note that the labor market influences the wage and salary
COMPENSATITION MANAGEMENT
structure through the supply of labor. But organizations differ
greatly on how many of their jobs are highly market-oriented,
particularly in those organizations in which the labor supply is
mostly provided from within the organization.
As discussed earlier, most organizations replace the external
labor market with an internal labor market that makes decisions
by administrative means rather than according to supply and
demand. These organizations have restricted ports of entry,
which are highly sensitive to the labor market but rely on the
organization’s internal labor supply to fill most job openings.
The exception occurs when there is an internal and external
shortage of people to fill vacancies for specific skills. In fact, any
job for which qualified people are in short supply becomes a
market-sensitive job. But given relatively adequate labor
supplies, the labor market determines wages only if the labor
market: is structured by unions, is otherwise well organized, or
is designed to fill openings from outside the organization.
Shortages in the labor market provide those who are qualified
to fill the jobs an opportunity to negotiate better terms of
employment. A part of this negotiation is for a relative increase
in pay greater than other groups are obtaining. This, of course,
runs into the problem of customary relationships already
discussed.
But another part of the negotiations is for a “better job.”
Workers in jobs where there is a shortage of qualified workers
will demand changes in job content that will increase the job’s
value to the organization and in the eyes of other workers.
Computer programmers are an example of a group of workers
with a skill in short supply in a new and expanding industry.
The independence of action and discretion allowed this group
of employees is based, at least partially, on the continuing
shortage of this skill.
The product market also affects wage structures through cost-
oriented jobs. Such jobs exist where profit margins are sensitive
to changes in unit labor cost. If the ratio of unit labor cost to
price is critical, the jobs involved become cost-oriented jobs, and
organizations will strongly resist changes in their wage rates,
especially changes not made by other organizations.
Organizations that compete in the same product market, those
whose prices are interrelated, or those experiencing or anticipat-
ing increased competition or decreased demand may regard any
increase in unit labor costs as a threat, especially when labor cost
is a significant proportion of total costs.
On the other hand, employees in these areas often recognize the
advantageous position they are in and seek maximum advan-
tage.
Prevailing Market Rate
This is also known as the ‘comparable wage’ or ‘gain wage rate’,
and is the most widely used criterion. An organization’s
compensation policies generally tend to conform to the wage-
rates payable by the industry and the community.
This is done for several reasons:
• First, competition demands that competitors adhere to the
same relative wage level.
47
 • Second, various government laws and judicial decisions
COMPENSATITION MANAGEMENT
make the adoption of uniform wage rates an attractive
proposition.
• Third, trade unions encourage this practice so that their
members can have equal pay, equal work and geographical
differences may be eliminated.
• Fourth, functionally related firms in the same industry
require essentially the same quality of employees, with the
same skills and experience. This results in a considerable
uniformity in wage and salary rates.
• Finally, if the same or about the same general rates of
wages are not paid to the employees as are paid by the
organisation’s competitors, it will not be able to attract and
maintain a sufficient quantity and quality of manpower.
Belcher and Atchison observe: “Some’ companies pay on the
high side of the market in order to obtain goodwill or to insure
an adequate supply of labour, while other organisations pay
lower wages because economically they have to, or because by
lowering hiring requirements they can keep jobs adequately
manned.”
The Cost of Living
The cost-of living pay criterion is usually regarded as an auto
minimum equity pay criterion. This criterion calls for pay
adjustments based on increases or decreases in an acceptable cost
of living index.
In recognition of the influence of the cost of living, “escalator
clauses” are written into labour contracts. When the cost of
living increases, workers and trade unions demand adjusted
wages to offset the erosion of real wages. However, when living
costs are stable or decline the management does not resort to
this argument as a reason for wage reductions.
The Living Wage
This criterion states that wages paid should be adequate to
enable-an employee to maintain himself and his family at a
reasonable level of existence
However, employers do not generally favour using the concept
of a living wage as a guide to wage determination because they
prefer to base the wages of an employee on his contribution
rather than on his need. Also, they feel that the level of -living
prescribed in a worker’s budget is open to argument since it is
based on subjective opinion.
Productivity
It is an another criterion, and is measured in terms of output
per man- hour. It is not due to labour efforts alone. Techno-
logical improvements, better organization and management,
the development of better methods of production by labour
and management, greater ingenuity and skill by labour are all
responsible for the increase in productivity.
Actually, productivity measures the contribution. of all the
resource factors - men, machines, methods, materials and
management. No productivity index can be devised which will
measure only the productivity of a specific factor of production.
Another problem is that productivity can be measured at several
levels - job, plant, industry or national, economic level. Thus,
although theoretically it is a sound compensation criterion,
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48
operationally many problems and complications arise because
of definitional measurement and conceptual issues.
Trade Union’s Bargaining Power
Trade unions do affect rate of wages. Generally, the stronger
and more powerful the trade union, the higher the wages. A
trade union’s bargaining power is often measured in terms of
its membership, its financial strength and the nature of its
leadership.
A strike or a threat of a strike is the most powerful weapon
used by it. Sometimes trade unions force wages up faster than
increases in productivity would allow and become responsible
for unemployment or higher prices and inflation. However, for
those remaining on the pay roll, a real gain is often achieved as a
consequence of a trade union’s stronger bargaining power.
Unions affect wage structure, but the differential effects of craft
and industrial unionism and the type of bargaining relationship
are considerable. Craft unions tend to determine craft rates as
well as the design of craft jobs for all organizations employing
members of the craft.
The limit of craft rates is the cost-price resistance of employers.
Industrial unions, on the other hand, are more concerned than
craft unions with employing organizations, but less concerned
with product markets because they often bargain with organiza-
tions in many product markets.
Thus, industrial unions may attempt to impose a common
wage structure on organizations, even if the wage structure
clashes with product-market realities.
Within organizations, industrial unions are concerned with
equalities and differentials among particular groups of jobs.
They often serve to reinforce custom and tradition in jobs and
wage structures, while they resist changes that might decrease
employee security.
If the industrial union deals with organizations in a common
product market, it may attempt to impose a common job
design and wage structure by comparing rates of a number of
reasonably comparable jobs. But even in such cases, the
influence of industrial unions on wage structure is light
compared with that of craft unions.
Please note that the unions also affect wage structures by
resisting lower wage rates for jobs downgraded by technological
change and by demanding that increased productivity arising
from any source results in wage increases.
Typically this means that wages of changed jobs are not cut but
often increased when the changes result in increased productiv-
ity. Such job rates distort rational job and wage structures, and a
series of them can so impair an organization’s cost-profit
position that management is forced to fight for a revised,
rational wage structure.
Union strategy, with respect to general increases, can also affect
wage structures. Flat cents-per-hour or dollars-per-month
increases maintain absolute differentials, but compress the
structure in relative terms, whereas flat percentage increases
maintain relative differentials and increase absolute differentials.
Industrial unions especially may follow a policy of cents-per-
hour increases because most of their members are in lower-paid
11.622.1
groups. But unions cannot maintain this strategy in the face of
opposition from higher-paid groups. In fact, worker preferences
and resulting labor-supply shortages force restoration of relative
differentials in both union and nonunion situations.
But probably the strongest influence of unions on wage
structures is the quality of the union-management relationship.
As mentioned, some unions take an active part in job evalua-
tion, and their interest in a rational wage structure results in
reduced grievances over wage inequities.
Other unions, most of them craft unions, seek to preserve
customary relationships and job security, resist changes in job
content and structure, and are uninterested in the employer’s
problems of maintaining economic efficiency.
Still other unions seem totally uninterested in job designs and
the wage structure of the organization and they
1. Insist on no wage cuts when job content changes,
2. Demand wage increases for all increases in job productivity,
3. Strongly resist job-content and other changes calculated to
increase productivity, and
Encourage wage-inequity grievances. In such cases job, and wage
structures become chaotic, and correcting the irrationalities may
require long and bitter strikes, which are often prolonged by
political struggles within the union resulting from the wage
inequities.
Job Requirements
Generally, the more difficult a job, the higher are the wages
Measures of job difficulty are frequently used when the relative
value of one job to another in an organization is to be ascer-
tained. Jobs are graded according to the relative skill, effort,
responsibility, and job conditions required.
Managerial Attitudes
These have a decisive influence on the wage structure and wage
level since judgment is exercised in many areas of wage and
salary administration — including whether the firm should pay
below average, or above average rates, what job factors should
be’ used to reflect job worth, the weight to be given for
performance or length of service, and so forth, both the
structure and level- of wages are bound to bound to be affected
accordingly.
These matters require the approval of the top executives. Lester
observes, “Top management’s desire to maintain or enhance
the company’s prestige has been a major factor in the wage
policy of a number of firms.
Desires to improve or maintain morale, to attract high-caliber
employees, to reduce turnover, and to provide a high living
standard for employees as possible also appear to be factors in
management’s wage-policy decisions.
Psychological and Social Factors
These determine in a significant measure how hard a person will
work for the compensation received or what pressures he will
exert to get his compensation increased.
Psychologically, persons perceive the level of wages as a measure
of success in life; people may feel care have an inferiority
complex, seem inadequate or feel the reverse of all these.
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11.622.1
They may not take pride in their work, or in the wages get.
COMPENSATITION MANAGEMENT
Therefore, these things should not be overlooked by the
management in establishing wage rates. Sociologically and
ethically, people feel that “ equal work should carry equal wages,”
that “ wages should be commensurate with their efforts,” that “
they are not exploited, and that no distinction is made on the
basis of caste, color, sex or religion.” To satisfy the conditions
of equity, famines and justice, a management should take these
factors into consideration.
Please note that people and institutions both have a hand in
designing jobs and wage structures. Craft unions, for example,
determine the kinds of work their members do and expect
employing organizations to adjust to these decisions.
Jobs for clerical workers are structured by the institutions that
train them, with the result that clerical jobs are often quite
similar in different organizations.
Professional employees and managers insist on having a say in
the design of their jobs, and the result is influenced in part by
the institutions that train them. At the other extreme are
semiskilled factory employees.
Organizations employing these workers are subject to little
influence on job design by either employees or unions, except in
job-redesign decisions. Unions of semiskilled factory workers
typically insist, however, on participating in the latter decisions.
This participation is guided by customary relationships among
and within employee groups. Custom also operates in non-
union situations, causing resistance to change in job design.
A further societal influence on jobs and wage structures is the
technology used by the organization and changes in that
technology. But technology seldom provides rigid boundaries.
It typically provides choices within which management, unions,
and competitive pressures can operate in designing jobs and job
relationships.
Skill Levels Available in the Market
With the rapid growth of industries, business trade, there is
shortage of skilled resources. The technological development,
automation have been affecting the skill levels at a faster rates.
Thus the wage levels of skilled employees are constantly
changing and an organization has to keep its level upto suit the
market needs.
From the last lessons, it is clear that organizations determine
the pay for jobs by taking a number of considerations into
account. Furthermore, they have considerable choice as to how
much emphasis to place on various determinants.
These choices lead in turn to variations in the wage structures
that organizations create. But organizations do not have total
freedom in the design of wage structures. Besides the determi-
nants so far considered, there are a number of other influences
on the design of wage structures that will be considered in this
section.
These influences are often indirect in that they influence the
design of jobs and therefore the way the organization is likely
to evaluate it in relation to other organization jobs.
49
 Introduction to Salary Administration
COMPENSATITION MANAGEMENT
It comprehends systems and procedures designed for purposes
of efficiently managing the compensation of organisational
members.
The wage policies of different organizations vary somewhat.
Marginal units pay the minimum necessary to attract the
required number and kind of labour. Often, these units pay
only the minimum wage rates required by labour legislation,
and recruit marginal labour.
At the other extreme, some units pay well above the going rates
in the labour market. They do so to attract and retain the
highest calibre of the labour market. They do so to attract and
retain the highest calibre of the labour force.
Some managers believe in the economy of higher wages. They
feel that, by paying high wages, they would attract better
workers who will prod use more than the average worker in the
industry. This greater production per employee means greater
output per man hour.
Hence, labour costs may turn out to be lower than those
existing in firms using marginal labour. Some units pay high
wages because of a combination of favourable product market
demand, higher ability to pay and the bargaining power of a
trade Union.
But a large number of them seek to be competitive in their
wage programme, i.e., they aim at paying somewhere near the
going rate in the labour market for the vari0us classes of labour
they employ.
Most units give greater weight to two wage criteria, viz., job
requirements and the prevailing rates of wages in the labour
market. Other factors, such as changes in the cost of living, the
supply and demand of labour, and the ability to pay are
accorded a secondary importance.
In the short run, the economic influence on the ability to pay is
practically nil. All employers, irrespective of their profits or
losses, must pay no less than their competitors and need pay no
more if they wish to attract and keep workers. In the long run,
the ability to pay is very important.
During the time of prosperity, employers pay high wages to
carry on profitable operations and because of their increased
ability to pay. But during a period of depression, wages are cut
because funds are not available. Marginal firms and non-profit
organisations (like hospitals and educational institutions) pay
relatively low wages because of low or no profit.
If the demand for certain skills is high and the supply is low,
the result is a rise in the price to be paid for these skills. When
prolonged and acute, these labour-market pressures probably
force most organisations to “reclassify hard-to-fill jobs at a
higher level” than that suggested by the job evaluation.
The other alternative is to pay higher wages if the labour supply
is scarce; and lower wages when it is excessive. Similarly, if there
is great demand for labour expertise, wages rise; but if the
demand for manpower skill is minimal, the wages will be
relatively low.
Mescon says: “The supply and demand compensation criterion
is very closely related to the prevailing pay, comparable wage and
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50
on-going wage concepts since, in essence, all of these remunera-
tion standards are determined by immediate market forces and
factors.
This is done for several reasons:
• First, competition demands that competitors adhere to the
same relative wage level.
• Second, various government laws and judicial decisions
make the adoption of uniform wage rates an attractive
proposition.
• Third, trade unions encourage this practice so that their
members can have equal pay, equal work and geographical
differences may be eliminated.
• Fourth, functionally related firms in the same industry
require essentially the same quality of employees, with the
same skills and experience. This results in a considerable
uniformity in wage and salary rates.
• Finally, if the same or about the same general rates of
wages are not paid to the employees as are paid by the
organisation’s competitors, it will not be able to attract and
maintain a sufficient quantity and quality of manpower.
Belcher and Atchison observe: “Some companies pay on the
high side of the market in order to obtain goodwill or to insure
an adequate supply of labour, while other organisations pay
lower wages because economically they have to, or because by
lowering hiring requirements they can keep jobs adequately
manned.
Control or Administration of Wages and
Salaries
Wage and salary administration should be controlled by some
proper agency. This responsibility may be entrusted to the
personnel department or to some job executive. Since the
problem of wages and salary is very delicate and complicated, it
is usual entrusted to a Committee composed of high-ranking
executives representing major line organizations.
The major functions of such Committee are:
i. Approval and /or recommendation to management on job
evaluation methods and findings;
ii. Review and recommendation of basic wage and salary
structure;
iii. Help in the formulation of wage policies from time to
time;
iv. Co-ordination and review of relative departmental rates to
ensure conformity; and
v. Review of budget estimates for wage and salary
adjustments and increases.
This Committee should be supported by the advice of the
technical staff. Such staff committees may be for job evaluation,
job description, merit rating, wage and salary survey an industry,
and for a review of present wage rates, procedure and policies.
Alternatively, the over-all plan is first prepared by the Personnel
Manager in consensus and discussions with senior members of
other departments. It is then submitted for final approval of
the top executive.
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Once he has given his approval, for the wage and salary structure

COMPENSATITION MANAGEMENT
and the rules for administration, its implementation becomes a
joint effort of all heads of the departments.
The actual appraisal of the performance of subordinates is
carried out by the various managers, who in turn submit their
recommendations to higher authority and the latter, in turn, to
the personnel department.
The personnel department ordinarily reviews recommendations
to ensure compliance with established rules of administration.
In unusual cases of serious disagreement, the president makes
the final decision.
Principles of Salary Formulation
The main factors affecting salary levels within an organisation
are:
External relativities: market rates as affected by supply and
demand and general movements in pay levels.
Internal relativities: salary relativities between jobs within the
organisation depending on the values attached to different jobs.
Individual worth: the value of the individual’s performance to
the organisation.
Description
External Relativities
A salary is a price indicating, like any other price, the value of the
service to the buyer and seller; the employer and the employed.
The going rate ‘for a job is its market rate, and many will claim
that a job is worth what the market says it is worth. External Stage 1. Self contained model where external influence is
equity is a fundamental aim of any salary system. marginal
If insufficient attention is given to market rates your Stage2. Depicting the interplay of external and internal influ-
organisation may not be able to attract and retain good quality ence.
personnel. Although internal salary structure is not directly and The salary structure of an enterprise is built on the premise that
instantaneously responsive to market forces at all points, the each job has its own price. This is determined by the scientific
general structure must reflect the changing pressures of the job evaluation method and/or by the going rate in the area.
market.
Besides this, there are many region-cum-industry settlements
Internal Relativities like the agreement between the management and the union of
The value of a job within an organisation is relative. Within an industry in a particular geographic region, which may form
your own organisation, pay levels will be affected by real or the basis for wage fixation.
perceived differences between the value of jobs. In this sense,
The wages that an employer is willing to pay depends on his
the value of a job is comparative.
philosophy, his capacity to pay, his competitive position and his
The ideal salary structure should establish and maintain ability to attract and retain a workforce by factors other than
appropriate differentials based on an objective system of wages.
measuring relative internal values. As we have seen in an earlier
The government has always played a significant role in the
unit, we must take recourse to job evaluation to arrive at this
determination of wages in the organised sector. You are
internal relative values of jobs. However I when you design
probably aware that there are a number of laws to ensure
such an ideal structure you must also take account of external as
payment of a minimum wage and payment on time.
well as internal pressures.
Moreover, given the imbalanced positions of the employer and
Individual Worth the employee, the government has had often to appoint wage
Although the value of a job is relative to other jobs inside and boards to determine the wages in particular industries: You are
outside the organisation, the value of a person in the job is also perhaps aware of the labour courts and industrial tribunals
something very specific to that individual. Hence, his salary set up by the government to settle wage disputes by adjudica-
should be influenced by his performance. tion.
The salary system should, as far as possible, enable the indi- In unionized industries/organisations wages/salaries can be
viduals to be rewarded according to the contribution and not determined through the bilateral process of collective bargain-
restricted by the artificial barriers contained in a rigid salary ing. However, when such processes break down or reach a
structure.

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11.622.1 51
 deadlock, recourse is taken to government machineries of-
COMPENSATITION MANAGEMENT
labour tribunals arid law courts.
Principles of Wages and Salary
Administration
The generally accepted principles governing the fixation of
wages and salary are:
i. There should be definite plan to ensure that differences in
pay for jobs are based upon variations in job requirements,
such as skill effort, responsibility or job or working
conditions, and mental and physical requirements.
ii. The general level of wages and salaries should be reasonably
in line with that prevailing in the labour market. The labour
market criterion is most commonly used.
The plan should carefully distinguish between jobs and
employees.
A job carries a certain wage rate, and a person is assigned to fill it
at that rate. Exceptions sometimes occur in very high-level jobs
in which the job holder may make the job large or small,
depending upon his ability and contributions.
Equal pay for equal work i.e., if two jobs have equal difficulty
requirements, the pay should be the same, regardless of who
fills them.
An equitable practice should be adopted for the reorganization
of individual differences in ability and contribution.
For some units, this may take the form of rate ranges, with in –
grade increases, in others, it may be a wage incentive plan. In still
others, it may take the form of closely integrated sequences of
job promotion.
There should be a clearly established procedure for hearing and
adjusting wage complaints. This may be integrated with the
regular grievance procedure, if it exists.
The employees and the trade union, if there is one, should be
informed of his own position, and of the wage and salary
structure. Secrecy in wage matters should not be used as a cover-
up for haphazard and unreasonable wage programme.
The wage should be sufficient to ensure for the worker and his
family reasonable standard of living. Workers should receive a
guaranteed minimum wage to protect them against conditions
beyond their control.
The wage and salary structure should be flexible so that
changing conditions can be easily met. Prompt and correct
payments of the dues of the employees must be ensured and
arrears of payment should not accumulate.
For revision of wages, a wage committee should always be
preferred to the individual judgment, however unbiased, or a
manager.
The wage and salary payments must fulfill a wide variety of
human needs, including the need for self-actualization. It has
been recognized that “ money is the only form of incentive
which is wholly negotiable, appealing to the widest possible
range of seekers…. Monetary payments often act as motivators
and satisfiers interdependently of other job factors.
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Summary of Wage Determination Process and
Administration Rules
Organizations wish to pay for more than just the job that the
employee does. Employees contribute both in terms of
membership (staying on the job) and being productive while
on the job. Both of these sets of contributions need to be
rewarded by the organization.
Wage structures deal with rewarding these sets of contributions
by establishing rate ranges for jobs. This allows for variable pay
rates for employees on the same job and/or in the same pay
grade.
The breadth of the rate range (distance from top to bottom) is
a matter of judgment for the designer of the wage structure.
Further, the decision is interrelated with other factors in the
wage structure, namely the distance from top to bottom of the
entire wage structure, the number of pay grades, and the
amount of overlap between grades.
The design of rate ranges may vary from a structured set of
steps a given percentage apart to an open range in which only
the minimum, midpoint and maximum are defined. Picking
the type of range depends largely on the factors that the
organization wishes to reward.
Step systems do a good job of rewarding membership and
seniority. Open ranges allow the organization to more clearly
recognize variable performance. There is an aspect of rewarding
both in either case, so the choice is one of emphasis and not of
kind.
In administering the movement of employees within rate
ranges, compensation specialists face a number of problems.
Recruitment in the labor market may require the organization to
hire new employees at advanced positions on the range. This in
turn can lead to compression, as current employees are paid less
than new employees.
Keeping employees within the rate range is a constant problem.
One of the most pervasive problems is keeping the focus of
increases on performance; supervisors and employees alike are
more comfortable with seniority increases.
Last, while other aspects of compensation administration are
often centralized in the hands of compensation staff, the
determination of pay increases within grade must involve all
supervisors in the organization.
We have also examined a radically different type of pay system,
that of skill-based pay. In this system employees are paid for
the range of skills that they bring to the job that are useful in
performing the job. As employees learn more skills they are paid
more.
These types of plans can provide the organization with a well-
trained work force, flexible as to work assignments and
interested in the work. It can also be more costly, require too
many people in training, and be difficult to integrate with the
traditional wage structure of the organization.
Aims of Salary Administration
The aim of salary administration is to develop and maintain a
salary system of policies and procedures. A well-developed
salary system will enable your organisation to attract, retain and
motivate people of the required caliber and qualifications.
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Such a system should also be able to control your payroll costs.

COMPENSATITION MANAGEMENT
These aims and objectives have to be seen in greater depth from
the point of view of the organisation, its individual staff, and.
collectively.
Organisational Aims
The salary system should be tailored to meet the organisation’s
special needs and should be easily capable of modification in
response to change.
In particular the aim of the system should be:
1. Ensure that the organisation can recruit the quantity and
quality of staff it requires;
2. Encourage suitable staff to remain with the organisation;
3. Provide rewards for good performance and incentives for
further improvements in performance;
4. Achieve equity in pay for similar jobs;
5. Create appropriate differentials between different levels of
jobs in accordance with their relative value;
6. Operate flexibly enough to accommodate organisational
changes and relations in the relative market rates for
different skills
7. Be simple to explain, understand, operate and control
8. Be cost-effective in the sense that the benefits of the system
are obtained without undue expense
Individual Aims
The individual wants to feel that he is being treated fairly, and
he expects to be paid according to his own evolution of his
worth. His assessment will be based on comparisons with
market rates for similar jobs elsewhere and with the pay received
b other staff in the organisation.
Collective Aims
The objective of trade unions and staff associations must be to
obtain the maximum benefits for their members. They will
want their members’ pay to keep ahead of inflation, to match
or exceed market rates and to reflect any increase in the prosper-
ity of the company.
Moreover, they will also want an equitable system and may
object to merit review schemes based on management discre-
tion, because they are thought to be arbitrary and unfair.
Tutorial Activity 1.1
Questions
1. Discuss the factors influencing wage and salary structure?
2. Throw light on the principles of wage and salaries
administration.
3. Explain the importance of maintenance of a smooth wage
and salary administration in organizations.

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11.622.1 53
COMPENSATITION MANAGEMENT
LESSON 8:
INTRODUCTION TO THE THEORY OF WAGES
Learning Objective
• To further understand the concept of wages
• To understand different Theory of wages
• The Employee’s Acceptance of a Wage Level
• The Internal Wage Structure
• Wage and Salaries and Motivators
• To know the relation between Labour and Wages
Wages
Wages in the widest sense mean any economic compensation
paid by the employer under some contrast to his workers for
the services rendered by them. Wages, therefore, include family
allowance, relief pay, financial support and other benefits.
But, in the narrower Sense wages are the price paid for the
services of labor in the process of production and include only
the performance wages or wages proper. They are composed of
two parts - the basic wage and other allowances.
The basic wage is the remuneration, by way of basic salary and
allowances, which is paid or payable to an employee in terms of
his contract of employment for the work done by him.
Allowances, on the other hand, are paid in addition to the basic
wage to maintain the value of basic wages over a period of
time.
Such allowances include holiday pay, overtime pay, bonus and
social security benefits. These are usually not included in the
definition of wages.
However, in India, different Acts include different items under
wages, though all the Acts include basic wage and dearness
allow come under the term wages. For example, under the
Workmen’s Compensation Act, 1923, Section 2 (m), “wages for
leave period, holiday pay, overtime pay, bonus, attendance
bonus, and good conduct bonus” form part of wages.
Under the payment of wages act, 1936 section 2 (VI) “any
award of settlement and production bonus, if paid, constitutes
wages.”
But under the Payment of Wages Act, 1948, “retrenchment
compensation, payment in lieu of notice and gratuity payable
on discharge constitute wages.”
The following type of remuneration, if paid, do not amount to
wages under any of the Acts:
i. Bonus or other payments under a profit-sharing scheme
which do not form a part of the contract of employment.
ii. Value of any house accommodation, supply of light, water,
medical attendance, traveling allowance; or -payment in lieu
thereof or any other concession.
iii. Any sum paid to defray special expenses entailed by the
nature of the employment of a workman.
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iv. Any contribution to pension, provident fund, or a scheme
of social security and social insurance benefits.
v. Any other amenity or service excluded from the
computation of wages by a general or special order of an
appropriate governmental authority.
A wage level is an average of the rates paid for the jobs of an
organization, an establishment, a labour market, an industry, a
region or a nation. A wage structure is a hierarchy of jobs to
which wage rates have been attached.
Labor and Wages
The type of job one does and the financial compensation he or
she receives are very important in our society. Job type is linked
to status as is wealth. While the type of job one performs is
arguably more important status wise then wealth, both are
important to Americans.
In the past we used to use other descriptions to classify
workers. The terms blue collar or white collar employees were
used to describe the type of vocation.
Blue Collar - Manual laborers
White Collar - Officer workers
Pink Collar - Jobs associated with women like nursing,
secretarial, etc. This being a rather sexist term, is no longer used.
Today we classify our work roles into three categories called
labor grades. The se labor grades are described below:
Skilled Labor
These are workers who have received specialized training to do
their jobs. They have developed and honed a special skill and
may or may not need to be licensed of certified by the state.
Some examples of skilled labor are: carpenters, plumbers,
electricians, business executives and managers, artisans, accoun-
tants, engineers, police, mechanics, etc. These may be blue or
white collar workers.
Unskilled Labor
These are workers who have received no special training and
have few specific skills. As our society has grown into an
increasingly technological one, the members of this group have
developed more and more skills. A mechanic, for example, used
to be considered unskilled labor.
Today that is no longer the case. Mechanics require a great deal
of skill and training to work with today’s modern engines.
Examples of unskilled laborers are construction workers,
sanitation and custodial workers, painters, factory assembly line
workers, etc. These are blue collar workers.
Professionals
Arguably the elite of the labor grades, these are those workers
who need an advanced degree to do their jobs. The three
primary groups of professional are doctors, lawyers and
teachers. These are white collar workers.
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These labor grades are often said to be non competing labor
grades because workers rarely move from one grade to another
and do not compete salary wise with each other. There are
reasons why they do not compete with each other.
The cost of education and training may be a significant obstacle.
They might lack the opportunity to make such a move and they
might also have a lack of initiative.
Theory of Wages
There are two key theories that explain why salaries are the way
they are in a particular field. These two theories are:
Traditional Theory of Wage Determination
In this theory the law of supply and demand dictates salary.
These days programmers are in short supply and are in great
demand thus they will command a higher salary.
Likewise doctors and lawyers whose specialized skills people
need command a high wage. If you looked at the bill my
electrician gave me you would know he is in demand!
Theory of Negotiated Wages
Those employees who work in unions where the union
negotiates salary on behalf of all workers fit into this theory.
Since I am a teacher my salary is set by collective bargaining with
my union. I may be the best teacher in the world sought after
by many students and parents but it wouldn’t matter.
However, different methods of wage payment are prevalent in
different industries and in various countries. There may be
payment by time or payment by results, including payment at
piece rates.
Wages are fixed mainly as a result of individual bargaining,
collective bargaining or by public or State regulation. How wages
are determined has been the subject of several theories of
wages. The main elements in these theories may be summed up
as follows:
Below is mentioned the theory of Wages:
1. Subsistence theory
2. Wages fund theory
3. The surplus value theory of wages
4. Residual claimant theory
5. Marginal productivity theory
6. The bargaining theory of wages
7. Behavioural theories
Now let us discuss the theory of Wages in detail:
1. Subsistence Theory
This theory, also known as ‘Iron Law of Wages,” was pro-
pounded by David Ricardo (1772-1823). This theory (1817)
states that: “The laborers are paid to enable them to subsist and
perpetuate the race without increase or diminution.”
The theory was based on the assumption that if the workers
were paid more than subsistence wage, their numbers would
increase as they would procreate more; and this would bring
down the rate of wages.
If the wages fall below the subsistence level, the number of
workers would decrease - as many would die of hunger,
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11.622.1
malnutrition, disease, cold, etc. and many would not marry,
COMPENSATITION MANAGEMENT
when that happened the wage rates would go up.
In economics, the subsistence theory of wages states that
wages in the long run will tend to the minimum value needed
to keep workers alive. The justification for the theory is that
when wages are higher, more workers will be produced, and
when wages are lower, some workers will die, in each case
bringing supply back to a subistence-level equilibrium.
The subsistence theory of wages is generally attributed to David
Ricardo, and plays a large role in Marxist economics. Most
modern economists dismiss the theory, arguing instead that
wages in a market economy are determined by marginal
productivity
2. Wages Fund Theory
This theory was developed by Adam Smith (1723-1790). His
basic assumption was that wages are paid out of a pre-
determined fund of wealth which lay surplus with wealthy
persons - as a result of savings.
This fund could be utilized for employing laborers for work. If
the fund was large, wages would be high; if it was small, wages
would be reduced to the subsistence level. The demand for
labour and the wages that could be paid them were determined
by the size of the fund.
3. The Surplus Value Theory of Wages
This theory owes its development to Karl Marx (1818-1883).
According to this theory, the labour was an article of commerce,
which could be purchased on payment of ‘subsistence. price.’
The price of any product was determined by the labour time
needed for producing it. The labourer was not paid in propor-
tion to the time spent on work, but much less, and the surplus
went over, to be utilized for paying other expenses.
Marx himself considered his theory of surplus-value his most
important contribution to the progress of economic analysis
(Marx, letter to Engels of 24 August 1867).
It is through this theory that the wide scope of his sociological
and historical thought enables him simultaneously to place the
capitalist mode of production in his historical context, and to
find the root of its inner economic contradictions and its laws
of motion in the specific relations of production on which it is
based.
4. 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.
5. Marginal Productivity Theory
This theory was developed by Phillips Henry Wicksteed
(England) and John Bates Clark (USA). According to this
theory, wages are based upon an entrepreneur’s estimate of the
value that will probably be produced by the last or marginal
worker. In other words, it assumes that wages depend upon
the demand for, and supply of, labour.
55
 Consequently, workers are paid what they are economically
COMPENSATITION MANAGEMENT

worth. The result is that the employer has a larger share in profit
as has not to pay to the non-marginal workers. As long as each
additional worker contributes more to the total value than the
cost in wages, it pays the employer to continue hiring; where
this becomes uneconomic, the employer may resort to superior
technology.
6. The Bargaining Theory of Wages
John Davidson propounded this theory. Under this theory,
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.
7. Behavioural Theories
Many behavioral scientists - notably industrial psychologists and
sociologists like Marsh and Simon, Robert Dubin, Eliot Jacques
have presented their views or wages and salaries, on the basis of
research studies and action programmes conducted by them.
Briefly such theories are:
The Employee’s Acceptance of a Wage Level
This type of thinking takes into consideration the factors, which
may induce an employee to stay on with a company. The size
and prestige of the company, the power of the union, the
wages and benefits that the employee receives in proportion to
the contribution made by him - all have their impact.
The Internal Wage Structure
Social norms, traditions, customs prevalent in the organization
and psychological pressures on the management, the prestige
attached to certain jobs in terms of social status, the need to
maintain internal consistency in wages at the higher levels, the
ratio of the maximum and minimum wage differentials, and
the norms of span of control, and demand for specialized
labour all affect the internal wage structure of an organization.
Wage and Salaries and Motivators
Money often is looked upon as means of fulfilling the most
basic needs of man. Food, clothing, shelter, transportation,
insurance, pension plans, education and other physical mainte-
nance and security factors are made available through the
purchasing power provided by monetary income - wages and
salaries.
Merit increases, bonuses based on performance, and other
forms of monetary recognition for achievement are genuine
motivators. However, basic pay, cost of living increases, and
other wage increases unrelated to an individual’s own productiv-
ity typically may fall into maintenance category.
Tutorial Activity 1.1
Questions
1. Explain the importance of the theory of wages.
2. State the difference between blue collar, white collar and
pink collar employees.
3. What are the different types of theory of wages. Explain in
detail.

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56 11.622.1

LESSON 9:
INTRODUCTION TO MINIMUM, FAIR AND LIVING WAGE
Learning Objective
• To know the concept of Statutory, Bare or Basic Minimum
Wage
• To understand Fair Wage
• To understand Living Wage
• The Need-Based Minimum Wage
Some new terms have gained currency in India after indepen-
dence. There are:
Statutory Minimum Wage
It is the wage determined according to the procedure prescribed
by the relevant provisions of the Minimum Wages Act, 1948.
Once the rates of such wages are fixed, it is the obligation of
the employer to pay them, regardless of his ability to pay. Such
wages are required to be fixed in certain employments where
“sweated” labour is prevalent, or where there is a great chance of
exploitation of labour.
Bare or Basic Minimum Wage
It is the wage, which is to be fixed in accordance with the awards
and judicial pronouncements of Industrial Tribunals, National
Tribunals and Labour Courts. They are obligatory on the
employers.
Minimum wage, and fair wage and living wage are the terms
used by The Report of the Committee on Fair Wages, set up by
the Government in 1948 to determine the principles on which
fair wages should be based and to suggest how these principles
should be applied. According to this Committee, the minimum
wage should represent the lower limit of a fair wage. The next
higher level is the fair wage, and the highest level of the fair
wage is the living wage.
A Minimum Wage
It 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, for their medical care and for some
amenities.
The question of determining the minimum wage is a very
difficult one for more than one reason. Conditions vary from
place to place, industry to industry and from worker to worker.
The standard of living cannot be determined accurately.
What then should be the quantum of the minimum wage?
What is the size of the family it should support?
Who should decide these questions?
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11.622.1
COMPENSATITION MANAGEMENT
These issues are very difficult to decide. Moreover, since the cost
of living varies with the price level, it follows that this index
should be periodically reviewed and modified.
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 suste-
nance of life but also for the preservation of the efficiency of
the workers by way of education, medical care and other
amenities.
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. This obviously
implied a high level of living.
Such a wage was so determined by keeping in view the national
income, and the capacity to pay of an industry. The Committee
was of the opinion that although the provision of a living
wage should be the ultimate goal, the present level of national
income did not permit of the payment of a living wage on the
basis of the standards prevalent in more advanced countries.
The goal of a living wage was to be achieved in three stages. In
the first stage, the wage to be paid to the entire working class
was to be established and stabilized. In the second stage, fair
wages were to be established in the community-cum-industry.
In the third stage, the working class was to be paid the living
wage.
The living wage may be somewhere between the lowest level of
the minimum wage and the highest limit of the living wage,
depending upon the bargaining power of labour, the capacity
of the industry to pay, the level of the national income, the
general effect of the wage rise on neighboring industries, the
productivity of labour, the place of industry in the economy of
the country, and the prevailing rates of wages in the same or
similar occupations in neighboring localities.
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.”
57
 Between these two limits, the actual wages should depend on
COMPENSATITION MANAGEMENT
considerations of such factors as:
a. The productivity of labour;
b. The prevailing rates of wages in the same or neighbouring
localities;
c. The level of the national income and its distribution; and
d. The place of industry in the economy of the country.
The Need-Based Minimum Wage
The Indian Labour Conference, at its 15th session held in July
1957, suggested that minimum, wage fixation should be need-
based, and should meet the minimum needs of an industrial
worker.
For the calculation of the minimum wage, the Conference
accepted the following norms and recommended that they
should guide all wage-fixing authorities, including the Mini-
mum Wage Committee, Wage-Boards, and adjudicators:
i. The standard working class family should be taken to
consist of 3 consumption units for the earner; the earnings
of women, children and adolescents should be disregarded;
ii. The minimum food requirements should be calculated on
the basis of the net intake of 2,700 calories, as
recommended by Dr. Akroyd, for an average Indian adult
of moderate activity.
iii. The clothing requirements should be estimated at a per
capita consumption of 18 yards per annum, which would
mean, for an average worker’s family of four, a total of 72
yards;
iv. In respect of housing, the norms should be the minimum
rent charged by the Government in any area for houses
provided under the Subsidized Housing Scheme follow-
income groups; and
v. Fuel, lighting and other miscellaneous items of expenditure
should constitute 20 per cent of the total minimum wage.
Ever since the I.L.C. made its recommendations on the need-
based minimum wage, attempts were made by several
government and private agencies and trade union organizations
to work out is monetory equivalent. These estimates have
varied considerably.
Tutorial Activity 1.1
Questions
1. What are the different types of wages?
2. What is the difference between minimum wage, living wage
and fair wage?
3. What do you understand by the term need-based
minimum wage and explain the importance of it in
compensation management?
4. Identify an organization, study it’s compensation package
and find out the kind of wage level offered by it to it’s
employees.
Tutorial Activity 1.2
Now let us study from the notification below “The minimum
wages notified by the Government of Madhya Pradesh” and
the employees covered under it.
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58
Labour Bureau
Government of
India
Report
Onevaluation studies on
implementation of The minimum
wages act, 1948
In bidi making establishments in
Madhya pradesh
Wages, Earnings and Hours of Work
5.1 Introduction
5.1.1 The Minimum Wages Act, 1948 is both a protective and
beneficial legislation guaranteeing the payment of minimum
rates of wages to the workers in the various Scheduled Employ-
ments scattered over different parts of the country. Although
the Act does not provide for registration of establishments, yet
it is applicable to employments where the workers are particu-
larly vulnerable to exploitation, due to ignorance, poverty,
illiteracy and lack of bargaining power.
The workers in bidi industry are scattered over large areas and
do not have collective bargaining power. Therefore, they are in
need of protection. The Act empowers both the Central and
the State Governments to fix and revise the minimum rates of
wages in the Scheduled Employments falling under their
respective jurisdictions.
The bidi making establishments fall under the Scheduled
Employment “Tobacco” (including Bidi Making) Manufacto-
ries’ in the State Sphere. Therefore, the responsibility for
implementation of the provisions of the Minimum Wages Act,
1948 rests with the State Governments. They notify the
minimum wages for bidi workers within their jurisdiction.
5.1.2 In Madhya Pradesh, the rates of minimum wages for
Bidi Rollers are fixed on a piece rate basis (number of bidis
rolled), the traditional measure being per thousand bidis.
However, fixation and revision of minimum wages is of no
consequence unless these are actually paid to them.
The problems of the bidi workers continue to be a cause of
concern for the labour administrators and enforcement
authorities as the workers often complain of the unfair
treatment at the hands of manufacturers, Contractors and
agents in matters of rejection of finished products, issue of
inadequate quantity and poor quality of raw material (tendu
leaves, tobacco, thread, etc.) as well as the violation of the
provisions of the Bidi and Cigar Workers (Conditions of
Employment) Act, 1966, the Minimum Wages Act, 1948 and
the Equal Remuneration Act, 1976.
The Regional Labour Ministers Conference held during 1994-95
had endorsed the recommendations of the Ministry of Labour
for the Constitution of a Tripartite Standardisation and District
Level Vigilance Committee and had made the following
recommendations in respect of bidi workers:-
11.622.1
The minimum quantity of raw material to be issued should be In bidi making industry all the time-rated (monthly/daily paid)

COMPENSATITION MANAGEMENT
800 grams of tendu leaf of standard average quality and 300 workers other than the above mentioned piece rated categories
grams of tobacco for 1000 bidis of standard size. have been classified into three broad categories as Skilled, Semi-
The wage loss due to rejection should not be more than 2.5 skilled and Unskilled workers.
percent instead of 5 percent. The occupations’ which comprise these three skill catego-
Alternatively, the rejected bidis should be returned to workers ries are as under: -
after deducting proportionate cost of tendu leaf and tobacco
issued to them at the rates to be fixed by the State Govern- 1. Skilled : Driver (Heavy Vehicle), Accountant,
Munim, Cashier, Store Keeper, Head Clerk,
ments from time to time alongwith wages. Godown keeper
The State Governments as well as Welfare Commissioners have 2.Semi-Skilled : Sorter/Checker, Bhattiwala, Driver (Light
been requested to give wide publicity to the statutory provisions Vehicle), Typist, Billman, Clerk
of the Bidi and Cigar Workers (Conditions of Employment) 3.Unskilled: Loader, Un-loader, Puda Maker and
Act, 1966, pertaining to rejection of not more than 2.5 percent Chowkidar.
bidis of sub-standard quality and ensure that employer/
Contractor supplies tendu leaf of the optimum quality to the Prescribed rates of Minimum Wages (including V.D.A.) for
workers. * time rated employees were as below:
* Annual Report 1999-2000, Ministry of Labour, Government Sl. No. Skill Category Monthly Daily Wages
of India, Wages (Rs.) (Rs.)
1. Skilled 1995.44 76.75
5.2 Prescribed Rates of Minimum Wages
2. Semi-Skilled 1828.30 70.32
‘Tobacco (including bidi making) Manufactories’ is a Scheduled 3. Unskilled. 1662.80 63.95
Employment originally included in Part-I of the Schedule
appended to the Act. The minimum wages applicable to the N.B.- The wages include the variable dearness allowance.
bidi workers at the time of the Study were notified by the State 5.2.1 These wages have been linked to 1206 points of the
Government of Madhya Pradesh as provided under Section Labour Bureau Series of All-India Consumer Price Index
3(1)(b) and Section 5 of the Minimum Wages Act, 1948.Prior to Numbers for Industrial Workers (Base 1960=100).The Variable
1953, Minimum Wages were fixed at Re. 0.62 to Rs. 1.37 per Dearness Allowance (VDA) is payable at the rate of 1 paisa per
thousand bidis. point for an increase of 930 points over 1206 points upto
These wages were revised to Rs. 2.00-2.25 for the first time in 30.09.2001.
1966.Since then they have been revised several times. The latest 5.2.2 The revised rates of minimum wages are subject to the
wage revision, which was in force at the time of the study, had following conditions:-
become effective from 1st October, 2000 vide notification No.
1/9/A/5/97/32759-33288 dated 12-10-2000. The variable dearness allowances shall be calculated on 1st
October of every year on the basis of the average indices for
The minimum rates of wages for various categories of twelve months i.e., July to June of the preceding year.
employees in Tobacco (including Bidi Making) Manufactories
appearing in Part I of the Schedule were linked to the Con- The revised rates of daily wages are to be worked out by
sumer Price Index Numbers (Industrial Workers).The revised dividing the monthly rates by 26 days.
rates of minimum wages applicable during the period of study Wherever the prevailing wages are higher, the revised wages will
are given below:- not have adverse effect on any employee in any case and the
higher rates shall continue to be paid.
An employee shall be entitled to a guaranteed minimum wage
Prescribed Minimum rates ofWages for piece rated employees
Class of Employees Minimum Wages ( in Rs.) of Rs.178.00 in case the employer fails to supply sufficient
1. Bidi Rolling 36.17(per thousand bidis) quantity of raw material for rolling 5600 bidis per week.
2. Wrapping/Packing/Labelling Rs. 19.65 per thousand bundles
(a) Pasting of Slips on bidi bundles Rs. 22.00 perthousand bundles The guaranteed wage will include the actual number of bidis
(i) Labelling, Puda Making etc. Rs. 15.85 per thousand bundles made by an employee during a week from the raw material
(ii) Labelling on both sides of bundles Rs. 11.26 per thousand bundles supplied to him.
(b) Wrapping and Labelling Rs.4.76 per thousand bundles
(i) Thin paper labelling Rs.5.01 perthousand bundles An employee shall not be entitled to the guaranteed wages if he
(ii)Thin paper sticking Rs. 68.35 perlakh bidis
(iii)Labelling Rs. 81.05 perlakh bidis fails to make full use of the raw material supplied to him while
(iv)Puda Making Rs. 81.05 per lakh bidis the raw material so supplied is sufficient for rolling 5600 bidis
( c) Wrapping on 1000 bundle (each per week.
bundle of 25 bidis)
(i) Wrapping of Horizontal & Vertical In case an employer fails to supply raw material due to certain
Strips conditions like fire, distress, epidemic etc., which are not under
(ii)Wrapping/Pasting of paper
(iii)Wrapping and Pasting of Trade Mark his control, an employee shall not be entitled to the guaranteed
wages.

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11.622.1 59
 5.3 Mode of Payment 5.4 Wage Period
COMPENSATITION MANAGEMENT

5.3.1 Section 3(2) of the Minimum Wages Act, 1948 5.4.1 Section 3 (3b) of the Minimum Wages Act, 1948
empowers the Appropriate Governments to fix the minimum provides for different wage periods ranging from hour to
rates of wages either for time rated work or for piece-rated month. The minimum wages notified by the Government of
work. In bidi making establishments employers have adopted Madhya Pradesh for different types of operations were either
both the systems of payment of wages i.e., ‘time rate’ and time rated or piece rated. The wage periods adopted by the bidi
‘piece rate’. Wages for bidi rolling, wrapping, packing and manufacturers for different categories of employees covered by
labelling operations are paid on ‘piece rate basis’ while those in the study are presented in Table 5.3.
all other operations on ‘time rate basis’.The stratum-wise Table 5.3 Percentage Distribution of Bidi Employees
system of payments is shown in Table 5.1. According to Wage-periods
Table 5.1 Percentage Distribution of Employees by
Stratum and System of Payments Sl. No. Categories of Employees Percentage of Employees paid
Monthly Weekly Total
1 Wrapper/Labeller/Packer 100.0 - 100.0
Sl. No. Stratum/ District Percentage of employees paid on 2 Taraiwala (Sorter)/ 100.0 - 100.0
the basis of Checker
Time-rate Piece-rate 3 Furnaceman (Bhattiwala) 100.0 - 100.0
1 Stratum I 16.0 84.0 4 Clerk 100.0 - 100.0
Sagar 5. Raw Material Distributor 100.0
2 Stratum II 17.4 82.6 6 Bidi Roller - 100.0 100.0
Jabalpur, Satna All Categories 26.5 73.5 100.0
3 Stratum III 19.2 80.8
Gwalior, Datiya and Vidisha
4 Stratum IV 24.1 75.9 5.4.2 It will be seen from the Table that all the factory workers
Balaghat and office staff viz., Wrappers, Labellers, Raw Material Distribu-
5 Stratum V 20.8 79.2
Bhopal, Indore, Devas,
tors, and Clerical Staff, etc., were paid on monthly basis.On the
Ujjain& Hoshangabad other hand all the Bidi Rollers were paid on weekly basis.
All Strata 18.5 81.5 As such the overall proportion of bidi employees paid on
weekly basis worked out to 73.5 percent, as against 26.5 percent
5.3.2 It is evident from the Table that major proportion (81.5 of other workers who were receiving wages on monthly basis.It
percent) of employees were paid on piece rate basis and only was observed that in operations like bidi rolling, wages were
18.5 percent were paid on time rate basis. The proportion of calculated on the basis of daily production and payments were
employees paid on piece rate basis in different Strata oscillated made on weekly basis or adjusted on a monthly basis.
between 84.0 percent and 75.9 percent the former being in It was also observed that because of these adjustments after a
Stratum I and the later in Stratum IV. week or a month, the Bidi Rollers did not have a clear idea
Inter-stratum variation was attributed to the fact that Stratum-I about their actual earnings.
was the largest bidi producing area dominated by the smaller 5.5 Hours of Work
establishments of agents and middlemen engaged in getting The working hours in the Scheduled Employment ‘Tobacco
the bidis rolled for passing on to bigger or Trade Mark Estab- (including Bidi Making) Manufactories’ are governed by the Bidi
lishments for wrapping, packing and marketing. and Cigar Workers (Conditions of Employment) Act, 1966.The
5.3.3 The category-wise system of payment of wages is given Act restricts the hours of work to nine per day and forty eight
in Table 5.2.It will be seen from the Table that all the Bidi per week with a maximum spread over of 10.30 hours per day.
Rollers, Packers, Labellers and Wrappers were paid on piece rate Under the Act no employee can be made to work beyond five
basis.All other workers, like,Sorters, Furnace Men, Raw Material hours without a rest interval of at least half an hour. An adult
Distributors, Clerks, etc., were paid on time rate basis. employee can work in excess of the prescribed hours of work
Table 5.2 Percentage Distribution of Bidi Employees by subject to the payment of over time wage rate. However, the
their Categories and by the System of Payments: period of work should not exceed 10 hours in a day and 54
hours in a week, inclusive of overtime work.
Sl. No. Categories of Employees Percentage of Employees The payment for overtime work has to be made at twice the
paid on the basis of
ordinary rate of the wages or the average daily full time earnings
Time-rate Piece-rate
1. Wrapper/Labeller/Packer - 100.0
in case of piece rate workers. The Minimum Wages Act, 1948 on
2. Taraiwala (Sorter)/Checker 100.0 - the other hand only provides for fixation of normal hours of
3. Furnaceman (Bhattiwala) 100.0 - work, a weekly day of rest and payment of overtime wages in
4. Clerk 100.0 - the Scheduled Employments by appropriate Government.
5. Raw Material Distributor 100.0 - However, all these and similar provisions of the Act are of little
6. Bidi Roller - 100.0 consequence to a major proportion of the employees in this
All Categories 18.5 81.5 industry comprised of a sizeable number of Bidi Rollers who
roll bidis within the four walls of their houses.

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60 11.622.1
These home workers do not have any prescribed hours of work 5.6.2.2 The above table reveals that the average daily earnings

as they roll bidis as and when they are free from their domestic
chores. The premises/factory workers, however, are the real
beneficiaries of these provisions. As far as the Trade Mark
Establishments and the medium sized establishments are
concerned, the provisions of the Act, relating to hours of work,
rest interval, weekly holidays, etc. were being implemented. The
time rated employees were usually working as Clerks, Raw
Material Distributors, Taraiwalas, etc.
5.6 Wages and Earnings
1.6.1 During the course of Study, it was observed that although
the big manufacturers were keeping records of the wages paid
to premises workers and the Bidi Rollers who were directly
employed by them, yet the records for Bidi Rollers engaged by
the Contractors were not maintained correctly as they showed
only production.As the payments were made through Contrac-
tors, there were, therefore, chances of exploitation of the Bidi
Rollers at the behest of the former.
1.6.2 The employees in bidi making industry constitute a
heterogeneous lot with various categories of bidi workers on
the one extreme and the Bidi Rollers (home workers) engaged
either directly or through the Contractors on the other.The
dependants of the home workers rendering effective assistance
in rolling bidis constitute a large segment of Bidi Rollers who
could not be treated as employees for want of an established
employer-employee relationship.
Hence for properly analysing the earnings of the Bidi Rollers
(home workers), it is necessary to identify and isolate the
contribution of this hidden segment of Bidi Rollers.During
the study, an effort was made to separate the estimated earnings
of these workers from those of the registered or the identified
Bidi Rollers.
5.6.2 Bidi Workers
5.6.2.1 The bidi workers constituted 26.5 per cent of the
employees covered by the Study. Average daily earnings of
different categories of bidi workers are given in Table 5.4.
Table 5.4 Average Daily Earnings of Bidi Workers (in
Rupees)
COMPENSATITION MANAGEMENT
of Clerks were Rs. 89.32 per day, far above the prescribed wages
in the Trade Mark Establishments, in keeping with the require-
ments of management and responsibilities assigned to
them.For the purpose of the study, Managers have been
clubbed with the clerks because wages had not been notified for
the managerial staff.
The average daily earnings of Clerks worked out to be the
highest (Rs.122.60) in Stratum III and the lowest (Rs.76.71 per
day) in Stratum II.Overall average daily earnings of Raw
Material Distributors and Furnacemen worked out to Rs. 61.62
and Rs. 67.96 respectively.The average earnings of Raw Material
Distributors were the lowest (Rs.57.69 per day) in Stratum III
which were attributed to low wage paid areas of Datiya and
Vidisha dominated by Contractors, Sattedars and Sub-Contrac-
tors.
They were not only distributing raw materials but also were
actively involved in collecting the bidis.Surprisingly, a system of
obtaining commission from the Bidi Rollers by the Sattedars to
compensate the low wages paid to them by the Trade Mark
Establishments and Contractors was in vogue.For piece rated
workers viz., Wrappers/Labellers/Packers the average daily
earnings worked out to Rs.62.33.
5.6.3 Bidi Rollers and Helpers
5.6.3.1 In Madhya Pradesh Bidi Rollers constituted the largest
segment among the bidi employees. They collected the raw
material from the Employers or Contractors and rolled the
bidis in their dwellings. They get a lot of assistance from their
family members in rolling bidis.
It is a fact that most of these helping dependants, who were
skilled rollers, did not have registration in any bidi factory as the
manufactures avoided registration of a large number of Bidi
Rollers to evade the fringe benefits due to them .The employers
met their requirements of daily production by giving huge
amounts of raw material to the registered Bidi Rollers for
rolling bidis with the help of their dependants. The average
daily earnings of the Bidi Rollers and their helping dependants
are given in Table 5.5.

Sl. Categories Average daily earnings in

No. Stratum-I Stratum-II Stratum-III Stratum-IV Stratum V All Strata
1 Wrapper, Labeller, 63.69 66.64 62.67 65.22 50.53 62.33
Packers.
2 Taraiwala/Sorter/ 69.29 72.89 51.83 85.17 69.98 68.98
Checker
3 Furnaceman 67.93 68.29 66.62 67.13 68.89 67.96
(Bhattiwala)
4. Raw Material 63.96 65.23 57.69 - 61.11 61.62
Distributor
5 Clerk 89.82 76.71 122.60 80.40 86.54 89.32
All Categories 71.31 69.36 69.08 75.14 65.23 69.36

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11.622.1 61
 Table 5.5 Average Daily Earnings of Bidi Rollers and The Bidi Rollers did not get regular employment in bidi making
COMPENSATITION MANAGEMENT

their Helping Dependants(in Rupees) establishments also.They had always remained an exploited lot
in the hands of petty Contractors who did not even keep the
records and registers of the Bidi Rollers.The employment
Sl. No. Average daily earnings of
opportunities in agriculture had also not been encouraging
Stratum/ District Bidi Rollers Helping Overall enough for the Bidi Rollers to lean on.
Dependants
5.6.3.3 The above table also reveals that the average daily
1 Stratum I 20.36 14.21 17.77
Sagar
earnings of the registered Bidi Rollers were substantially higher
2 Stratum II 24.76 19.52 22.31 than their helping dependants in all the Strata except Stratum
Jabalpur,, Satna
IV where it was marginally higher. It shows that these helping
3 Stratum III 26.16 20.99 23.76
Gwalior, Datiya and Vidisha dependants of Bidi Rollers made a significant contribution
4 Stratum IV 18.88 17.17 18.01 towards the production of the bidi industry, yet they consti-
Balaghat
5 Stratum V 20.46 14.66 18.00 tuted a neglected lot, deprived of the benefits of various labour
Bhopal, Indore, Devas, laws. With the modern salesmanship entering the bidi industry
Ujjain&Hoshangabad
All Strata 22.04 16.62 17.88
the margin of profit in the bidi industry is quite lucrative for the
brands established in the market. There is, therefore, an urgent
need for bringing this hidden work force under the labour laws
EXHIBIT – 8 with a well defined employer-employee relationship for effective
enforcement of the minimum wage legislation.

Average Daily Earnings of Bidi Rollers and their

Helping Dependants (Table 5.5)

5.6.3.2 It emerges from the Table that in all the five Strata the
wages paid were below the prescribed wage levels. The average
daily earnings of the Bidi Rollers worked out to Rs. 22.04 per
day. The average daily earnings were highest in Stratum III (Rs.
26.16 per day) followed by Stratum II (Rs. 24.76 per day),
Stratum V (Rs. 20.46 per day), Stratum I (Rs. 20.36 per day) and
the lowest in Stratum IV (Rs.18.88 per day).
In Stratum III the highest average daily earnings of Bidi Rollers
were attributed to the non-availability of Bidi Rollers ( whose
average daily earnings were lower than those of Bidi Workers) in
the districts of Gwalior, Datiya and Vidisha where the average
daily employment in the establishments was the lowest.
Moreover, in the absence of any trade unions the Bidi Rollers
were not strong enough to bargain for the prescribed wages.
The other important reasons for low earnings were malpractices
in matters of rejection of finished bidis on the ground of not
conforming to quality standards, issue of inadequate quantity
and poor quality of tendu leaf and tobacco by the employers or
their Contractors or agents.The workers in these areas accepted
whatever wages the employers gave.

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62 11.622.1

LESSON 10:
INTRODUCTION TO THE MINIMUM WAGE
Tutorial Activity
Asian Labor Update
Learning Objective
• To study about minimum wage policy
• Does a minimum wage policy protect workers who are
under pressure in the ‘race to the bottom’ of labor
standards in a globalising world economy?
• The role of Trade Union
Virtually everywhere in the world, there is on-going debate on
the usefulness of minimum wage regulation. Since structural
adjustment programmes were introduced in the 1980s to many
developing countries, minimum wage regulation has been
under attack on several grounds: proponents of the structural
adjustment programme argued that minimum wage regulation
did not help the poorest of poor workers, i.e. those in the
informal sector, as the regulation covered only formal sector
workers; furthermore, if a minimum wage is set at an unrea-
sonably high level, it would have a negative impact on
employment and therefore make its overall effect on income
distribution at best ambiguous.
Particularly, as the accelerating process of globalisation forces
nation states to compete against each other to attract more
foreign investment, minimum wage regulation is seen as a
possible barrier to more investment.
Before looking at the current debate on minimum wage policy,
it is useful to have a brief look at the definition, aim, and
history of minimum wage regulation.
A minimum wage is a minimum level of payment established
by law for work performed. Its purpose is to protect vulnerable
low wage workers from exploitation. It is a time-based wage
that usually applies to unskilled adults entering work for the
first time. As a minimum wage is established by a law, it is
legally enforceable.
The key purpose of a minimum wage system is social to
prevent labor exploitation and poverty. This means the
minimum wage should provide sufficient purchasing power to
enable a worker to have a basic standard of living. The mini-
mum wage may also have an economic objective - to motivate
workers, enable them to enjoy the benefits of economic
growth, and contribute to the economy.
It is generally considered that minimum wage regulation was
first developed in New Zealand (1896) followed by Australia
(1899), and later Britain (1909). As the main objective of
minimum wage regulation was the elimination of ‘sweating’,
that is the payment of exceptionally low wages, its application
was usually restricted to a limited number of particularly low-
paying sectors or to selected categories of workers, such as
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11.622.1
COMPENSATITION MANAGEMENT
home-workers, women, children and indigenous workers
judged to be particularly vulnerable.
A number of developing countries also carried out experiments
with minimum wage regulation to protect categories of workers
judged to be particularly vulnerable. For instance, Sri Lanka’s
Minimum Wage Ordinance was promulgated in 1927, while
Argentina introduced the Home Work Act in 1918 with a view
to protecting low paid home-workers.
However, with the exception of a few countries, minimum
wage fixing remained a rarely used and limited instrument of
government policy in both industrialised and developing
countries before the Second World War.
Towards the end of the economic depression of the 1930s and
after the Second World War, the number of countries adopting
minimum wage regulation grew rapidly. There was also a trend
towards extending wage protection to more and more groups
of workers and in many cases was more universal.
The early development of minimum wage regulation and
subsequent expansion since the 1920s are well reflected in a
series of International Labour Conventions on minimum wage
regulation by the International Labour organisation (ILO):
Minimum Wage Fixing Machinery Convention (No. 26) 1928,
the Minimum Wage Fixing Machinery (Agriculture) Convention
(No. 99) 1951, and the Minimum Wage Fixing Convention (No.
131) 1970.
In spite of impressive development of the minimum wage
system in many countries, however, it should be noted that as
with industrial relations, both the exact nature and the scope of
minimum wage protection reflect the particular historical and
institutional development of the country concerned.
Some countries in Asia, for example Thailand, Indonesia,
China, and Japan, have decentralised minimum wage systems,
while others like South Korea and Vietnam have a single
minimum wage for the entire country. Cambodia has minimum
wage fixing machinery only for the country’s garment and textile
sector.
As seen above, minimum wage regulation had been adopted by
more and more industrialised and developing countries as a
major social policy tool to protect low-skilled workers by
establishing a minimum wage floor under which no payment
should be made.
But the usefulness of a minimum wage is now under question
by policy-makers and economists, as both developing and
developed countries have faced a serious under-employment
and unemployment crisis since the 1980s.
The standard argument against the minimum wage system was
based on the assumption that a minimum wage above a certain
level will cause unemployment and therefore inadvertently work
against poverty reduction. In the specific context of
63
 informalisation in developing economies, a minimum wage
COMPENSATITION MANAGEMENT
system in the formal sector was blamed for crowding out
formal sector jobs into the informal sector.
But empirical [= practical, as opposed to theoretical] research
undertaken recently did not show a negative effect on employ-
ment by moderate increases in the minimum wage. Also,
recently the ILO undertook a multi-country statistical analysis
of the effect of minimum wages on poverty, employment, and
informalisation in developing countries.
The study found that if other things were equal, the level of the
minimum wage has an insignificant effect on the level of
employment. Also, the study concluded, after analysing
economic data in Latin American countries, that changes in the
ratio between the minimum wage and the average wage exert no
significant impact on the share of the informal economy in
South and Central America.
This result supports the view that labour market rigidity, and
more specifically low wage rigidity, is not the major factor
behind the informalisation of Latin American economies.
Regarding the effect of minimum wage on poverty, ILO
analysis found that for a constant level of GDP per capita and
average wage in manufacturing, in one locality, a higher mini-
mum wage is associated with a lower national level of poverty.
In sum, the research findings strongly support the idea that the
minimum wage may bring positive results in poverty alleviation
by improving the living conditions of workers and their
families while having no negative results in terms of employ-
ment. Also, no evidence indicated that the level of the
minimum wage relative to the average wage affected the size of
the informal economy in Latin America.
The above studies suggest that the argument against a mini-
mum wage system in developing countries on the grounds of
employment and poverty is not convincing.
Let us examine another important argument against minimum
wage regulation which is often put forward in the context of
globalisation and competitive edge. Often it is alleged that a
high minimum wage is responsible for weakening competitive-
ness of industries.
But is it really true?
Take the case of Thailand. At the peak of the Asian financial
crisis in 1997 - 1998, there was a heated debate on the role of
the minimum wage in Thailand. One view argued that the
minimum wage was one factor responsible for falling competi-
tiveness of Thai industries which triggered the crisis.
The ILO conducted research to investigate relations between
wages and other economic variables. The ILO’s research revealed
that it was not primarily the level of the minimum wage but
other macroeconomic factors such as a fixed exchange rate and
falling productivity of Thai industries which caused falling
competitiveness, eventually leading to the economic crisis.
At the same time, however, it should be emphasised that
without developing a sound enterprise wage structure, which
encourages a cycle of skill development and productivity
enhancement, there could be a minimum wage ‘trap’ for both
employers and workers.
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64
During the pre-crisis period in Thailand, the ratio of minimum
wage to average wage in non-metropolitan regions was
extremely high (around 70 percent). Because of this Thai trade
union officials complained that workers, often with several years
experience and skills, were ‘stuck’ on the minimum wage.
Available evidence confirmed this to be the case. For such
workers, the minimum wage had thus drifted from its usual
intent - to provide a wage floor for unskilled, new entrants to
the labour market.
But there are other possible consequences. For one, the function
of the wage to motivate is disrupted when the link between pay
and performance is weakened. While minimum wage increases
might be seen as ‘rewarding’ workers with seniority, it remains
possible that the motivation of the wage is disturbed when
there is no obvious link between pay and performance after
years on a job.
On the contrary, it is possible that higher increases in the
minimum wage than in average wages could reduce the
incentive to improve skills. If either is true, labour productivity
could suffer. Thai employers, on the other hand, argued the
complete opposite - that generous increases in the minimum
wage had deprived them of the ability to control their own
wage structures and to devise wage policies suited to the
enterprise.
There is some evidence to support this view; employers often
abandon their own wage decisions to the government’s annual
announcement of the minimum wage adjustment. Efforts to
link wages more closely to enterprise performance were frus-
trated.
The example of Thailand illustrates the importance of develop-
ing a sound enterprise wage structure through enterprise pay
negotiations and a good human resource management policy,
which should activate a cycle of pay increases, more motivation,
skill development, and higher productivity. Actually, when
workers have no bargaining power at enterprise level, there is a
real danger that a legal minimum wage turns into an effective
maximum wage.
In Cambodia for example, the majority of workers in garments
and textiles receive just a minimum wage, which is currently
US$45 per month. As trade unions are very weak at the
enterprise level, the fragmented trade union movement tends to
concentrate efforts on increasing minimum wages through
tripartite negotiation with the National Labour Council. It may
be an inevitable, logical choice for an emerging trade union
movement which has very weak roots in the work place.
However, it is very clear that unions should make great efforts
to improve pay bargaining capacity at the enterprise level to
achieve settlements above the level of minimum wages.
Otherwise there is a real danger that minimum wage effectively
becomes maximum wage and union organisations in the
workplace will find it difficult to recruit rank-and-file workers
and convince them of the value of union membership.
This situation may suggest that the most appropriate role for a
minimum wage is to provide a defined floor to the wage
structure to provide a ‘safety net’ protection for the lowest
income groups.
11.622.1
For this reason, an ILO publication suggests that the economic minimum wage on employment, but also with its impact on

COMPENSATITION MANAGEMENT
impact of minimum wages should ideally be only a slight the level of poverty.
upward pressure at the bottom end of the wage structure, with However, trade unions in many Asian countries face an uphill
little effect on average wages and inflation. battle to win a minimum wage system, as the globalisation
Of course there is the opposite case, too. In Korea, for example, process and mobility of capital put great downward pressures
the minimum wage accounts for only around 30 percent of on working conditions and in particular on minimum wage
average wage and therefore covers less than two percent of the systems. This is a battle for decent work for all working men
total workforce. At this low level of minimum wage relative to and women, which will continue.
average wage, we could say that the minimum wage system has By Chang-Hee Lee, Industrial Relations Specialist, East
failed to meet its original goal of protecting low-wage unskilled Asia Multidisciplinary Advisory Team, ILO, Bangkok
workers.
If minimum wages are too low the objective of poverty
reduction will not be achieved. People will continue to work
because they have no alternative but the result is a society of
‘working poor’.
Therefore, minimum wage determination is a delicate issue,
which should be seen in a broader context of interplay between
market forces and collective bargaining power at various levels
of economies, not in isolation from other forces at work.
In this regard, the fact that minimum wage fixing through
tripartite discussion - either negotiation or consultation - is
common in many countries is important. This introduces an
element of negotiation between government, workers, and
employers in the wage setting process. Where there is good
quality information and the parties genuinely desire a common-
interest outcome, tripartite deliberation could offer a mutually
beneficial compromise.
But trade unions and other parties to consultations in many
developing countries face a number of problems.
As illustrated above, in a number of countries where trade
unions at the workplace have very weak bargaining power,
national trade union centres tend to concentrate excessive effort
on the minimum wage fixing process, unintentionally resulting
in further weakening trade union organisations and collective
bargaining in the workplace.
Another typical problem in least developed countries is that
there is often no reliable data on economic variables to be taken
into account for minimum wage fixing and adjustment. Even
if there are economic data for it, trade unions often lack the
capacity to analyse them and engage in meaningful joint
discussions.
Developing power and abilities of trade unions at both
workplace and national levels is an urgent task in many coun-
tries.
After years under attack for alleged negative effect on low-paid
employment, the minimum wage regulation seems to be back
in favour as a means of providing unskilled workers with
decent living conditions.
Several factors are responsible for the renewed interest in the
minimum wage as a tool of market policy.
First, several studies in the 1990s showed that the minimum
wage had little, if any, effect on creating unemployment.
Second, there is a new human rights approach that focuses on
the right to have decent employment. In developing countries,
policy makers are not only concerned with the impact of the

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11.622.1 65
COMPENSATITION MANAGEMENT
LESSON 11:
INTRODUCTION TO BASIC KINDS OF WAGE PLANS
Learning Objective
• To know concept of Wage Plans
• To understand the different Types of Wage Plans
Interaction
There are two major kinds of wage and salary payment plans:
those under which remuneration does not vary with output or
the quality of output, but depends on the time unit consumed
in performing work. These are known as time wage plans. The
time unit may be the day, week, fortnight or month. Time plans
are non-incentive in the sense that earnings during a given time
period do not vary with the productivity of an employee during
that period.
The second kind is concerned with the output or some other
measure of productivity during a given period of time. To earn
more, an employee is required to put in more labour and
produce more. This Kind is known as the piece or output
wage plan. It is a direct financial incentive plan,
Thus, the “time” and the “output” wage plan are the two basic
systems. All the other plans are simply variations of these two.
Types of Wage Plans
After understanding above the concept of wage plans no let us
understand in details below the different types of wage plans:
Time Rate
This is the oldest and the most common method of fixing
wages. Under this system, workers are paid according to the
work done during a certain period of time, at the rate of so
much per hour, per day, per week, per fortnight or per month
or any other fixed period of time.
The essential point is that the production of a worker is not
taken into consideration in fixing the wages; he is paid at the
settled rate as soon as the time contracted for is spent.
Merits
The merits of the system are:
1. It is simple, for the amount earned by a worker can be easily
calculated;
2. As there is no time limit for the execution of a job,
workmen are not in a hurry to finish it and this may mean
that they will pay attention to the quality of their work;
3. As all the workmen employed for doing a particular kind of
work receive the same wages, ill will and jealousy among
them are avoided;
4. Due to the slow and steady pace of the worker, there is no
rough handling of machinery, which is a distinct advantage
for the employer;
5. It is the only system that can be used profitably where the
output of an individual workman or groups of employees
cannot be readily measured. The day or time wage provides
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66
a regular and stable income to the worker and he can,
therefore, adjust his budget accordingly.
This system is favored by organized labour, for it makes for
solidarity among the workers of a particular class. It requires less
administrative attention than others because the very basis of
the time wage contract is good faith and mutual confidence
between the parties.
Demerits
The main drawbacks of this system are:
i. It does not take into account the fact that men are of
different abilities and that if all the persons are paid equally,
better workmen will have no incentive to work harder and
better. They will therefore be drawn down to the level of
the least efficient workman.
Halsey observes: “Matters naturally settle down to an easy-
going pace in which the workmen have little interest in their
work and the employer pays extravagantly for his product.”
Taylor says: “The men are paid according to the position
which they fill and not according to their character, energy,
skill and reliability.”
ii. The labour charges for a particular job do not remain
constant. This puts the authorities in a difficult position in
the matter of quoting rates for a particular piece of work.
iii. As there is not specific demand on the worker that a piece
of work needs to be completed in a given period of time,
there is always the possibility of a systematic evasion of
work by workmen.
iv. This system permits many a man to work at a task for
which he has neither taste nor ability, when he might make
his mark in some other job.
v. As the employer does not know the amount of work that
will be put in by each worker, the total expenditure on
wages for turning out a certain piece of work cannot be
adequately assessed.
As no record of an individual worker’s output is maintained, it
becomes difficult for the employer to determine his relative
efficiency for purposes of promotion.
Piece Rate
Under this system, workers are paid according to the amount of
work done or the number of units completed, the rate of each
unit being settled in advance, irrespective of the time taken to
do the task. This does not mean that a worker can take any time
to complete a job because if his performance far exceeds the
time, which his employer expects he would take, the overhead
charge for each unit of article will increase.
There is indirect implication that a worker should not take more
than the average time. ‘ If he consistently takes more time than
the average time, he does it at the risk of losing his job.
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Under this plan, a worker, working in given conditions and
with given machinery, is paid exactly in proportion to his
physical output. He is paid in direct promotion to his output,
the actual amount of pay per unit of service being approxi-
mately equal to the marginal value of his service in assisting to
produce that output.
This system is adopted generally in jobs of a repetitive nature,
where tasks can be readily measured, inspected and counted. It
is particularly suitable for standardized processes, and it appeals
to skilled and efficient workers who can increase their earnings
by working to their full capacity. I
In weaving and spinning in the textile industry, the raising of
local in the mines, the plucking of leaves in plantations, and in
the shoe industry, this system can be very useful. But its
application is difficult where different shifts are employed on
the same work or where a great variety of different grades of
workers are employed on different and immeasurable services,
as in the gas and electricity industries.
A worker’s earnings can be calculated on the basis of the
following formula: WE=NR, where WE is the worker’s
earning, N stands for the number of pieces produced and R for
the rate per piece.
Merits
This system has many advantages:
i. It pays the workman according to his efficiency as reflected
in the amount of work turned out by him. It satisfies an
industrious and efficient worker, for he finds that his
efficiency is adequately rewarded. This gives him a direct
stimulus to increase his production.
ii. Supervision charges are not so heavy, for workers are not
likely to while away their time since they know that their
wages are dependent upon the amount of work turned out
by them.
iii. Being interested in the continuity of his work, a workman
is likely to take greater care to prevent a breakdown in the
machine or in the workshop. This is a point of considerable
gain to the management, for it reduces plant maintenance
charges:
iv. As the direct labour cost per unit of production remains
fixed and constant, calculation of costs while filling tenders
and estimates becomes easier.
v. Not only are output and wages increased, but the methods
of production too are improved, for the worker demands
materials free from defects and machinery in perfect running
conditions.
vi. The total unit cost of production comes down with a larger
output because the fixed overhead burden can be
distributed over a greater number of units.
Demerits
The demerits of the system are:
i. In spite of the advantages accruing to the management as
well as to the workmen, the system is not particularly
favoured by workers. The main reason for this is that the
fixation piece rate by the employer is not done on a scientific
basis.
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11.622.1
In most cases, he determines the rate by the rule-of-thumb
COMPENSATITION MANAGEMENT
method, and when he finds that the workers, on an average,
get higher wages compared to the wages of workers doing
the same task on a day-rate basis, pressure is brought to
bear upon the workers for a cut in the piece rate. Halsey
observes: “cutting the piece price is simply killing the goose
that lays the golden eggs. Nevertheless, the goose must be
killed. Without it, the employer will continue to pay
extravagantly for his work; with it he will stifle the rising
ambition of his men.”
ii. As the workers wish to perform their work at breakneck
speed, they generally consume more power, overwork the
machines, and do not try to avoid wastage of materials.
This results in a high cost of production and lower profits.
iii. There is a greater chance of deterioration in the quality of
work owing to over zealousness on -the part of workers to
increase production. This over-zealousness may tell upon
their health, resulting in a loss of efficiency.
iv. It encourages soldiering; and there “arises a system of
hypocrisy and deceit, because to escape further cuts they
begin to produce less and also regard their employers and
their enemies, to be opposed in everything they want.
v. Excessive speeding of work may result in frequent wear and
tear of plant and machinery and frequent replacement. Trade
unions are often opposed to this system, for it encourages
rivalry among workers and endangers their solidarity in
labour disputes.
Balance or Debt Method
This method is a combination of time and piece rates. The
worker is guaranteed an hourly or a day-rate with an alternative
piece rate.
If the earnings of a worker calculated at the piece rate exceed the
amount which he would have earned if paid on time basis, he
gets credit for the balance, i.e., the excess piece rate earnings over
the time rate earnings.
If his piece rate earnings are equal to his time rate earnings, the
question of excess payment does not arise. Where piece rate
earnings if less than time rate earnings, he is paid on the basis
of the time rate; but the excess which he is paid is carried
forward as a debt against him to be recovered from any future
balance of piece work earnings over time work earnings. This
system presupposes the fixation of time and piece rates on a
scientific basis.
Let us suppose that the piece rate for a unit of work is Re. 1.00
and the time rate Rs. 0.37V2 an hour, the weekly work hours are
40 and the number of units to be completed during these 40
hours is 16.
It will be seen that the debit during the second week completely
eliminated the edit of Re. 1.00 obtained during the first week.
The worker will be paid his guaranteed time rate, in this case
Rs.15.00, in the first week and the same amount in the second
eek, although his earnings during the first week are Rs.16.00 and
during the second eek they are Rs.14.00.
An adjustment will be made periodically to find out the balance
be paid to him.
67
 The obvious merit of this system is that an efficient worker has
COMPENSATITION MANAGEMENT
an opportunity to increase his wages. At the same time, workers
of ordinary ability, by getting the guaranteed time wage, are
given a sufficient incentive to attain the same standard, even
though the excess paid to them is later deducted from their
future credit balance.
Table 16 : Balance Method of Wage Payment
Total
Total
Earnings
Name of Units of Earnings Debit
Worker Completed
Under
Under
Credit
Piece
Rate
Rate
Sohan Nil
first week)
16 Rest. 16/- Rest. 15/- Rest. 1/-
Sohan
14 Rest. 14/- Rest. 15/- Rest. Nil
Nil
Second week)
Questions
1. What do you understand by the term wage plan?
2. What are the basic kinds of wage plans?
3. What proper administration of wage plans is required in
compensation management?
Tutorial Activity 1.1
Let Us Understand What is a Pension Equity Plan?
To meet the needs of workers who hold a number of jobs
throughout their lives, employers continue to seek new kinds
of retirement income plans; pension equity plans, like cash
balance plans, let employees know the lump-sum value of their
pension while they are still working.
Traditional defined benefit pension plans have been described
as “golden handcuffs,” providing generous (“golden”)
retirement income to workers who remain with the same
employer (the “handcuffs”) throughout their work life. Such
plans, which often base benefits on earnings in a worker’s last
years with the company, may provide lower benefits for those
employees who work in multiple jobs throughout their
lifetimes. In January 2002, employees had worked for their
current employer for an average of 3.7 years; those aged 45 to 54
had worked for their current employer an average of 7.6 years.1
These data suggest workers may be accumulating retirement
benefits from several jobs; employers have attempted to deal
with these changing needs by seeking alternative approaches to
providing retirement income.
The different career plans of the younger generations have led
many employers to conclude that their retirement plans were
not beneficial to these younger, more mobile workers. This was
not conducive to attracting potentially valuable employees that
could help increase efficiency.
One new approach is the pension equity plan, which is a defined
benefit plan that builds cash value throughout a person’s
working life. Much like cash balance pension plans,3 which have
received considerable attention in recent years, pension equity
plans offer the guaranteed benefits of a defined benefit plan
68
while expressing benefits in terms of a current lump sum,
which mobile employees can access when they leave their
employer. (See the appendix for a comparison of cash balance
plans and pension equity plans.)
When designing retirement benefits, today’s employers may face
different issues than were faced in the past. Consider some of
the needs of today’s employers.
• The ability to recruit new employees that are well into their
careers
Balance
• The ability to provide predictable retirement benefits
• The ability to accommodate early retirement
• The ability to provide portable benefits upon employment
Rest. 1/
termination or retirement
• The ability to provide benefits that keep up with inflation
Rest. 1/ To meet these needs, new, hybrid forms of pension plans—
including pension equity plans and cash balance plans—have
been developed. Such plans are referred to as “hybrids” because,
even though they are defined benefit plans, they combine the
features of both defined benefit and defined contribution
plans. A defined benefit plan typically includes a formula for
computing benefits at retirement. Benefits are often based on
salary and length of service; employers are required by law to
place sufficient funds in the plan to pay for future benefits.
The Federal government guarantees benefit payments, within
limits. In contrast, a defined contribution plan specifies
contributions, or ranges of contributions, from employers and
employees. The contribution is often stated as a percentage of
the employee’s salary; all funds go into an individual account
designated for the employee. The fund balance, including
investment earnings, is paid to the employee at retirement.
Unlike a defined benefit plan, the risk of investment loss in a
defined contribution plan is borne by the employee.
Hybrid plans began to emerge in the late 1980s with the
introduction of cash balance plans. Hybrid plans generally
specify contributions to an account (or balance) like a defined
contribution plan, but guarantee final benefits like a defined
benefit plan. Such plans grow throughout an employee’s career
and allow employees to see that growth through an account
balance.
The key difference between defined contribution plans and
hybrid plans is that defined contribution plans establish an
actual account for each participant while hybrid plans use a
theoretical account that does not actually accrue funds.
A defined contribution account accumulates the actual funds
contributed by the employee and employer, and the account
changes with investment earnings and losses. The account in a
hybrid plan is theoretical and is not actually funded by employer
contributions. The employee receives credits each year and the
account balance grows, but the employer contributes to the plan
as a whole (covering all workers in the plan) to ensure that
sufficient funds will be available to pay all benefits. The
employer’s contribution in a given year may be more or less
than what is credited to an individual employee’s account.
Among the first pension equity plans was the plan designed for
RJR Nabisco and introduced in 1993. BLS data indicate that, of
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11.622.1
the 22 percent of full-time private industry workers with a
defined benefit pension plan in 2000, 3 percent participated in
pension equity plans. In 1997, about 1 percent of full-time
workers in larger private companies with a defined benefit
pension plan were in a pension equity plan. While the incidence
of pension equity plans remains very low, other hybrid plans
have grown rapidly, perhaps suggesting that more pension
equity plans will be seen in the future. In 2000, for example, 1 in
4 full-time private industry workers with a defined benefit
pension plan was in a cash balance plan, up from 1 percent in
1988 and 6 percent in 1997.7
Plan Design
A pension equity plan is a defined benefit plan that provides an
annuity or lump-sum benefit at the termination of a
participant’s employment. Pension equity plans define benefits
in terms of a current lump-sum value. Annual credits can be
based on age, service, or a combination of both. The plan
determines the total benefits by providing a “schedule of
percents” that are accumulated throughout the work life of the
employee.
When an employee leaves the employer, either at retirement or
at any time once vested, the accumulated percentage is applied to
final earnings (defined by the plan) to determine a lump-sum
benefit.
Appendix: The following tabulation shows an example of how
a pension equity plan might accumulate percents of earnings
strictly on the basis of age:
Age Percent of earnings accumulated
29 and younger 2.5
30 to 35 3.0
36 to 40 4.0
41 to 45 5.0
46 to 50 6.5
51 to 55 8.5
56 to 60 10.5
61 and older 13.5
Employees receive a percent of earnings credits for each year of
service, which are accumulated throughout the employee’s career
with the employer. The total percent (shown as a credit in some
plans) is multiplied by the employee’s final average earnings.
Final average earnings generally are defined as an annual average
of the highest earnings over a specific number of years—for
example the average of the highest 3 years of earnings.
Table 1. Illustrates how three different workers would accumu-
late benefits under a pension equity plan. Each employee leaves
© Copy Right: Rai University
11.622.1
the company with the same final average earnings (as defined by
COMPENSATITION MANAGEMENT
the plan), but the amount of their actual lump-sum benefit -
and consequently their annuity value - differs considerably
because of differences in their ages and lengths of service.
Because the benefit credits accumulate more quickly for older
workers, employee 1 with 15 years of service at age 40 has a
smaller lump-sum benefit than does employee 3, who has 15
years of service at age 65. The employee with 30 years of service
who retires at age 65 has the greatest accumulation, reflecting
both long service and nearness to retirement age.
Employers may use alternative approaches to determining
credits under a pension equity plan. For example, an employer
with multiple lines of business can adjust the percents to
accommodate many different types of workers. Table 2 shows
an example of this flexibility. In this example, the plan includes
three different schedules of percents for three different occupa-
tional groups within the same company.
Pension equity plans can vary their accrual rate based on both
age and service, and they can provide different accruals for those
earning more than the Social Security taxable wage base. For
example, an employer can provide a standard age-based accrual
and add to that a smaller accrual based on service. Employees
with 10 to 20 years of service might receive an additional service
accrual of 2 percent per year, while those with more than 20
years of service might receive an additional 3 percent per year.
Defined benefit pension plans are also allowed to “integrate”
benefits with Social Security; such a provision takes into account
the employer funding of Social Security benefits up to an
annual threshold (the Social Security taxable wage base). A
pension equity plan might vary its accruals for those earning less
than or more than the wage base. For example, a plan that
accrued 3 percent of earnings per year for those aged 31 to 40
might increase that accrual to 5 percent per year for those
earnings that exceed the wage base.
Distributions
While pension equity plans identify their benefits in terms of a
lump sum (a percent multiplied by final earnings), as a defined
benefit plan they must make benefits available in the form of
an annuity. In practice, this annuity requirement is typically only
applicable to workers who are nearing retirement age. By law,
defined benefit plans with a value of $5,000 or less can, without
the consent of the covered employee, pay the employee a lump
sum and not offer an annuity option. In a traditional defined
benefit plan, such value is determined by the present value of
future benefits. In a hybrid plan, the value is the actual account
balance.
Workers whose account value is greater than $5,000 must be
offered the option of an annuity; in fact, the standard form of
benefit for a married employee must be a joint-and-survivor
annuity. Only if both the employee and spouse waive the right
to a joint-and-survivor annuity can the benefit be paid out in
another way, such as a lump sum.
While hybrid plans are designed to allow workers to know the
value of their retirement benefits at any time, and to have easy
access to the lump-sum value of those benefits should they
leave their employer, receipt of retirement benefits prior to
69
 retirement age can have adverse tax consequences. Such distribu- While this early retirement “reduction” is considered a penalty
COMPENSATITION MANAGEMENT

tions are considered taxable income in the year they are received.
The distribution may also be subject to a 10-percent Federal tax
penalty for early receipt of retirement benefits, depending upon
the employee’s age. To avoid such taxes, the employee terminat-
ing employment and moving on to another job can roll over
the lump-sum benefit into an Individual Retirement Account
(IRA) or a retirement plan sponsored by a future employer.
Pension Equity Plan Advantages
The ability of employees to know the current value of their
plans at any time is one of the advantages of pension equity
plans. Another perceived advantage is that there is no reduction
in benefits due to early retirement. This means that if a worker
terminates his or her employment before normal retirement
age, but has fulfilled the vesting requirements, the benefit will
reflect the length of time worked. In contrast, a traditional
defined benefit pension plan specifies periodic pension
distributions as the amount available at normal retirement age.
Employees receiving benefits before that age typically receive
lower benefits to account for receiving benefits over a longer
expected lifetime.
by some, it is in fact merely an adjustment based on life
expectancy. (Some employers subsidize that adjustment by
making the reduction less than a true actuarial reduction.) No
such adjustment occurs in a pension equity plan. Because
benefit accruals typically rise with age, however, the pension
equity plan formula already has adjustment for age built into
the accrual formula.
While pension equity plans and cash balance plans share
methods of accumulating value, a major difference is the
earnings used to determine the benefit. Cash balance plans
specify a credit each year, based on that year’s earnings. By
contrast, in a pension equity plan, the credits are applied to final
earnings. This feature provides built-in inflation protection.
Regardless of whether an employee has just a few years of
service required for vesting or has worked under the plan an
entire career, benefits are based on earnings at the end of the
employee’s career.
Through its annual benefits survey, BLS has tracked the change
in retirement plans over time, from traditional defined benefit
to defined contribution to hybrid plans. BLS will continue to
monitor and report on the incidence of pension equity plans.
Comparison of features of Pension Equity Plans and Cash
Balance Plans

Feature Pension Equity Plan Cash Balance Plan

Benefit formula Percent of earnings, may vary by age, service, or Percent of earnings, may vary by age,
earnings service, or earnings

How benefits are Percent of earnings, as determined by the benefit Dollar amount (benefit formula times
accumulated formula, are accumulated each year, but the final benefit earnings) placed in hypothetical account
is not determined until employee leaves the plan each year; interest on account balance also
credited each year

Definition of earnings Total accumulated benefit applied to final earnings, as Percent applied to each year’s earnings
defined by the plan; final earnings typically those in last
3-5 years before retirement

How to determine value of Employees can multiply their accumulated percent of Account balance is the current benefit
benefits for current earnings times their final earnings as defined by the plan
employees to determine their current benefit

Distribution Specified as a lump sum, but can be converted to an Specified as a lump sum, but can be
annuity converted to an annuity- By L. Bernard Green

He is a graduate student in economics at Florida State University. During 2001 and 2002, he worked as an intern in the Division of
Compensation Data Analysis and Planning, Bureau of Labor Statistics.

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70 11.622.1

LESSON 12:
INTRODUCTION TO WAGE DIFFERENTIALS
& ELEMENTS OF A GOOD WAGE PLAN
Learning Objective
• To learn the meaning and definition of wage differential
• To understand the concept of wage differential
• To know the types of wage differential
• To understand the reasons for wage differential
• To know the need of a good wage plan
• To understand the essentials of a good wage plan
Wage Differentials
Definition
The word differential means relating to, or showing a difference,
or making use of a specific difference or distinction. Wage
differential is an element of location selection that is a wage scale
reflecting the average schedule of workers’ pay in an area that
takes into account the performance of related tasks or services.
Wages differ in different employments or occupations, indus-
tries and localities, and 0 between persons in the same
employment or grade. One therefore comes across the terms as
occupational wage differentials, inter-industry, inter-firm, inter-
area or geo graphical differentials and personal differentials.
Wage differentials has been classified into three categories:
First
The differentials that can be attributed to imperfections in the
employment markets, such as the limited knowledge of
workers in regard to alternative job opportunities available
elsewhere; obstacles to geographical, occupational or inter-firm
mobility of workers; or time lags in the adjustment of resource
distribution and changes in the scope and structure of eco-
nomic activities. Examples of such wage differentials are
inter-industry, inter-firm, and geographical or inter-area wage
differentials.
Second
The wage differentials which originate in social values and
prejudices and which are deeper and more persistent than
economic factors. Wage differentials by sex, age, status or ethnic
origin belong to this category.
Third
Occupational wage differentials, which would exist even if
employment markets were perfect and social prejudices were
absent.
In other words, wage differentials may be:
i. Occupational differentials or differentials based on skill;
ii. Inter-firm differentials;
iii. Inter-area or regional differentials;
iv. Inter-industry differentials; and
v. Differentials based on sex.
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11.622.1
COMPENSATITION MANAGEMENT
Description of each wage differential in detail:
i. Occupational Differentials
These indicate that since different occupations require different
qualifications, different wages of skill and carry different degrees
of responsibility, wages are usually fixed on the basis of the
differences in occupations and various degrees of skills.
The basis functions of such differentials are:
a. To induce workers to undertake “more demanding,” “more
agreeable or dangerous” jobs, or those involving “a great
chance of unemployment, or wide uncertainty of earnings.”
b. To provide an incentive to young person to incur the costs
of training and education and encourage workers to develop
skills in anticipation of higher earnings in future.
c. To perform a social function by way of determining the
social status of workers. In countries adopting a course of
planned economic development, skill differentials play an
important role in manpower and employment
programmes, for they considerably help in bringing about
an adequate supply of labour with skills corresponding to
the requirements of product plans.
Inter-occupational differentials may comprise skilled,
unskilled and manual wage differentials; non-manual and
manual (white and blue-collar); and general skill differentials.
Occupational wage differentials generally follow the changes in
the relative supplies of labour to various occupations.
ii. Inter-firm Differentials
Inter-firm differentials reflect the relative wage levels of workers
in different plants in the same area and occupation. The main
causes of inter firm wage differentials are:
a. Difference in the quality of labour employed by different
firms;
b. Imperfections in the labour market; and
c. Differences in the efficiency of equipment, supervision and
other non-labor factors.
Differences in technological advance, managerial efficiency,
financial capacity, age and size of the firm, relative advantages
and disadvantages of supply of raw materials, power and
availability of transport facilities - these also account for
considerable disparities in inter-firm wage rates. Lack of co-
ordination among adjudication authorities, too, are responsible
for such anomalies.
iii. Inter-area or Regional Differentials
Such differentials arise when workers in the same industry and
the same occupational group, but living in different geographical
areas, are paid different wages.
Regional wage differentials may be conceived in two senses. In
the first sense, they are merely a part of inter-industry differen-
tials in a particular region.
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 The industry mix varies from one area to another, and for this
COMPENSATITION MANAGEMENT
reason alone, the general average of wages would be expected to
vary. In the second sense, they may represent real geographical
differentials, resulting in the payment of different rates for the
same type of work. In both cases, regional differentials affect
the supply of manpower for various plants in different regions.
Such differentials are the result of living and working condi-
tions, such as unsatisfactory or irksome climate, isolation,
sub-standard housing, disparities in the cost of living and the
availability of manpower. In some cases, regional differentials
are also used to encourage planned mobility of labour.
iv. Inter-industry Differentials
These differentials arise when workers in the same occupation
and the same area but in different industries are paid different
wages. Inter-industry differentials reflect skill differentials. The
industries paying higher wages have mostly been industries
with a large number of skilled workers, while those paying less,
have been industries with a large proportion of unskilled and
semi-skilled workers.
Other factors influencing inter-industry differentials are the
extent of unionization, the structure of product markets, the
ability to pay, labour-capital ratio, and the stage of development
of an industry.
v. Personal Wage Differentials
These arise because of differences in the personal characteristics
(age or sex) of workers who work in the same plant and the
same occupation. “Equal pay for equal work” has been recom-
mended by the I.L.O. Convention (No. 100), as also by
Industrial Courts, Labour Tribunals, the Minimum Wages
Committee and the Fair Wage Committee.
But in practice this principle has not been fully implemented
because in occupations which involve strenuous muscular work,
women workers, if employed, are paid less than men workers.
Lack of organization among women employees, less mobility
among them, their lower subsistence and their weak constitu-
tion are other reasons which bring them lower wages than their
male counterparts receive.
Elements or Ingredients of a Good Wage Plan
Before going ahead with the plans and elements of a good
wage plan, first let us discuss why a good wage plan is
required?
Ans. A good wage plan is a more or less a mandatory require-
ment by the oprating firms in order to attract the most creamy
work force. Also it helps in tackling retention management and
employee motivation problems to a great extent.
So below is mentioned the following features of a good wage
plan:
i. It should be easily understandable, i.e., all the employees
should easily understand what they are to get for their work.
They should be instructed in how the wage plan works.
ii. It should be capable of easy computation, i.e., it should be
sufficiently simple to permit quick calculation. Mathematical
tables may be supplied, be reference to which calculations
can. be quickly made.
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72
iii. It should be capable of effectively motivating the
employees, Le., it should provide an incentive for work. If
both the quality and quantity of work are to be stressed at
the same time, a plan should be selected that will not
unduly influence the worker to work too fast or to become
careless of quality.
iv. It should provide for remuneration to employees as soon
as possible after the effort has been made. Daily or weekly
payment of wages would be preferable to induce employees
to work.
v. It should be relatively stable rather than frequently varying
so that employees are assured of a stable amount of
money.
Latest Updates In Labor Welfare Laws
India Calls For New Standards In Labour Welfare Laws
Employment Generation Be Given Continued Priority In
Ilo’s Agenda Says Dr. Jatiya
Labour Minister Addresses ILC Session In Geneva
India has urged the International Labour Organisation (ILO) to
explore new methods of standards setting concerning labour
welfare laws. It should have a discussion on the standard
setting agenda in a two tier and a double discussion procedure,
one at the regional level and the other at the International level.
This will give more opportunities to reflect the regional
positions and better understanding and appreciation at the
international level. This suggestion was made by the Indian
Labour Minister, Dr. Satyanarayan Jatiya while addressing the
87th Session of the International Labour Conference in Geneva,
today. He said many of the ILO conventions have been
adopted ignoring realities of the situation obtaining in the
developing countries and this two tier discussions will help
remove the regional imbalances.
Turning to unemployment and under employment, Dr. Jatiya
called for analysing and addressing effectively the present
employment scenario so as to achieve socio-economic progress.
The worsening employment situation all over the world
demands urgent attention and a plan of action to find solution.
He stressed that employment generation must be kept on the
top of the agenda of the ILO for the next decade. Any
measures for employment should also be full, freely chosen and
productive in terms of the Copenhagen Declaration, he averred.
The Labour Minister pointed out that every worker as human
being deserves to be treated with dignity, equality and respect
and these should be integrated in the employment and wage
policies of the Governments. This is necessary to create a
balance between employment generation on the one hand
leading to the decent income, livelihood, equality of life and
unavoidable corollary of the income generation, on the other.
Referring to social protection, Dr. Jatiya stated that it assumes
vital importance for those unfortunate sections of the society
and the working class discriminated and economically
exploitated for a long period. Among them are, bonded,
contract, migrant and casual labourers.
11.622.1
Their protection has been a major commitment of the Indian
Government, he said. Equally significant has been, India’s
commitment, to the ethos and culture of tripartism through
social dialogue. In India all important policy decisions on
Labour, including legislation are taken only after taking into
confidence, the social partners namely, the State, Employers and
Employees, as also after obtaining consensus through various
tripartite fora.
The Labour Minister Dr. Jatiya also reiterated India’s commit-
ment to the principles in the ILO Constitution and the
Philadelphia declaration. He expressed India’s appreciation for
the comprehensive report “Decent Work” of Dr. Juan Somavia,
Director General of the ILO and said it provides the right
direction and thrust for the policies and programmes of the
ILO in the changing context of the social and economic
environment, globally as well as nationally.
India also welcomes the strategic objective approach set in the
report taking into account the economic, employment, emerg-
ing social conditions as well as the rapid technological changes.
These are already embodied clearly and forcefully in the Consti-
tution of India, Dr. Jatiya added.
Full Text Of The Speech Of Dr. Satyanarayan Jatiya,
Union Labour Minister, Government Of India While
Addressing The Plenary Of The International Labur
Conference In Geneva On 9th June 1999
I join distinguished speakers to congratulate you on your
election as the President of the 87th Session of the International
Labour Conference. I would also like to take this opportunity
to place on record our appreciation for the very comprehensive
report of Dr. Juan Somavia, Director General of the ILO
captioned “Decent Work” which provides the right direction
and thrust to the policies and programmes of the ILO in the
changing context of the social and economic environment
globally as well as nationally.
His report has adopted a strategic objective approach taking into
account the economic, employment, emerging social conditions
as well as the rapid technological changes. We welcome the
dominant theme of ‘Decent Work’ which is the corner stone of
the strategic objective and which also has been embodied clearly
and forcefully in the Constitution of India in the Directive
Principles of State Policy.
The most important manifestation of the phenomenon of
globalisation is widespread unemployment and under employ-
ment. If the goal of achieving social progress has to be achieved
parallel to economic progress, the present employment scenario
has to be analysed and addressed effectively.
The DG has candidly noted that globalisation has brought
prosperity as well as inequalities which are testing the limits of
collective social responsibility. He has, therefore, rightly identi-
fied “Creation of greater opportunities for women and men to
secure decent employment and income” as one of the strategic
objectives of the organisation in coming years.
We consider it as the most important strategic objective and the
progress on all other objectives is contingent upon the progress
achieved in this core objective. The worsening employment
situation all over the world demands urgent action.
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11.622.1
The Asian region in the recent past experienced a major financial
COMPENSATITION MANAGEMENT
crisis as a result of which over 20 million people lost their jobs.
There was runaway inflation and a consequential fallout
adversely affecting wages of the workers.
Logically, therefore, employment generation should be on the
top of the agenda of the ILO in the coming decades. Such
employment should also be full, freely chosen and productive
in terms of the declaration adopted at Copenhagen in which the
present DG of ILO had played an important role.
In other words , the dignity, equality and respect with which
every worker as a human being deserves to be treated should be
integrated in the employment policy and wage policy so that
there is employment generation leading to decent income,
livelihood and quality of life as the logical corollary.
Till recently the multi-lateral agencies dealing with social issues
and economic issues were acting independently and were giving
different policy prescription to national governments without
trying to harmonise the conflicting positions. The ILO should,
therefore, have a view on the design of the macro economic
policies at the international level.
We, therefore, welcome the consensus emerging in the ILO
constituents for more effective and substantive relationship
with the Bretton Wood institutions as they now greatly
influence employment policy, social security, labour laws, labour
market relation, etc. at the national level.
Social protection assumes importance for those unfortunate
sections of the society and working class in particular, who have
been victims of social discrimination and economic exploitation
for generations.
Among them are the special victims of social exclusion such as
bonded labour, contract labour, migrant labour, casual labour
and indentured labour. Their protection has been an article of
faith and commitment for my national government. Equally
significant has been out commitment to the ethos and culture
of tripartism through social dialogue.
In India, all important policy decisions on labour, including
legislation are taken only after taking into confidence the three
social partners and after obtaining a consensus through various
tripartite fore.
Mr. President I take this opportunity to reiterate our commit-
ment to the principles enshrined in the ILO constitution and
the Philadeplphia Declaration. The recently adopted Declaration
on Fundamental Principles and Rights at work and its follow
up is aimed at achieving economic progress accompanied by
social justice.
Fundamental priciples at work place identified for promotion
should be considered in the context of the broader framework
for development at the national and international level.
We are again happy to note that the DG has underlined the
promotional nature of this Declaration and the importance of
technical cooperation as one of the means to achieve this goal.
Our submission is that the Declaration should not be used for
intrusive monitoring of national economic and social policies
and for developing non-tariff barriers in international trade.
73
 We apprehend that the proposals for voluntary code of conduct
COMPENSATITION MANAGEMENT
can easily be distorted and utilised for unilateral action in trade
and investment. Therefore, the ILO should not become a
forum for institutionalising such arrangements.
We need to seriously consider the efficacy of the standard
setting activity. Many of the Conventions adopted over a period
of time are now found unsuitable to meet the requirements of
the present conditions. We welcome the suggestion of the DG
that we should explore new methods of standard setting.
The organisation should consider discussion on the standard
setting agenda in a two-tier and double discussion procedure,
one at the regional positions and laer their understanding and
appreciation at the international level. Many of the Conventions
have been adopted ignoring realities of the situation obtaining
in the developing countries and the two-tier discussions will
rectify the situation
Tutorial Activity 1.1
Questions
1. What do you understand by the term wage differential and
state the reasons for the existence of it?
2. What are the elements or ingredients of a good wage plan?
Tutorial Activity 1.2
Case Study
Micro-Diversification Study
A Case of a Labour Contractor at Dharmaram
Introduction
This case focuses on the migration of labourers in search of
daily wage during the dry season. Mr Prabhakar is one such
labour contractor who has a tie up with a sugar factory. In
addition to earning for himself, he provides daily wages to
nearly 100 labourers during the lean season.
The Village Context
Paidipally is a small village in the Narayankhed mandal of
Medak district. It is situated five Kms away from the town of
Naryankhed. The village has more of a Kannada influence as it
lies very near to the state of Karnataka.
The town of Bidar in Karnataka is only 60 Kms away from
Paidipally. Paidipally has nearly 300 households with around
1,000 people. Most of the people are engaged in agriculture.
Majority of the people are small and marginal farmers who
practice traditional agriculture. As agriculture is dependent on
rainfall, often uncertain, people migrate to other places in search
of wage labour.
The soil is black cotton type. People mostly grow jowar and
pulses. Only one crop is grown due to scarcity of water. There is
lack of irrigation facility and people mostly have to depend on
rainfall which is less than 600 mm per year. Few farmers have
bore-well and are engaged in cultivation of vegetables.
It is well connected with buses to Narayankhed every hour. The
supply of electricity is very erratic although everybody has
connections.
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74
Since Narayankhed town is very near to the village, people
mostly go there for all their needs. There is a hospital and both
primary and high schools in Narayankhed.
Family Details
Prabhakar is now around 40 years of age. He has been staying in
this village from his childhood. His family consists of his wife,
three sons and one daughter who are dependent on him.
His parents stay in the neighbouring village. His children go to
school and his wife looks after affairs of the house. The main
income source for the family is earnings from the labour
contract.
The family has three acres of agricultural land the value of
which would be Rs. 45,000. Jowar and pulses are cultivated in
this land during the kharif season. The family also has one cent
of residential land with a house. The value of this property
would be about Rs. 75,000.
Diversification History
Prabhakar’s father used to work as a daily wage labourer. He
often had to go out of his village in search of wage labour in
the lean season. In this process, he came across a private sugar
factory newly established near Narayankhed.
The only other sugar factory existent at that time in
Narayankhed was the Nizam Sugars Public Limited. He got in
touch with the owner of the sugar factory and got a contract of
drying the sugarcane Bagas 1 which was used as fuel for the
boilers for heating the sugarcane juice.
This contract gave them work for additional three to four
months during the lean season often from December to
February. Prabhakar assisted his father for four years in this
business and learnt the required skills. From the income earned
from this source, he and his father could acquire three acres of
land and a residential house.
Prabhakar was married by this time to Saraswati. The income
from agriculture was meagre as small surpluses were left after
own consumption. All expenditure of the house had to be met
from the profits from the above contract. In order to increase
the family’s income, he decided to try and get similar contract
elsewhere, instead of assisting his father.
Around 18 years ago, he got his first contract from the Sri
Srinivasa Sugar factory in Ramayampet for the drying of bagas.
He is still continuing with the same contract. From these
earnings, he could buy another house. He also invested some
amount in digging a bore well. However, this was not success-
ful.
When he got the contract, he started engaging labourers from
his village by paying some advance wages to them. He in turn
got an advance from the owner of the sugar factory. This
advance payment to the labourers was necessary, as they had to
support their families in their absence.
He gradually started using his labourers in the manufacturing
process of sugar in addition to bagas drying. At present, he
employs about 100 workers, of whom nearly 30 are working in
the processing of sugar.
The workers are divided into various categories at the beginning
and wages are paid according to the kind of work they do. The
11.622.1
wage varies from Rs. 18 to Rs. 100 per day. The person at the

COMPENSATITION MANAGEMENT
boiler will get Rs. 100, labourer using his own bullocks for
drying bagas will get Rs. 90 whereas a person engaged in drying
the bagas will get Rs. 18.
Prabhakar explained that the income from this activity is mostly
dependent on the amount of sugarcane supply to the factory
for crushing. Higher the inflow of sugarcane in the factory,
greater is requirement of bagas and therefore a higher income in
the season.
He would incur losses if the factory does not run for the full
season completely (i.e. for nearly three months) as the advance
given to the workers could not be taken back for lack of any
work.
Prabhakar suffered a heavy loss last year due to inadequate
supply of sugarcane to the factory. The factory has a capacity to
process 100 bags per day. Last year, it ran for a month. For the
rest of the two months, it was not operating.
Due to this, he suffered a loss of Rs 30,000. He had to sell off
one his house to recover this loss. Out of the sale proceeds, he
had partly repaid this loss to the sugar factory and the rest was
given as credit by the factory owner.
Thus was possible because of his association for the last 18
years. Often he has been supported by the factory owner in the
event of any unforeseen circumstances.
Future Plans
Prabhakar is not very sure about his future plans. He wants to
continue to do this business as it is providing wages to more
than 100 families. The factory owner had offered him a job on
several occasions but he is not keen on taking it as it is against
his dignity.
He could have earned Rs. 4,000 per month easily as supervisor
in the factory. He has plans to invest in a bore well again. He
wants his children also to get into this business.
Answer the Questions Below Based on the Case Study
Above
1. What is the author trying to highlight with the help of this
case?
2. What kind of contractual arrangements exist in the
processing sector?
3. Is temporary migration a common phenomena in dryland
regions? If so then when?

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11.622.1 75
COMPENSATITION MANAGEMENT
LESSON 13:
INTRODUCTION TO INSTITUTIONAL MECHANISM
FOR WAGE DETERMINATION
Learning Objective
• To know the Institutional Factors Influencing or
determining Wage Rates
• To understand the Role of Wage Board
• To learn the concept of Wages and Social Security
Interaction
Reward management involves the development of pay
structures of varying degrees of formality which define the rates
of pay for jobs, the pay relativities between jobs and the basis
upon which job holders are paid.
Pay structures are designed by reference to judgments about job
values as expressed by relativities with other jobs and external
(market) rates of pay for comparable jobs.
These judgments are made against the background of the
factors which influence job values. Bearing these in mind, steps
can be taken to establish internal job values by using some form
of job evaluation.
External values are also established by surveying and analyzing
market rates, and the information gained from job evaluation
and market rate surveys is combined when developing the pay
structure.
This chapter deals with the factors influencing job values and
relativities and the basis upon which the rates of pay for
individual jobs and job holders are determined.
The Institutional Factors Influencing or determining wage
rates are:
• Intrinsic value,
• Internal relativities,
• External relativities and market practice,
• Inflation,
• The circumstances of the firm and trade union pressures,
• Job evaluation
• Performance management
• Legislation
• Wage Boards
Intrinsic Value
The concept of intrinsic value is based on thee apparently
reasonable belief that the rate for a job should be determined
by reference to the amount of responsibility involved or the
degree of skill or level of competence required to perform it.
The responsibilities of a job are the particular obligations that
have to be assumed by any person who carries out the job.
Responsibility is exercised when job holders are accountable for
what they do. The level of responsibility is related to the
outputs job holders are expected to achieve and their contribu-
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76
tion - the impact they can make on the end results of their
section, department or the organization as a whole.
Responsibility involves the exercise of discretion in making
decisions which commit the use of the organization’s resources.
Rates of pay are therefore influenced not only by the scope of
the job in terms of its impact on. results but also by the size of
resources controlled, the amount of authority job holders
possess, the degree of freedom they have to make decisions and
to act, and the extent to which they receive guidance or instruc-
tion on what they should do.
Perception about the intrinsic value of jobs will be influenced
not only by the outputs .of job holders but also by the impact
they can make on the results achieved by the organization as a
whole. The scope or size of jobs and their rates of pay are
therefore related to the accountability of job holders for
achieving results.
The intrinsic value of jobs may also be related to the input and
process factors of knowledge and skills and competencies.
Knowledge, and skills refer to what job holders need to know
and are able to do to meet the requirements of their jobs.
Competencies are the behavioral characteristics which demon-
strably differentiate between levels of performance in a given
role.
Internal Relativities
The problem with the concept of intrinsic value is that it does
not take account of the other factors affecting value. It can be
argued that there is no such thing as absolute value. The value
of anything is always relative to something else and is affected
by external economic factors as well as internal relativities.
Within an organization, job values will be determined by
perceptions of the worth of one job compared with others.
Internal differentials reflect these perceptions, which may be
based on information relating to the inputs made by jobhold-
ers as reflected by the requirement to use different levels of
knowledge or skill.
Or more importance may be attached to outputs- the added
value they create. internal differentials will be strongly influenced
by differentials established in the external market from which
the organization recruits and to which existing employees may
be tempted to return.
The organization structure will clearly influence differentials and
methods of payment. A hierarchical structure with well-defined
layers of responsibility will provide a clear indication of the
pattern of differentials and produce a pay structure with fairly
narrow bands.
A flatter, more flexible, structure will make it hard to establish a
rigid rank order and differentials will be more fluid within
broader pay bands and will depend more on relative levels of
competence and contribution.
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External Relativities
A salary or wage is a price which, like any other price, represents
the value of the service to the buyer and the seller: the employer
and the employed. The external value of a job - the market rate
- is primarily determined by the laws of supply and demand.
However, all the market does is to allow us to assume that
people occupying equal positions tend to be paid equally and as
Kanter puts it: ‘The process is circular... we know what people
are worth because that’s what they cost in the job market, but
we also know that what people cost in the job market is just
what they’re worth.’
The market rate concept is in any case an imprecise one. Market
rate surveys always reveal a considerable range of rates which
reflect the special circumstances of the organizations, including
the level of people they employ and their policies on how they
want their levels of pay to relate to market rates - their market
stance or pay posture.
There will, however, be trends in market rates to which internal
pay structures must respond if they are to remain competitive.
Individual rates and differentials have to be adjusted in the light
of changing market pressures if the organization needs good
quality staff.
This will be particularly important at the intake points in a
structure and in respect of individuals whose market worth is
high and who are therefore vulnerable to the attractions of
better paid jobs elsewhere.
It is also important to bear in mind the concept of individual
market worth. In effect, this says that any employable individual
has a price which is related to what other organizations are
prepared to pay for his or her services. Organizations ignore at
their peril the individual market worth of any employees they
wish to retain whose talents are at a premium in the market
place.
Inflation and Market Movement
Inflationary pressures clearly affect general trends in rates of pay
and earnings. They underpin pay market movements.
Organizations have been accustomed to taking into account
inflation when adjusting their pay structures although, if their
managements have any sense, they have refused to commit
themselves to any semblance of index linking.
They have had to be prepared to increase rates by less than
inflation in hard times and they have reserved the right to
restrict increases to individuals to below the rate of inflation if
their performance does not justify the retention of their real
level of earnings.
Increasingly, however, employers are basing pay reviews on
movements in market rates, which are, in any case, responsive to
the rate of inflation.
Business Performance and/or Financial
Circumstances
The business or strategic aims of the organization and .its plans
for achieving those aims will provide the basis for developing
pay strategies and policies. The resulting business performance
and/or the financial circumstances of the organization will
influence the amount it can afford to pay and its pay policies on
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11.622.1
such matters as how it wants to relate pay to performance and
COMPENSATITION MANAGEMENT
market rates.
Trade Union Pressures
Depending on their bargaining power, trade unions will
attempt to pressurize managements into increasing pay by at
least the amount of inflation. They will press for higher rates
on the grounds of the organization’s ability to pay and trends
in market movement and the going rate for specific jobs, and
they may attempt to restore lost differentials.
Factors influencing pay levels for individuals
The pay levels of individual job holders will be influenced by
three factors in addition to the rate for their job:
1. their market worth as mentioned above;
2. the level of skills or competence they possess - their inputs;
3. their level of performance in the job - their outputs and the
overall contribution they make to organizational success.
The amount of influence these factors exert will depend on the
job and the internal environment of the organization. In a
non-bureaucratic and flexible firm, where the level of technol-
ogy is high and a large proportion of the staff are knowledge
workers, individual worth will be more important than
position in a job hierarchy.
As Kanter has stated: Major employing organizations are
rethinking the meaning of worth itself. And as they are doing
this, they are gradually changing the basis for determining pay
from position to performance, from status to contribution.
How rates of pay for individual jobs and job holders are
determined.
Overall levels of pay will be affected by business aims, plans and
performance, external economic and union influences, reward
policies and market rates.
These general considerations will, of course, affect individual
rates for jobs and job holders. These rates will be determined by
market relativities, the ‘size’ of the job within the structure, as
measured by job evaluation, and individual levels of perfor-
mance.
The latter will determine rates of pay above the base rate either
by a performance management process or a pay for-performance
scheme.
This process of individual pay determination takes place within
the framework of job and role analysis and, apart from
business and market rate considerations, is largely influenced by
the interrelated processes of job evaluation and performance
management for those in receipt of performance-related pay.
Job Evaluation
Job evaluation is used to measure relativities and determine
where the job should be placed in a pay structure (the rate for
the job). Relative job size is assessed in terms of inputs
(knowledge and skills), process (behavioral requirements
involving the use of competences) and outputs (the level of
responsibility for results and the impact the job makes on team
or organizational performance).
The Bureau of Labour Statistics, U.S.A., says that “job evalua-
tion is the evaluation or rating of jobs to determine. their
77
 position in the job hierarchy. The evaluation may be achieved
COMPENSATITION MANAGEMENT
through the assignment of points or the use of some other
systematic method for essential job requirements, such as skills,
experience and responsibility.”
Objectives of Job Evaluation
The general purpose of job evaluation may include a number
of more specific goals:
1. To provide a basis for a simpler, more rational wage
structure;
2. To provide an agreed-upon means of classifying new or
changed jobs;
3. To provide a base for individual performance
measurements;
4. To reduce pay grievances by reducing their scope and
providing an agreed-upon means of resolving disputes;
5. To provide incentives for employees to strive for higher-
level jobs;
6. To provide information for wage negotiations;
To provide data on job relationships for use in internal and
external selection, personnel planning, career management, and
other personnel functions.
Performance Management
Performance management assesses the individual’s performance
in the job and in a performance-related pay environment,
determines the rate of pay for that individual in the job -
whether he or she is positioned within a pay range or on a pay
scale.
Performance management is a strategic and integrated approach
to delivering sustained success to organizations by improving
the performance of the people who work in them and by
developing the capabilities of teams and individual contribu-
tors.
As a manager one of our most important responsibilities to
our organization is to manage performance well. We need to
manage not only our performance but also the performance of
the many individuals we supervise and develop over the years.
Our ability to manage performance effectively will contribute to
our organization? Success and will positively affect the people
who work in our organizations. This programme aims to equip
the participants with understanding and skills so that they can
motivate the employees to contribute their best to the organiza-
tion
The performance management process will be based on
precisely the same factors used in evaluating the job as recorded
in a job description or role definition derived from job or role
analysis: namely skills, competences and results. The starting
point of performance management is an agreement on skill and
competence requirements and on the principal accountabilities
or main tasks of the job.
This leads to agreements on specific standards of performance,
targets and work plans and personal development plans which
form the criteria on which performance is reviewed and
assessed.
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78
For those on an incentive’ or payment by results scheme, pay
will be determined by reference to job evaluation and the
quantified results achieved by job holders.
It has been very rightly said that Performance management is an
ongoing communication process that involves both the
performance managers (viz., Political and Sr.Civil Service
Executives, Deputy Commissioners) and the employee in
• Identifying and describing essential job functions and
relating them to the mission and goals of the organisation.
• Developing realistic and appropriate performance standards
(i.e., a written statement describing how well a job should
be performed.) to assess the progress toward determined
goals. Giving and receiving feedback about performance and
use of information either to confirm or change current
policy or programme directions to meet those goals and
report on the success in meeting goals.
• Writing and communicating constructive performance
appraisals.
• Planning, education and development opportunities to
sustain, improve or build on employee work performance.
Legislation
Minimum Wages Act,1948
Background
A tripartite Committee viz.,”The Committee on Fair Wage”
was set up in 1948 to provide guidelines for wage structures in
the country. The report of this Committee was a major
landmark in the history of formulation of wage policy in India.
Its recommendations set out the key concepts of the ‘living
wage’, “minimum wages” and “fair wage” besides setting out
guidelines for wage fixation.
Article 39 - The State shall, in particular, direct its policy towards
securing (a) that the citizen, men and women equally shall have
the right to an adequate livelihood and (b) that there is equal
pay for equal work for both men and women.
Article 43 - The State shall endeavour, by suitable legislation or
economic organisation or in any other way, to give all workers,
agricultural, industrial or otherwise, work, a living wage,
conditions of work ensuring a decent standard of life and full
enjoyment of leisure, and social and cultural opportunities.
Enactment of the Minimum Wages Act
Historical Backdrop
• The initiative started with the resolution placed by one Shri
K.G.R.Choudhary in 1920 for setting up Boards for
determination of minimum wages in each industry.
• The International Labour Conference adopted in 1928
Convention No.26 and Recommendation No. 30 relating to
wage fixing machinery in trades or parts of trades.
• On the recommendation of the Standing Labour
Committee and Indian Labour Conference, a Labour
Investigation Committee was appointed in 1943 to
investigate into the question of wages and other matters
like housing, social conditions and employment.
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• A draft bill was considered by the Indian Labour
Conference in 1945.
• The 8th meeting of the Standing Labour Committee
recommended in 1946 to enact a separate legislation for the
unorganised sector including working hours, minimum
wages and paid holidays.
• A Minimum Wages Bill was introduced in the Central
Legislative Assembly on 11.4.46 to provide for fixation of
minimum wages in certain employments. It was passed in
1946 and came into force with effect from 15.3.48.
Under the Act, Central and State Governments are appropriate
Governments to
a. notify scheduled employment
b. fix/revise minimum wages
The Act contains list of all these employments for which
minimum wages are to be fixed by the appropriate Govern-
ments.
There are two parts of the Schedule. Part I has non-agricultural
employments whereas Part-II has employment in agriculture.
Criteria for Notification of Scheduled
Employment
The appropriate Government fixes the minimum wage in
respect of only those scheduled employments where the
number of employees is 1000 or more.
Fixation/Revision of Minimum Wages
Norms
The norms include those which were recommended by the
Indian Labour Conference in its session held in 1957 at
Nainital.
i. 3 consumption units for one earner.
ii. Minimum food requirements of 2700 calories per average
Indian adult.
iii. Clothing requirements of 72 yards per annum per family.
iv. Rent corresponding to the minimum area provided for
under Government’s Industrial Housing Scheme.
v. Fuel, lighting and other Miscellaneous items of expenditure
to constitute 20% of the total Minimum Wages.
Other Parameters
i. “Children education, medical requirement, minimum
recreation including festivals/ceremonies and provision for
old age, marriage etc. should further constitute 25% of the
total minimum wage.” This judgment was delivered by the
Supreme Court of India in 1991 in the case of Reptakos
Brett and Co.Vs.its workmen.
ii. Local conditions and other factors influencing the wage rate.
Methods for Fixation/Revision of
Minimum Wages
Fixation
Section 3 empowers appropriate Government to fix the
minimum rates of wages in the scheduled employments.
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11.622.1
Revision
COMPENSATITION MANAGEMENT
Revise the Minimum rates at an appropriate interval of not
exceeding five years.
Procedure for Fixation/Revision
In Section 5 of the Minimum Wages Act,1948, two methods
have been provided for fixation/revision of minimum wages.
They are Committee method and Notification method.
Committee Method
Under this method, committees and sub-committees are set up
by the appropriate Governments to hold enquiries and make
recommendations with regard to fixation and revision of
minimum wages, as the case may be.
Notification Method
In this method, Government proposals are published in the
Official Gazette for information of the persons likely to be
affected thereby and specify a date not less than two months
from the date of the notification on which the proposals will be
taken into consideration.
After considering advice of the Committees/Sub-committees
and all the representations received by the specified date in
Notification method, the appropriate Government shall, by
notification in the Official Gazette, fix/revise the minimum
wage in respect of the concerned scheduled employment and it
shall come into force on expiry of three months from the date
of its issue.
Variable Dearness Allowance (VDA)
It was recommended in the Labour Ministers’ Conference held
in 1988, to evolve a mechanism to protect wages against
inflation by linking it to rise in the Consumer Price Index. The
Variable Dearness Allowance came into being in the year 1991.
The allowance is revised twice a year, once on 1st April and then
on 1st October. In the State Sphere, 22 States/Union Territories
have provisions for Variable Dearness Allowance, at present.
Enforcement Machinery
The enforcement of the provisions of the Minimum Wages Act
in the Central Sphere , is secured through the officers of Central
Industrial Relations Machinery. In so far as State Sphere is
concerned, the enforcement is the responsibility of the respec-
tive State Government/Union Territory.
National Wage Policy
Though it is desirable to have a National Wage Policy it is
difficult to conceive a concept of the same. The National Wage
Policy has been discussed on many occasions in different fora.
Because fixation of wages depends on a number of criteria like
local conditions, cost of living and paying capacity also varies
from State to State and from industry to industry, it would be
difficult to maintain uniformity in wages. The Indian Labour
Conference, held in November, 1985 expressed the following
views-
“Till such time a national wage is feasible, it would be desirable
to have regional minimum wages in regard to which the Central
Government may lay down the guidelines. The Minimum
Wages should be revised at regular periodicity and should be
linked with rise in the cost of living”
79
 Accordingly, the Government issued guidelines in July, 87 for 37. Ash Pit Cleaning in Railways. 50.33
COMPENSATITION MANAGEMENT

setting up of Regional Minimum Wages Advisory Committees. 38. Marble and Calcite mines. 54.28
These Committees renamed subsequently as Regional Labour
39. Uranium mines. 54.28
Ministers’ Conference, made a number of recommendations
which include reduction in disparities in minimum wages in 40. Mica mines. 54.28
different states of a region, setting up of inter-state Coordina- 41. Employment in Lignite Mines. 54.28
tion Council, consultation with neighbouring States while 42. Employment in Gravel Mines. 54.28
fixing/revising minimum wages etc.
43. Employment in laying down of 54.28
Scheduled employments for which central government has fixed underground electric wires, radio,
minimum wages under the Minimum Wages Act,1948 television, telephone, telegraph
Sl. Name of Employment Minimum Wages per day and overseas communication cables
NO. (in Rs.) and similar other underground cabling work.
1. Agriculture 86.63 44. Employment in the Slate Mines. 54.28
2. Construction or maintenance of 54.28 45. Security Services 54.28
roads or building operations. Wage Board
3. Stone breaking or stone crushing. 70.27 In the 1950s and 60s, when the organized labour sector was at a
4. Maintenance of buildings. 54.28 nascent stage of its development without adequate
unionisation or with trade unions without adequate bargaining
5. Construction and Maintenance of Runways. 54.28
power, Government in appreciation of the problems which
6. Gypsum mines. 54.28 arise in the arena of wage fixation due to absence of such
7. Barytes mines. 54.28 bargaining power, constituted various Wage Boards.
8. Bauxite mines. 54.28 The Wage Boards are tripartite in character in which representa-
9. Manganese mines. 54.28 tives of workers, employers and independent members
participate and finalise the recommendations. The utility and
10. China Clay mines. 54.28
contribution of such boards in the present context are not
11. Kyanite mines. 54.28 beyond question.
12. Copper mines. 54.28 Except for the Wage Boards for Journalists and Non-journalist
13. Clay mines. 54.28 newspaper and News-agency employees, which are statutory
14. Stone mines. 54.28 Wage Board, all other Wage Boards are non-statutory in nature.
Therefore, recommendations made by these Wage Boards are
15. White Clay mines. 54.28
not enforceable under the Law.
16. Ochre mines. 54.28
The importance of the non-statutory Wage Boards, has
17. Fire Clay mines. 54.28 consequently declined over a period of time and no non-
18. Steatite (Soapstone and Talc) mines. 54.28 statutory Wage Board has been set up after 1966, except for
19. Asbestos mines. 54.28 sugar industry, where last such Wage Board was constituted in
1985. The trade unions, having grown in strength in these
20. Chromite mines. 54.28
industries, are themselves able to negotiate their wages with the
21. Quartzite mines. 54.28 management. This trend is likely to continue in future.
22. Quartz mines. 54.28
Wages and Social Security
23. Silica mines. 54.28 The Government has assumed responsibility for securing a
24. Magnesite mines. 54.28 minimum wage for certain sections of workers, in industry and
25. Graphite mines. 54.28 agriculture, who are economically weak and stand in need of
protection. Towards this end the Minimum Wages Act provides
26. Felspar mines. 54.28
for the fixation and revision of wage rates in these occupations.
27. Redoxide mines. 54.28 These measures have not proved effective in many cases.
28. Laterite mines. 54.28 For better implementation of the law, the machinery for
29. Dolomite mines. 54.28 inspection has to be strengthened. Wage determina- tion in
30. Iron Ore mines. 54.28 major industries is left to the process of collective bargaining,
conciliation, arbitration and adjudication. The Second Plan
31. Granite mines. 54.28
recommended the setting up of Wage Boards as the most
32. Wolfram mines. 54.28 suitable method of settling wage disputes where large areas of
33. Magnetite mines. 54.28 industry are concerned. This has so far been applied to the
34. Rockphosphate mines. 54.28 cotton and jute textiles, cement, sugar and plantation industries;
and will be extended to other indus- tries according to circum-
35. Hematite mines. 54.28
stances.
36. Loading, unloading in Railways’ goods shed 50.33

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80 11.622.1
It has been decided to appoint a Board soon for the iron and

COMPENSATITION MANAGEMENT
steel industry. The representatives of employers and workers
have agreed that unanimous recommendations of a wage board
should be implemented fully.
An encouraging trend has been noticed in the coal mining
industry where employers and workers have agreed to set up a
bipartite committee to examine the entire question of wage
revision in the industry; alternative wage-fixing machinery will
be considered only if the bipartite committee fails to arrive at a
settlement.
Some broad principles of wage determination have been laid
down in the Report of the Fair Wages Committee. On the basis
of agreement between the parties, the Indian Labour Confer-
ence had indicated the content of the need-based minimum
wage for guidance in the settlement of wage disputes. This has
been reviewed and it has been agreed that the nutritional
requirements of a working class family may be re-examined in
the light of the most authoritative scientific data on the subject.
Apart from the minimum wage, care should be taken in fixing
fair wages for different classes of workers, that adequate
incentives are provided for the acquisition and development of
skills and for improvements in output and quality. There are,
however, wide disparities between the wages of the working
class, on the one hand, and the salaries at the higher manage-
ment levels, on the other.
Owing to the uncertainty attaching to it, the question of bonus
has become a source of friction and dispute. It has been decided
to appoint a Commission which will include representatives of
both parties to study the problems connected with bonus
claims and to evolve guiding principles and norms for the
payment of bonus.

Notes:

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11.622.1 81
COMPENSATITION MANAGEMENT
LESSON 14:
LEGALISTIC FRAMEWORK FOR WAGE DETERMINATION
Learning Objective
• Minimum Wages Act, 1948
• Payment of Wages Act, 1936
• Payment of Bonus Act, 1965
Interaction
With regard to legalistic framework for wage determination in
respect to Indian economy we will discuss the laws relating to
Wage and Salary Administration and they are - Minimum
Wages Act-1948, Payment of Wages Act 1936 and Payment of
Bonus Act, 1965.
Minimum Wages Act, 1948
Object and Scope
The level of wages payable to workers is determined by the
forces of demand and supply. In a welfare state the protection
of the interests of workers is one of the aims of any legislation
which is enacted in the labour field. The Indian Labour class
besides being illiterate is by and large not organized to protect
its interest in a competitive market where supply of labour is
always in excess of demand. Under such conditions the Indian
Parliament enacted the Minimum wages Act, 1948.
The Minimum wages Act was enacted to secure the welfare of
the workers in a competitive market by providing for a mini-
mum limit of wages in certain employment. This is the
preamble of the Act. The Act purports to achieve the preven-
tion of exploitation of labour and for that purpose authorizes
the appropriate government to take steps to prescribe mini-
mum rates of wages in scheduled industries.
It is only with regard to certain specified industries that the
payment of statutory minimum wages have been laid down.
The object of the Act is to do social justice to workers em-
ployed in the scheduled employments by prescribing minimum
rates of wages for them. The concept of locus standi has also
been enlarged with a view to ensure the application of the law.
The Act contemplates that minimum wages rates must ensure
not the mere physical need of the worker which could keep him
just only his subsistence and that of his family but also
preserve his efficiency as a workman. It should also provide for
some measure of education, medical requirements and
amenities. The Directive Principle of state policy as enshrined in
Articles 43 of the constitution also adheres to this principle
The Tripartite committee of the Indian labour Conference held
in New Delhi in 1957 declared the wage policy which was to be
followed during the 2nd five year plan. The five norms of
Fixations of “Minimum Wages” are:-
i. The standard working class family should be taken to
consist of three consumption units for the one earner, the
earnings of women, children and adolescents should be
disregarded.
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82
ii. The Minimum food requirement should be calculated on
the basis of a net intake of calories, as recommended by a
doctor of the committee, for an average Indian adult of
moderate activity.
iii. Clothing requirements should be estimated at per Capita
consumption of 18 yards per annum which would, for the
average workers family of four, a total of 72 yards.
iv. In respect of housing, the rent corresponding to the
minimum area provided for under Government Industrial
Housing scheme should be taken into consideration
infixing the minimum wage.
v. Fuel, lighting and other’ miscellaneous’ items of
expenditure should constitute 20% of the total minimum
wages.
Keeping in view the socio-economic aspect of the wages
structure, the Supreme Court added the following
additional component as ab’1lide for fixing the minimum
wage in the industry:-
vi. Children education, medical requirement, minimum
recreation including festivals, ceremonies and provision for
old age, marriages, etc. should further constitute 25% of the
total minimum wages.
The wage which approximately answers the above six compo-
nents in nothing more than a minimum wage at subsistence
level. The employees are entitled to the minimum wage at all
times and under all circumstances An employer who cannot pay
the minimum wage has no right to engage labour and no
justification to run the industry.
The Concept of Minimum Wages
The Act does not define minimum wages. It is only through
the definition of ‘wages’ as defined in the Act that the concept
of minimum wages can be deduced Wages as defined in the Act
means all renuneration, capable of being expressed in terms of
money which would, if the terms of employment, express or
implied, were fulfilled, be payable to a person employed in
respect of his employment or work done in such employment,
and includes house rent allowances, but wages do not include:
i. The value of
a. any house accommodation, supply of light, water,
medical attendance; or
b. any other amenity or any service excluded by general or
special order of the appropriate government;
ii. any contribution paid by the employer to any pension fund
or provident fund or under any scheme of social insurance;
iii. any traveling allowance or the value of any traveling
concession;
iv. any sum paid to the persons employed to defray special
expenses entailed on him by the nature of his employment;
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v. any gratuity payable on discharge.
It was held in Manganese ore (India) Ltd V. Chadilalsaha, 1991
L.I. C 524 S.C when the attendance bonus is an additional
payment made to the workmen as a means of procuring their
regular attendance with the object of increasing production then
the bonus is in the nature of extra remuneration to regular
attendance which is not payable to all the workmen at the time
of joining the employment but is payable to a workmen who
has put in continuous service for the specified period then the
attendance bonus would be held to be only an incentive and
not a wage and hence it is not treated as minimum wage fixed
under the Act.
Broadly speaking the wages can be classified into following
categories:
a. The Living Wage
The concept of living wage is the wage rate which prevails in
most of the economically advanced countries. The living wage
must provide not merely for absolute essentials such as food,
shelter, clothing, frugal comfort, provision for evil days etc. as
well as regard for the special skill of an artisan if he is one.
b. Fair Wage
It was held in Express News papers (p) LTD. Vs. Union of
India 1961 I.L.L.J. 339 SC that Fair Wage is a mean between the
living wage and the bare minimum wage. In All India Reserve
Bank of India 1965 LL.L.J 175 SC, A fair wage is thus related to
fair workload and the earning capacity It is a step 100ver than
the living wage ‘W11ile the lower limit of fair wages must
obviously be minimum wages, the upper limit is equal1y set by
what may broadly be called the capacity of industry to pay.
The factors which determine the capacity to pay will be:
1. the productivity of the labour;
2. the prevailing rates of wages in the same Or similar
industries in the same or neighboring localities;.
3. the present economic position of the industry, its prospects
in the near futures.
The fair wages win grow with the growth and development of
the national economy and the progress made by the industry
must be approximate to the capacity of the industry to pay.
c. Minimum Wage
The minimum wage is the lowest wage in the scale below which
the efficiency of a worker is likely to be impaired. The minimum
wage, includes not only the bare physical necessities but also a
modicum of comfort otherwise known as conventional
necessities. The minimum wage must, therefore, provide not
merely for the bare subsistence of life but also for the preserva-
tion of the efficiency of worker. For this purpose the minimum
wage most also provide for some measure of education,
medical requirements and amenities.
It is in light of the above discussion there is a difference
between minimum wage and fair wages. In Sangam Press. Vs.
Its Workmen, the Supreme Court observed that in case of fair
wage, besides the principle of industry cum region, the
company’s capacity to bear the financial burden must receive due
consideration. But mere hopeful observation made in the
director’s annual report cannot be the basis for awarding
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11.622.1
increased, wages because such observations are sometimes
COMPENSATITION MANAGEMENT
made to inspire hope and confidence in shareholders and they
cannot be a substitute for actual audited figures.
The minimum wage as defined means
1. Any minimum rate of wages fixed or revised by the
appropriate government in respect of scheduled
employments may consist of
i. A basic rate of wages and a special allowance at a rate to
be adjusted at such intervals and in such manner as the
appropriate government may direct to accord as nearly
as possible with the variation of cost of living index
number applicable to such workers;
ii. A basic rate of wages with or without the cost of living
allowance, and the cash value of allowance in respect of
essential commodities at concession rate where so
authorized;
iii. An all inclusive rate allowing for the basic rate, the cost
of living allowance and the cash value of concession, if
any.
2. The cost of living allowance and the cash value of the
concession in respect of supplies of essential commodities
at concessional rates shall be computed by the competent
authority at such intervals and in accordance with such
directions as may be specified or given by the appropriate
government. The Act does not define minimum wages
presumably because it would not be impossible to lay down
a uniform minimum wage for all industries throughout the
country on account of different and varying conditions
prevailing from industry to industry and from one port of
the country to another The legislature also thought it
inexpedient not to apply the Act to all industry at a time.
The Payment of Wages act, 1936
(IV OF 1936)
Background
Before this enactment, in the Payment of Wages Act, 1936 the
employer could decide on the wages of employees according to
his own whim and fancy. Employer also used to deduct sums
from wages as fine. The position of employees was weak and
their conditions deplorable. In this backdrop, Royal commis-
sion on Labour was appointed in 1929, which gave the Report
on the basis of such report, The Payment of Wages Act, 1936
was enacted.
This Act regulates the payment of wages to persons employed
in any factory and in Railway administration. The State Govern-
ment, after giving three months notice may extend the Act to
any class of persons employed ill any Industrial establishment.
The Act shall not be applicable in case if the average pay in
respect of a wage period exceed Rupees one thousand six
hundred a month or more.
Object Act
The main objects of the Act are:
i. to pay the wages to the employees
ii. to pay the wages at proper times as specified in the Act.
iii. to prevent unauthorized deductions
83
 The preamble to Act clearly states the object:
COMPENSATITION MANAGEMENT
“Whereas it is expedient to regulate the payment of wages to
certain class of employed persons. This act is a piece of
legislations inclined towards social justice.
Definitions
Sec 2 of the Act dea1s with definitions Sec 2 (vi) of the Act
defines wages. “Wages” means all remuneration (whether by
way of salary, allowance or-otherwise) expressed in terms of
money or capable of being so expressed which would if the
terms of Employment express or implied, were fulfilled, be
payable to a person employed in respect of his employment or
of work done in such employment and also includes.
a. any remuneration payment under any award or settlement
between the parties or order of a court;
b. any remuneration with respect to overtime work or holidays
or any lease period;
c. any additional remuneration payable paid as bonus under
the terms of employment
d. any sum which by reason by the termination of
employment of the person employed is payable under any
law, contract or instrument which provides for the payment
of such sum but does not provide for the time within
which the payment is to be made.
e. any sum to which the person employed is entitled, under
any scheme framed under any law for the time being in
force. But it does not include
1. Any bonus which does not form part of the
remuneration payable under the terms of employment
or which is not payable under any award or settlement
between the parties or order of court;
2. The value of any house accommodation or of the
supply of light, water, medical attendance or other
amenity or of any service excluded from computation
of wages by a general or special order of the State
Government.
3. Any contribution paid by the employer to any pension
or provident fund and the interest which may have
accrued thereon.
4. Any traveling allowance or the value of any traveling
concession.
5. Any sum paid to the employed person to defray
speci1l1 expenses entailed on him by the nature of his
employment.
6. Any gratuity payable on the termination of
employment in cases other than those specified in sub
clause(d)
See 2 (1) of the Act defines ‘employed person’ which includes
the legal representative of a deceased employed person.
Sec 2 (a) of the Act defines ‘employer’ which includes the legal
representative of a deceased employer.
Responsibility For Payment of Wages
Sec 3 of the Payment of Wages Act, 1936 provides that every
employer shall be responsible for the payment to persons
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84
employed by him of all wages required to be paid under this
Act.
Fixation of Wage Periods
See 4 provides that every person responsible for the payment of
Wages shall fix periods in respect of which such wages shall be
payable, and such period is called “wages period” No wage
period shall exceed one month.
Rule Making Power
Under Section 26 Rule making powers are given to State
Government to regulate the procedure to be followed by the
authorities and Courts referred to in Sections 15 and 17.
Section 26(2) the State Government may be notification in the
official Gazette make rules for the purpose of carrying-into
effect the provisions of this Act.
Section 26(3) In particular and without prejudice to the
generality of the foregoing power, rules made under Sub-
Section (2) may
a. Requires the maintenance of such records, registers returns
and notices as are necessary for the enforcement of the Act,
prescribe the form thereof and the particulars to be entered
in such registers of records;
b. Require the display in a conspicuous place on premises
where employment is carried on of notices specifying rates
of wages payable to persons employed on such premises;
c. Provide for the regular inspection of the weights, measures
and weighing machines used by employers in checking or
ascertaining the wages of persons employed by them;
d. Prescribe the manner of giving notice 9f the days on which
wages will be paid;
e. Prescribe the authority competent to approve under sub-
section (l) of Section 8 acts and omissions in respect of
which fines may be imposed;
f. Prescribe the procedure for the imposition of fines under
Section 8 and for making of the deductions referred to in
section 10;
g. Prescribe the conditions subject to which deductions may be
made under the provision to sub-section (2) of Section 9;
h. Prescribe the authority competent to approve the purposes
on which the proceed of fines shall be expend and;
i. Prescribe the extent to which advances maybe made and the
installments by which they may be recovered with reference
toc1ause (b) of section 12;
ia. Prescribe the extent to which loans may be granted and the
rate of interest payable thereon with reference to section
12A;
ib. Prescribe the powers of Inspection for the purpose of this
Act.
j. Regulate the scales of costs which may be allowed in
proceedings under this Act;
k. Prescribe the amount of Court fees payable in respect of
any proceedings under this Act;
l. Prescribe the abstracts to be contained in the notices
required by section 25.
11.622.1
la. Prescribe the form and manner in which nominations may
be made for the purpose of sub section (1) of Sec. 25-A the
cancellation or variation of any such nomination, or the
making of any fresh nomination in the event of the
nominee predeceasing the person making nomination and
other matters connected with such nominations;
lb. Specify the authority with whom amounts required to be
deposited under clause (b) of Sub Section (1) of Section
25A shall be deposited, and the manner in which such
authority shall deal with the amount deposited with it
under that clause;
m. Provide for any other matter which is to be or may be
prescribed.
Sub Section (4) in making any rule under this Section the State
Government may provide that a contravention of the rule shall
be punishable with fine which may be extended to Rs. 200/
Sub Section 5 provides that all rules made under this section
shall be subject to the condition of previous publication, and
the date to be specified under clause (3) of Section 23 of
General clauses Act 1897 (10 of 1897) shall not be less than
three months from the date on which the draft of the pro-
posed rules was published.
Sub Section 6 provides that every rule made by the Central
Government under this section shall be laid, as soon as may be
after it is made, before, each House of Parliament while it is in
session on for a total period of30 days which may be comprised
in one session or in two or more successive sessions and if,
before the expiry of the session immediately following the
session or the successive sessions aforesaid, both houses agree
in making any modification in the rule or both houses agree
that the rule should not be made, the rule shall thereafter have
effect only in such modified form or be of no effect, as the case
may be; so however, that any such modification or annulment
shall be without prejudice to the validity of anything previously
done under that rule.
The Payment of Bonus Act 1965
(ACT 21 OF 1965)
Definition, Scope, Applicability and Extent of Bonus Act
Meaning: Bonus is an Extra Payment made out of Profits.
Definition
It is surprised to note that the most important term “Bonus”
which is the ‘oxygen’ of the payment of Bonus Act, 1965, has
not been defined in this Act or any other labour and industrial
legislation. ‘The Bonus Commission’ explained. It is difficult to
define in rigid terms the concept of bonus but it is possible to
urge that once profit exceed a certain base, labour should
legitimately have a share in them. It is proper to construe the
concept of bonus as sharing by the workers in the prosperity of
the concern in which they are employed.
New English Dictionary defines, “A boon or gift over and
above what is normally due as remuneration to the receiver and
which is therefore, something wholly to the good.
The term bonus is applied to a cash payment made in addition
to wages. It generally represents the cash incentive given-
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11.622.1
additionally on certain grounds of attendance and efficiency
COMPENSATITION MANAGEMENT
being, maintained.
Kind of Bonus
The Supreme Court in New Maneck Chowk Spinning and
Weaving Company Vs. Textile Labour Association 1961 I LLJ
521 at 526 suggested four types of Bonus, namely -
i. Production Bonus;
ii. Bonus as an implied term of contract between the parties,
iii. Customary bonus in connection with some festival and
iv. Profit bonus
Profit Bonus
Profit bonus has been given statutory recognition in the
payment of Bonus Act, under this the quantum of bonus
depends on the extent of profit obtained in the relevant year.
This is subject to a statutory minimum and maximum bonus.
Production Bonus
The payment of production bonus depends upon Production
and is in addition to wages. It is an incentive to greater effort on
the part of the labour for more production. 1976 amendment
by Section 31 recognizes production bonus.
There are good will bonus, customary bonus etc.
Bonus Commission
Government of India in 1961 setup a commission for consid-
ering all questions relating to bonus. The recommendations
were accepted and an ordinance was issued by the Government
in 1964 which was replaced by the payment of Bonus Act, 1965,
which was assented by the President on 25.09.1965.
Under the Bonus Act, liability to pay Bonus has become a
statutory obligation imposed upon the employer covered by the
Act.
Object
Article 43 (Directive Principles of state policy) of the constitu-
tion of India expects “living wage” for all the workers, and to
achieve it directs the Government to make legislations. The
preamble of the Act explains the object: “An act to provide for
the payment of bonus to persons employed in certain estab-
lishments on the basis of profits or on the basis of production
and for matters concerned therewith”
The essential factors for a successful industry are
i. Labour and
ii. Capital.
The General Motors (India) Ltd., Vs. Its “Workmen” ex-
plained; It is universally accepted principle now that profits ate
made possible by the contributions that profits are made
possible by the contributions that both capital and labour make
in any particular industry, and it is concealed1hat labour has a
right to share in increased profits that are made in any particular
period. The distribution of increased profits is made by
payment of Bonus than by increase in wages. Wages must be
fixed on normal conditions. Thus it ensures the peace, amicable
relations between employee and employer, and the prosperity
of the concern.
85
 Scheme of the Act
COMPENSATITION MANAGEMENT
The Act is designed
i To impose statutory liability upon the employer of every
establishment covered by the Act to pay bonus to
employees in the establishment.
ii. To define the principles of payment of bonus according to
the Prescribed formula
iii. To provide for payment of minimum and maximum
bonus and linking payment of bonus with the scheme of
set off and set on.
Application of the Act
Under Section 1(3), the Act applies to every factory and every
other establishment in which ten or more persons are employed
on any day during the accounting year. Thus the Act applies to
shops, offices, mines etc. if minimum of 10 persons were
employed an any day of the accounting year.
The Act is a comprehensives and exhaustive law, dealing with
bonus in all its aspects. An employee of an establishment to
which the Act does not apply cannot claim bonus under the
Act.
The Mill Owner’s Association, Bombay Vs. The Rashtriya Mill
Mazdoor Sangh Bombay 1950 (z) LLJ124 7.
The Industrial Court went elaborately into the matter in this
case and laid down certain principles and awarded to the
workmen bonus equivalent in amount to 3/8th of the total
basic earnings of each workman subject to certain conditions.
This decision is known as the “Full Bench Formula”, a leading
decision in the payment of Bonus case- laws.
Principles
1. Bonus is paid to employees in cash. It is not ex-gratia. If
the employer refuses to pay bonus, the employee can rise
“Industrial dispute”.
2. Capital & labour contribute to the earning of the concern so
it is fair that labour should derive some benefit if there is
surplus after meeting prior charges.
3. Bonus is like profit sharing. It renders cash incentive to
labour which would encourage for a better efficiency and
production. Where the industry does not have the capacity
to pay living wage, bonus must be looked upon as a
temporary satisfaction, wholly of partly, to meet the needs
of labour.
4. The decision of the award of bonus is based on two fold
objective.
i. Recognition of the fact that the labour contributed for
the profit earned by industry & so it has a right to claim
a share in it.
ii. It is intended to bridge or narrow down the gap as
may be reasonably possible between the living wage to
which the labour is entitled and the actual age received.
5. Social Justice: Payment of bonus is rendering social justice
to the poor and hard working labor.
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86
Salient Features of the Payment of Bonus Act, 1975
1. The payment of Bonus Act, 1965 (Act No. 21) has 40
sections and four schedules.
2. The payment of Bonus rules have been framed in 1945
which have only 5 rules and 4 norms.
3. Two sections 33 and 3 7 were repealed from the Act 21 of
1975. Two sections 31-A, and 34-A are newly incorporated
in the Act.
4. This Act applies to every factory and every other
establishment in which twenty or more persons are
employed on any day of the Accounting year.
5. Bonus Win be payable within 8 months from the closure
of Accounting year.
6. Bonus will be payable only cash
7. Bonus will be paid from the balance known as “Available
Surplus”.
8. It applies only to private sector.
9. The provisions of this Act apply from the accounting year
commencing on any day in the year 1964.
10. The term “Bonus” has no definition in the payment of
Bonus Act, 1965.
11. It is regarded as Deferred Wages payable to employees. It is
the right accrued to them by the Act, and not a charity on
the employer. It is not an ex-gratia, but paid in addition to
wages.
12. Lord Birkenhead opines: It differs from wages, in that it
does hot rest on contract, but still payments for Bonus are
made because legally due, but which the parties do not
contemplate to continue indefinitely.
13. The Supreme Court of India while disposing Mill Owner’s
Association Vs. Rashtriya Mill Mazdbor Sangh (1950)
expressed. When the goal of living wages has been attained,
bonus like profit sharing, would present more as the cash
incentive to greater efficiency and production.
14. The responsibility is imposed upon the Employer to
calculate bonus & distribute it within 8 months from the
closure of accounting year. He must maintain registers. If
the Provisions of Act 21 of 1965 are contravened, the
punishment is imprisonment for a term which may extend
to six months or with fine which may extend to Rs. 1000/-
or with both.
Eligibility for Bonus
Under Section 8 every employee is entitled to bonus in any
accounting year if he has worked in the establishment for not
less than 30 working days in that year.
Section 2 (13) provides that the employee shall be entitled to get
Bonus, if his salary or wages does not exceed Rs.2500/- per
men sum in any industry to do any skilled, unskilled manual,
supervisory, managerial, administrative, technical or clerical work
for hire or reward whether the terms of employment be express
or implied.
Disqualification for Bonus
Under Section 9 an employee is disqualified from receiving the
bonus if he is dismissed from service for fraud, riotous or
11.622.1
violent behavior while on the premises of the establishment or
for committing theft, miss-appropriation or sabotage of any
property of the establishment. A dismissal based on the above
mentioned guilt is subject to the review of the tribunals under
Section 10. Section 10-A of the Industrial Disputes Act and by
the High Court under Articles 226 and 227 and Supreme Court
under Article 136 of the Constitution. If the dismissal of the
employee is based on any other ground it will not disqualify
him from claiming the Bonus Disqualifications.
a. Fraud
An employee is disqualified to receive bonus if he is dismissed
from service for Commission of fraud. Fraud is an act of miss-
conduct under the Model Standing Orders, 1946 punishable
with dismissal. The standing orders to the establishment in
question should-have provided fraud as a ground for dismissal
so as to attract the disqualification under Section 9(a).
Examples
1. A - an employee working in XYZ Chit funds pvt Ltd. if he
advertises against that company and induces the customers
of his company to join another LMN Chit Funds Pvt. Ltd.,
it is a clear example of fraud.
2. A - an employee of XYZ co. Ltd. obtained the property of
the company by playing fraud and deceitful means. He was
convicted by the Court. He is disqualified far bonus.
b. Riotous or Violent Behavior
An employee who is dismissed an ground of riotous or violent
behavior is disqualified to receive bonus. Such riotous or violent
behaviors must have been committed by the employee on the
premises of the establishment. The expression “riotous and
violent behavior” is wider in scope that riotous and disorderly
behavior used in the Model Standing orders. Hence dismissal
on ground of disorderly behavior will not disqualify to receive
bonus unless such disorderly behavior is of violent nature.
c. Theft, Misappropriation or Sabotage
Dismissal of the employee for commission of theft, misappro-
priation or sabotage of any property of the establishment will
disqualified such employee from receiving bonus.
Theft - Section 378 of the Indian Penal Code defines theft
Every employee must perform his duties with loyalty and
faithfulness. If the commits any theft, he is liable far criminal
proceedings. He is also disentitled for bonus.
Misappropriation - Section 408 of IPC defines Misappropria-
tion. An employee, if dishonestly misappropriates or converts
to his awn use any movable property which belongs to the
employer, shall be liable far criminal proceedings far his
misappropriation and may be dismissed from service disen-
titled far Bonus.
Sabotage – Can notes devices adopted by the employee
obstructing or interfering with the process of industry with a
view to reduce the profits of the employer.
The eligibility to bonus to employees is revised up to Rs. 3500/
- per month from Rs. 2500/- with effect from 1.4.1993.
The extent of benefit also is raised to Rs.2500/- from Rs.
1600/- is by the 1995 Amendment
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11.622.1
Minimum Bonus and Maximum Bonus
COMPENSATITION MANAGEMENT
Minimum Bonus
Scope: Section 10 explains about the payment of Minimum
Bonus.
Section 10: Payment of Minimum Bonus
Subject to other provisions of this Act, every employer shall be
bound to pay to every employee in respect of accounting year
commencing on any day in the year 1977 and in respect of every
subsequent accounting year a minimum bonus which shall be
8.33% of the salary or wage earned by the employee during the
accounting year or one hundred rupees, which ever is higher,
whether or not the employer has any allocable surplus in the
accounting year.
Provided that where such employee has not completed fifteen
years of age of the beginning of the accounting year the
provisions of this section shall have effect in relation to such
employees as if for the words “one hundred rupee” the words
“Sixty rupees” were substituted.
Important Points on Section 10
1. Minimum Bonus 8.33%- every employee is entitled to get a
minimum bonus which shall be 8.33% of the salary or
wage earned by him during the accounting year or Rs. 100/-
which ever is higher,
2. Section 10 has been substituted by Act 66 of 1980 with
effect from 21.08.1980. The provisions of Section 10 newly
inserted came into force with effect from the accounting year
1979 previously it was only 4% of Rs. 40 which ever was
higher. It is now enhanced to Rs. 100 or 8.33 of salary
whichever is higher.
3. In case of employee having not completed 15 years of age
at the beginning of accounting year, the minimum bonus is
reduced to Rs. 65.
4. It is well settled law that minimum bonus has to be paid
even if the company is in loss. Whether ‘or not the
employer has allocable surplus in the accounting year,
minimum bonus shall be payable irrespective of allocable
surplus.
Claim of Minimum Bonus - Not an Industrial Dispute
Claim for Minimum bonus under Section 10 does not consti-
tute on industrial dispute within Section 22 of the Bonus Act It
is not necessary that it should be referred for adjudication to the
Industrial Tribunal Labour Court is competent to entertain
application under Section32 (2) of the Industrial Disputes Act
and determine the amount of minimum bonus. No minimum
bonus is payable when an establishment is exempt under
section 16 of the Act.
Maximum Bonus Set off and set on
Section 11 explains about maximum bonus. Section 11:
payment of Maximum bonus
1. Where in respect of any accounting year referred to Section
10, the allocable surplus exceeds the amount of minimum
bonus payable to the employees under that Section, the
employer shall in lieu or such minimum bonus, be bound
to pay to every employee in respect of that accounting year
87
 bonus which shall be an amount in proportion to the salary
COMPENSATITION MANAGEMENT
or wage earned by the employee during the accounting year
subject to maximum of 20% of such salary wage.
2. In computing the allocable surplus under this section, the
amount set on the amount set off under the provision of
section 15 shall be taken into account in accordance with the
provisions of that section.
Under Section 15 the excess amount after giving the maximum
bonus under Section 11 may be set on for the succeeding year.
Similarly the deficiency to pay even the minimum bonus under
Section 10 may be set off in the succeeding year if there is excess
after meeting the minimum bonus in that succeeding year.
Set on and Set off Allocable Surplus
Section 15 explains about set on and set off of allocable
surplus. A fair reading of this section and fourth schedule gives
a clear picture & understanding.
Section 15, set on and set off allocable surplus.
1. Where for any accounting year, the allocable surplus exceeds
the amount of maximum bonus payable to the employees
in the establishment under Sec. 11, then the excess shall,
subject to a limit of 20% of the total salary or wage of the
employees employed in the establishment in that
accounting year, be carried forward for being set on in the
succeeding accounting year and so on up to and inclusive of
the fourth accounting year to be utilized for the purpose of
payment of bonus in the manner illustrated in the fourth
schedule.
2. Where for any accounting year, there is no available surplus
or the allocable surplus in respect of that year falls short of
the amount of minimum bonus payable to the employee
in the establishment under section 10, and there is no
amount or sufficient amount carried forward and set on
under section (i) which could be utilized for the purpose of
payment of the minimum bonus, then, such minimum
amount or the deficiently, as the case maybe, shall be carried
forward for being set off in the succeeding accounting year
and so on up to and inclusive of the fourth accounting year
in the manner illustrated in the fourth schedule.
3. The principle of set on and set off as illustrate in the
Fourth schedule shall apply to all other cases, not covered by
sub section (1) or sub section (2) for the purpose of
payment of bonus under the Act.
4. Where in any accounting year any amount has been carried
forward and set on or set off under this section then, in
calculating bonus for the succeeding accounting year, the
amount of set on or set off carried forward from the ear list
accounting year shall first be taken into account.
Proportionate Reduction of Bonus in Certain Cases
Under Section 13 where an employer has not worked for all the
working days in any accounting year, the minimum bonus
ofRs.1001- or Rs.60/- as the case may be, if such bonus is
higher than 8 1/3 percent of salary or wage for the days he has
worked in that accounting year, shall be proportionately
reduced.
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88
Computation of Number of Working Days
Under Section 14 an employee shall be deemed to be working in
an establishment in any accounting year also on the days on
which he has been laid off or has been on leave with salary or
wage or has been absent due to temporary disablement or the
employee has been on maternity leave with salary or wages.
Special Provisions Regarding Certain Establishments
Section 16 of the Act provides some benefits to newly set up
establishment by exempting them from the obligation to pay
bonus under the Act. A more charge in the location, manage-
ment, name or ownership will not make the establishment a
newly set up establishments shall be entitled to bonus under
the Act in the following manner:
1. For the first five accounting years following the year in
which the employer sells goods produced in such
establishment, bonus shall be payable only for such
accounting year in which the employer derives profits from
such establishment such bonus shall be calculated under the
Act for that year and that too without applying the scheme
of set off and set on under Section 15 of the Act
2. To an establishment mentioned in (i) above the provisions
of Section 15 shall apply with some modification for die’
sixth and seventh accounting years. The modification are:
a. For the sixth accounting year, the set on and set off
principle will be applicable as against the allocable surplus of
the fifth, sixth accounting year.
b. For the seventh accounting year the set on or set off
principle will be applicable in respect of the allocable surplus
of the fifth, sixth and seventh accounting year.
3. From the eight accounting year following the accounting
year in which the employer starts selling goods produced in
such establishment, the provision of Section 15 shall apply
to such establishment as they apply to any other
establishment.
Production or manufacture of goods during the trial running
of any factory or during the prospective stage of any mine or
any oil field shall not be treated as production or manufacture
of goods under the provisions of section 16 the appropriate
government will decide disputes on this after giving reasonable
opportunity to the parties to represent their case and the
decision of the government shall be final and not questionable
before any court or other authority.
However in case of the employer of an existing establishment
with different branches, department etc. has been paying bonus
to employees of all such departments or undertaking or
branches on the basis of consolidated funds or profile of such
branches then the employer shall be liable to pay bonus in
accordance with the provisions of the Act for all the employees
on the basis of the consolidated profits.
Non-Statutory Bonus
Under Section 17, if in a particular accounting year an employer
has paid to an employee:
a. Puja Bonus or other customary bonus
b. interim bonus (ie) part of the bonus payable under this a
act before the date on which such bonus becomes payable
11.622.1
 he shall be entitled to deduct the amount of bonus so paid
from the amount of bonus payable by him to the
employees under this act in respect of that Accounting year
& the employee is entitled to receive only the balance.
In case of customary or contractual bonus, the liability depends
exclusively on the express or the implied contract and its terms
are governed by the custom or contract under which a claim
thereto arrives.
Deduction of Certain Amount from the Bonus
Payable Under the Act
Section 18 empowers an employer to deduct the amount of
financial loss from the bonus payable to an employee in a
particular accounting year provided that the following condi-
tions are satisfied.
i. The misconduct of the employee should have caused
financial loss to the employer.
ii. The employee should have been found guilty of such
misconduct by holding a domestic enquiry.
iii. The financial loss should have been caused in the
accounting year, from the bonus pertaining to which the
deduction is sought to be made.
Payment of Bonus
Under Section 19, the payment of bonus must be only in cash.
If there is dispute as to liability to pay bonus then the bonus
must be made within one month from the date of award of
such authority. In all other cases bonus must be paid within 8
months from the date of closing of the accounting year.
However, on sufficient reasons, the government may extend the
period of payment of bonus beyond the eight months,
provided in any case it must not exceed two years. Such
extensions permissible on satisfaction of the following
conditions
i. Employer should give application to the appropriate
government.
ii. Application should disclose sufficient reasons
iii. Government should hear the parties.
Application of the Act to establishment in public sector
Under Section 20, the provisions of this Act shall apply in
relation to an establishment in public sector like an establish-
ment in private sector if:
i. In any accounting year such establishment in public sector
sells any goods produced or manufactures by or renders any
services in competition with an establishment in private
sector.
ii. The income from such sale or service or both is not less
than twenty percent of the gross income of the
establishment in public sector for that accounting year.
Reference of disputes under the Act
Section 22 contemplates two types of disputes under the Act.
i. Dispute with respect to bonus payable-under the act.
ii. Dispute with respect to the application of the act to on
establishment in public sector between the employer & his
employees.
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11.622.1
Such disputes are deemed to be industrial disputes as defined in
COMPENSATITION MANAGEMENT
Section 2(k) of the Industrial Disputes Act & in such cases
settlement method under Industrial Disputes Act or under any
corresponding law in the state will apply.
When a dispute between an employer and its employees in a
beedi factory regarding payment of bonus arose, it was held
that Section 22 of the Bonus is Act is clearly applicable. There-
fore, the reference of such a dispute under U.P. Industrial
Dispute Act is quite valid as it is a corresponding law relating to
the investigation & settlement of industrial disputes in force in
a state as envisaged under section 22 of payment of Bonus Act.
Appropriate Forum
Section 22 envisages that where any dispute arises between an
employer and its employees with respect to the bonus payable
under the Act, then such a dispute ought to be deemed to be an
industrial dispute and it has to be dealt with under the indus-
trial law as an industrial disputes. When the dispute results in
an award or settlement or an agreement, the employee can
recover all the bonus due from the employer as per section 21
of the payment of Bonus Act. Therefore a claim made under
the Act in a Civil Court could not be sustained.
Duty of the Tribunal
In a dispute referred under section 22 of the Act regarding the
bonus payable under the Act, the tribunal is under a duty to
decide the rate of bonus payable by the employer. In the
absence of the rate being specified, the employer would be
handicapped in carrying out the directions contained in the
award.
Presumption as to Balance Sheet, Profit and Loss
Section 23 raises a rebut table presumption about the accuracy
of the settlement and particulars contained in the balance sheet,
profit and loss account for corporations and companies
produced before the said authority. The presumption is not
hard and fast presumption, incapable of being rebutted a
presumption juries dejure. The presumptions not conclusive
but rebut table.
If the said authority is satisfied that the statements and
particulars contained in the balance sheet and the profit and loss
account of the corporation or the company are not accurate it
may take such steps as it thinks necessary to find out the
accuracy of such statements and particulars. The satisfaction of
the authority is subjective satisfaction, which can’t be called in
question in judicial review. The authority may therefore, on
being satisfied about the in accuracy of the statement or the
particulars, call for the proof of the statements and particulars.
Application for Clarification
Section 23 (2) entitles trade unions or where there are not trade
unions the employees who are party to the dispute to seek
clarification relating to any item in the balance sheet or the profit
and loss account by making an application to the adjudicating
authority upon such application being made the authority has
to satisfy itself whether such clarification is necessary. If satisfied
the authority has to give an opportunity to the employer of
being heard in opposition to the Application After hearing the
parties the authority is enjoined to make an order directing the
corporation or company as the case may be to give the trade
89
 union or the employees such clarification within a time to be
COMPENSATITION MANAGEMENT
specified in the direction. Such order of the authority shall be
binding on the corporation or the company.
Hence Section 23 gives power and jurisdiction to the tribunal to
direct corporations and companies concerned to furnish
clarification relating to any item in their balance sheet, Profit &
loss account. The section does not limit the power of the
Tribunal to give such directions only after a hearing or after
evidence is adduced: Such clarification can be given or furnished
by making further discover or giving further particulars.
Maintenance of Registers, Records etc.
Section 26 of the Act enjoins on every employer to prepare and
maintain such registers, records and other documents in such
form & in such manner as may be prescribed by the rules under
the Act. It is a mandatory provision and the employer is under
the duty to produce them when called upon by an Inspector to
do so. Violence of this is an offence under the Act.
Machinery and Miscellaneous Matters
Machinery
Section 27 empowers the appropriate government to appoint
Inspector for implementing the Act The Inspectors are given
power to:
i. Require an employer to furnish necessary information’s.
ii. Enter any establishment or premises for inspection
iii. Examination of accounts registers, other documents of
salary, wages or bonus.
iv. Discovery of documents etc.
Inspectors are deemed to be public servants under the penal
code.
Any person required to furnish information or to produce
documents, if fails to do so will be contravening the law
attracting the penal provision under Section 28 of the Act.
Production Bonus
1976 Amendment- By 1976 amendment Section 31-A is added
to link payment of bonus with production or productivity
under this, where an agreement or settlement has been entered
in to by the employees with their employer before this amend-
ment or where the employees enter into any agreement or
settlement with their employer after the commencement of this
amendment for payment of annual bonus linked with
production instead of bonus based on profit than such
employees shall be entitled to receive bonus due to them.
Under such agreement or settlement. However, such agreement
or settlement whereby the employees relinquish their right to
receive minimum bonus under Section to shall be null and void
in so far as it deprives them to such right. It is also provided
that such employees shall not be entitled to be paid such bonus
in excess of 20 percent of the salary or wage earned by them
during the relevant accounting year.
Section 31-A is given over riding effect. However, it is subject to
the statutory minimum and maximum bonus. This for the
first time production bonus is statutorily recognized even
though it is based on the agreement between parties.
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90
The new section applies to all agreements or settlements
whether entered into before or after 25.9.1975 being the date
when the amending ordinance came into force. Section 31-A
relates to bonus linked with production in lieu of bonus based
on profits: It does not speak about other kinds of bonus
therefore, the provision does not affect customary or traditional
or contractual bonus.
Penalty: Section 28 prescribes a penalty of imprisonment for a
term of six months or, a fine up to one thousand rupees or
both imprisonment and fine against a person who contravenes
any of the provisions of this Act or any rule made there under
or who fails to comply with a direction or requisition under this
act or any rule made there under or who fails to comply with a
direction or requisition under this Act.
Offences by Companies
Section 29 of the Act deals with offences committed by
companies. Clause 1 of Section 99 imposes an absolute liability
on the offences: But liability of a less strict nature is contem-
plated. Under Section 29(2) where an offences under the Act is
committed by a company the officer who was in charge of and
was responsible to the company for the conduct of business of
the company shall be deemed to be guilty of the offence shall
be liable to be proceeded against and punished as if he has
committed the offence.
Proviso to Section 29(i) says that a person charged of an offence
under Sub section (i) has the following defenses.
i. Want of Knowledge
Mens has been made an ingredient of the offence. But the
burden of proof has been cast on the person charged with the
offence.
In other words the person charged with an offence under Sub
section (i) has to prove that the offence was committed without
his knowledge, and not for the prosecution to prove that he
had the knowledge.
ii. Due Diligence
The second defense open to the accused is that even if he had
the knowledge of the commission of the offence he exercised
all due diligence to prevent the commission of the offence.
Section 29(2) includes more persons In the list of offenders for
the offence committed by the comp_. In addition to such
person “any director, manager, secretary or other officer of the
company” may also be deemed to be guilty of the offence
under this Act if the offence has bee n committed.
i. with his consent or connivance.
ii. is attributable to any neglect on his part.
From the language of this provision it is clear that the burden
of proof is on the prosecution. It is for the prosecution to
prove that the offence has been committed with the consent or
connivance or is attributable to any neglect on the part of the
director manager, secretary or other officer of the company,
before a person can be deemed to be guilty of the offence.
Cognizance of Offence
A court can take cognizance of the offence punishable under the
Act only on a complaint made by or under the authority of
appropriate Government. Any offence punishable under the
11.622.1
Act can be tried only by a court not inferior to a presidency or a
Magistrate of the first class. Immunity to acts in good faith;
Section 31 confers immunity to Government and officers of
Government, against legal proceedings in court of law by way
of suit or prosecution or otherwise, for all acts done in good
faith or intended to be done in good faith provided the act is
done under the Act.
Act not to apply to certain classes of employees.
Section 32 of the A ct makes it clear that the provisions of this
act will not be applicable to following clause of empl6yees.
i. employees employed by the Life Insurance Corporation of
India.
ii. Seamen defined in clause (42) of section 3 of the Merchant
shipping act 1958 (44 of I958)
iii. employees registered or listed under any scheme made
under the Dock Workers (Regulation of employment) Act
1948 (9 of 1948) and employed by registered or listed
employers.
iv. employees employed by an establishment engaged fin any
industry carried on by or under the authority of any
department of the Central Government or State
Government of a local authority.
v. Employees employed by:
a. The India Red Cross Society or any other Institution
of alike nature (including its branches)
b. Universities and-other educational institutions.
c. Institution (including hospital, chambers of commerce
and social welfare institutions established not for
purposes of profit)
Under entry V(s) two requirement must be satisfied
namely:
i. that is an institution and
ii. it is establishment not for the purpose of profit.
Unless, both these conditions are cumulatively satisfied the
employers of such institution will not be exempted from
Bonus Act under Section 32. Thus is Workmen of Tirumale
Tirupathy Devasthanam Vs the Management The tribunal was
required to adjudicate on the issue whether the Transport
department operating under the Devasthanam is excluded
under entry V (c) of Section 32 the question arose when the
employee of the above transport department claimed bonus
under the Act.
Without taking evidence to show that the institution was “not
for purpose of profit” the Tribunal gave this award. This part
of the award was set aside by the Supreme Court directing the
Tribunal to decide the issue de novo after taking evidence and
considering the dominant purpose of the institution.
Coffee Board set up under Coffee Act only aids the marketing
of coffee and helps the registered owners to earn profits. The
board does not earn profits to itself and it is not an institution
formed for earning profits and therefore, falls with in the
exception under section 32(v) (c) of the payment of bonus Act.
The fact that the management might have made some profits in
the past, & not a relevant consideration in the matter of exercise
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11.622.1
of its power by the Government under section 36 of the
COMPENSATITION MANAGEMENT
Bonus Act.
Rule Making Powers
Under Section 58 the Central Government is vested with the
power to frame rules to carry into effect the provisions of the
Act. The rules may provide for:
a. The authority for granting permission under the provisions
to sub-clause (iii) of clause (i) of Section 2.
b. The preparation of registers, records and other documents
and the form and manner in which such registers, records
and documents may be mentioned under Section 26.
c. The powers which may be exercised by an Inspector under
Clause(e) of Sub-section (2) of Section 27.
d. any other matter which is to be or may be prescribed.
Rules Must be laid before the Houses of Parliament Sub-
section (3) prescribes that every rule made under this section
shall be laid with maximum expediency before each house of
Parliament while it is in session for a period of 30 days. The
period of 30 days may be comprised in one session or in two
successive sessions. If before the expiry of the session in which
the rules is to be laid down or the session immediately follow-
ing both the Houses agree in making any modification in the
rules or both the Houses agree that the rules should not be
made, the rules shall thereafter have effect only in such modified
form or be of no effect as the case may be. However, any such
modification or annulment shall be without prejudice to the
validity of anything previously done under any of these rule.
Conclusion
The payment of Bonus Act 1965 is designed to make the
proper distribution of profits between the employer and
employees and to upgrade the wages to “Living Wages Stan-
dards”. It does not interfere with customary, contractual bonus,
beside the right to ask the statutory bonus under Act 21 of
1965.
Therefore, the payment of Bonus Act, 1965 is a step forwarded
to achieve the target fixed by the Article 43 of the constitution,
and to bridge the gap between the wages and the living wages,
and to give the social security to the employees.
91
COMPENSATITION MANAGEMENT
LESSON 15:
INTRODUCTION TO THE IMPORTANCE OF WAGE DIFFERENTIALS
AND WAGE DIFFERENTIALS IN INDIA
Learning Objective
• To know the importance of Wage Differential
• To understand the reasons for Wage Differential
• Prevalence of Wage Differential in India and the reasons for
it
Introduction
Wage differentials have a great economic and social significance,
for they are directly related to the allocation of the economic
resources of a country, including manpower, growth of the
national income, and the pace of economic development.
Social welfare activity depends, in a large measure, on such wage
differentials as will:
a. Cause labour to be allocated among different occupations,
industries and, geographical areas in the economy in such a
manner as to maximise the national product
b. Enable full employment of the resources of the economy
to be attained; and
c. Facilitate the most desirable rate of economic progress.
Wage differentials reflect difference in the physical and mental
abilities of workers, differences in productivity, in the efficiency
of management and in consumer preferences, and act as sign
posts for labour mobility. By providing an. important incentive
for labour mobility, they bring about a re-allocation of the
labour force under changing circumstances.
Under competitive conditions, wages are determined by
conditions of demand (which reflect the productivity of
workers) and conditions of supply (which reflect the attractive-
ness of jobs).
The level of wages would depend upon the relative scarcity of
supply in relation to demand. Scarcity differentials (which may
be due to specific skills and mental abilities) produce wage
differentials; and as long as the former as inevitable, the latter,
too, would be so.
In other words, wage differentials reflect the different degrees of
scarcity of the different categories of labour; and since different
categories cannot be reduced to the same degree of scarcity in
the market, wage differentials are inevitable.
Reasons for Wage Differential
Wage differentials arise because of the following factors:
a. Differences in the efficiency of the labour, which may be due
to inborn quality, education, and conditions under which
work may be done.
b. The existence of non-competing groups due to difficulties
in the way of the mobility of labour from low paid to high
paid employments.
c. Differences in the agreeableness or social esteem of
employment.
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92
d. Differences in the nature of employment and occupations.
The nature and the extent of wage differentials are conditioned
by a set of factors such as the conditions prevailing in the
market, the extent of unionization and the relative bargaining
power of the employers and workers.
The rate of growth in productivity, the extent of authoritarian
regulations and the centralization of decision-making, customs
and traditions, the general economic, industrial and social
conditions in a country, and a host of other subjective and
objective factors operating at various levels.
The prevailing rates of wages, the capacity of an industry to pay,
the needs of an industry in a developing economy, and the
requirements of social justice also directly or indirectly affect
wage differentials.
Wage Differentials in India
Due to the paucity of relevant data on wage differentials, it is
not possible to analyze them in India; yet the main features of
the Indian wage structure may be stated thus:
As a characteristic of the unorganized labor market, personal
differentials because of job selling, individual bargaining and
wage discrimination have tended to persist in India, especially in
the unorganized sector of the economy, and even in the
organized and unorganized sections in industry.
The tendency appears to be towards the elimination of wage
differentials because of government interference through the
fixation of the minimum wages and, of late, through the
appointment of Wage Boards and pressures from trade unions.
Wage differentials by, sex are quite common despite the fact the
Constitution of India enjoins upon the State to direct its policy
towards securing “equal pay for equal work” for men and
women, awards of some industrial Tribunals provide for
“different wages for men and women workers, not on the
ground that the work done is unequal but on the ground that
the wages of women workers support a smaller family, that the
cost of employing women workers is higher.”
As regards inter-firm and inter-industry differentials in India,
the former were quite important and frequent in the past,
particularly in the jute mill industry.
Of late, however, there has been a tendency towards the
elimination of inter-firm differentials. The forces, which tend to
eliminate inter-personal differentials in the country operate in
this case as well.
Tutorial Activity 1.1
Questions
1. Discuss the reasons and importance of wage differential.
2. Recent trends in wage differential in India.
11.622.1
Latest Updates on Rural Labor
Conditions
Rural Labour Enquiry
Report on Wages & Earnings of Rural Labour
Households
(55th round of N.S.S.) 1999-2000
Scope and Method of Enquiry
Introduction
1.1 About two-third of the total labour force in the country
lives in rural areas.Wage paid employment is the main
source of their livelihood. It has been the endeavour of
the Government of India to alleviate the poverty,
particularly in the rural areas, by formulating and
implementing various target oriented anti-poverty rural
development programmes. Sound data base is of utmost
importance for formulating such action programmes.
With this end in view, the first Agricultural Labour Enquiry
(ALE) was conducted in 1950-51, followed by the second in
1956-57. The scope of the subsequent enquiries was
enlarged to cover all rural labour households instead of
agricultural labour households alone covered in the first two
enquiries. Hence, the third enquiry in the series known as
the first Rural Labour Enquiry (RLE) was conducted in
1963-65 followed by the second in 1974-75, the third in
1977-78, the fourth in 1983, the fifth in 1987-88, the sixth
in 1993-94 and the seventh in 1999-2000.
With a view to narrowing down the gap between the
successive rounds of the Enquiry, the RLE was integrated
with the General Employment & Unemployment Survey
of the NSSO in 1977-78 and all subsequent enquiries are
now being conducted quinquennially to provide continuous
data in the form of time series.
1.2 During the course of the Rural Labour Enquiries (RLE)
data on various socio-economic aspects viz, Employment &
Unemployment, Consumption Expenditure, Wages &
Earnings and Indebtedness of rural and agricultural
labourers are collected.
The RLE is also aimed at throwing up data on household
consumption expenditure of the rural/agricultural
labourers for drawing weighting diagrams for updating the
series of the Consumer Price Index Numbers for
Agricultural/Rural Labourers. Under these enquiries, the
data are collected and analysed for rural labour as a whole.
However, in order to enable comparison with the previous
enquiries as also to understand problems of this segment
which constitutes bulk of the rural labour, the analysis is
presented for agricultural labour separately.
1.3 The usefulness of the data thrown up by the Rural Labour
Enquiries has been acknowledged by various Committees
and Commissions from time to time. The National
Commission on Labour (1969) and the National
Commission on Rural Labour (1991) have recommended
that the periodic surveys undertaken by the Government to
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11.622.1
understand the rural situation should be continued and
COMPENSATITION MANAGEMENT
intensified.
The second National Commission on Labour (1999) has
recommended that the Rural Labour Enquiries should be
conducted more frequently. The results of the latest Rural
Labour Enquiry, the seventh in the series, for which the
field work was undertaken by the NSSO during its 55th
Round Survey (July, 1999 to June, 2000), are being
published in the following five reports;
i. General Characteristics of Rural Labour Households;
ii. Indebtedness among Rural Labour Households;
iii. Wages and Earnings of Rural Labour Households;
iv. Employment and Unemployment of Rural Labour
Households; and
v. Consumption Expenditure of Rural Labour
Households.
Objectives
1.4 The main objectives of the enquiry are
i. To provide upto date serial data on demographic
structure, extent of employment & unemployment,
wages and earnings, household consumption
expenditure, indebtedness, etc. for building up of
reliable estimates of important socio-economic
characteristics of rural labour in general and agricultural
labour in particular.
ii. To provide data relating to consumption expenditure
for derivation of weighting diagram for updating the
series of CPI numbers for agricultural and rural
labourers.
Scope
1.5 The Enquiry relates to all rural labour households.
However, provision has been made in the tabulation plan
to get separate estimates for agricultural labour households.
Geographical Coverage
1.6 The survey covered the whole of the Indian Union,
excepting (i) Ladakh and Kargil districts of Jammu &
Kashmir, (ii) 768 interior villages of Nagaland situated
beyond 5 Kms. of the bus route, and (iii) 172 villages in
Andaman & Nicobar Islands which are inaccessible
throughout the year. A few other areas of Jammu &
Kashmir were also excluded from the survey coverage due
to unfavourable field conditions.
Sample Design
1.7 A stratified multistage sampling design was adopted for
selection of the sample units for the survey. The first stage
units (FSU) were the census villages (panchayat wards for
Kerala). The ultimate statge units (USU) were the
households.
1.8 Sampling frame for first stage units : The list of census
villages as per 1991 population census (list of Census
villages as per 1981 Census for the State of Jammu &
Kashmir) constituted the sampling frame for selelction of
sample FSUs for most of the states. For the rural areas of
93
 Kerala, however, the list of panchayat wards was used as the
COMPENSATITION MANAGEMENT
sampling frame for selection of panchayat wards. For
Nagaland, the list of villages located within 5 Kms. of a
bus route constituted the sampling frame, whereas, the list
of accessible villages constituted the sampling frame for
Andaman & Nicobar Islands. All the uninhabited villages
of the country, as per 1991 Census, were left out of the
purview of the survey.
1.9 Stratification of the first stage units : From the list of
villages of each State/Union Territory (U.T.), initially, two
special strata were formed by considering villages (a) with
very small population and (b) with very high population as
stated below:-
Stratum 1: all FSU’s with population between 1 to 100.
Stratum 2: FSU’s with population more than 15,000
The above two strata were spread across a given State and
were not confined to any particular administrative division
within the State. Each of the above two strata was formed
if at least 50 such FSU’s were there in the respective frames.
Otherwise, these villages were included in the general strata.
While forming general strata, efforts were made to treat each
district with population less than 2 millions as a separate
stratum. If limitation of sample size did not allow
forming so many strata, smaller districts within a particular
NSS region were merged to form a stratum. Each district
with rural population of 2 million or more as per 1991
Census (1.8 million or more as per 1981 Census in case of
Jammu & Kashmir) was as usual split into a number of
strata.
1.10 Allocation of first stage units : At the all-India level, a total
number of 10,384 FSU’s (6208 villages and 4176 urban
blocks) was selected for survey in the central sample in the
55th round. The actual State/UT level allocation of FSUs in
the rural sector is given in Statement- I. State/UT level rural
sample size was allocated among the rural strata in
proportion of population. Sample size for the whole round
for each State/UT was allocated equally among the 4 sub-
rounds. Stratum level allocation for both rural and urban
areas of a sub-round were made in even numbers in order
to facilitate selection of FSU’s in the form of 2 independent
sub-samples. Sub-sample numbers were 1 and 2 for sub-
round 1; 3 & 4 for sub-round 2; 5 & 6 for sub-round 3; and
7 & 8 for sub-round 4. One salient feature of the 55th round
was the “rotation sampling scheme” which was adopted for
the first time in the NSS for the purpose of collection of
employment-unemployment data from central sample
only. Under this scheme, 1 sub-sample of the sampled first
stage units (FSU’s) of each sub-round was revisited in the
subsequent sub-round. From each such FSU, sample
households visited in the previous sub-round for collecting
data on employment-unemployment were revisited in the
subsequent sub-round for collecting employment-
unemployment details.
1.11 Selection of FSU’s : For each sub-round, sample first stage
units from each stratum were selected in the form of 2
independent sub-samples by following circular systematic
sampling with (a) probability proportional to population
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94
for all rural strata other than stratum 1, and (b) equal
probability for rural stratum 1.
1.12 Selection of hamlet-groups (hg’s) : Depending upon the
values of approximate present population (P) and
approximate total number of non-agricultural enterprises
(E) of the villages, the FSU’s were further divided into a
fixed number of hamlet-groups (hg’s) as stated below:
Value of P No. of hg’s Value of E No. of hg’s
formed in the FSU formed in the
as per population FSU as per
criterion enterprise
criterion
1 2 3 4
Less than 1 Less than 100 1
1200
1200-1999 5 100-249 5
2000-2399 6 250-299 6
2400-2799 7 300-349 7
2800-3199 8 350-399 8
and so on and so on
However, for rural areas of Himachal Pradesh; Sikkim, and
Poonch, Rajouri, Udhampur and Doda districts of Jammu
& Kashmir, the number of hamlet-groups formed in the
village as per population criterion was: 1 for P<600; 5 for
P=600 to 999; 6 for P=1000 to 1199; 7 for P=1200 to 1399;
8 for P=1400 to 1599, and so on (procedure remaining
unchanged as per enterprise criterion). Further, the higher
of the two values obtained, as per population and
enterprise criteria was taken as the number (D) of hamlet-
groups to be formed in the FSU. In cases where hg’s were
formed in the sample FSU, the same was done by more or
less equalising the population of the different hg’s of the
FSU.
1.13 Formation of segments within FSU : The hamlet group
having maximum concentration of non-agricultural
enterprises was selected with certainty for listing of
households. This hamlet-group was referred to as segment
1. From the remaining (D-1) hg’s of the FSU, 2 more hg’s
were selected circular systematically and these 2 selected hg’s
together were referred to as segment 2 for doing a
combined listing of households. The listing of
households was done only in segments 1 and 2 of the
FSU. The FSU’s not requiring hg formation were treated as
segment 1 for the purpose of data collection and
estimation.
1.14 Sampling frame of households : All households of
segments 1 and 2 of the FSU were listed independently and
this list of households of the segments 1 and 2 constituted
the sampling frame for the purpose of selection of sample
households from the corresponding segments.
1.15 Stratification of households : All the households listed in
a segment were stratified into two second stage strata, viz.,
‘affluent households’ which formed second stage stratum 1,
and the rest which formed second stage stratum 2. A
household was classified as ‘affluent’ if the household
owned certain items like motor car/jeep, colour TV,
11.622.1
 telephone, etc. or owned land/livestock in excess of certain 22 Tamil Nadu 352 4173 17338

COMPENSATITION MANAGEMENT
limits. 23 Tripura 86 1031 4853
1.16 Selection of households : Sample households were 24 Uttar Pradesh 791 9432 57397
selected from the respective frames by circular systematic
25 West Bengal 384 4550 23508
sampling with equal probability. For the purpose of
systematic sampling, households in the frame of second 26 A & N Islands 24 273 1514
stage stratum 2 were arranged by means of livelihood by 27 Chandigarh 16 180 654
land possessed classes for rural samples. Two households 28 D & N Haveli 16 192 914
from second stage stratum 1 and ten households from
29 Daman & Diu 15 180 821
second stage stratum 2 were selected from FSUs with no hg
formation. In the case of FSUs with hg formation, one 30 Delhi 16 187 982
household from second stage stratum 1 and three 31 Lakshadweep 7 84 363
households from second stage stratum 2 were selected from 32 Pondicherry 24 288 1222
segment 1 and one household from second stage stratum 1
All-India 6,046 71,385 3,74,856
and seven households from second stage stratum 2 were
selected from segment 2. Period of Survey
1.18 The enquiry was integrated with the 55th round of the
Sample Size N.S.S. during the period July, 1999 to June, 2000 which
1.17 A total of 3,74,856 persons spread over 71,385 rural was divided into 4 sub-rounds of three months
households in 6046 villages were surveyed. The number duration each.
of sample villages and sample rural households and
persons surveyed in different States/Union-territories and Concepts and Definitions
all-India for rural sector are set out in the following 1.20 The important concepts and definitions adopted for the
statement: survey are as follows :
Statement - I i. Household
Number of villages, rural households and persons surveyed A household is a group of persons normally living together
under central sample and taking food from a common kitchen. A boarding and
lodging house, a hotel or a hostel is treated as a cluster of
Sl.No. State/U.T. No. of No. of No.of households where each individual boarder(with his dependants
villages households persons or guests) forms a separate household. Households main-
tained and fed directly by institutional bodies such as those in
1 2. 3. 4. 5. prisons, police quarters, cantonments, hospitals, asylums, relief
1 Andhra Pradesh 432 5181 22600 camps are, however, excluded from the scope of the survey.
2 Arunachal Pradesh 74 827 4314 ii. Household Members
3 Assam 291 3462 19272 Any person who is a normal resident of the sample household
4 Bihar 611 7311 40109 is considered to be a member of the household. The members
of a household may or may not be related by blood to one
5 Goa 16 192 944
another. Accordingly, any person who usually lives and takes the
6 Gujarat 208 2479 12807 principal meals with the household is also considered a member
7 Haryana 96 1132 6502 of the household.
8 Himachal Pradesh 140 1634 7793 iii. Household Size
9 Jammu & Kashmir 131 1472 8322 The number of normally resident members of a household
10 Karnataka 232 2763 14154 formed the size of the household. It included temporary stay-
aways but excluded temporary visitors and guests.
11 Kerala 240 2604 12324
12 Madhya Pradesh 432 5144 28816 iv. Rural Labour Household
A household was classified as rural labour household if its
13 Maharashtra 352 4121 20399
major source of income during the last 365 days preceding the
14 Manipur 64 738 3997 survey was more from wage paid manual labour (agricultural
15 Meghalaya 80 933 4901 and/or non-agricultural) than either from paid non-manual
16 Mizoram 39 428 2276 employment or from self-employment. Rural labour house-
holds include agricultural labour households also.
17 Nagaland 40 480 2441
18 Orissa 293 3477 17059 v. Agricultural Labour Household
Of the households which are initially classified as ‘Rural Labour
19 Punjab 184 2152 12067
Households’, those deriving 50 percent or more of their total
20 Rajasthan 272 3229 19021 income from wage paid manual labour in agricultural activities
21 Sikkim 88 1056 5173 are treated as agricultural labour households.

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11.622.1 95
 vi. Rural Labour Households with Cultivated Land
COMPENSATITION MANAGEMENT
A household with cultivated land, either owned or taken on
lease, was treated as household with land. Cultivated land was
taken to mean the net area sown during the last calendar year
(i.e. January to December, 1998) preceding the year of enquiry
and included orchards and current fallows.
vii. Land Possessed
Land possessed means land owned (including land under
‘owned-like possession’) (+) land leased in (-) land leased out
(+) any land held by the household which is neither owned nor
leased in (e.g. encroached land etc.).
viii. Manual Work
A job essentially involving physical labour is considered as
manual work. However, jobs essentially involving physical
labour but also requiring a certain level of general, professional,
scientific or technical education are not to be termed as manual
work. On the other hand, jobs not involving much of physical
labour and at the same time not requiring much educational
background, are to be treated as manual work. Thus, engineers,
doctors, dentists, midwives, etc. are not considered as manual
workers even though their jobs involve some amount of
physical labour. But, peons, chowkidars, watchmen, etc., are
considered as manual workers even though their work may not
involve much physical labour.
ix. Wage Paid Manual Labour
A person who does manual work in return for wages in cash or
kind or partly in cash and partly in kind (excluding exchange
labour) is a wage paid manual labour. Salaries are also to be
counted as wages. A person who is self-employed in manual
work is not treated as a wage paid manual labour.
x. Rural Labour
Rural labourer is defined as ‘one who does manual work in
rural areas in agricultural and/or non-agricultural occupation in
return for wages in cash or kind, or partly in cash and partly in
kind.’ The term ‘wages’ included salary also. Any person who
was self employed, though in manual work, was not treated as
a wage paid manual rural labourer. Exchange labour was also
excluded.
xi. Agricultural Labour
A person was treated as an agricultural labourer if he/she
followed one or more of the following agricultural occupations
in the capacity of a labourer on hire, whether paid wholly in cash
or kind or partly in cash and partly in kind;
a. farming including cultivation, tillage, etc.
b. dairy farming;
c. production, cultivation, growing and harvesting of any
horticultural commodity;
d. raising of livestock, bee-keeping or poultry farming;
e. any practice performed on a farm as incidental to or in
conjunction with farm operations (including any forestry or
timbering and the preparation for market and delivery to
storage or to market or to carriage for transportation to
market of farm products).
It might be noted that manual work in fisheries was excluded
from the purview of the category of agricultural labour.
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96
Further, carriage for transportation coming under the category
(e) above referred only to the first stage of transportation from
farm to the first stage of disposal.
xii. Activity Status
It is the activity situation in which a person was found during a
reference period with regard to the person’s participation in
economic and non-economic activities. According to this, a
person could be in one or a combination of the following three
broad activity statuses during a reference period:
i. working or being engaged in economic activity (work),
ii. being not engaged in economic activity ( work) but either
making tangible efforts to seek ’work’ or being available for
‘work’ if the ‘work’ is available, and
iii. being not engaged in any economic activity (work) and also
not available for ‘work’.
Broad activity statuses mentioned in (I) and (ii) above are
associated with ‘being in labour force’ and the last with ’not
being in the labour force’. Within the labour force, broad
activity status (I) is associated with ‘employment‘ and that of
(ii) with ‘unemployment’.
Identification of each individual into a unique situation could
pose a problem when more than one of the three broad activity
statuses listed above were concurrently obtained for a person.
In such an eventuality, the identification uniquely under any one
of the three broad activity statuses was done by adopting either
the major time or priority criterion. The former was used for
classification of persons according to the ‘usual activity status’
approach and the latter for classification of persons according to
the ‘current activity status’ approach. Each of the three broad
activity statuses was further sub-divided into several detailed
activity categories. If a person categorised as engaged in
economic activity by adopting one of the two criteria mentioned
above was found to be pursuing more than one economic
activity during the reference period, the appropriate detailed
activity status code related to that activity in which relatively
more time had been spent. A similar procedure was adopted
for assigning detailed activity code for persons categorised as
engaged in non-economic activity and pursuing more than one
non-economic activity. The detailed activity categories under
each of the three broad activity statuses used in the survey are
stated below:
Working (Or Employed)
1. worked in a household enterprise (self-employed) as an
own-account worker;
2. worked in a household enterprise (self-employed) as an
employer;
3. worked in a household enterprise (self-employed) as
‘helper’;
4. worked as a regular salaried/wage employee;
5. worked as a casual wage labour in public of works;
6. worked as a casual wage labour in other types of works;
7. did not work due to sickness though there was work in
household enterprise;
11.622.1
8. did not work due to other reasons though there was work
in household enterprise;
9. did not work due to sickness but had regular salaried/wage
employment;
10. did not work due to other reasons but had regular salaried/
wage employment,
Not Working But Available For Work (Or Unemployed)
11. sought work,
12. did not seek but was available for work.
Neither Working Nor Available For Work (Or Not In
Labour Force)
13. attended educational institutions;
14. attended domestic duties only;
15. attended domestic duties and was also engaged in free
collection of goods (vegetables, roots, fire-wood, cattlefeed,
etc.,) tailoring, weaving etc., for household use.
16. renters, pensioners, remittance recipients, etc.,
17. not able to work due to disability;
18. beggars, prostitutes etc;
19. others;
20. did not work due to sickness (for casual workers only)
(Sl.No. 7,8,9,10,12and 20 are applicable only in the case of
current weekly and current daily status approaches.)
xiii. Usual Activity Status
The usual activity status relates to the activity status of a person
during the reference period of 365 days preceding the date of
survey. The activity status on which a person spent relatively
longer time (major time criterion) during the 365 days preceding
the date of survey is considered the principal usual activity
status of the person. To decide the principal usual activity of a
person, he/she is first categorised as belonging to the labour
force or not, during the reference period on the basis of major
time criterion. Persons, thus, adjudged as not belonging to the
labour force are assigned the broad activity status ‘neither
working nor available for work’. For the persons belonging to
the labour force, the broad activity status of either ‘working’ or
‘not working but seeking and/or available for work’ is then
ascertained again on the basis of the relatively longer time
spent in the labour force during the 365 days preceding the
date of survey. Within the broad activity status so determined,
the detailed activity status category of a person pursuing more
than one such activity will be determined again on the basis of
the relatively longer time spent.
xiv. Subsidiary Economic Activity Status
A person whose principal usual status is determined on the
basis of the major time criterion may have pursued some
economic activity for a relatively shorter time (minor time)
during the reference period of 365 days preceding the date of
survey. The status in which such economic activity is pursued is
the subsidiary economic activity status of the person. In case of
multiple subsidiary economic activities, the major two activities
and their statuses based on the relatively longer time spent
criterion will be considered . It may be noted that engagement
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11.622.1
in work in subsidiary capacity may arise out of the two follow-
COMPENSATITION MANAGEMENT
ing situations
i. a person may be engaged for a relatively longer period
during the last 365 days in economic/non-economic activity
and for a relatively shorter period in another economic
activity and
ii. a person may be pursing one economic/non-economic
activity almost through out the year in the principal usual
activity status and also simultaneously pursuing another
economic activity for a relatively shorter period in a
subsidiary capacity.
xv. Current Weekly Activity Status
The current weekly activity status of a person is the activity
status obtaining for a person during a reference period of 7 days
preceding the date of survey. It is decided on the basis of a
certain priority cum major time criterion. According to the
priority criterion, the status of ‘working’ gets priority over the
status of ‘not working but seeking or available for work‘ which
in turn gets priority over the status of ‘neither working nor
available for work‘. A person is considered working (or
employed) if he/she, while pursuing any economic activity,
had worked for at least one hour on at least one day during the
7 days preceding the date of survey. A person is considered
‘seeking or available for work (or unemployed)’ if during the
reference week no economic activity was pursued by the person
but he/she made efforts to get work or had been available for
work any time during the reference week though not actively
seeking work in the belief that no work was available. A
person who had neither worked nor was available for work
any time during the reference week, is considered to be
engaged in non-economic activities (or not in labour force) .
Having decided the broad current weekly activity status of a
person on the basis of ‘priority’ criterion, the detailed current
activity status is again decided on the basis of ‘major time
criterion’ if a person is pursuing multiple economic activities.
xvi. Self-Employed
Persons who operated their own farm or non-farm enterprises
or were engaged independently in a profession or trade on own-
account or with one or a few partners were deemed to be
self-employed in household enterprises. The essential feature
of the self-employed is that they have autonomy (i.e., how,
where and when to produce) and economic independence (i.e.,
market, scale of operation and money) for carrying out their
operation. The fee or remuneration received by them com-
prised two parts - share of their labour and profit of the
enterprise. In other words, their remuneration was determined
wholly or mainly by sales or profits of the goods or services
which were produced. Self-employed persons were categories as
follows:
i. Own-account workers: those self-employed persons who
operated their enterprises on their own account or with one
or a few partners and who, during the reference period, by
and large, ran their enterprise without hiring any labour.
They could, however, have had unpaid helpers to assist
them in the activity of the enterprise;
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 ii. Employers: those self-employed persons who worked on tion by the normal resident members of the household and
COMPENSATITION MANAGEMENT

their own account or with one or a few partners and, who, also by the guests, whether during ceremonies or otherwise. To
by and large, ran their enterprise by hiring labour; and avoid double counting, transfer payments like charity, loan,
iii. Helpers in household enterprise: those self-employed advance, etc., made by the household are not considered
persons (mostly family members) who were engaged in consumption for items of groups (i) and (ii), since transfer
their household enterprises, working full or part time and receipts of these items have been taken into account. However,
did not receive any regular salary or wages in return for the the item ’cooked meals’ is an exception to the rule.
work performed. They did not run the household xx. Children
enterprise on their own but assisted the related person Persons below 15 years of age have been treated as children
living in the same household in running the household
enterprise.
Present Report
1.21 This is the first report in the series of five reports to be
xvii. Earnings brought out on the basis of seventh RLE covering different
Earnings meant payments received in cash or kind or both cash aspects of rural labour. It presents analysis of data on the
as well as kind or those that are receivable for the work done wages and earnings of rural labour households. It contains
during the reference week. The kind wages were evaluated at the the basic results on wages and earnings of workers of
current retail prices. Bonus and perquisites evaluated at retail Labour Households at state and all-India level. It gives (a)
prices were also included in earnings. Amount receivable as earning strength and the number of wage earners in the
‘over-time’ for the additional work done beyond normal average size of Labour Households; (b) data on wages and
working time was also included in the earnings. earnings of agricultural labour households workers in
xviii. Indebted Households agricultural and non-agricultural operations; (c) earnings of
A household is considered as an indebted household if it has workers (men, women and children) of agricultural labour
taken loan from others and part or whole of which had households and rural labour households in different
remained outstanding on the date of survey. Loan included agricultural operations; (d) level of real earnings in
borrowings in cash and/or kind and credit purchases made by agricultural operations during 1999-2000; and (e)
the households. If the nature, source and purpose of two or comparison of wages of agricultural labour household
more loans are similar, they are treated as a single loan. workers with Minimum Wages fixed by the State
Borrowings in kind are evaluated at the retail prices prevailing in Governments for agricultural operations as well as with
the local market at time of borrowing. An advance payment wages paid to workers in organised sector (viz factories,
received for forward delivery of goods is also regarded as a mines & plantations).
loan. The dues on time of credit purchases, like newspaper,
milk, services of dhobi, etc., are also treated as loans.
xix. Household Consumption Expenditure
The expenditure incurred by a household on domestic con-
sumption during the reference period is the household’s
consumer expenditure. The household consumer expenditure
is the total of the monetary values of consumption of various
groups of items, namely, (i) food, pan (betel leaves), tobacco,
intoxicants and fuel & light, (ii) clothing and footwear, and (iii)
miscellaneous goods and services and durable articles.
For groups (i) and (ii), the total value of consumption is
derived by aggregating the monetary value of goods actually
consumed during the reference period. An item of clothing
and footwear is considered to be consumed if it is brought into
maiden or first use during the reference period. The consump-
tion may be out of (a) purchases made during the reference
period or earlier; (b) home grown stock; (c) receipts in exchange
of goods and services; (d) any other receipt through gift, charity,
borrowing; and (e) free collection. Home produce is evaluated
at the ex farm or ex factory prices. For evaluating the consump-
tion of the items of group (ii), i.e., items categorised as
miscellaneous goods and services and durable goods, a different
approach is followed. In this case, the expenditure made during
the reference period for the purchase of goods and services is
considered to be consumption.
It is pertinent to mention here that the consumer expenditure
of a household on food items relates to the actual consump-

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98 11.622.1

LESSON 16:
INTRODUCTION TO EXECUTIVE COMPENSATION
AND COMPONENTS OF REMUNERATION
Learning Objective
• To understand the meaning and concept of Executive
Compensation
• To know the unique features of Executive Remuneration
• To know the various components of Executive
Remuneration
• To read articles on Executive Compensation
Executive Compensation
Introduction
For the higher management, salaries are influenced by the size
of a company performance of the company, by the specific
industry, and in party by the contribution of the incumbent to
the process of decision-making. The more profitable the
organization is the firm, the better is the compensation paid to
the executives.
The industries that are more highly constrained by governmen-
tal regulation (banks, life insurance, railroads, public utilities)
pay relatively less than those that are more free to carry on their
business (private firms).
Executive remuneration has certain unique features, such
as:
1. It cannot be compared to the wage and salary schemes
meant for other employees in organizations;
2. Executives are denied the privilege of having unionized
strength;
3. Secrecy is maintained in respect of executive remuneration;
4. Executive pay is not supposed to be based on individual
performance measure but rather on unit or organizational
performance.
5. Executive remuneration is subject to statutory ceilings in
some respects
Components of remuneration
See - rewards management by Armstrong
Introduction
Write
Executive remuneration generally comprises four ele-
ments:
i. Salary and allowance,
ii. Bonus,
iii. Incentives,
iv. Perquisites.
Description of Each Element
Salary is the first component of executive remuneration. Salary
is supposed to be determined through evaluation and serves as
the basis for other types of benefits. Bonus plays an important
role in today’s competitive executive payment programmes.
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11.622.1
COMPENSATITION MANAGEMENT
There are almost as many bonus systems as there are companies
using this form of executive remuneration. If bonus consti-
tutes short-term benefit, stock options are long-term benefits
offered to executives. Stock options are attractive to sharehold-
ers too.
Perquisites contribute a major source of income for executives.
Straight salaries, bonuses, stock purchase plans and profit-
sharing are used to compensate major executives.
Of these, the straight salary is the most common method. The
salary is determined by mutual agreement between the indi-
vidual and the employer. The sales effected, the cost of
production, reduction in expenses and the profits made are also
taken into account.
Bonuses related to performance are also aid to executives at a
certain percentage of the profits. The bonuses may average from
30 per cent- to 50 per cent of the basic salary.
These bonuses operate most effectively in increasing
motivation when the following conditions exist:
The amount paid is closely related to the level of individual
performance;
The amount paid after taxes represents a clearly noticeable rise
above the base salary level.
The amount paid is closely related to the level of company
performance;
The amount paid is tied into the base salary in such a way that
the combined earnings are equitable both in relation to internal
and external standards;
The amount paid is reduced drastically whenever an individual
experiences a real and continuing decrease in performance
effectiveness;
The amount paid is based on an easily understandable system
of allocation, and the individual is provided with complete
information on the relationship between bonus and perfor-
mance.
Moreover, executives are compensated for the various expenses
incurred by them, for taxation takes away a major portion of
their salary. Such payments are in the form of:
a. Medical care;
b. Counsel and accountants to assist in legal, tax and financial
problems;
c. Facilities for entertaining customers and for dining out;
d. Company recreational area (swimming pool and
gymnasium);
e. The cost of the education and training of executives,
scholarships for their children, and allowances for business
magazines and books; and
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 f. Free well-furnished accommodation, conveyance and
COMPENSATITION MANAGEMENT
servants. All these go under the head of perquisites.
Based upon his research findings on managerial pay, Megginson
offers the following generalisations:
Satisfaction with pay is a function of comparison with another’s
pay, with downward comparisons’ having the greatest impact.
A manager’s satisfaction with his income and its motivational
effect appear to be directly related to anticipated pay raises.
Those managers who expect large increases in future apparently
are less satisfied with their existing level of income; those
expecting little or no increases are more satisfied.
The choice of merit, as opposed to seniority, as the basis for
determining salary rates tends to increase with education and
position. The actual determinants of pay differentials seem to
be job level supervisory experience and professional experience.
Managerial incentive compensation has tended to become
flexible. If the various compensation media are to be used to
motivate managers, there must be a return to a greater flexibility.
Tutorial Activity 1.1
An Article on Empowerment and Growth
The EVA story at TCS
-By S.Mahalingam
Tata Consultancy Services (TCS) employs over 15000 profes-
sionals, has offices in 23 countries and projects in 50 countries
across the world, and revenues around $700 million. Among its
clientele are number of Fortune 500 companies and it is in the
league of 30 top IT consulting firms in the world.
TCS today is an Indian enterprise with a global reach its hiring
and people care practices are in line with the industry practices
and the compensation model has been traditional. The
company has now set its sights on becoming a truly global
organisation. Its vision is to be among the top 10 IT consulting
organisations in the world, a global employer of choice.
It is looking towards institutionalising leading edge practices in
hiring, training, and people care, with and innovative EVA -
based compensation model. The target model will be one that
offers a high growth, high performance internal environment to
empowered, proactive, high-brand consultants operating in a
dynamic external environment.
One important factor in understanding the context of TCS
growth is that the company veritably set up the industry in
India and metamorphosed in phases from an industry-builder
to a lead-player in the industry it created. In the new market
place it has defined for itself, it has to run alongside the new
breed of competitors in the country on the one hand, and on
the other, the established giants in the global league it is
breaking into, as a logical culmination of its growth.
In the initial phase, the mission within TCS, right from 1968
when the organisation came into being, appeared to the creation
of the industry and the setting standards. The expansion of the
market took place in the 70s and 80s when the company
grappled with issues of fixing rates in different countries and
the cost structure of the company was being formed internally.
It was also part of a group which had its own tradition to
© Copy Right: Rai University
100
follow in terms of creation of infrastructure, communication,
training the work force, continuing education and many such
issues. Creating and identity of purpose and shared vision for
the employees was critical as also the building of a number of
assets.
Given the expediencies of the trail-blazing phase in the 70s and
the 80s, profit maximisation was not the only goal. The
company, nevertheless, was profitable. In the 90s, with the
globalisation of Indian software, there was a spurt of competi-
tors with operational excellence as their capability. In this phase
too, TCS continued to grow, but it had to grow higher than the
competition, which was no longer small. It needed to go ahead
and start looking at itself all over again.
Evolution of EVA
The current operating environment is characterised by players
who are increasingly moving into globalisation and towards a
more perfect market place. The industry is faced with stiff
competition, consolidation, rapid technological advancement
and obsolescence, high R&D costs and talent retention. As a
strategy-focused organisation, TCS was looking at growth
beyond competition, defining for themselves and expansion
path that would sustain their leadership in a world shaped by
continuously evolving market forces. They thus had to think
above operational excellence into product innovation to evolve
projections for multi-year growth framework. EVA seemed to
provide the tool for this self-propelling growth model.
The search lights now beamed on a different set of focus paths:
How to grow at a rate higher than just the increase in numbers?
How to sell competency and value rather than skills? How to
manage commitment without over-committing? How to
reduce wastage and increase efficiency to avoid the trappings of a
very high cost organisation? The answer translated to measures
at all levels. The total pre-occupation with customer’s satisfac-
tion had to be re-turned to introduce an element of profit
orientation. This needed a system of efficient resource manage-
ment, better control of outstanding, performance evaluation
that would link reward to revenue generation.
The company had to make sure the operational and tactical
levels were aligned with the strategic, so that customer satisfac-
tion was reflected through higher revenues, and sales officers
were responsive to selling the more valuable services of TCS
rather than just meeting targets.
To take proactive steps to enhance value for themselves as well
as their customers, in around 1996, the company organised its
structure into a three dimensional model (Exhibit) defined
along industry practices (which are verticals like engineering,
transportation, telecom), service practices (assignment themes
such as eBusiness, outsourcing, architecture and technology
consulting), and geographies (which are regional groupings).
The TCS business units now belongs to one cell or span across
multiple cells in this cubic grid. Each is a revenue generating unit
outside the grid, which do not have a direct revenue earning
capability. These include the corporate office support functions
and R&D, which contribute in an indirect way towards the
organisation’s earnings.
11.622.1
The EVA Model
In giving shape to the EVA model, an organisation needs to
keep its focus towards the ultimate goal of aligning its people
to the corporate mission, creating an entrepreneurial culture
through an empowered work force, and building ownership
with accountability. TCS worked out a EVA framework to align
corporate value with the performance of the constituent
business units and the individuals who comprised these.
It translated to a compensation model, where the employee had
a share in the corporate pie with add-ons from the profits of
the Business Unit and the Individual Performance Factor. At
the individual level, an employee needs to know the drivers to
tweak to enhance the EVA of the company, of the business
unit, and his own contribution towards all these. There are
three basic drivers - revenue, cost, and capital charge. Revenue is
driven by the r ate or license price put into the product, sales,
billable hours, response time, and domain skills.
On time delivery obviously has an impact on revenue because
better delivery cycles improve the turnaround to the customers.
Cost is managed through productivity, is affected by sales and
marketing costs, recruitment and others. Receivables and
training are the bulk of the capital charge. These are a representa-
tive list, and there are many others.
The individual works towards the improvement of the benefit
package, which essentially has three components - the Corporate
EVA, the Business Unit EVA, and the Individual Performance
Factor. Out of the total EVA payment a certain percentage goes
to each employee on the basis of corporate EVA improvement.
Secondly, if your business unit did better than another business
unit, then automatically you got more than the other business
unit. Again it is a team reward concept. The third one depends
on the evaluation of individual performance.
Strategic Benefits
With the introduction of EVA, yet another plank has fallen in
to place in the systemic efforts towards optimisation. Activity
Based Costing, implemented 1992 onwards, was a major factor
facilitating the smooth transition to EVA. Balance Scorecard was
another adaptation in the journey towards excellence.
TCS also participated in the Tata Business Excellence Model,
(TBEM), which is really an adaptation of the Malcolm
Baldridge award, for the Tata companies. Initiatives such as the
process map, a metrics definition, a number of data collection
points are other enablers in data driven management. With the
introduction of EVA, the company has to take a fresh look at
the integrated system in a holistic perspective, and evolve ways
and means of optimising it.
Implementation of EVA requires the integration of the
planning and the tracking process. TCS sought to achieve this
through a home grown tool called e-pilot, which essentially
drills down from strategy to day-to-day activity. This facilitates
the integrated planning approach, in defining the corporate
EVA, linking it to the business unit/cell, and further to various
components down the line, all the way to the drivers connected
to each activity. With the drill-down of targets, the tracking
becomes automated.
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11.622.1
Incentive scheme
COMPENSATITION MANAGEMENT
A comprehensive EVA - based Incentive Compensation Plan
has been designed for the employees. Building the incentive
scheme requires a detailed exercise in arriving at the target EVA.
The TCS model was defined backed by a market analysis and a
study of 24 competitors, largely outside India. The framework
had specifications for target EVA, with carefully defined EVA
intervals and provision for the positioning of zero EVA. The
gradation continued through incentives corresponding target
attainment, the double incentive. Implementation now covers
the whole consulting organisation.
TCS is also implementing the bonus bank at the individual
level. This exercise begins with a target bonus being earmarked
for allocation on corporate target realisation, with a built in
multiplication factor for exceeding the targeted EVA. When the
corporate target is exceeded, a ‘potential bonus’ is declared. This
accrues to the bonus bank of the individual as two compo-
nents: Component A, the result of the share in the corporate
pie; Component B, a composite factor depending on the
business unit and individual performance.
The accruals are cumulated over the years and the pay out each
year is decided as a portion of this cumulative balance, leaving a
surplus in the bonus bank. This concept of bonus bank allows
an unlimited multi-year decision horizon, replacing the
traditional thresholds and caps. It demands sustainable
performance improvements, and maintains the important
cumulative relationship between pay and performance.
The firsthand experience was a revelations, as we saw how we
actually get paid out from the increases, demonstrating the
dictum that EVA pays for itself. The reward is that the size of
the pie could become different as its gets enlarged and the
individual and the corporation appears to benefit considerably.
It ensures the channelisation of information across levels and
each entity can see how it fares against targets.
It enhances the sense of participation through the realisation of
the share in the larger pie, and provides the motivation to
contribute to enlarge the pie. EVA really forces the organisation
to adopt a proper business planning approach, gets a focus on
strategies, and helps monitor the accountability of people. In a
nutshell, it gives a barometer on how the organisation is being
run and mandates critical stocktaking to evolve on a continuous
improvement path.
Tutorial Activity 1.2
An Article on Human Capital
-by S. Mahalingam
Originally published in Praxis (Business Line), May 2001.
Pundits of Today Assert That it is the Human Capital That
Energises the Creation of Wealth
We, the people of the modern ICE age, seem to have come full
circle, to taking a look at ourselves. Management theories are
veering round to a re-evaluation of that invaluable human
factor and its critical contribution to the creation of wealth. In
fact, they have gone one step further to stress that people are the
wealth. Pundits of today assert that while the other forms of
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 capital, including material, equipment, tools and technology,
COMPENSATITION MANAGEMENT
only represent inert potentialities, it is the human capital that
converts this potential and energizes the creation of wealth.
Let us take a peep into this fascinating attempt at pricing the
priceless, or what was hitherto considered priceless simply
because not many serious attempts were made at its valuation.
What makes the challenge more interesting is that this form of
capital is floating rather than fixed. No organization can own its
human capital the way it owns its other assets. And, inevitably,
there is a constant ‘flight of capital’.
Here we have all the trappings of perpetual dynamics when
compared to static assets whose tenure can be safely projected.
Today, there is nothing sacrosanct about employer-employee
relationships and a professional parting of ways is an accepted
way of life. For instance, the only loyalty the silicon generation
exhibits is to the Silicon Valley itself, not to any individual
organization within its bounds.
The imperatives of attrition have to be accorded due recogni-
tion, and this is the other dimension an organization has to
focus on. Employers have to understand the value that is lost
when a key employee leaves. So, we will also examine the cause
of attrition in the new knowledge-oriented organization and
what can be done to motivate loyalty.
Capital Redefined
An organization is made up of competencies which we can
loosely call ‘capital’. Its key components are ‘customer capital’,
‘structural capital’ and ‘human capital’. Broadly a company’s
strength arises out of its customer base which purchases its
products. This customer capital triggers a number of key
decisions such as new product and service packages, new
designs in anticipation of customer preferences and new
locations from which a number of customers could be
profitably served.
We have heard of a company being acquired purely because of
the strength of its customer base. Besides customers, the
strength of an organization arises out of the efficiency of its
operations. This is characterized by the manner in which its
processes are designed and operated. We can call this the
structural capital. But the key strength comes out of its human
capital. It is the expertise of its employees which ensures that
customers are acquired and retained, and the processes work
efficiently to satisfy the customer’s needs. We can say that
human capital is the basis for the creation of customer and
structural cap-ital.
The accounting system does not capture the values of these
forms of capital. Indeed, even a management information
system hardly captures the accretion or depletion of these critical
components in the functioning of an organization.
For a Knowledge Base on the Knowledge Worker
In the information technology (IT) industry, we started
examining the issues relating to the human capital of an
organization. If people hold the key to prosperity anywhere, it
is more so in the IT industry which employs knowledge
workers. Here, human capital is not merely one component of
capital; it is the critical component that forms the basis for other
forms of capital: People with their expertise are the sole creators
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102
of value to the customer and people through their effort are the
key to the optimization of its process efficiency.
Perhaps the natural corollary to this is the high attrition rate in
the IT industry. So IT organizations have a critical need to know
the value they would forego when they are about to lose a
person. This knowledge is important in taking appropriate
action, in making counter-offers, in keeping up a constant
preventive effort to fine-tune the compensation structure. All
these should always be in line with the value being pro-vided by
the employees.
Bundle of Competencies
An employee has a bundle of competencies, each of which
needs to be valued. In the computer software field, with which
I am most familiar, we classified competencies under five major
heads - domain, technology, project management, initiative and
leadership. A software project attempts to computerize
applications such as production scheduling in a manufacturing
organization, trade settlement in a stock exchange or recoveries
for an insurance company. An analyst developing the require-
ments for the system must have expertise in the specific
business area such as manufacturing, securities trading or
insurance.
We call this business knowledge the domain expertise. A
software designer must be knowledgeable about the technology
that provides the platform for the system and makes it work.
Similarly, project management is an essential area of expertise
for a person leading a part or whole of a project, to ensure that
resources are marshaled to yield effective results in the required
time. Besides these, what makes a person valuable to the
organization is the consummate acumen for enterprise and
execution - the generation of ideas and the speed of implemen-
tation. These come under the umbrella of initiative.
Finally comes the quality of being an inspiration to others: Is a
person a thought leader? The ability to apply a new technology
in ways unanticipated is one example of displaying thought
leadership.
The Depth Dimension
We have defined different categories in which the skill-level of a
person can be classified. This will bring out the breadth of
expertise. We need to also know the depth of experience. There
are four levels of expertise that are termed exposed, experienced,
expert and excellent. A person who has merely gone through a
training programme is only exposed to the technology. If he
has practiced that skill in one or more projects for an acceptable
minimum period, he becomes experienced.
An expert is one who is recognized by his peers to be knowl-
edgeable, to whom they turn for resolution of complex
problems. Excellence is attained and proclaimed when an
outside committee of experts in the field recognizes a person’s
expertise. This level is usually reached when a person passes an
examination or is invited to become a member of an exclusive
club of experts.
Now for the verdict...
Therefore, a person’s competency can be judged by looking at
both the breadth and depth of his skills. The all-important
question now is whether these skills are of value. For example,
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expertise in an old computer language, which has become A major factor for a person’s loyalty to an organization is the

COMPENSATITION MANAGEMENT
obsolete, has little market value. However, before January 1, compensation structure. The value of a person can certainly be a
2000, this rare skill was of great importance to people who still guiding factor in arriving at the appropriate compensation level.
had running systems that used these obsolete languages. Miles to go...
The value therefore is contingent upon the use to which the Organizations are getting differentiated on the basis of the
expertise is put. In the soft-ware field, as in most others, there knowledge each possesses. In a world of constant technological
is value to a skill so long as it is usable and there is effective changes, an organization prospers from the quality of its
demand for people possessing that skill. people. People who are relevant for today’s work may not be
Is there a Magic Formula? able to meet the challenges of tomorrow. We need to get them
Once we have determined that there is value, we need to to forget some aspects of today’s competency and build the
establish its quantification. A skill has a value so long as it can requirements of the future into them. Increasingly, the invest-
fetch a return. One method is to look at possible returns over ment decisions of top management will not be restricted to the
the next five years and thereafter discount the amount by an acquisition of brick-and-mortar assets, but of building
accepted percentage to arrive at the current value. additional competencies in people.
This will require us to forecast the revenue that can be generated Human resources valuation has remained an academic exercise
each year over the next five years for a person (for instance, a and largely ignored even in industries where the expertise of
Java programmer). The attempt is to calculate the value of a employees is the key differentiating factor. The process of
competency at a point in time. Therefore, we do not bother valuation is complex and challenging. But unless we adequately
about the additional value that may accrue to a person as he assess the value of human resources, we will not be able to
moves up the competency ladder respond to future needs.
A person has a set of competencies and a value is assigned to
each of these competencies. The sum total of it is the value of
an employee and the sum total of the value of all employees is
the human capital of the organization. This human capital,
together with the customer and structural capital produces the
revenue.
To Retain Ms High Value
When an employee leaves, an organization loses that much of
capital as determined by the valuation given above. The
organization’s response to this situation should be guided by
the value being lost. Unfortunately, there may be no escalation
when a valuable employee leaves. The senior management gets
into the act only when a very experienced employee leaves,
irrespective of whether he has a higher or lower value than a less
experienced person.
An organization needs to look for a system for the scientific
computation of employee values, stored in a constantly
updated data-base, with triggers for intimation to top manage-
ment based on employee valuation. Management can then be
made to sit up and take notice whenever high-value employees
leave, irrespective of the years of service. In fact, compensation
across the board can be structured to be in line with this
valuation system.
Why do employees leave an organization? Compensation is
only one of the factors and, unfortunately, that is the only factor
looked into. In my organization, we did a detailed survey on
what would result in increased commitment to the organiza-
tion, which intrinsically meant reduction in attrition. We realized
that increase in job satisfaction as well as increase in opportuni-
ties at higher levels of value had a positive influence. These
resulted in a person moving up the expertise ladder.
There are supplementary factors too, such as improvement in
the work environment and elimination of irritants largely
brought about as a result of bureaucracy. What kind of effort is
needed to enhance satisfaction levels as well as eliminate
irritants? It again depends on the potential value created or lost.

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11.622.1 103
COMPENSATITION MANAGEMENT
LESSON 17:
INTRODUCTION TO NATURE AND
OBJECTIVES OF JOB EVALUATION
Job Evaluation and Internal Equity
Learning Objective
• To know the definition and concept of job evaluation
• To understand the need for job evaluation
• To know the objectives of job evaluation
• To study the prevalence of job evaluation
• To understand the responsibility of job evaluation and the
various bodies responsible for it
• To analyse the relationship between job evaluation and job
analysis
Interaction
Job evaluation is the process of methodically establishing a
structure of jobs within an organization based on a systematic
consideration of job content and requirements. The purpose of
the job structure or hierarchy is to provide a basis for the pay
structure. The job structure, as seen in previous lessons, is only
one of the determinants of the wage structure. But it is an
important one often used.
Definition of Job Evaluation
Below are given some important definitions of job evaluation:
The I.L.O. defines job evaluation as “an attempt to determine
and compare demands which the normal performance of a
particular job makes on normal workers without taking into
account the individual abilities or performance of the workers
concerned.”
The Bureau of Labour Statistics, U.S.A., says that “job evalua-
tion is the evaluation or rating of jobs to determine. their
position in the job hierarchy. The evaluation may be achieved
through the assignment of points or the use of some other
systematic method for essential job requirements, such as skills,
experience and responsibility.”
In the words of the Netherlands Committee of Experts on
Job Evaluation, “job evaluation is a method which helps to
establish a justified rank order of jobs as a whole Being a
foundation for the setting of wages. Job evaluation is the only
one of the starting r establishing the relative differentiation of
base wage rates.”
Kimball and Kimball define job evaluation as “an effort to
determine the relative every job in a plant to determine what the
far basic wage for such a job should be.
According to Wendell French, “job evaluation is a process of
determining the worth of the various jobs within the
organisation, so that differential wages may to jobs of different
worth.” The relative worth of a job means value produced
factors as responsibilities skill, effort and working conditions.
We may define job evaluation as. a process of analyzing and
describing positions, g them and determining their relative
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104
value by comparing the duties of different s in terms of their
different responsibilities and other requirements.
It is the quantitative measurement of relative job worth for the
purpose of establishing Consistent wage rate differentials by
objective means. It measures the differences between job
difference between job requirements, the objective being the
setting of pay for wage administration purposes.
It does not set the price of a job; it merely fixes its relative
worth.
It presents an effort to determine the relative value of every job
in a plant, and to determine what the fair wage for such a job
should be. It is not evaluating the merit of the worker who is
the work. It rates the job and not the qualities of the individual
worker on the which is the task of employee rating.
Conceptual Discussion
Job evaluation developed out of civil service classification
practices. Job analysis applied to time study and selection, and
some early employer job and pay classification systems. Whether
formal job evaluation began with the United States Civil Service
Commission in 1871 or with Frederick W. Taylor in 1881, it is
about 100 years old.
The first point system was developed in the 1920s. Employer
associations have contributed greatly to the adoption of certain
plans. The spread of unionism has influenced the installation
of job evaluation in that employers gave more attention to
rationalized wage structures as unionism advanced. The War
Labor Board during World War II encouraged the expansion of
job evaluation as a method of reducing wage inequities.
Job evaluation has received a good deal of attention in recent
years as a result of social concern regarding discrimination.
A study of job evaluation as a potential source of and/or a
potential solution to sex discrimination in pay was made by the
National Research Council under a contract from the Equal
Employment Opportunity Commission.
The study suggested that jobs held predominantly by women
and minorities may be undervalued. Such discrimination may
result from the use of different plans for different employee
groups, from the compensable factors employed, from the
weights assigned to factors, and from the stereotypes associated
with jobs.
Although the preliminary report failed to take a position on job
evaluation, the final report concluded that job evaluation holds
some potential for solving problems of discrimination.
Why to do Job Evaluation?
Organizations usually begin the process of designing a wave
structure by determining their job structure. Two often-cited
principles of compensation are (1) equal pay for equal work and
(2) more pay for more important work. Both imply that
organizations pay employees for contributions required by jobs.
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Most organizations utilize job assignment as a major determi-
nant of employee contributions. A formal wage structure,
defined as a rate or range of rates established for job classifica-
tions, seems to be standard organization practice, except in very
small organizations. Formal job evaluation or informal
comparison of job content is the almost universal base of pay
rates.
Job evaluation is concerned with jobs, not people. A job is a
grouping of work tasks. It is an arbitrary concept requiring
careful definition in the organization. Job evaluation determines
the relative position of the job in the organization hierarchy. It
is assumed that as long as job content remains unchanged, it
may be performed by individuals of varying ability and
proficiency.
Objectives of Job Evaluation
The general purpose of job evaluation may include a number
of more specific goals:
1. To provide a basis for a simpler, more rational wage
structure;
2. To provide an agreed-upon means of classifying new or
changed jobs;
3. To provide a base for individual performance
measurements;
4. To reduce pay grievances by reducing their scope and
providing an agreed-upon means of resolving disputes;
5. To provide incentives for employees to strive for higher-
level jobs;
6. To provide information for wage negotiations;
7. To provide data on job relationships for use in internal and
external selection, personnel planning, career management,
and other personnel functions.
Also, says an I.L.O. Report, “the aim of the majority of
systems of job evaluation is to establish, on agreed logical basis,
the relative values of different jobs in a given plant or machin-
ery, i.e., it aims at determining the relative worth of a job.
The principle upon I all job evaluation schemes are based is that
of describing and assessing the value jobs in the firms in terms
of a number of factors, the relative importance of which varies
from job to job:
i. To secure and maintain complete, accurate and impersonal
descriptions of each distinct job or occupation in the entire
plant;
ii. To provide a standard procedure for determining the
relative worth of each job in a plant;
iii. To determine the rate of pay for each job which is fair and
equitable with relation to other jobs in the plant,
community or industry;
iv. To ensure that like wages are paid to all qualified employees
for like work;
v. To promote a fair. and accurate consideration of all
employees for advancement and transfer;
vi. To provide a factual basis for the consideration of wage
rates for similar jobs in a community and in an industry;
and
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11.622.1
vii. To provide information for ‘work organization, employees’
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selection, placement, training and numerous other similar
problems.
In fact, the primary purpose of job evaluation is to set wages
and salary on the basis the relative work or jobs in the
organisation. It goes this by providing a ground for the
following matters:
a. Equity and objective of salary administration, i.e., paying
the people whose work is alike the same wages, and
establishing appropriate wage differentials between jobs
calling for different skills and responsibilities;
b. Effective wage and salary control;
c. Union-management negotiations on wages; and
d. Comparison of wage and vary rates with those of other
employees. Besides setting wages, job evaluation also helps
in:
a. Providing standardization of, and improvement in,
working conditions;
b. Clarifying the functions, authority and responsibility of
employees;
c. Establishing references for the settlement of grievances
arising out of individual rates and for negotiations
with a trade union on internal wage structure and
differentials;
d. Developing machinery for a systematic reviewing of
job rates as job contents change; and
e. Developing personnel statistics.
Prevalence of Job Evaluation
Job evaluation is used throughout the world. Although recent
evidence is not available, it appears that job evaluation is more
prevalent in the United States than elsewhere.
However, a 1982 International Labor Office publication states
that in centrally controlled economies or in economies where
wage or income controls exist, job evaluation is frequently used
Holland has had a national job evaluation plan since 1948 as a
basis for its national wages and incomes policy. Sweden and
Germany have a number of industry-wide plans.
Great Britain, like the United States, usually employs job
evaluation at the plant or company level. Australia and some
Asian countries have installed some forms of job evaluation.
Russia and some of the Eastern European countries make wide
use of job classification.
The evidence on use of job evaluation in the United States
shows that smaller companies are somewhat less likely to use
job evaluation. Almost all government jurisdictions, however,
employ some form of job evaluation.
In the past twenty years job evaluation has come under attack in
the United States. This has come about from a change in the
American economy and the type of organizations that domi-
nate the “new” economy of today.
Job evaluation works best in large bureaucratic organizations. In
the past twenty years these behemoths of the American
economy have faced increasing problems remaining competitive.
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 The result is that they have downsized greatly and removed
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many layers of organization. Vertical movement within
organizations has slowed down and employees increasingly
move to jobs in other organizations rather than stay with their
current employer.
The new companies gaining a foothold in the economy are
smaller and organizationally flexible. There has also been a
demise of unions; individuals now bargain for their own
wages. Lastly, organizations are putting more emphasis on
employee skills and performance, as opposed to the job.
All this does not mean that organizations ignore the job as a
determinant of wages. What has happened is that wage systems
have become more flexible and weight skill and performance
more heavily.
The use of market wage data for more and more jobs is
increasing and made more practical as data has become readily
available on the Internet. Within organizations, job evaluation
systems have become simpler, less formal and have reduced
their complexity.
A major trend in this direction has been broadbanding. In
broadbanding, the number of levels in the job evaluation plan
is reduced, and the width of the grade levels increased dramati-
cally. This allows employees to receive wage increases without
having to move up to a new grade level that is tied to a higher
organizational level.
Responsibility for Job Evaluation
The installation and operation of job evaluation involves
certain responsibilities. Several possibilities for implementing
the process are apparent.
One or more committees may be selected, a department may be
set up or an existing one assigned, or a consulting organization
may be brought in. These possibilities are not mutually
exclusive.
Support for the program is essential because installation of it
involves commitments of time, effort, and money. Such
support is usually obtained by securing top management
approval and the collaboration of other managers and organiza-
tion members. Often this approval is obtained through a
committee set up for this purpose.
Hence, let us study below the various bodies involved with the
responsibility of Job evaluation:
The Committee Approach
This committee is given an explanation of job evaluation, the
purposes it is expected to accomplish, a rough time schedule,
and perhaps an estimate of the cost of the program. The
committee makes the decision to install job evaluation, decides
on the scope of the project, and assigns responsibility for the
work.
The actual work of job evaluation is usually done in committee
in both large and small organizations, whether the task is
accomplished by organization members alone or with the help
of a consultant.
Committees have the advantage of being able to pool the
judgment of several individuals. The committee usually selects
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106
the compensable factors, determines weighting, chooses the
method of comparing jobs, and evaluates jobs.
The chair of the committee is usually a compensation profes-
sional, although a consultant, if employed, may assume the
chair for part of the work. Other members are typically other
managers selected for their analytical ability, fairness, and
commitment to the project.
Representation of broad areas of the organization aids in
communication and in gaining acceptance. But job evaluation
committees should be kept small to facilitate decision making.
Five members may be optimum, ten a maximum. A common
procedure is to invite supervisors to committee meetings when
jobs in their department are under study.
In union-management installations, union members are regular
members of the committee. Where the union is not involved
employee representation is often rotated. Employee representa-
tion in committees seems to aid in securing acceptance and in
communication.
Committee job ratings are a result of pooled judgments. This
usually means either that ratings made individually are averaged
or a consensus is reached as a result of discussion.
Committee members must be trained. Much of this training
involves following the steps in the process. But it is advisable to
train committee members how to guard against personal bias
and the common rating errors.
Consultants
Consultants are sometimes employed to install job evaluation
plans. Successful consultants are careful to ensure that organiza-
tion members are deeply involved in installing the plan and are
able to operate the plan on their own.
Consultants are most likely to be employed in small organiza-
tions where no member has the necessary expertise. They are
also more likely to be employed when a complex rather than a
simple plan is to be installed. Consultants often have their own
ready-made plans.
Sometimes consultants are brought in to insure objectivity in
union-management installations. It is also common to hire
consultants to evaluate management jobs, because the objectiv-
ity of committee members rating jobs at levels higher than their
own may be questioned.
Compensation Department Involvement
It is quite possible for the organization to assign installation
and operation of a job evaluation plan to the compensation
department. Sometimes the compensation professional
heading the unit and a number of job analysts carry out the
task.
Those who favor this last approach emphasize the technical
nature of the task. They may also be reacting to the difficulty of
getting operating managers to devote the time that the program
requires.
While they may recognize the education and communication
advantages of committees, they believe these advantages can be
provided in other ways. It is doubtful that this position can be
justified, though.
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Input by operating managers and perhaps employees during
job evaluation installation is probably essential to acceptance of
the results. Once the program is installed, however, there seems
to be no reason why a department cannot operate it with proper
provision for settling grievances.
Union Involvement in Job Evaluation
Union involvement has the same rationale as that offered in our
discussion of job evaluation committees. Acceptance and
understanding are the expected results of involvement.
In practice, union participation in job evaluation has varied
greatly. Some unions profess to formally evaluate an
organization’s jobs independently and then use the information
as an aid in collective bargaining.
Some job evaluation plans have been installed and maintained
as a joint venture. A well-known union-management job
evaluation plan exists in the steel industry. Less well-known is
the joint plan in the West Coast paper industry. There is
evidence that joint plans are more successful
than unilateral plans. But this is not always the case.
Many unions in organizations with job evaluation plans review
the findings after installation by management and either present
grievances on individual jobs or insist on bargaining the wage
structure. In the latter case, the bargained wage structure may
follow the job structure resulting from job evaluation or
represent a compromise.
Some unions have ignored job evaluation plans installed
unilaterally by management. Some employers prefer this
response, believing that job design and evaluation are manage-
ment prerogatives. Other employers invite union participation
in the hopes of obtaining understanding and acceptance of the
plan.
If a union rejects an invitation to participate in job evaluation
and ignores the plan, the employer installs the plan unilaterally,
recognizing the need for a logical hierarchy of jobs. The findings
are used in negotiating the wage structure.
Unions have criticized job evaluation on several grounds:
1. that it restricts collective bargaining on wages,
2. that wages shouldn’t be based solely on job content,
3. that supervisors do not or cannot explain the plan to
employees,
4. that management doesn’t administer the plan the way it
explained it, and
5. that it is subjective.
Employee Acceptance of Job Evaluation
Job evaluation is usually judged successful when employees,
unions, and organizations report satisfaction with it. Most
surveys report organization satisfaction levels at 90 percent or
better. Employee acceptance is the primary criterion organiza-
tions use in determining the success of a job evaluation plan.
This is reflected in the increasing use of employees on job
evaluation committees and in the communication steps
accompanying job evaluation installations.
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11.622.1
Relationship Between Job Evaluation and Job
COMPENSATITION MANAGEMENT
Analysis
Job evaluation is the output provided by job analysis. As seen
earlier, Job analysis describes the duties of a job, authority
relationships, skills required, conditions of work, and addi-
tional relevant information. Job evaluation on the other hand,
uses the information in job analysis to evaluate each job valuing
its components and ascertaining relative job worth.
It involves, in other words, a formal and systematic comparison
of jobs in order to determine the worth of one job relative to
another, so that a wage or salary hierarchy results. So it is a
process by which jobs in an organisation are evaluated.
When jobs are evaluated, the relative worth of a given collection
of duties and responsibilities to the organisation is assessed.
This process is adopted to help a management to maintain high
levels of employee productivity and employee satisfaction.
If job values are not properly studied, it is very likely that jobs
would not be properly realized, i.e, high valued jobs may receive
less pay than low-valued jobs.
When employees realise that this is happening, they become
dissatisfied. They may leave the organisation, reduce their efforts
or perhaps adopt other modes of behaviour detrimental to the
organisation.
Therefore, in modern society, a great deal of attention is paid to
the value of a job. What a particular job should be paid is
greatly influenced by the value of judgement about the worth
of a job. In other words, a person is paid for what he brings to
a job his education, training and experience provided that these
are related to the requirements of the job which he is assigned.
Summary
The discussion in this chapter showed that the development of
a wage structure is the result of a number of influences. These
factors vary from ones over which management has a great deal
of control to ones in which management must simply be
responsive.
Given the variety of influences, it is also not likely that organiza-
tions will always be able to develop optimum structures and
that current structures will need adapting in the future.
While the economics of the labor market is a major consider-
ation, it is not the only determinant to influence the design of
wage structures. Most organizations also must consider labor-
cost ratios, product market competition, and union demands,
when determining their wage structure.
Furthermore, many labor markets are abstractions that do not
provide a close fit for an organization’s jobs or wage-paying
ability.
Wage structures have to do with the internal alignment of jobs
in a wage hierarchy. To do this there must be a hierarchy or
structure of jobs within the organization. Determining the
internal job structure is the task of job evaluation. This process
compares jobs, not people, in terms of a set of criteria, called
compensable factors, to establish the job hierarchy.
Job evaluation is a major tool that organizations use to make
job comparisons when determining the relative equity of jobs
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 within the organization. In job evaluation there is an interesting
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conflict.
On one hand, like wage surveys, this process requires technical
expertise of a compensation professional. On the other hand,
acceptability of job evaluation results relies on the perceptions
of management and workers so that their participation would
seem to be a necessity in job evaluation.
Tutorial Activity 1.1
The Lmpact of Electronic Communication Systems
on HRM Practices
such systems has benefited the process of performance
evaluation. ... technologies opens up new fronts in job training
methods ... Article by Abhishek Dasgupta of XLRI. ...
We are all living in a world where technology is changing
practically every instance. The place we go to work is also
experiencing radical changes due to similar reasons. Every
organization is trying its very best to capture market shares
using cutting-edge customized solutions. This trend has also
affected the way organizations are structured especially in the US,
which is the hub of such expertise.
Recent trends in organization structure suggest that they will
become increasingly distributed, flexible and responsible to
environment and market changes. The networked organizations
emphasize on the multidisciplinary work arrangements linking
people across organizational boundaries, less clearly defined
authorities and multidirectional communication patterns.
What is ECS?
The technology fueling these type of new organization
structures are the computer based communication technologies
or Electronic Communication Systems. This includes electronic
mail, computer conferencing and video conferencing which
facilitate rapid, multidirectional communication flow.They also
enable multimedia document exchange and storage, and
exchange of information across organizations.
The use of ECS has been expanding at an explosive rate e.g the
number of e-mail messages sent in the US alone has grown
from 776 billion in 1994 to 2.6 trillion in 1997 and is projected
to reach 6.6 trillion this year.Revenues for the videoconferencing
industry were to the tune of $15 billion in 1999. Corporations
are setting up videoconferencing rooms at a fast pace and using
it as lower cost substitution for air travel.
The Technologies Under ECS Include
Audio Systems:
Telephone
Audio conferencing
Voice mail
World Wide Web phone systems
Chat Systems:
Internet relay chat
Web chat
Conferencing:
Computer conferencing
Web conferencing
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108
Electronic mail systems:
e-mail
e-mail with multimedia
Videoconferencing:
Desktop video
Room based video conferencing
Though most of these technologies have been available for
quite sometime, few have considered the impact of communi-
cation technologies on managing personnel. This leads us to a
few questions….
What skills are required when employees communicate within
the organization via telephone and not face-to-face?
Can one asses job applicants through videoconferencing?
How can one train, monitor, motivate and control employees
through electronic mail?
Some of these critical questions have been dealt with in the later
part of this essay.
Implications of ECS on HRM practices
Employee selection and recruitment
A distance spanning medium like ECS introduces new changes
in the way job interviews are conducted. Media transferring aural
and visual data such as telephony and videoconferencing can
provide low cost alternatives for interviewing reducing the
nagging costs of travel, accommodation and incidentals. The
increasing use of such technologies in the US has led to
decreasing costs which have made it more accessible.
It has also been observed that the candidate provides more
candid responses in interviews conducted via such new
channels. Also it has been found that telephone eliminates
visual cues and screens off information which may be irrelevant
such as sex, age, style of dressing etc. thus the focus is on
interview content and fosters the selection of a more diversified
workforce.
The choice of the medium for interview may also have a
symbolic meaning for applicants. Firms conducting interviews
by telephone might be perceived as cost effective or
videoconferencing may impress upon technological sophistica-
tion. On the other hand, companies may be viewed as being
disinterested or in deep financial straits.
Performance Evaluation
ECS has transformed the way data is observed and information
is collected. The filtering out of stereotypes and biases by such
systems has benefited the process of performance evaluation.
With the much discussed flattening of organizations and
diffused job specifications, it has become difficult for managers
to observe what their subordinates actually do. ECS has proved
to be an effective tool in collecting and collating vital informa-
tion about employees from subordinates, peers and customers.
Recently conducted research has revealed that groups have been
more productive in generating ideas through electronic commu-
nication as compared to face-to-face interaction. This
productivity is attributed to large number of people participat-
ing simultaneously and its associated advantages.
11.622.1
The provision of a shared screen system in the organization
encourages member’s to associate the ideas as “our’s” or “the
group’s”. This is attributed to feeling of depersonalization and
anonymity.
The delivery of feedback, extremely critical in performance
appraisals is facilitated by such technologies in a much better
way. There is evidence to show that willingness to give feedback
increases when the feedback need not be delivered face-to-face. It
also reduces the concerns associated with delivery of “bad
news” to the appraisee.
The only hindrance lies in the fact that such communication is
not free from tampering and secrecy is in question. Hacking of
such data can be tremendously damaging to the organisation’s
interests.
Training and Development
This topic brings us to the question - What are the job skills
required to perform a job that relies on ECS? Well, technical
knowledge is important but more important is the ability to
convey ideas and information in writing rather than oral
communication e.g. e-mail.
The availability of new technologies opens up new fronts in job
training methods. Remote sites for videoconferencing, com-
puter managed games and simulations, videotaped lectures and
interactive video training are relevant in providing “just in time
training”.
Employee-employee interaction is enhanced by ECS, which
promote development of the organization through mutual
information exchange especially in large organizations. The
exchange of information increases the personal self-esteem,
identification with the organization and feeling of “our group”.
In Conclusion
Till now we have analysed the importance and impact of new
technologies on the organizations of today. We have tried to
identify its possible implications on managing personnel.
However most of the studies referred to belong to specific
contexts and the generalisability of these practices is in question.
The media effects on various HR practices has been taken more
or less in as positive developments, but more needs to be done
to assess its full implications. They could be negative or
unprofitable in the long run. Also the cost effectiveness and
relevance outside the US in underdeveloped economies like
India needs to be explored.
Whatever may be the case, ECS is here to stay, may not be in the
form as suggested above. It could be a combination of manual
and new media to produce the eclectic mix.
What we need to do is to focus on the fact. The fact that ECS
has opened up a number of possibilities - it is up to our
imagination to maximize its benefits through customization in
the Indian environment.
Tutorial Activity 1.2
HR Managers and Employee Expectations
Competence mapping, job evaluation and classification, reward
systems management and performance ... These two case
studies are good indication of the nature of HR ...
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11.622.1
India as a country is less systems-driven and more relationship-
COMPENSATITION MANAGEMENT
driven. Consequently every employee has high expectations
from the HR department. However, due to their administra-
tion-heavy roles, HR managers are unable to meet the needs of
some or several employees, and land up displeasing many, says
TV Rao.
Today in India and in other Asian countries, there are plenty of
HR or HRD managers. They inhabit every corner of an
organisation. Even a small-scale industry nowadays thinks of
HR manager. Organisational life without them seems incom-
plete. In the IT sector, it is almost a norm to have one HR
manager for every 50 IT professionals.
In one of the audits of an IT company, the author found that
there were 11 HR managers to handle 300 IT staff.
They were all assigned to 30 IT professionals each. Their job
descriptions have indicated that they should socialise every new
recruit, mentor them, explain to them the detailed process of
their work, performance appraisal, reward system and keep in
touch with them so as to enable them to contribute their best.
Fresh graduates from the schools of social work were recruited
and placed as HR managers. The audit revealed that they are
hated most by the IT professionals of the company.
They were considered inaccessible, unsympathetic, putting
hurdles all the time, lacking an understanding of IT basics,
insensitive to trends in the changing pattern of compensation
and excessively concerned with monitoring the performance of
new recruits.
Shrinking Roles
While the number of HR managers have grown dis-propor-
tionately in the last few years, their knowledge-base has
remained very poor. Their credibility has shrunk, along with
their roles and in some cases they have become power brokers.
Some of the relatively good HR managers have saved their
image by restricting themselves to training and organisation
development. Those in charge of performance appraisals have
also suffered a great deal of image bashing, as they could not
satisfy most line managers who thought they are excellent
performers. In the last decade with globalisation and economic
liberalisation, Industrial Relations (IR) jobs have become
redundant.
As a result, most organisations have diverted a large number of
their IR managers to the HR side as HR managers. Thus, there
is a new breed of HR managers in some organisations trying to
find out how they can do an HRD-oriented IR. Competence
mapping, job evaluation and classification, reward systems
management and performance appraisal and training have
become the preoccupation of many of them. They were ill
prepared for this jump. Outsourcing came to their rescue and
they kept themselves busy, trying to find out agencies to whom
they can outsource compensation surveys, employee satisfaction
surveys, organisational climate surveys, etc.
Results of Surveys
There are very few scientific studies available on HRD managers
of today. The author has been involved in the HRD audit of
several companies.
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 The following descriptions taken from some leading industries
COMPENSATITION MANAGEMENT

of India depict the situation.

One of the organisations, which employs nearly 16 HRD staff,
was examined. The HRD department is separate from the
personnel administration and industrial relations departments
of the company, which have 30-odd staff. The 16 HRD staff
examined were found to have the following profile:
An average age of 44 years with about a third of them over 50
years of age. Imagine the nature of qualifications they had
acquired 25 years ago when no HRD existed. None of them
had any professional qualification in HRD. Two of them had
qualifications in personnel management and four were trained
in training and development. Put together, they had experience
as shown in the table.
They have, in all, attended a total of 171 training programmes
in the last five years, accounting for about 556 man days’
training. A few of them did not attend any programme after
joining the company. Of the 556 man-days of training, only 45
man-days dealt with HRD-related themes. Only three of them
were found to be members of appropriate professional bodies
in HRD.
The line managers of this company, however, felt that the
importance given to HRD function by the top management is
very high. 66 percent rated this as very high.
In another study of a professionally managed company, a total
of 11 staff manned the corporate personnel function. They
included four senior managers at general manager/deputy
general manager level.
The chief of personnel was estimated to spend less than 29
percent of his total time on HRD activities. Only two of them
had professional qualifications in HR. The only area where they
had a reasonable degree of proficiency was found to be in
performance management.
This is a clear indication of the gross neglect of the HRD
function. This case study is a good indication of the nature of
HR and some common areas HRD managers are weak in.

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110 11.622.1

LESSON 18:
INTRODUCTION TO PRINCIPLES AND PROCEDURE OF
JOB EVALUATION PROGRAM
Job Evaluation and Internal Equity
Learning Objective
• To learn the Details of the Principles of Job Evaluation
• To understand the Concept of Job Evaluation procedure
• To learn the Sequential procedure of Job Evaluation
Interaction
There are certain broad principles, which should be kept in
mind before putting the job evaluation programme into
practice. According to Kress, these principles are:
i. Rate the job and not the man. Each element should be
rated on the basis of what the job itself requires. .
ii. The elements selected for rating purposes should be easily
explainable in terms and as few in number as will cover the
necessary requisites for every job without any overlapping.
iii. The elements should be clearly defined and properly
selected.
iv. Any job rating plan must be sold to foremen and
employees. The success in selling it will depend on a clear-
cut explanation and illustration of the plan.
v. Foremen should participate in the rating of jobs in their
own departments.
vi. Maximum co-operation can be obtained from employees
when they themselves have an opportunity to discuss job
ratings.
vii. In talking to foremen and employees, any discussion of
money value should be avoided. Only point values and
degrees of each element should be discussed.
viii.Too many occupational wages should not be established. It
would be unwise to adopt an occupational wage for each
total of point values.
Introduction to Procedure of Job
Evaluation
After studying the principles of job Evaluation it is important
to know the process and procedures involved in job evaluation,
it is useful at this point to understand the steps in the process.
The first step is a study of the jobs in the
organization.Through job analysis, information on job content
is obtained, together with an appreciation of worker require-
ments for successful performance of the job. This information
is recorded in the precise, consistent language of a job descrip-
tion.
The second step is deciding what the organization “is paying
for” - that is, what factor or factors place one job at a higher level
in the job hierarchy than another. These compensable factors are
the yardsticks used to determine the relative position of jobs.
In a sense, choosing compensable factors is the heart of job
evaluation. Not only do these factors place jobs in the
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11.622.1
COMPENSATITION MANAGEMENT
organization’s job hierarchy, but they also serve to inform job
incumbents which contributions are rewarded.
The third step in job evaluation is to select a method of
appraising the organization’s jobs according to the factor(s)
chosen. The method should permit consistent placement of
jobs containing more of the factors higher in the job hierarchy
than jobs involving lesser amounts.
The fourth step is comparing jobs to develop a job structure.
This involves choosing and assigning decision makers, reaching
and recording decisions, and setting up the job hierarchy.
The final step is pricing the job structure to arrive at a wage
structure. Strictly speaking, this step is not part of job evalua-
tion. As seen earlier in this chapter, many wage structure
determinants are used by organizations. The job structure is
only one of these.
This view of job evaluation implies that its major purpose is to
classify jobs and establish a job hierarchy based on job content.
Other perspectives are that job evaluation
1. links external and internal markets, and
2. is a process used to gain consensus and acceptance of a pay
structure.
Perhaps these views could all be accommodated by the recogni-
tion that job structures and wage structures are separate
concepts and that the relationship between them is a decision
that varies among organizations.
Basic Procedure of Job Evaluation
The basic procedure of job evaluation is to compare the content
of jobs in relation to one another, in terms of their skills or
responsibility or some other requirement. The job contents may
be decided upon in two ways, i.e.,
Either by making an intuitive “overview” i.e., by deciding that
one job is “more important” than another, and not going any
deeper in why - in terms of specific job-related factors; or by
comparing one job to another by focusing on certain ‘basic
factors’, which may be common in each job.
Such factors are called compensable factors - which determine
the definition of job content; that determine how the jobs
compare to each other; and they also help determine the
compensation paid for each job.
The organisation might develop its own compensable factors or
use those factors adopted by others. For example, the “Equal
Pay for Equal Work Act” (in USA) focuses on four factors:
skills, efforts, responsibility and working conditions.
While some other system (say Hay system in the States) focuses
on know-how, problem solving and accountability. Often
several basic factors are chosen initially and then subdivided into
sub-factors. For example, refer to the following table
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 Table 1.1 : Compensable Factors Why were the Standards Revised?
COMPENSATITION MANAGEMENT

Universal Factors Sub-factors No. of Degrees The major reasons for the year 2000 revisions of the standards
include:
Knowledge Education 8
Experience 8 • emphasizing the need to monitor customer satisfaction,
Skill 8 • meeting the need for more user-friendly documents,
Problem-Solving Interpretation 8 • assuring consistency between quality management system
Compliance 8 requirements and guidelines,
Communication 8 • promoting the use of generic quality management principles
Decision-Making Interpersonal 8 by organizations, and
Managerial 8 • enhancement of their compatibility with ISO 14001.
Asset
In addition, the year 2000 revision of the ISO 9000 standards
When compensable factors are available, jobs can be evaluated gives users the opportunity to further increase value to their
more systematically. Each job is compared with all the others activities and to improve their performance continually by
using the same factors, sub-factors, and number pf degrees. focusing on the major processes within the organization.
Sometimes job specifications are based on these factors, stating
Extensive surveys have been performed on a worldwide basis
the “human requirements” of the job in terms of condensable
to understand the needs of all users of the quality management
factors like education, skills problem solving, and decision-
system standards. The new revisions take into account previous
making.
experience with quality management system standards (1987
In India, the National Institute of Personnel Management, has and 1994 editions) and emerging insights into generic manage-
laid down the following steps which should be taken to install a ment systems. They result in a closer alignment of quality
job evaluation programme: management systems with the needs of organizations and
Analyse and Prepare Job Description better reflect the way organizations run their business activities.
This requires the preparation of a job description and also an ISO’s rules of procedure (the ISO/IEC Directives) also specify
analysis of job requirements for successful performance. that standards be periodically revised to ensure that those
Select and Prepare a Job Evaluation Plan standards are current and satisfy the needs of the global
This means that a job must be broken down into its compo- community. [FAQ 001, March 2001]
nent parts i.e., it should involve the selection of factors, Who is Responsible for Revising the Standards?
elements needed for the performance of all jobs for which The revision process is the responsibility of ISO Technical
money is paid, determining their value and preparing written Committee (TC) 176 and is conducted on the basis of consen-
instructions for evaluation. sus among quality and industry experts nominated by ISO
Classify Jobs Member bodies, and representing all interested parties.[FAQ
This requires grouping for arranging jobs in a correct sequence 002, March 2001]
in terms of value to the firm, and relating them to the money Will the Year 2000 Revision Affect my Organization’s
terms in order to ascertain their relative value. Current Quality System Registration/Certification?
Install the Programme Yes. The strategy adopted by your organization to meet the
This involves explaining it to employees and putting it into requirements of ISO 9001:2000 should include an appropriate
operation. timing for upgrading your organization’s registration/ certifica-
tion.
Maintain the Programme
It is expected that the process of upgrading registration/
Jobs cannot continue without updating new jobs and job
certification will be a smooth transition that is incorporated into
changes in obedience to changing conditions and situations.
the applicable Registration or Certification Body’s regular audit
Tutorial Activity 1.1 routine.
Frequently Asked Questions (FAQ’s) The International Accreditation Forum (IAF has already
This list of Frequently Asked Questions (FAQ’s) has been established a set of guidelines for Certification Bodies/
updated after publication of the ISO 9000:2000 family of Registrars to follow, and this includes a transition period of up
International Standards . Input has been obtained from experts to three years after the 15th of December 2000. You are advised
and users of the ISO 9000 standards, expressed during to contact your registration/certification body to negotiate a
seminars and presentations around the world. The list will be suitable transition time frame for the assessment of your own
reviewed and updated on a regular basis to maintain its accuracy, organization. [FAQ 003, March 2001]
and to include new questions where appropriate. It is intended How Much is the Transition to the New Standards
that this list will also provide a good source of information for Going to Cost?
new users of the standards. One of the goals of ISO/TC 176 is to produce standards that
will minimize any potential costs during a smooth transition.
Any additional costs may be considered as a value-added
investment.

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112 11.622.1
The cost of implementing any necessary changes in order to
meet the new requirements of ISO 9001:2000 will vary from
one organization to another, depending on various factors such
as the actual state of implementation of the quality manage-
ment system, the size and complexity of the organization, the
attitude and commitment of the top management, etc. It is
expected that the benefits to all organizations will outweigh
eventual costs associated with the transition.
Regarding the costs of upgrading the certification, the Interna-
tional Accreditation Forum’s (IAF) guidelines provide for the
incorporation of audits to the new standard into surveillance
visits for existing (1994) certifications, wherever possible.
[FAQ 004, March 2001]
Where can My Organization Obtain Copies of the
Revised Standards?
Copies of the revised standards may be purchased from
National Standards Bodies. Many countries may have these
available in local-language versions (see ISO Online) for a listing
of member body, i.e. national standards bodies, contact details).
[FAQ 005, March 2001]
Where can I Obtain Information on the Revised
Standards?
There are a number of sources of information on the revision
of ISO 9000 quality management system standards, including,
of course, this web site, which carries detailed information on
the revised standards and is updated on a regular basis. ISO
Central Secretariat in Switzerland is also maintaining a web site
at http://www.iso.ch that carries general information on the
revised standards.
Your National Standards Body should be able to provide copies
of the revised standards and registrars/certification bodies will
be able to provide guidance on transitional registration arrange-
ments (see the ISO web site for a listing of the member bodies,
i.e. the national standards bodies, contact details).
[FAQ 006, March 2001]
Where Does My Organization Go If It Needs
Clarification or Interpretation of the Revised
Standards?
The starting point for any individual request for an interpreta-
tion should be with the enquirer’s national standards body. ISO
central secretariat and TC 176 cannot accept direct requests from
individuals for interpretations of the ISO 9000 standards.
Instead, ISO/TC 176 has established a Working Group for
interpretation, with a formal procedure to provide answers to
the questions that are forwarded by the national standard
bodies.(See the ISO web site http://www.iso.chfor a listing of
the member bodies, i.e. the national standards bodies, contact
details). [FAQ 007, March 2001]
Will My Organization Need a Full Reassessment for
the Revised Standards?
This is primarily an issue between your organization and your
registration/certification body. It is expected that conformity to
the new ISO 9001:2000 standard will be evaluated by certifica-
tion bodies during regular surveillance visits, and that full
reassessment will only take place once current certificates expire.
[FAQ 008, March 2001]
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11.622.1
Will My Organization Have to Change Its Quality
COMPENSATITION MANAGEMENT
System and, if So, When?
It is not the intention that you should have to change the
whole structure of your system or re-write all your procedures;
however, the revised standards include some new requirements
and you should consider addressing them in your system at an
appropriate opportunity.
A joint group from the International Accreditation Forum,
ISO/TC 176 and ISO/CASCO have agreed that there should
be a 3 year ‘transition’ period during which accredited certifica-
tion to the 1994 standards and ISO 9001:2000 may continue to
coexist. This ‘transition period’ will end on 15 December 2003.
By that date, all organizations wishing to retain accredited
certification will have to have migrated their quality management
system to being compliant with ISO 9001:2000.
ISO/TC 176/SC2 has published a Transition Planning Guide
to assist organisations in their migration. [FAQ 09, March 2001]
Will My Organization Have to Re-write All its
Documentation?
No. If your current quality management system is successfully
implemented, satisfies the needs and objectives of your
organization, reflects the way your organization works, ad-
dresses all of the new requirements, no changes are required.
However, if your current documented system does not address
all of the new requirements, additional documentation may be
necessary.
The International Standard ISO 9001:2000 has clarified the need
for required documentation. Only 6 documented procedures are
required by the standards for administration of the system;
however, other documented procedures may be required by
your organization in order to manage the processes which are
necessary for the effective operation of the quality management
system. This will clearly vary depending on the size of the
organization, the kind of activities in which it is involved and
their complexity. [FAQ 010, March 2001]
Are the Revised Standards More Compatible with
National Quality Award Criteria?
The quality management principles are now the basis for the
revised standards, which are better aligned with the philosophy
and objectives of most quality award programs. These prin-
ciples are:
• Customer focus,
• Leadership,
• Involvement of people,
• Process approach,
• System approach to management,
• Continual improvement,
• Factual approach to decision making, and
• Mutually beneficial supplier relationships. [FAQ 011, March
2001]
Does the Revised Standards Address Financial
Issues?
Financial issues are not addressed in the ISO 9001:2000
standard. The ISO 9004:2000 guidance standard emphasizes the
113
 financial resources needed for the implementation and improve-
COMPENSATITION MANAGEMENT
ment of a quality management system.
[FAQ 012, March 2001]
What are the Benefits of the Revised Standards?
There are a number of major benefits with the revised quality
management systems standards. Among them are:
Applicability to all product categories, in all sectors and to all
sizes of organizations
Simple to use, clear in language, readily translatable, and easily
understandable
Significant reduction in the amount of required documentation.
Connection of quality management systems to organizational
processes
Provision of a natural move towards improved organizational
performance
Greater orientation toward continual improvement and
customer satisfaction
Compatibility with other management systems such as ISO
14000
Provision of a consistent basis to address the needs and
interests of organizations in specific sectors (e.g. medical
devices, telecommunications, automotive, etc)
The concept of the consistent pair - ISO 9001 covering the
requirements and ISO 9004 for going beyond the requirements
in order to further improve the performance of the organiza-
tion. Consideration of the needs of and benefits to all
interested parties. [FAQ 013, March 2001]
What are the Main Changes to the Standards?
The main changes that have been introduced in the consistent
pair of quality management system standards are:
A new process-oriented structure and a more logical sequence of
the contents
A continual improvement process as an important step to
enhance the quality management system
Increased emphasis on the role of top management, which
includes its commitment to the development and improvement
of the quality management system, consideration of legal and
regulatory requirements, and establishment of measurable
objectives at relevant functions and levels.
The concept of “Application” of the standard has been
introduced (in clause 1.2) as a way to cope with the wide
spectrum of organizations and activities.
A requirement for the organization to monitor information on
customer satisfaction as a measure of system performance.
Significant reduction in the amount of required documentation.
Terminology changes/improvements for easier interpretation.
Increased compatibility with the environmental management
system standard ISO 14001
Specific reference to quality management principles.
Consideration of the benefits and needs of all interested
parties.
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114
Addition of the concept of organizational self-assessment as a
driver for improvement (ISO 9004:2000) .[FAQ 014, March
2001]
What New Requirements Have Been Introduced Into
The Revised ISO 9001 Standard?
The main new requirements include:
Continual improvement
Increased emphasis on the role of top management.
Consideration of statutory and regulatory requirements.
Establishment of measurable objectives at relevant functions
and levels.
Monitoring of information on customer satisfaction as a
measure of system performance.
Increased attention to resource availability.
Determination of training effectiveness.
Measurements extended to system, processes, and product.
Analysis of collected data on the performance of the quality
management system [FAQ 015, March 2001]
Why Has the Requirement for Monitoring of
Customer Satisfaction Been Included in ISO 9001?
“Customer satisfaction” is recognized as one of the driving
criteria for any organization. In order to evaluate if the product
meets customer needs and expectations, it is necessary to
monitor the extent of customer satisfaction. Improvements can
be made by taking action to address any identified issues and
concerns. [FAQ 016, March 2001]
Will the Revised Standards Improve Customer
Satisfaction?
The quality management system described in the revised
standard is based on quality management principles that include
the “process approach” and “customer focus”. The adoption of
these principles should provide customers with a higher level of
confidence that products will meet their needs and increases
their satisfaction. [FAQ 017, March 2001]
What is a Process?
Any activity or operation, which receives inputs and converts
them to outputs, can be considered as a process. Almost all
activities and operations involved in making a product or
providing a service are processes.
For organizations to function, they have to define and manage
numerous inter-linked processes. Often the output from one
process will directly form the input into the next process. The
systematic identification and management of the various
processes employed within an organization, and particularly the
interactions between such processes, may be referred to as the
‘process approach’ to management.
The revised quality management system standards are based on
just such a process approach, in line with the guiding quality
management principles. [FAQ 018, March 2001]
What is Meant by “Continual Improvement”?
“Continual improvement” requires an organization to focus on
continually increasing the effectiveness and/or efficiency of its
processes, to fulfill its policies and objectives. Continual
11.622.1
improvement (where “continual” highlights that an improve-
ment process requires progressive consolidation steps)
responds to the growing needs and expectations of customers
and ensures a dynamic evolution of the quality management
system. [FAQ 019, March 2001]
How Will the Implementation of the New Standards
Help My Organization to Improve its Efficiency?
ISO 9001:2000 aims at guaranteeing the effectiveness (but not
necessary the efficiency) of the organization. For improved
organizational efficiency, however, the best results can be
obtained by using the new ISO 9004:2000 in addition to ISO
9001:2000. The guiding quality management principles are
intended to assist an organization in continual improvement,
which should lead to efficiency throughout the organization.
[FAQ 020, March 2001]
How Will the Revised Standards Improve the
Perception of ISO 9001 Certification/Registration?
By demonstrating to organizations that the process of certifica-
tion based on the new ISO 9001 standard adds value to their
own business goals, a market-wide improvement in the
perception of ISO 9001 certification should be developed.
The rationale behind the revision process places great emphasis
on making quality management systems closer to the processes
of the organization and on continual improvement. As a result,
the revised standards (ISO 9001:2000 and ISO 9004:2000) are
directed to the achievement of business results, including
satisfaction of customers and others.
There is confidence that management of the organization will
be able to adopt the quality management system standards not
only for certification purposes, but also as a profitable invest-
ment. [FAQ 021, March 2001]
What Will Happen to the Guideline Documents (e.g.,
ISO 9000-3, ISO 9004-2) in the ISO 9000 Family?
The revised ISO 9001 and ISO 9004 quality management
system standards have been prepared taking into account these
and other guideline documents of the former ISO 9000 family.
The revised standards are intended to be sufficiently generic so
as to eliminate the need for specific guidance on their applica-
tion.
It is intended that the responsibility for some of the guideline
standards (such as ISO 9000-3 and 9000-4) will be transferred to
other ISO/IEC Technical Committees. It is proposed that
standards such as ISO 9004-2 and ISO 9004-3 be withdrawn
and other documents (e.g. ISO 10013) may become technical
reports at their next revisions. ISO 10012 will remain as an
international standard.
This situation is currently under review by ISO/TC 176. [FAQ
022, March 2001]
What Will Happen to ISO 10012-1 and ISO 10012-2?
Current plans are to maintain these measurement systems
standards as part of the year 2000 ISO 9000 family.
A work item has been approved for the merger of 10012-1 and
10012-2 into one standard. The new ISO 10012 standard is
targetted for publication in early 2002. [FAQ 023, March 2001]
© Copy Right: Rai University
11.622.1
What Happened to ISO 8402 and ISO 9000-1?
COMPENSATITION MANAGEMENT
The terms and vocabulary previously found in the ISO 8402
standard are addressed in the ISO 9000:2000 (Quality Manage-
ment Systems: Fundamentals and Vocabulary) standard. The
quality management concepts in ISO 9000-1 have been inte-
grated into the ISO 9000:2000 standard. [FAQ 024, March 2001]
Which Standard Will My Organization be
Registered/Certified to?
All organizations will be registered/certified to ISO 9001:2000.
The scope of registration/certification will need to reflect clearly
the activities covered by the organization’s Quality Management
System, and any exclusion to non-applicable requirements of
the standard (through 1.2 “Application”) documented and
justified in the quality manual. (See also the ISO/TC 176/SC2
Introduction and Support Package: Guidance on ISO 9001:2000
Clause 1.2 Application.) [FAQ 025, March 2001]
What Happened to the 1994 Versions of ISO 9001,
9002 & 9003 ?
The year 2000 publications have superseded corresponding 1994
versions of the standards. However, noting the IAF-ISO/
CASCO-ISO/TC 176 agreement that accredited certification to
the 1994 editions should remain possible for up to 3 years after
the publication (i.e. until 15 December 2003) of the revised
standards, copies of the 1994 editions will still be available on
request from ISO and the national standards bodies during that
period. [FAQ 026, March 2001]
My Organization is Currently Registered/Certified to
ISO 9003. What do We Need to do?
There are significant differences between the ISO 9003 standard
and the revised ISO 9001:2000 standard, notably in the product
realization activities. You should perform a gap analysis based
on the standard to determine what areas in your organization’s
quality management system already comply with the revised
requirements. Where your current system does not address the
applicable ISO 9001:2000 requirements, development and
implementation of processes to ensure compliance will need to
be made. [FAQ 027, March 2001]
What Will Happen to My Organization if it is
Currently Registered/Certified to ISO 9002:1994?
The organization is not obliged to include within the scope of
its certification all the products that it provides. (Note that the
ISO 9000:2000 definition of “Product” includes services!).
However, for those products that are included in the certifica-
tion scope, all applicable requirements of ISO 9001:2000 will
need to be addressed. The standard allows for the exclusion of
some requirements (via clause 1.2 “Application”), but only if it
can be shown that these requirements are not applicable to the
organization.
Exclusions are limited to Section 7 (“Product Realization”), and
requirements may only be excluded if it can be shown that they
do not affect the organization’s ability to provide product which
meets customer and applicable statutory/regulatory require-
ments.
If design activities are required to demonstrate your
organization’s capability to meet customer or statutory/
regulatory requirements for products covered by the quality
115
 management system certification, then these design activities
COMPENSATITION MANAGEMENT
must be included in the scope of your registration/certification
to the ISO 9001:2000 standard.
If design activities are not required to demonstrate your
organization’s capability to meet customer and applicable
statutory /regulatory requirements, or if your product is
provided on the basis of established design, you will still be
registered to ISO 9001:2000. In this case, you will need to justify
the exclusion of the design and development requirements in
your quality manual. (See also the ISO/TC 176/SC2 Introduc-
tion and Support Package: Guidance on ISO 9001:2000 Clause
1.2 Application.) [FAQ 028, March 2001]
Can Organizations Remain Certified/Registered to
the 1994 Version of ISO 9001, 9002 and 9003?
Although organizations are encouraged to make the transition
to ISO 9001:2000 certification as soon as possible, according to
the IAF/ISO-CASCO/ISO-TC 176 Communiqué on transi-
tion policy, organizations may choose to continue or even seek
new certification/registration to the 1994 versions of ISO 9001,
ISO 9002, and ISO 9003. Any accredited certificates issued or
renewed will, however, only remain valid for a maximum of
three years after the publication of ISO 9001:2000 (i.e. until 15
December 2003). [FAQ 029, March 2001]
What does My Organization Need to do if it is
Currently Registered/Certified to ISO 9002:1994 or
ISO 9003:1994?
Since publication of ISO 9001:2000, ISO 9002 and ISO 9003 are
superseded. You will need to evaluate which specific require-
ments of ISO 9001:2000 are applicable to the nature of your
business and the extent to which your present QMS meets
those requirements. Provisions have been made to exclude non-
applicable requirements within Section 7 of the standard
through clause 1.2 “Application”.
If, for example, the nature of your products does not require
you to perform design activities or if your product is provided
on the basis of established design, you will need to discuss and
justify the exclusion of these requirements with your certifica-
tion/registration body. (See also the ISO/TC 176/SC2
Introduction and Support Package: Guidance on ISO 9001:2000
Clause 1.2 Application.) [FAQ 030, March 2001]
Will I be Able to Certify/Register My Organization
to ISO 9004:2000?
No. As ISO 9004:2000 is a guidance standard, it is not intended
to be used for third party certification purposes. A key element
in the new ISO 9004 is the ability to perform self-evaluation.
Third party QMS certifications/registrations are performed to
ISO 9001:2000, which has consolidated the previous ISO 9001,
9002, and 9003 standards. [FAQ 031, March 2001]
How Do Certificates to the Revised ISO 9001:2000
Identify the Scope of the Quality Management
System?
It has always been necessary to define clearly the scope of
registration/certification. The merging of ISO 9001, 9002, and
9003 into a single requirements standard (ISO 9001:2000)
requires more emphasis for the scope to define the products,
© Copy Right: Rai University
116
services and processes covered by certification/registration.
[FAQ 032, March 2001]
How Will the Consistent Pair of Standards Affect a
Registered/Certified Organization?
The idea of a “consistent pair” of standards is the very core of
the revision process. The aligned structure of ISO 9001:2000
and ISO 9004:2000 will encourage organizations not only to
look at their activities from a process standpoint, but also to
look beyond certification to a system which will be truly
beneficial in improving operational performance. [FAQ 033,
March 2001]
What Should I do Now?
You should contact your National Standards Body to obtain
information. (See the ISO web site http://www.iso.ch for a
listing of the member bodies, i.e. the national standards
bodies, contact details).
You should be careful with the information that you receive
from sources other than your National Standards Body,
professional associations, or ISO member organizations.
It is recommended that your organization familiarize your
personnel with the quality management principles, analyze the
changes in the revised standards, and consider how those
changes may affect your activities and related processes. [FAQ
034, March 2001]
How Should My Organization Deal With the
Transition to the Year 2000 Standards?
Consultation on ‘transition’ arrangements between ISO TC
176, ISO CASCO, and the International Accreditation Forum
(IAF) in September 1999 resulted in the following agreements:
Accredited certificates to ISO 9001: 2000 shall not be granted
until its publication as an International Standard.
Certification/registration body assessments to the latest draft
of the revised standard may begin prior to publication of ISO
9001: 2000 as an International Standard.
Certificates issued to the 1994 editions of ISO 9001, ISO 9002,
or ISO 9003 shall have a maximum validity of three years from
the date of publication of ISO 9001: 2000.
ISO 9001: 2000 will require auditors and other relevant certifica-
tion body personnel to demonstrate new competencies.
Certification bodies will need to take particular care in defining
the scope of certificates issued to ISO 9001: 2000 and the
permissible exclusions to the requirements of the standard.
[FAQ 035, March 2001]
My Organization is Applying Now for ISO 9001
Certification/Registration. What Should I do?
Continue with your plans to implement your system and to
apply for certification. We strongly recommend that you read
the new standards, particularly ISO 9004 in conjunction with
ISO 9001, and ensure that your quality management system
effectively adds value to your organization’s activities. [FAQ 036,
March 2001]
11.622.1
How Does ISO 9001:2000 Relate to the Needs of
Specific Business Sectors?
The text of ISO 9001:2000 is more generic than the 1994
version in order to be applicable to different types of product
and to organizations of different sizes. Due to this generic
nature it may be that some industrial or commercial sectors will
identify additional requirements to attend to their specific needs.
To assure consistency between the ISO 9001 requirements and
sector requirements, a pilot study has been conducted using the
development of an automotive industry document as the test
vehicle. The pilot project has successfully achieved the publica-
tion of an ISO technical specification (ISO/TS 16949). The full
results of the pilot scheme, and the working methods em-
ployed, will be reviewed in due course.
[FAQ 037, March 2001]
How Will Interested Parties Benefit by the
Organization Adopting the New ISO 9004?
If the system is appropriately implemented, utilizing the eight
Quality Management Principles, all the interested parties will
benefit from ISO 9004. Customers and users will benefit by
receiving the products (see ISO 9000:2000) that are:
Conforming to the requirements
Dependable and reliable
Available when needed
Maintainable
People in the organization will benefit by:
Better working conditions
Increased job satisfaction
Improved health and safety
Improved morale
Improved stability of employment
Owners and investors will benefit by:
Increased return on investment
Improved operational results
Increased market share
Increased profits
Suppliers and partners will benefit by:
Stability
Growth
Partnership and mutual understanding
Society will benefit by:
Fulfillment of legal and regulatory requirements
Improved health and safety
Reduced environmental impact
Increased security [FAQ 038, March 2001]
How Will a Small Organization be Able to Adapt the
Requirements of the Standard? What Flexibility Will
be Allowed?
The requirements of the revised ISO 9001 are applicable to
small, medium, and large organizations alike. ISO 9001:2000
provides some flexibility, through clause 1.2 “Application”, on
© Copy Right: Rai University
11.622.1
the exclusion of certain requirements for specific processes (i.e.
COMPENSATITION MANAGEMENT
those covered by clause 7, such as design activities) that may not
be performed by the organization. However, the individual
organization will still need to be able demonstrate its capability
to meet customer and applicable statutory or regulatory
requirements for its products, and will need to consider this
when determining the complexity of its quality management
system. [FAQ 039, March 2001]
What Will Happen to the ISO Handbook: ISO 9000
for Small Businesses?
The small business handbook was published by ISO in 1996
and was intended to provide guidance from ISO/TC 176 for
the 1994 versions of ISO 9001, ISO 9002, and ISO 9003. ISO
9001:2000 applies a more generic approach, devoid of the
hardware and manufacturing bias of the current standard, and
is designed to be much more user-friendly for smaller organiza-
tions. ISO/ TC 176/SC2 will be revising the Small Business
Guide during 2001. [FAQ 040, March 2001]
What’s the Relationship Between the Revised ISO
9001 and ISO 14001?
The revised ISO 9001 has been developed to enhance compat-
ibility with ISO 14001 Environmental management systems,
particularly with regard to terminology and content. There is
close collaboration between the technical experts of ISO/TC
176 and ISO/TC 207 (the Technical Committee responsible for
the ISO 14000 series of standards).
A recent review of ISO 14001 and ISO 14004 by ISO/TC 207/
SC 1 has led to the initiation of a revision of those standards.
This will provide the opportunity for further enhancement of
the compatibility between the ISO 9000 and ISO 14000
standards. [FAQ 041, March 2001]
Are There Any Guidelines Covering Joint
Implementation of ISO 9001 and ISO 14001?
It is expected that the revisions of the two standards will be
compatible in terminology and content. It is not expected that
an ISO guideline will be prepared on this subject at the present
time. If the need for such a document arises, ISO will consider
the request as a new project.
For the quality and environmental auditing guidance standards
(ISO 10011 and ISO 14010/14011/14012), the two responsible
ISO technical committees (TC 176 and TC 207) are preparing a
single common auditing standard (ISO 19011), scheduled for
publication in the third quarter of 2002. [FAQ 042, March 2001]
Will There be a Common Guideline Standard for
Auditing QMS and EMS According to ISO 9001 and
14001?
Yes. A specific agreement between the two ISO Technical
Committees (TC 176 and TC 207) has set up a joint working
group to prepare a single standard on auditing activities, both
for quality management and environmental management
systems. This new standard (ISO 19011) will replace the existing
ISO 10011 and ISO 14010/14011/14012 documents. The
planned publication date for this standard is the third quarter
2002. [FAQ 043, March 2001]
117
 My Organization Provides Services. How are the Notes:
COMPENSATITION MANAGEMENT

New Standards Applicable to Us?

The standards are applicable to all types of organizations. The
language in the revised standards is simpler, more user-friendly,
and with less manufacturing bias. The new standards are equally
appropriate to all sectors, including service providers.
(Note: the definition of the term ‘product’ in ISO 9000:2000
also includes services. ISO 9001:2000 and ISO 9004:2000 have
been written to reflect this definition.) [FAQ 044, March 2001]
I am a Qualified Quality Management Practitioner
(Consultant, Auditor, or Trainer). What do I Need
to do?
As a minimum, you should familiarize yourself not only with
the requirements of the new ISO 9001:2000, but also with the
content and philosophies of ISO 9000:2000, ISO 9004:2000
and the quality management principles. You must clearly
understand your client’s activities and processes and appropri-
ately interpret the requirements of the standards to add value to
their operations. [FAQ 045, March 2001]
My Organization is a Regulatory Body. What do We
Need to do?
You should review the regulations currently in effect and ensure
that any references to the quality management system standards
are appropriate. You should then examine the revised standards
and determine if the changes are relevant to the regulations that
you have issued and make recommendations to the legislative
body. [FAQ 046, March 2001]
What Needs to be Done to Ensure that Auditors are
Ready to Work to the Revised Standards?
Auditors, whether external or internal, will have to demonstrate
their competence not only on the structure, content and
terminology of the revised standards, but also on the underly-
ing quality management principles. The revised standards
require that auditors are able to understand the organization’s
activities and processes and appropriately audit against the
requirements of the standard in relation to the organization’s
objectives. According to the IAF/ ISO-CASCO/ ISO TC 176
Transition Policy, auditors must demonstrate competency in:
The requirements of the ISO 9001:2000.
The concepts and terminology of the ISO 9000:2000.
The eight Quality Management Principles
A general understanding of the performance improvement
guidelines of ISO 9004:2000
Familiarity with the latest draft of the auditing guidance
standard (ISO 19011). [FAQ 047, March 2001]
Where can I Find a Competent Speaker to Make a
Presentation on the Revised Standards?
ISO cannot provide speakers for individual organizations, but
has a register of experts, with language skills, who would be
willing to make presentations to industry groups, regional
conferences, etc. based on the remuneration of expenses only.
You should contact the Secretary of ISO/TC 176/SC2
(charles_corrie@bsi-global.com) for further information. [FAQ
048, March 2001]

© Copy Right: Rai University

118 11.622.1

LESSON 19:
INTRODUCTION TO BASIC JOB EVALUATION METHODS/SYSTEMS
&PACKAGED POINT PLANS
Job Evaluation and Internal Equity
Learning Objective
• Introduction to Basic Evaluation Systems
• To know Four Basic, Traditional Systems of Job Evaluation
• To understand the Ranking System
• To understand the Grading or Job Classification System
• To understand the Point System
• To understand the “Packaged” Point Plans
• To understand the Factor Comparison System
Basic Job Evaluation methods/systems:
Write Introduction
Four Basic, Traditional Systems Of Job Evaluation
There are four basic, traditional systems/mehtods of job
evaluation:
1. The ranking system;
2. The grading or job classification system;
3. The point system; and
4. The factor comparison system.
The first two systems are popularly known as the non-analytical
or non-quantitative or summary systems, because they utilize
non-quantitative methods of listing jobs in order of difficulty
and are, therefore, simple. The last two systems are called the
analytical or quantitative systems, because they use quantitative
techniques in listing the jobs. They are more complex and are
time consuming.
The principal differences between these methods reflect:
1. Consideration of the ‘job as a whole,’ versus consideration
of compassable factors’; and
2. Judging and comparing jobs with each Other rather than
assigning numerical scores on a rating scale.
The Plans commonly used today represent variations of
these basic methods:
The Ranking System
Mechanism: Under this system, all jobs are arranged or ranked
in the order of their importance from the simplest to the
hardest, or in the reverse order, each successive job being higher
or lower than the previous one in the sequence. It is not
necessary to have job descriptions, although they may be useful.
Sometimes, a series of grades or zones are established, and all
the jobs in the organization are arranged into these. A more
common practice is to arrange all the jobs according to their
requirements by rating them and then to establish the group or
classification.
The usually adopted technique is to rank jobs according to “the
whole job” rather than a number of condensable factors.
© Copy Right: Rai University
11.622.1
COMPENSATITION MANAGEMENT
According to this method, the ranking for a university may be
like thus.
Table 1.2 : Ranking of University Personnel
Ranking Order Pay Scale Range
Professor Rs.5000-8000
Associate Professors Rs. 4000-7000
Assistant Professors Rs.35006000
Registrar Rs. 4000-7000
Dy. Registrar Rs.3500-5000
Assistant Registrar Rs. 3000-4500
Clerk Grade I Rs. 1000-2500
Clerk Grade II Rs. 900-1800
Class Four Servants Rs. 500-800
After ranking, additional jobs between those already ranked may
be assigned an appropriate place/wage rate.
Generally speaking, the following five steps are involved in
system:
Step 1: Preparation of job description, particularly when the
ranking of jobs is done by different individuals and there is a
disagreement among them.
Step 2: Selection of Raters, jobs may be usually ranked by
department or in “Clusters” (i.e., factory workers, clerical
workers, menials, etc). This eliminates need for directly compar-
ing factory jobs and clerical jobs. Most organizations use a
committee of raters.
Step 3: Selection of rates and key jobs, usually a series of key
jobs or bench-mark jobs (10 to 20 jobs, which include all major
departments and functions) are first rated; then the other jobs
are roughly compared with these key jobs to establish a rough
rating.
Step 4: Ranking of all jobs. Each job is then compared in detail
with other similar jobs to establish its exact rank in the scale.
For this each rater may be given a set of ‘index card,’ each of
which contains a brief description of a job.
These jobs are then ranked from ‘lowest to highest’ or from
‘highest to the lowest’ are ranked first and then the next highest
and next lowest and so forth until all the cards have been
ranked.
Step 5: Preparation of job classification from the rating: The
total ranking is divided into an appropriate number of groups
or classifications, usually 8 to 12. All the jobs within a single
group or classification receive the same wage or range of rates.
The ranking system of job evaluation usually measures each job
in comparison with other jobs in terms of the relative impor-
tance of the following five factors:
119
 i. Supervision and leadership of subordinates;
COMPENSATITION MANAGEMENT
ii. Co-operation with associates outside the line of authority;
iii. Probability and consequences of errors (in terms of waste,
damage to equipment, delays, complaints, confusion,
spoilage of product, discrepancies, etc.);
iv. Minimum experience requirement; and
v. Minimum education required;
Merits
i. The system is simple, easily understood, and easy to explain
to employees (or a union). Therefore, it is suitable for small
organisations with clearly defined jobs.
ii. It is far less expensive to put into effect than other systems,
and requires little effort for maintenance.
iii. It requires less time, fewer forms and less work, unless it is
carried to a detailed used by company.
Demerits
i. As there is no standard for an analysis of the whole job
position, different bases of comparison between rates
occur. The process is initially based on judgment and,
therefore, tends to be influenced by a variety of personal
biases.
ii. Specific job requirements (such as skill, effort and
responsibility) are not normally analyzed separately. Often a
rater’s judgment is strongly influenced by present wage
iii. The system merely produces a job order and does not
indicate to what extent lore important than the one below
it. It only gives us its rank or tells us that it is r or more
difficult than another; but it does not indicate how much
higher or more lit.
Job Classification or Grading Method
Under this system, a number of pre-determined grades or
classifications are first established by a committee and then the
various jobs are assigned within each grade or Grade descrip-
tions are the result of the basic job information which is usually
‘ed from a job analysis.
After formulating and studying job descriptions and job
specifications, jobs are grouped into classes or grades which
represent different pay levels ranging from low to high.
Common tasks, responsibilities, knowledge and experience can
identified by the process of job analysis. Certain jobs may then
be grouped together a common grade or classification.
General grade descriptions are written for each classification, and
finally these are used as a standard for assigning all the other
jobs particular pay scale.
Mechanism: The following five steps are generally involved:
i. The preparation of job descriptions, which gives us basic
job information, usually derived from a job analysis.
ii. The preparation of grade descriptions, so that different
levels or grades of jobs IY be identified. Each grade level
must be distinct from the grade level adjacent to it; the same
time, it should represent a typical step in a continuous way
and not a big jump or gap.
© Copy Right: Rai University
120
After establishing the grade level, each job is assigned to an
appropriate grade level on the basis of the complexity of
duties, non-supervisory responsibilities and provisory
responsibilities.
iii. Selection of grades and’ key jobs. About 10 to 20 jobs are
selected, which elude all the major departments and
functions and cover all the grades.
iv. Grading the key jobs. Key jobs are assigned to an
appropriate grade level and their relationship to each other
studied.
v. Classification of all jobs. Jobs are classified by grade
definitions. All the jobs in e same grade receive the same
wage or range of rates. For example, menials may be put
into one class; clerks in another; junior officers in a higher
class; and the top executive in the top class.
Table 1.3 gives us the gradations of five classes designed by a
title label and increasing in value.
Table 1.3
Grades Description of Job Classification
Clerk Grade III Pure routine concentration, speed and
accuracy, works under supervision; may or
may not be held responsible for supervision.
Clerk Grade II No supervision by others, specially skilled
for the job by having an exhaustive knowl
edge of the details.
Clerk Grade I Must have the characteristics of a second class
clerk and assume more responsibility.
Senior clerk Technically varied work, occasionally indepen
dent thinking and action due to difficult
work which require exceptional clerical ability
and extensive knowledge of principles and
fundamentals of the business of his
department. Not charged with the supervi
sion of others to any extent; works subject
to a limited check; dependable, resourceful
and able- to take decisions.
Head clerk Those handling or capable of taking a major
decision on the work they do; complicated
work requiring much independent thinking;
able to consider details outside the control.
Merits
i. This method is simple to operate and understand, for it
does not take much time or require technical help.
ii. The use of fully described job classes meets the need for
employing systematic criteria in ordering jobs to their
importance. Since many workers think of jobs in, or related
to, clusters or groups, this method makes it easier for them
to understand rankings.
11.622.1
iii. If an organization consists of 500 people holding to
different jobs, the jobs might be broken up into perhaps 5
classes, arranged in order of importance from high to low,
and described class by class. This class description broadly
reflects level of education, mental skill, profit impact or
some combination of these.
iv. The grouping of jobs into classifications makes pay
determination problems administratively easier to handle.
Pay grades are determined for, and assigned to, all the job
classification.
v. It is used in important government services and operates
efficiently; but it is rarely used in an industry.
Demerits
This system suffers from the following defects:
i. Although it represents an advance in accuracy over the
ranking method, it still leaves much to be desired because
personal evaluations by executives (unskilled in such work)
establish the major classes, and determine into which classes
each job should be placed.
ii. Since no detailed analysis of a job is done, the judgement in
respect of a whole range of jobs may produce an incorrect
classification.
iii. It is relatively difficult to write a grade description. The
system becomes difficult to operate as the number of jobs
increases.
iv. It is difficult to know how much of a job’s rank is
influenced by the man on the job.
v. The system is rather rigid and unsuitable for a large
organisation or for very varied work.
The Points System
This method is the most widely used type of job evaluation
plan. It requires identifying a number of compassable factors
(i.e., various characteristics of jobs) and then determining degree
to which each of these factors is present in the job.
A different of points is usually assigned for each degree of each
factors. Once the degree factor is determined, the corresponding
number of points of each factor are added and overall point
value is obtained.
The point system is based on the assumption possible to
assign points to respective factors which are essential for
evaluating individual’s job. The sum of these points gives us an
index of the relative significance of the jobs that are rated.
Mechanism: This system requires a detailed examination of
the jobs. The steps in this method followed are:
Step 1: The jobs have to be determined first which are to be
evaluated. They are clustered. The jobs which require:
i. similar activities,
ii. the same workers characteristics or traits (corresponding
machines, tools, materials and instruments) and n the same
kind of material (say wood or metal are placed in the same
cluster or family. Gonyea and Lunneborg have clustered 22
occupations in five groups, based 11m on factors in five
groups.
© Copy Right: Rai University
11.622.1
Table 1.4 : Clustering of 22 Occupations on the basis of
COMPENSATITION MANAGEMENT
Common Factors in Five Groups (after Gonyea and
Lunneborg)
A – Business group Includes buyer, office manager,
personnel manager, interior
decorator, Insurance salesman,
accountant, and secretary.
B- Masculine group Includes aviator, automobile
mechanics, surveyor, radio opera
tor, policeman and engineer.
C- Aesthetic Group Artist, writer, interior decorator.
D- Service group Policeman, social worker, lawyer,
physician, personnel counseller.
E – Scientific Group Medical lab technician, chemist,
physician, engineer, auto mechanic
and wire less operator.
Step 2: For the purpose, a pre-determined number of factors
are arbitrarily selected by raters. The number of factors used
varies a great deal from company to company, ranging from as
few as 3 to as many as 50, although most companies use less
than 15.
Sometimes, only three factors Gob conditions, physical ability
and mental requirements) be used. Another company may use 4
factors (skill, effort, responsibility and job conditions). As far as
possible, the factors selected are such as are common to all the
jobs.
The common factors are: Education and training; experience;
physical skills and t; planning for the supervision of others;
external contacts, internal contacts; confidential information and
working conditions.
Moreover, the factors which overlap in their meaning avoided
and factors which are unique and relative to each other described
in terms of varying degrees. They should also be so defined and
described that everyone associated with the plan gets the same
meaning of the words that are used.
Step 3: The next step is to break down each factor into degrees
or levels, and to assign a point value to each level or degree. For
example, experience, which is one of the most commonly used
job factors, may be sub-divided into 5 degrees.
The first degree, three months or less may be assigned 5 points;
the second degree, 3 to 6 months, given 10 points, the third
degree, 6 to 12 months, assigned 15 points; the fourth degree 1
to 3 years, assigned 20 points; and the fifth degree is over 3
years, and is assigned 25 points.
This same procedure is followed for each factor at each level or
degree represented by an appropriate number of points. The
point to note is that the major factors are assigned total points
and that each of these factors is broken up into sub-groups
(with written definitions for each), and these sub-groups are
121
 assigned points within the total established for the major group.
COMPENSATITION MANAGEMENT

Le Tourneau has given an example of job work point rating scale.

Chart 1.5

Some Items from the rating system developed by Le Tourneau with the scale values assigned to different factor (indicated by
numbers)

Rated by........ Job .............................. Department ........................... Date... ...... ...........

Factor Check the Correct Item for Each Factor
I. Education Elem. Addl Read
College High
School Maths Subjects & Write

5 4 3 2 1
II. Over 12 9 to 12 6 to 9 3 to 6 1 to 3
Experience.
Months Months Months Months Months
12 12 9 6 3
III. Learning Period Over 1 to 6 months 3 months 1 to 3
3 yrs. 3 yrs. to 1 yr. to 6 months months
10 8 6 4 2
IV. Mental Effort Very High High Average Below Low/Slight
Average
5 4 3 2 1
V. Mechanical Ability Very High High Average Below Slight
Average
5 4 3 .2 1
VI. Physical A,B,C,D E,F,G H,I,J K,L M
Effort 10 8 6 4 2
VII. Job Conditions A B,C D,E F,G H,I
10 8 6 4. 2
VIII. Hazards Very High High Average Below Slight
5 4 3 2 1
IX. Responsibility Over $ $ 25 M to $ 10 M to $1 M to Less
Equipment /----50 M $ 50 M $ 25 M $1OM $ 1M
5 4 3 2 1
Over 16 11 to 15 6 to 10 2 to 5 1
x. Responsibility
Persons 5 4 3 2
$10 m to $ 1M to
Over $60M $25 M to $ to
xI. Responsibility 25M $10 M Less $ 1 M
5 M4
5 2
very High High Average Below Slight
XII Complexity
5 4 3 Average 2 I
Below
very High High Average Slight
XIII Effect on Average
5 4 3 1
2
Below
Attention to Very High High Average Slight
XIV Average
operations 5 4 3 1
2
Below
Very High High Average Slight
XV Know other operation Average
5 4 3 1
2
Very High Below
High Average Slight
XVI Coordination I Average
4 3 1
5 2

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122 11.622.1
Generally speaking, the four job factors common to the point

COMPENSATITION MANAGEMENT
method of job rating Ire skill, effort, responsibility and job Table 1.7
conditions. The relative values of these are skill, 50 per cent; Job Elements and Degree Value Points Assigned to Each Factor and Key to Grades (for Machine
Operators)
effort, 15 per cent; responsibility, 20 per cent; and job condi- No. of 1st 2nd 3rd 4th 5th
Factors
tions, 15 per cent. Points Degree Degree Degree Degree Degree
1. Skill: 250
Step 4: Determination of relative values or weights to assign to (i) Education 70 14 28 42 56 70
each factor. For each job or cluster of jobs some factors are (ii) Experience 110 22 44 66 88 110
more important than others. For example, or executives, the (iii) Initiative and Ingenuity 70 14 28 42 56 70
2. Effort: 75
“mental requirements” factor would carry more weight than (iv) . Physical demand 50 10 20 30 40 50
“physical requirements.” The opposite might be true of . (v) Mental/ visual demand 25 5 10 15 20 25
3. Responsibility: 100
“factory jobs.”
(vi) Equipment/process 25 5 10 15 20 25
Step 5: The next step is to assign money values to points. For (vii) Material or product 25 5 10 15 20 25
(viii) Safety of others 25 5 10 15 20 25
this purpose, points Ire added to give the total value of a job; (ix) Work of others 25 5 10 15 20 25
its value of a job; its value is then translated into, terms of 4. Job Conditions:
money with a pre-determined formula. (x) Working conditions 50 10 20 30 40 50
(xi) Hazards 25 5 10 15 20 50
Table 1.6 shows the job points translated into job rupees.
Point Range Hourly Basic Rate Range Job Grade
Table 1.8
101-150 Rs. 6 to 10 1
Scale of Value for ‘Education’ Factor in NMTA Point
165-200 Rs. 8 to 12 2 System
201-250 Rs. 10 to 15 3
14 28 42 56 70
251-300 Rs. 15 to 20 4
Equivalent Equivalent Equivalent
301-350 Rs. 20 to 25 5 Read, write Equivalent 4yrs 4 yrs H.S.
4yrs
351-400 Rs. 25 to 30 6 add and to 2 yrs H.S. +2 +4 Yrs
subtract High School to 3 yrs Trade University
401-450 Rs. 30 to 35 7 Training
Training Training
451-500 Rs. 35 to 45 8
Sample definition of factors used in points system
“Packaged” Point Plans Skill
Developing a point plan for an individual organization is a A. (acquired) Facility in muscular co-ordination, as in operating
time-consuming process. Hence, often those evolved by machines; repetitive Movements, careful co-ordination,
famous group5 (as in America) are adopted for use. These dexterity, assembling, sorting etc.
contain ready-made factor and degree definitions and point
B. (acquired) Specific job knowledge necessary for the muscular
assignments for a wide range of jobs, which can be used with
co-ordination acquired by the performance of a job and not
little or no modification.
to be confused with general education or specialized
One of the most widely accepted point systems in NMTA knowledge. It is very largely training in the interpretation of
(National Metal Traders Association of the U.S.A.) utilizes the sensory impressions.
factors.
Examples
In the NMTA point system for hourly rated jobs, skill has been
given 50 per cent weight age, responsibility 20 per cent and job i. In operating an adding machine, the knowledge of which
conditions 15 per cent. Each factor has again been divided into key to depress for a sub-total would be a skill.
sub-factors, and the points allotted to each factor as distributed ii. In automobile repairs, the ability to determine the
among the sub-factors on the basis of their relative importance significance of a certain knock in the motor would be a skill.
in job performance. iii. In a hand firing boiler, the ability to determine from the
For example, the ‘skill’ factor has been assigned 250 points. Out appearance of the firebed how coal should be shovelled
of these, its sub-factors education, experience, initiative and over the surface would be a skill.
ingenuity - have each been assigned 70, 110 and 40 points Education relates to the schooling requirements, which are
respectively. Moreover, measurement scales have been con- essential for a satisfactory Performance of the job.
structed which give points and definitions of the degree of
The experience factor pertains to the extent of job training,
particular factor. Thus, 70 points allocated to ‘education,’ have
which is necessary for I before he gains a satisfactory proficiency.
been spread over five degrees in an arithmetic progression of 14
points (Tables 1.7 and 1.8) Initiatives and ingenuity appraise the independent action,
exercise of judgment, the of decisions or the amount of
planning that a job requires.

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11.622.1 123
 Effort Consideration will have to be given to the presence, relative
COMPENSATITION MANAGEMENT

In some jobs, particularly factory and other manual work more amount and continuity of exposures to dust, dirt, heat, fumes,
physical efforts are while in higher jobs, more of mental cold, noise, vibrations, wetness or other unpleasant conditions.
requirements is a must. 1. Environmental influences, such as atmosphere, ventilation,
Physical Requirements illumination, noise, congestion, fellow-workers, etc.
Physical efforts; sitting, standing, walking, climbing, pulling, 2. Hazards from the work or its surroundings.
lifting; both the amount exercised and degree of continuity 3. Hours.
should be taken into account. :)
Table 1.9 gives us the points assigned to the factors in National
Physical status, including age, height, weight, sex, strength and Office Managers’ Association Plan.
eye-sight.
In the case of evaluation for managerial positions, the factors
Mental Requirements and sub-factors given in Table 1.10 have been used in a number
Either the possession of and/or the active application of the of companies in the U.S.A
following:
Table 1.9 : Points Assigned to the Factors in National
1. (inherent) Mental traits, such as intelligence, memory, Office Managers’ Association Plan
reasoning, facility for verbal expression, ability to get along 1. Elemental - 250 points
with people and imagination.
2. Skill - 500 points
2. (acquired) General education, such as knowledge of
grammar and arithmetic; general information as to sports, a. General of special education 160
world events, etc. b. Training time on job 40
3. (acquired) Specialized knowledge such as chemistry, c. Memory 40
engineering, accounting, advertising, etc. d. Analytical ability 95
Responsibility e. Personal contact 35
The responsibility factor, for different items, measures responsi- f. Dexterity 80
bility for preventing damage to machinery or equipment which g. Accuracy 50
may result from error or negligence, and also measures the
probability of damage to materials, parts in process or finished 3. Responsibility - 200 points
goods. a. For company property 75
• For raw materials, processed materials, tools, equipment b. For procedures 125
and property. c. Supervision 50
• For money or negotiable securities. 4. Effort - physical work - 50 points
• For profit or loss, savings or methods improved. a. Place of work 5
• For public contacts. b. Cleanliness of work 5
• For records. c. Position 10
• For supervision. d. Continuity of work 15
i. Primarily, it means the complexity of supervision given to e. Physical or mental strain 15
subordinates; the number of subordinates is a secondary
feature. Planning, direction, coordination, instruction,
Table 1.10 : Factors and sub-factors used in Companies in
control and approval characterize this kind of supervision.
the USA
ii. The degree 9f supervision received. If jobs A & B gave no
i. Know-how
‘supervision to subordinates, but job A receives a much
closer immediate supervision than B, then B would be Requirement of duties
entitled to a higher rating than A in the supervision factor. Knowledge
To summaries the four degrees of supervision: Planning required
Highest degree - Gives much, gets less. Mental application
High degree - Gives more, gets much. Understanding required
Low degree - Gives none, gets little. ii. Responsibilities
Lowest degree - Gives none, get much. Initiative
Working Conditions Accountability
The working conditions factor appraises the surroundings or For personal relations
physical conditions under which a job must be done and the
For making policies
extent to which such conditions make the job disagreeable.
For policy interpretation

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124 11.622.1
Administration III.Factors Special to Jobs Predominantly Intellectual:

COMPENSATITION MANAGEMENT
Original thinking 13. Responsibility for mistakes
Creative ability 14. Responsibility for judgment
Managerial techniques lV. Supplementary Factors for Management Jobs:
iii. Relationships 15. Responsibility for authority
Supervision exercised 16. Human responsibility
Demand for leadership V. Factors Relating to Environmental Conditions:
Influence on policy-making 17. Factors of environment
Influence on method Source: I.L.O. Job Evaluation
For German Democratic Republic and Federal Republic
Table 1.11 : In U.K., the Factors Used by Imperial Chemical of Germany, the factors used are:
Industries Ltd. Table 1.13 :
Mental Requirement Physical Strength Working Conditions German Democratic Republic Federal Republic of Germany
Good memory Muscular strength (a) Physical: 1.Knowledge and experience 1. Training and experience
Ability to reason stamina vibration, position, 2.Mental effort 2. Skill, dexterity
Speed of reaction agility Fumes, Small, 3. Physical effort 3. Bodily strain
Even temperature. sensory accuracy Dust, Dirt, 4. Responsibility for others 4. Mental strain
Perseverance Acquired skills Heat, Cold , Change 5. Responsibility for equipment 5. Nervous strain
Mechanical sense and Knowledge Wetness, Clothing 6. Job conditions: 6. Responsibility
Initiative Education & Equipment, poor (a) temperature 7. Job Conditions:
Disparate attention Training Light Exposure (b) water, oil, grease, dust, etc (a) temperature oil, grease,
Ability to visualize Experience (c) gas, acid, poison, etc dirt,dampness, etc.
(d) noise, glare, etc. (b) dust
Sense of responsibility (B) Mental: (e) risk of accident (c) accident hazards
Noise, height, below (d) gas, noise, cold, darkness, etc
Ground isolation,
8. Unsupervised work.
Monotony, nervours
Tension, accident Risk (Source: I.L.O. Ibid., pp. 137-139).
Disease Risk Merits
The system enjoys the following, merits:
In France, the factors used for job evaluation scheme for 1. It gives us a numerical basis for wage differentials; by
manual workers at Telemecanique Electriue Plant, Nanterre, are: analysis a job by factors it is usually possible to obtain a
high measure of agreements on job value.
Table 1.12 2. Once the scales are developed, they can be used for a long
time.
I. Factors Common to all Jobs:
3. Jobs can be easily placed in distinct -categories.
1. Training
4. Definitions are written in terms applicable to the type of
2. Adaptation
jobs being evaluated, and these can be understood by all.
3. Difficulties of the Job
5. Factors are rated by points which make it possible for one
4. Physical Effort to be consistent in assigning money values to the total job
5. Mental Tension points.
6. Job Risks 6. The workers’ acceptance of the system is favorable because it
7. Discretion is more systematic and objective than other job evaluation
methods.
8. Human Contacts within the Company
7. Prejudice and human judgment are minimized, i.e., the
9. Human Contacts outside the Company
system cannot be easily manipulated.
II. Factors Special to Jobs Predominantly Manual:
8 It has the ability of handling a large number of jobs and
10. Responsibility for tools enjoys stability as long as the factors remain relevant.
11. Responsibility for products The availability of a number of ready-made plans probably
12. Responsibility for the Safety of others accounts for the wide points plans in job evaluation.

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11.622.1 125
 Demerits
COMPENSATITION MANAGEMENT
The drawbacks of the system are:
1. The development and installing of the system calls of
heavy expenditure.
2. The task of defining job factors and factor degrees is a time-
consuming and difficult task.
3. If many rates are used, considerable clerical work is entailed
in recording and summarizing the rating scales.
4. It is difficult to determine the factor levels within factors
and assign values to them. It is difficult to explain to
supervisors and employees. Workers find it difficult to fully
comprehend the meaning of concepts and terms, such as
factors, degrees and points.
Inspite of these drawbacks, this system is used by most
organizations because its greater accuracy possibly justifies the
large expenditure of time and money.
The Factor Comparison Method
Under this system, jobs are evaluated by means of standard
yardstick of value. It entails deciding which jobs have more of
certain condensable factors than others.
Here analyst or the Evaluation Committee selects some ‘key’ or
‘benchmark’ jobs for which there are clearly understood job
descriptions and counterparts in other organisations, and for
which the pay rates are such as are agreed upon and are accept-
able to both management and, labour.
Under this method, each job is ranked several times – once each
condensable factor selected. For example, jobs may be ranked
first in terms of factor ‘skill.’ Then, they are ranked according to
their mental requirements. Next they ranked according to their
‘responsibility,’ and so forth. Then these ratings are combined
for each job in an over-all numerical rating for the job.
Mechanism
The major steps in this system consist of the following:
Step 1
Clear-cut job descriptions are written and job specifications then
developed:
Preferably in terms of condensable factors. The people writing
job specifications are generally Provided with a set of definitions
which have been used in each of the condensable factor selected.
Usually five factors are used:
1. Mental requirements,
2. Physical requirements;
3. Skill requirements;
4. Responsibility and
5. Working conditions.
These factors are universally considered to be components of all
the jobs.
Step 2
Selecting of Key-Jobs: Such jobs are those jobs which represent
the range of jobs under study; and for which pay is determined
to be ‘standard’ or ‘reference points’ and for which there is no
controversy between the management and the employees.
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126
These ‘key’ jobs serve as standards against which all other jobs
are measured.
They are selected in such a way that they cover the range from
the ‘low’ to the ‘high’ paid jobs. Besides, such jobs must be
those on the pay of which analysts and executives do not
disagree. Again, they should be definable in accurate and clear
terms. Usually 10 to 30 jobs are picked up as ‘key’ jobs.
Step 3
Ranking of ‘Key’ Jobs: Several different members of the job
Evaluation Committee rank the key jobs on each of the five
factors (mental requirements, physical requirements, skill,
responsibility, and working conditions). Ranking is made
individually and then a meeting held to develop a consensus
(among raters) on each job.
Mental requirements involve inherent mental trait (such as
memory, intelligence, reasoning, ability to get acquired educa-
tion, and acquired specialization of education or knowledge).
Physical Requirements consist of physical effort (climbing,
pulling, walking and lifting); and physical conditions (age,
height, weight, sex, eye-sight and strength); skill requirements
are concerned with acquired facility in muscular co-ordination,
assembling, sorting, and dexterity of fingers; and acquired job
knowledge for an effective performance of the job.
Responsibility involves responsibility for raw and processed
materials, tools, equipment and property; money securities;
profit and loss; supervision; and maintenance of records.
Working Conditions include atmospheric conditions (illumina-
tion, ventilation, noise, congestion); hazards of work and its
surroundings; and hours of work.
Step 4
Valuing the Factors: The basic pay for each ‘key’ job is allocated
to each factor. Pay for such jobs should range from about the
lowest to, at or near the highest, and there must be complete
agreement on job selected. Usually, 15 to 20 jobs are chosen
against which to evaluate all the other jobs.
Step 5
Comparing all. Jobs with Key Jobs: All the other jobs are then
compared with the key jobs, factor by factor, to determine their
relative importance and position in the scale of jobs, to
determine also their money value.
This identical process is repeated for all the other factors. The
pay rate assigned to a job is obtained by adding the determined
amounts as indicated by the money values shown in the five
scales that individually set a job money value in relative compari-
son to fixed key jobs.
Step 6
Establishing the Monetary Unit Value for all Jobs: Monetary
values are assigned to each factor of every key job. This should
reflect a range from the lowest to the highest.
11.622.1
Table 1.14 : Factors used in a Typical System iii. Money rates, when used as a basis of rating, tend to

COMPENSATITION MANAGEMENT
influence the actual rate more than the abstract point.
Cents per Mental Skill Physical Responsibility Working
hour Requirement requirements requirement conditions iv. The system is complex and cannot be easily explained to,
200 Toolmaker* Labourer
180 Toolmaker Electrician and understood by, every day non-supervisory
160 Toolmaker* Inspector*
organizational employee.
140 Electrician* Machinist Toolmaker * Toolmaker*
120 Machinist! Electrician! Machinist* Inspection
v. The use of five factors is a growth of the technique
100 Assembler! Assembler! Inspector Machinist Electrician developed by its originations. Yet using the same five
60 Inspector Inspector Assembler! Electrician Machinist!
50 Labourer! Assembler! Assembler! factors for all organizations and for all jobs in an
25 Labourer! Labourer! Labourer!
organization may not always be appropriate.
* Indicates key job
! Indiactes non-key or unanalyzed job
The following example will clearly show how the system works:
Suppose job E and job A are similar in skill (Rs. 3.00); job B in
responsibility (Rs.85); job C in effort (Rs. 1.40); and job D in
working condition (Rs. 1.20); then its correct rate of pay will be
Rs. 6.45, i.e., the sum total of all.
Table 1.15 : Key Jobs, Job Factors and Correct Rates of Jobs
Job factor Job A correct Job B correct Job C correct Job D correct Job E correct
Rate:Rs 20 Rate:Rs 16 Rate:Rs 14 Rate:Rs 12 Rate:Rs 24
1. Skill 10 8 7.50 5 11
2. Effort 5 3 4 4 6
3. Responsibility 3 1 1 1 4
4. Working 2 4 1.50 2 3
Conditions

This system is usually used to evaluate white collar, professional

and managerial positions.
Merits
This system enjoys the following benefits:
i. It is a systematic, quantifiable method for which detailed
step by step instructions are available.
ii. Jobs are compared to other jobs to determine a relative
value.
iii. It is a fairly easy system to explain to employees.
iv. There are no limits to the value which may be assigned to
each factor.
v. The plan does not require a translation from points to
money. It involves a comparative process wherein jobs are
priced against other jobs rather than against some
established numerical scale.
vi. The reliability and validity of the system are -greater than
the same statistical measures obtained from group
standardized job analysis plans.
vii. The limited number of factors (usually 5) tends to reduce
the possibility of overlapping and over-weighting of
factors.
Demerits
The system suffers from the following shortcomings:
i. It is costly to install, and somewhat difficult to operate for
anyone who is not acquainted with the general nature of
job evaluation techniques.
ii. Wage levels change from time to time, and their minor
inconsistencies may be adjusted to bring all the jobs into
alignment. Jobs in which discrepancies are too wide are
discarded as key jobs.

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11.622.1 127
COMPENSATITION MANAGEMENT
LESSON 20:
INTRODUCTION TO IMPLEMENTATION OF EVALUATED JOB
Job Evaluation and Internal Equity
• To understand the Essentials of Success of Job Evaluation
Programmes
• To know the Advantages of Job Evaluation
• To learn the Limitations of Job Evaluation
• To understand the Implementation of the Evaluated Job
Structure
• To know the Suggestions for improving of the Job
Evaluation Programs
Essentials of Success of Job Evaluation
Programs
When it is finally decided to install a formal system of job
evaluation irrespective which system is decided upon, the
utmost care must be exercised to ensure that Human as well as
technical aspects are taken into account.
In order that a job evaluation system works efficiently, it is
necessary that all those to are concerned with job evaluation
should be fully conversant with the techniques d implications
of the different available systems. Otherwise, the chances of
success are doubtful.
The following measures may be adopted:
i. Supervisors should have full knowledge of the system.
They should understand it, and be able to explain to their
workers the purpose of the plan and how it works.
They must accept the desirability of the plan, for if they are
not convinced that it is useful, they will certainly not be able
to convince the employees.
ii. Supervisors as a group should receive a thorough training
in advance of the actual introduction of the plan to enable
them to explain the policies, principles and procedures to
anyone who wants to understand them.
iii. The management must give the widest publicity to every
phase of the programme, utilizing employee publications,
notice boards, departmental meetings and letters to
employees’ homes.
iv. Separate pay structures should be maintained for major
groups of employees. For example, it would be difficult to
work out a plan equally applicable to factory workers, office
workers, salesmen, and departmental heads.
The wages that are offered must be at or about the
prevailing rate in order that there may be a successful
competition for capable people.
v. Whatever plan or system is selected for each group will
arouse some fears or apprehensions. To overcome these, the
details of the administration of the plan should be as
simple as possible, and the management should endeavor
to involve a broad range of employees from a number of
departments.
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128
According to the findings of the International Relations
Sections of the Princeton University, the following conditions
are necessary for the successful operation of a job valuation
programme:
a. It must be carefully established by ensuring that:
i. The management’s aims are clear to all concerned and
that not only the manual workers but also all levels of
supervision and management employees fully
understand its implications; and
ii.All the relevant internal and external factors have been
taken into account in arriving at the final form of the
scheme.
b. It must have the full approval and continued support and
backing of the top management.
c . It must have obtained the acceptance of trade unions.
d. Adequate administrative control must be set up to ensure:
i. a centralized coordination of the scheme;
ii. the evaluation of new and changed jobs;
iii. a proper control of individual rate ranges; and
iv. the conduct of wage surveys to provide the necessary
information about the intra-plant ranges.
e. The importance of factors, other than job content, in wage
rate determination (employment market conditions, sex,
wage differentials, geographical wage differentials, and the
relative bargaining power of the management and the trade
union) must be recognized and taken into consideration
while launching a job evaluation programme.
f. Before launching a job evaluation programme, certain issues
should be decided beforehand. There are:
i. which category of employees are to be covered (i.e.,
whether hourly paid job or salaried job employees) and
up to what range?
ii. who will evaluate a job outside consultants or trade
analysts or the personnel of the personnel
department?
iii. How will the employees be consulted in regard to the
method of putting the programme through? and
iv. does a proper atmosphere exist for launching of the
programme?
Advantages of Job Evaluation
Knowles and Thomson state that job evaluation is useful in
eliminating many of the evils to which nearly all systems of
wage and salary payments are subject. These are:
i. Payment of high wages and salaries of persons who hold
jobs and positions not requiring great skill, effort and
responsibilities;
11.622.1
ii. Paying beginners less than they are entitled to receive in
terms of what is required of them;
iii. Giving a raise to persons whose performance does not
justify the raise;
iv. Deciding rates of pay on the basis of seniority rather than
ability;
v. Payment of widely varied wages and salary for the same or
closely related jobs and positions; and
vi. Payment of unequal wages and salaries on the basis of race,
sex, religion or political differences.
It may, however, be noted that a job evaluation system does
not accomplish all the purpose; rather it facilitates them.
Basically, it provides a systematic catalogue of the jobs in an
organisation, which is indispensable for management purposes.
I.L.O., Publication Claims Following Advantages for
Job Evaluation
i. Job evaluation is a logical and, to some extent, an objective
method of ranking jobs relative to one another. It may help
in. removing inequalities in existing wage structures and in
maintaining sound and consistent wage differentials in a
plant or industry.
ii In the case of new jobs. the method often facilitates fitting
them into the existing wage structure.
iii. The method helps in removing grievances arising out of
relative wages; and it improves labour-management
relations and workers’ morale. In providing a yardstick, by
which workers’ complaints or claims can be judged, the
method simplifies discussion of wages to be explained and
justified.
iv. The method replaces the many accidental factors, occurring
in less systematic procedures, of wage bargaining by more
impersonal and objective standards, thus establishing a clear
basis for negotiations.
v. The method may lead to greater uniformity in wage rates,
thus simplifying wage administration.
vi. The information collected in the process of job description
and analysis may also be used for the improvement of
selection, transfer and promotion procedures on the basis
of comparative job requirements.
vii. Such information also reveals that workers are engaged in
jobs requiring less skill and other qualities than they
possess, thereby pointing to the possibility of making
more efficient use of the plant’s labour.
Limitations of Job Evaluation
These are:
i. Though many ways of applying the job evaluation
techniques are available, rapid changes in technology and in
the supply and demand of particular skills have given rise to
problems of adjustment. These need to be probed.
ii. Substantial differences exist between job factors and the
factors emphasised in the market. These differences are
wider in cases in which the average pay offered by a company
is lower than that prevalent in other companies in the same
industry or in the same geographical area.
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11.622.1
iii. A job evaluation frequently favours groups different from
COMPENSATITION MANAGEMENT
those, which are favoured by the market. This is evident
from the observations of Kerr and Fisher. They observe,
“the jobs which tend to rate high as compared with the
market are those of janitor, nurse and typist, while craft
rates are relatively low. Weaker groups are better served by an
evaluation plan than by the market; the former places the
emphasis not on force but on equity.
iv. Job factors fluctuate because of changes in production
technology, information system, and division of labour and
such other factors. Therefore, the evaluation of a job today
is made on the basis of job factors, and does not reflect the
time job value in future. In other words, continuing
attention and frequent evaluation of a job are essential.
v. Higher rates of pay for some jobs at the earlier stages than
other jobs or the evaluation of a higher job higher in the
organizational hierarchy at a lower rate than another job
relatively lower in the organizational hierarchy often give rise
to human relations problems and lead to grievances among
those holding these jobs.
vi. When job evaluation is applied for the first time in any
organization, it creates doubts and often fear in the minds
of those whose jobs are being evaluated. It may also
disrupt the existing social and psychological relationships.
vii. A large number of jobs are called red circle jobs. Some of
these may be getting more and others less than the rate
determined by job evaluation.
viii.Job evaluation takes a long time to install, requires
specialized technical personnel, and may be costly.
ix. When job evaluation results in substantial changes in the
existing wage structure, the possibility of implementing
these changes in a relatively short period may be restricted by
the financial limits within which the firm has to operate.
Implementation of the Evaluated Job
Structure
The evaluated job structure has to be translated into a structure
of wage rates. This depends upon:
i. The range of wages to be paid, i.e., what should be the
maximum and minimum wages for the grade.
ii. Should there be any overlapping between pay ranges for
adjacent pay grades? If so, by how much?
iii. How many grades should be used?
iv. On what basis will an individual employee be advanced in
wages through the established pay range for the grade?
These issues are inter-related, and a change in any of these calls
for a change in at least one or the other issue.
As far as the first issue is concerned, it may be noted that the
difference between the maximum and the minimum is referred
to as the ‘wage range’ or ‘wage differential.
While evaluating a wage structure, it should be seen that the
range is not too high and that the job evaluated wage curve
does not have too many deviations from the existing industry
wage line. This should be done to prevent the turnover of
workers and avoid dissatisfaction amongst them.
129
 A wage range can be made with or without an overlap. Theoreti-
COMPENSATITION MANAGEMENT
cally, there should be no overlap because, in that case, an
employee near the top of a lower grade gets higher wages than
the employee in the higher grade. Too great an overlap may
cause dissatisfaction amongst employees and minimize the
rewards for superior performance.
However, though a too great overlap should be avoided, there
should be some overlapping between the grades so that
employees in the lower grades may, following an excellent
performance, get higher wages than an employee working in a
higher grade but showing a poor performance.
As regards the number of grades to be adopted in many wage
structures, the accuracy may be secured up to six grades; 12 or
more grades result in a higher accuracy. Generally, the number of
grades considered are between 6 to 11. If more grades are
adopted, the overlapping between them would be greater
Suggestions for Improving Working of
Job Evaluation Programs
We suggest the following measures and steps for improving
the working of evaluation programmes:
1. A job evaluation scheme should be chosen cautiously. It
should be devised and administered with due regard to the
conditions of the employment market, which cannot be
ignored if the scheme is to be successful. It should,
therefore, reflect those forces which are important in the
market, e.g., relative supply of and demand for labour,
bargaining power of the parties and job conditions.
2. The details of a scheme should be drawn up in such a way
that they do not conflict with other provisions of a
Collective Agreement such as, for example, seniority clauses
and grievance procedure.
3. The scheme should be introduced on a plant-to-plant basis
than applied to a whole industry. This is because it is
difficult to standardize jobs throughout an industry unless
the plants in it are so familiar that they can be treated as
being virtually a single firm.
4. The scheme should be sold to all concerned and
suggestions sought. If the workers in a plant are
unionized, it is highly desirable that any scheme adopted
should be agreed to and, if possible; developed jointly by
the company and the trade unions.
5. It is of major importance that-the number of job titles and
classifications be kept to a minimum. If they are not, a
scheme becomes too inflexible because of the narrow
coverage of the job descriptions. Promotions within a grade
become more serious. Moreover, workers tend to feel more
insecure and cling to their present jobs because they may not
have the qualifications for another job.
6. Any anticipated changes in methods should be carried out
before a scheme is installed and all modifications in it
should be resisted until it becomes fully established.
7. In preparing job descriptions it is a sound practice to
emphasize in them the things which make one job different
from another rather than to find a comprehensive statement
of all the duties of the jobs.
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130
8. A scheme which provides for single rates and for definite
ratios between the rates for classes of workers (A, B,C etc.)
within a job grade is easier to administer than one which
establishes rate ranges and has no fixed ratios.
9. A scheme is better administered by the Industrial Relations
staff of a company than by the Industrial Engineers who
may have developed it. The essence of successful
administration of a scheme is flexibility, and this is better
.understood by those engaged in industrial relations work
than by Industrial Engineers.
10. The better the state of industrial relations the easier it is to
intr0duce a job evaluation scheme.
Tutorial Activity 1.1
Write-intro
Factors Used in Rating Jobs
The factors usually considered in any rating procedure are
education, training, experience, mental effort, physical effort,
visual attention, initiative, responsibility, working conditions,
and physical hazards. These factors are sub-divided into degrees
- usually six; and points are allocated to these.
1. Education
This factor appraises the educational background of an
individual to determine whether he do the job satisfactorily.
First Degree
Ability to read, write and follow simple written or oral instruc-
tions.
Second Degree
Basic school education or its equivalent to do small arithmetical
calculations involving addition, subtraction, division and
multiplication of decimals and fractions.
Third Degree
High school education to determine knowledge of elementary
accounting or general shop practice and manufacturing meth-
ods.
Fourth Degree
Intermediate education to determine the ability to understand
and perform work calling for a knowledge of general engineer-
ing principles, commercial theory, principles of advanced
drafting, knowledge of general accounting fundamentals and of
complicated shop procedures and processes, etc.
Fifth Degree
Graduation to determine the ability to understand and perform
work of a specialized or technical nature, knowledge of finance,
business administration, chemistry, physics, journalism or any
other technical or specialized field.
Sixth Degree
Post-graduate research experience in any technical or specialized
field.
2. Training
This factor appraises the period of training needed by an
average individual to perform his efficiently.
First Degree
Upto 6 months;
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Second Degree Third Degree

COMPENSATITION MANAGEMENT
6 to 12 months; Continuous physical activity required.
Third Degree Fourth Degree
12 to 15 months; heavy physical activity required.
Fourth Degree Fifth Degree
15 to 18 months; Great physical effort to lift or push heavy objects.
Fifth Degree Sixth Degree
18 to 21 months; Extremely arduous physical effort required.
Sixth Degree 6. Visual Attention
Over 21 months. This factor appraises the extent and continuity of the visual
3. Experience attention needed on a job.
This factor appraises the length of period needed by an average First Degree
employee with a previously specified educational standard to be Minimum visual attention required.
able to perform the job satisfactorily.
Second Degree
First Degree Ordinary visual attention required.
Upto 3 months;
Third Degree
Second Degree Fairly close attention required.
3 to 6 months; Fourth Degree
Third Degree Close visual attention required to check the quality of products.
6 months to 2 years;
Sixth Degree
Fourth Degree Extremely close work with intense and constant visual atten-
2 to 4 years; tion.
Fifth Degree 7. Initiative
4 to 6 years; This factor appraises the capacity for independent decision or
Sixth Degree action required of an individual.
Over 6 years. First Degree
Elementary type of job. The employee receives detailed
4. Mental efforts
instructions and is expected to perform the job exactly, as
This factor appraises the mental effort required of an individual
indicated, without deviations.
to perform his job satisfactorily.
Second Degree
First Degree
Repetitive type. of job. Requires a close following of instruc-
Minimum mental effort required to do a simple rating job.
tions and procedures.
Second Degree
Third Degree
Some mental effort required.
Requires more frequent simple decisions on the part of the
Third Degree employee, but only when definite clear-cut precedents are
Considerable mental effort needed. available.
Fourth Degree Fourth Degree
Considerable organizing ability required. In addition to frequent simple decisions, the job calls for
Fifth Degree occasional decisions or actions following only general proce-
Sustained and diversified mental effort required. dures in the absence of clear-cut procedures.

Sixth Degree Fifth Degree

Sustained and diversified mental effort required, as also clarity Difficult and complex type of job. Requires independent and
“Of concepts and ideas. original action to achieve the desired results.

5. Physical Efforts Sixth Degree

This factor appraises the physical effort needed from an Extremely difficult and complex type of job requiring indepen-
employee for a satisfactory performance of a job. dent and original action to achieve the desired results.

First Degree 8. Responsibility

Very light physical effort required. This factor appraises the responsibility, which goes with the job
for preventing damage to tools, equipment or materials used in
Second Degree the performance of a job.
Light physical effort required, as in an office job.

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11.622.1 131
 First Degree Tutorial Activity 1.2
COMPENSATITION MANAGEMENT

Probable damage to tools up to Rs. 100 for an average mishap.

Intro - Write
Second Degree Pay Surveys and Job Evaluation
Probable damage to tools between Rs. 100 and Rs. 200. External relativities are established by pay surveys and research
Third Degree which analyze and compare market rates in order to achieve
Probable damage to tools between Rs. 200 to Rs. 500. external competitiveness.
Fourth Degree Internal relativities are assessed by job evaluation which
Probable damage to tools up to Rs. 5,000 per mishap. considers the relative value- or size of jobs and sometimes
generic roles within an organization as a oasis for achieving
Fifth Degree internal equity. There may be tension when the often competing
Probable damage to tools, equipment and materials not to claims of external competitiveness and internal equity pave to
exceed Rs. 10,000 per mishap. be reconciled, particularly in pay markets under pressure through
Sixth Degree skills shortages.
Probable damage exceeding Rs. 10,000 per mishap.
Pay Structures
9.Working Conditions Pay surveys and job evaluation provide the data for the design
This factor appraises the physical environment under which a and management of pay structures. They provide frameworks
job is performed. Physical envorment includes heat, cold, within which levels of pay for jobs and the differentials are
dampness, darkness, glare, dust, fumes, noise, etc. described or defined in the form of grades, bands, scales or
spot rates (individual job rates).
First Degree
Excellent working conditions. Pay structures also define the limits within which the pay of
employees can progress within their grades or bands and how
Second Degree
this progression takes place.
Occasional exposure to dust or fumes.
This can vary in accordance with assessments of performance,
Third Degree competence or skill. Progression may be up a fixed incremental
Constant exposure to one or more unpleasant conditions. scale or spine which defines the predetermined pay increases that
Fourth Degree employees can receive year by year on the basis of their time in
More disagreeable conditions. the job.
Fifth Degree But this approach is becoming much more rare. Progression in
Continuous exposure to disagreeable conditions. a pay structure can also be along a pay or maturity curve which
relates increases in pay to competence growth and/or higher
Sixth Degree levels of performance.
Continuous exposure to various intensely disagreeable condi-
Pay structures may cover all or only part of the organization.
tions.
There may, for example, be one structure for staff on salaries
10. Physical Hazards and another one for manual workers on wages (although this
This factor appraises the accident or health hazards, which exist often invidious distinction is progressively disappearing).
even though safety devices have been installed. Different structures may exist for separate job families (groups
First Degree of jobs where the work is similar), or market groups jobs in
No hazard exists. which rates of pay are influenced by market pressures so that to
attract and retain people they have to be paid more than those
Second Degree
in otherwise comparable jobs). Structures may consist of an
Minor injuries may be sustained if an accident takes place.
extended hierarchy of relatively narrow and / grades or a fairly
Third Degree small number of broad band (broadbanding).
If an accident takes place, an employee would receive severe cuts Pay structures are designed by reference to data from job
or burns. Fourth evaluation, competence analysis and analysis of market practice
Fourth Degree by external benchmarking (pay surveys). The design process is
The job is quite risky and the employee may catch some not a scientific one Much judgment has to be exercised.
industrial disease. Fifth
Fifth Degree
There may be loss of some part of the body in the accident.
Sixth Degree
If an accident takes place, the employee is more likely to be
killed or permanently ed by injuries.

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132 11.622.1

LESSON 21:
INTRODUCTION TO DETERMINANTS OF INCENTIVES
Principles of External and Internal Differential
Rewards and Incentives
Learning Objective
• To know the Meaning of Rewards and Incentives
• To know the Features of the Incentive Plans
• To understand the Determinants of Incentives
Meaning of Rewards and Incentives
An ‘incentive’ or ‘reward’ can be anything that attracts a
employees’ attention and stimulates him to work. In the words
of Burack and Smith, “An incentive scheme is a plan or
programme to motivate individual or group performance. An
incentive programme is most frequently built on monetary
rewards {incentive pay or monetary bonus}, but may also
include a variety of non-monetary rewards or prizes.”
On the other hand, French says, the term “incentive system has
a limited meaning that excludes many kinds of inducements
offered to people to perform work, or to work up to or beyond
acceptable standards.
It does not include:
i. wage and salary payments and merit pay;
ii. over-time payments, pay for holiday work or differential
according to shifts, i.e., all payments which could be
considered incentives to perform work at undesirable times;
and
iii. premium pay for performing danger tasks. It is related with
wage payment plans which tie wages directly or indirectly to
standards of productivity or to the profitability of the
organization or to both criteria.”
The use of incentives assumes that people’s actions are related
to their skills and ability to achieve important longer-run goals.
Even though many organizations, by choice, or tradition or
contract, allocate rewards on non-performance criteria, rewards
should be regarded as a “payoff’ for performance.
An Incentive Plan has the following important features:
1. An incentive plan may consist of both ‘monetary’ and ‘non-
monetary’ elements. Mixed elements can provide the
diversity needed to match the needs of individual
employees.
2. The timing, accuracy and frequency of incentives are the very
basis of a successful incentive plans.
3. The plan requires that it should be properly communicated
to the employees to encourage individual performance,
provide feedback and encourage redirection.
Determinants of Incentives
These features are contingencies, which affect the suitability and
design of incentives to varying degrees. The effective use of
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11.622.1
COMPENSATITION MANAGEMENT
incentives depends on three variables - the individual, work
situation, and incentive plan.
(i and iii) The Individual and the Incentives
Different people value things differently. Enlightened managers
realize that all people do not attach the same value to monetary
incentives, bonuses, prizes or trips. Employees view these
things differently because of age, marital status, economic need
and future objectives.
However, even though employee reaction to incentives varies
greatly, incentives must have some redeeming merits. For
example, there might be a number of monetary and non-
monetary incentive programmes to motivate employees.
Money, gift certificates, praises, or merit pay are of the continu-
ous parade of promotions.
(ii) The Work Situation
This is made up of four important elements:
a. Technology, machine or work system, if speed of
equipment operation can be varied, it can establish range of
the incentive.
b. Satisfying job assignments, a workers’ job may incorporate a
number of activities that he finds satisfying. Incentives may
take the form of earned time-off, greater flexibility in hours
worked, extended vacation time and other privileges that an
individual values.
c. Feedback, a worker needs to be able to see the connection
between his work and rewards. These responses provide
important reinforcement.
d. Equity, worker considers fairness or reasonableness as part
of the exchange for his work.
Incentives, in general, are important motivators. Their effective-
ness depends upon three factors: drives, preference value, and,
satisfying value of the goal objects. Misra says: “Beyond
subistence level, becoming needs (self-actualization needs)
possess greater preference value and are more satisfying than
deficiency needs (which are necessary for survival).
Below the subsistence level, however, the reverse holds true.”
He makes the following generalizations:
i. Incentives, whether they are monetary or non-monetary,
tend to increase the level of motivation in a person.
ii. Financial incentives relate more effectively with basic
motivation or deficiency needs.
iii. Non-financial incentives are linked more closely with higher
motivation, or becoming needs.
iv. The higher the position of a person in an organization’s
hierarchy, the greater is his vulnerability to non-financial
incentives.
“While budgetary restrictions and temporary improvements in
performance place a limit on the potency of money as a
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 motivator, non-financial incentives involve only human
COMPENSATITION MANAGEMENT
ingenuity as investment and also insure a relatively stable
acceleration in output.
Monetary incentive imply external motivation, non-monetary
incentives involve internal motivation. Both are important. It is
a judicious mix-up of the two that tends to cement incentives
with motivation.”
Tutorial Activity 1.1
This Article below is to understand that aside from the external
determinants of productivity - the market, raw materials, and ...
could not control, the employer’s reaction to MBO/Rewards
would become ...
Objectives, Expectations, Rewards
By E. A. Winning
Management and Employee Relations Consultant,
E. A. Winning Associates, Inc.
An Article Reprinted with permission from E.A. Winning
Associates, Inc
“Motivation comes from within: the only thing that a manager
or management can do is to provide an atmosphere in which
the individual can be motivated.”
Since 1968 I have used a modified Management by Objectives
(MBO) process, as opposed to a program, to generate the
communications necessary in achieving results desired and
stated by various structured and healthy companies.
MBO has primarily been used as a tool for individuals to make
the process successful, and these employees want to know what
good it’s going to do for them by following what could become
an unwieldy procedure. As I asked in a 1974 article about MBO,
“what’s in it for the individual?”
Many organizations that have implemented management by
objectives have assumed that achievement of objectives is
motivating for the employee, but this assumption has been the
downfall of many MBO programs.
An awkward number of individuals still ask, “What’s in this for
me?” For that reason, I believe that management by objectives
is not a motivator unless it is linked to a reward system. This
will appear contrary to many managers to whom I’ve told over
the years that you cannot motivate an employee.
Motivation comes from within: the only thing that a manager
or management can do is to provide an atmosphere in which
the individual can be motivated, hence, the rewards which I’ll
address in this chapter.
The rationale of organizations adopting MBO is this: Achieve-
ment is a motivator; meeting objectives is achievement;
therefore, meeting objectives is a motivator - something
satisfying to a person. The problem lies with defining achieve-
ment and motivation. In their dictionary of psychological and
psychoanalytical terms (no longer in print), English and English
defined achievement as “success in bringing and effort to a
desired end.”
In this case, just who is stating what the desired end is? Usually,
it is the organization, the company, the manager; even when the
individual has a say in the definition of the goal, it is external to
that person. And achievement has quite a different base from
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134
motivation, which English and English describe as “the general
name for the fact that an organism’s acts are partly determined
in direction and strength by its own nature...and/or internal
state.”
What is motivating to an individual is, then, determined by the
individual. What is achievement to an individual is shaped by
external forces - the supervisor, the company, for example. And
how does the individual know he has achieved? He may have a
sense of achievement, but it is the external reward for attaining
the desired end that overtly tells him that others recognize his
achievement - an essential condition to his internal motivation.
In other words, objectives setting without tangible rewards is
MBO in a vacuum. Rewards are tangible things by which the
employee can measure whether or not, and how much, he has
achieved, “grown,” and been recognized. Motivation depends
on how well an individual’s needs are met.
If achievement is one of those needs, the employee may be
motivated by his own sense of achievement, but if his sense of
achievement depends on confirmation by the rewards he
receives for meeting objectives, then he will need the rewards,
both as a confirmation and as a device to measure how well he
has achieved.
To put it a little more simply, if an individual has the need to
achieve something and he accomplishes that something, he will
be motivated. However, if he is told to do something, set dates
for reaching objectives, and he does what he was “supposed to
do” in a timely fashion, then unless he is rewarded, there is no
inherent motivation in reaching the goal.
In other words, even with mutually agreed upon goals, the
employee must receive a raise, a private office, a company car, a
bonus (ugh...but that’s later), or a pat on the back, the latter
probably the only “true” motivator.
What is needed is a greater incentive for the individual to set
and meet objectives, to be fully involved in MBO as a process.
MBO is usually thought of as a program, and a program has a
beginning and an end. The fact that most MBO programs do
have an end - die a natural death - may point to the underlying
flaw in hypotheses companies have about management by
objectives and what the employee will attain from them.
The incentive should meet the individual’s needs, the driving
forces that propel (motivate) an employee toward a goal that is
most often self-centered, rather than company-oriented.
Because motivation is internal, it is difficult to ascertain, but
achievement is external to the individual, and achievement can
be measured.
Although I don’t believe that a primary goal of MBO was to
measure achievement, it can certainly be used to do so. By itself,
it may satisfy only the company’s needs. It aids in planning and
control.
It helps in assessing productivity, costs, overhead, and so on. If
it doesn’t satisfy the individual’s needs, however, in the long
run MBO won’t work for the organization either. MBO with a
reward system is a viable approach to meeting corporate and
individual needs, to meeting terms of the employer-employee
“psychological contract.”
11.622.1
In an MBO/Rewards System, What Rewards?
There are, of course, a number of incentive or reward plans, the
success of which is dependent on the type of organization
involved. One of these incentive systems, piecework or
commission, predates MBO in its present form by a century.
Another, the bonus, goes back at least as far as Bob Cratchit’s
Christmas turkey.
Last, we have a percentage system; it may be a percentage of
salary increase based on merit (i.e., productivity), or a percentage
based on sales, or profits.
The idea behind piecework was to get the employee to produce
more by paying him in terms of the number of items he
produced. It is still a common practice, especially in textile,
electronics, and other assembly line industries. The commis-
sion, one step above piecework, is usually paid in sales areas, the
sales person reaping a percentage of the sales he has generated.
One step further is, of course, salary-plus-commission. These
three (two-and-one-half?) systems have one common under-
pinning: the individual is rewarded, or paid, according to his
own productivity.
Is the piecework or commission system a good one? To the
extent that both have at times excluded other motivational
factors, no. To the extent that both place the responsibility for
productivity on the individual, yes. The individual sets his own
pace and in doing so has set certain objectives within corporate
standards to be met.
Both systems are MBO approaches without being labeled as
such. Further, piecework and commissions standards are
relatively contractual in favor of the employer, thereby making it
easier to either reward the employee or dismissing him fairly.
The bonus is probably the oldest form of incentive system and
has been popular at upper-management levels for the past 20
years. The bonus is usually based on the individual’s present
salary, his status in the organization, his productivity, and/or
the company’s profit picture.
It is an incentive, but it loses much of its motivational impact
because it is too far separated in time from performance, or it
may be given across-the-board without regard for individual
productivity. Moreover, its impact is limited; it does not reach
far enough down into the company to affect the middle- or
lower-level employee.
The lower-level employee who gets no bonus feels that he is
doing the “real” work, while upper-management reaps a
percentage of the profits the employee has been instrumental in
attaining. If such is the case, why should the lower-level
employee write objectives and try to meet them? He may do it
because he has been told to, but he will really want to write and
meet objectives only if there is something in it for him, a
tangible reward when the goal has been reached.
If the bonus is given once a year, then how does one sustain
the momentum to reach the desired goal? Perhaps the bonus
will have to be a large one, or perhaps it should be given out
several times a year - for instance, at the end of every objectives-
review period. If a bonus system is used, it should be related to
objectives and based upon productivity. For that matter, all
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11.622.1
incentives should be based on productivity, or value to the
COMPENSATITION MANAGEMENT
company.
If bonuses are handed out across-the-board, they will satisfy
only a few, and may actually de-motivate those who feel that
they have been more productive than others who are receiving
the same reward.
Some of the defects of a bonus system may be avoided in a
percentage system, which, all in all, is probably the most
palatable and most productive when combined with MBO. The
percentage of salary would be entirely an individual matter. The
employee’s performance, and only his performance, would be
the basis for such a reward. His performance would be mea-
sured by how well he met the objectives he was committed to
and had “contracted” for with his supervisor.
Since objectives can be set for anyone at any level in the com-
pany, all employees could benefit from such a program.
Moreover, since a manager is supposed to be in control of his
organization and his subordinates’ reaching or not reaching
their objectives will reflect on his abilities, it is a fair system to
use in both the evaluation of the manager’s performance and
his reward.
A percentage increase of salary can be seen as a type of bonus,
but it is more specific and does not have some of the draw-
backs of other bonus systems. It is related only to the
individual’s performance and on what he has agreed to attain,
and the distance-in-time objection can be eliminated if it is tied
to fairly short-term objectives, if, for example, objectives are set
on a quarterly basis, and percentage increases are given (or not
given) at those intervals.
The Problems of an MBO/Rewards System
There is no question that there are negative aspects in all
incentive systems, and they are complicated by problems
inherent in MBO (which, I hope I made clear is not a panacea
for all rewards and motivational problems).
The first question that comes up is that of the negative
incentive, the reduction in salary or the loss of a bonus because
the employee hasn’t met objectives. In theory, if an employee is
to be rewarded for meeting objectives, then there should be a
reduction or withdrawal of the reward for not meeting them.
Years ago, I felt that the system should bend to some extent so
that effort toward meeting objectives should be rewarded, at
least minimally. In keeping with the loftier principle of never
confusing effort with results, I must retrench.
If the employee’s performance is based solely on meeting or
not meeting objectives, then effort would mean nothing.
However, employees are evaluated on a number of criteria, and
therefore effort is only one of the factors involved.
There are still some who would go so far as to give an indi-
vidual a decrease in salary depending on the degree to which
objectives were missed, and in an “entrepreneurial” context, this
might be acceptable: If the individual has total control over his
environment, the staffing, the budget, and the way the organi-
zation operated, like the self-employed business person, he
should expect to reap the profits, but he should also expect to
take any loss too.
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 Setting objectives is a tricky business, however. Control of Tutorial Activity 1.2
COMPENSATITION MANAGEMENT

conditions is difficult enough at upper levels and sometimes

A Case Study on TERI Rewards Corporate Efforts
nonexistent at lower ones. Aside from the external determi-
nants of productivity - the market, raw materials, and the like - The Annual Awards Recognise the Efforts of Corporates
much of an individual’s achievement may be contingent on that in Environmental Management and Sustainable
of others inside his company. Initiatives
In order to encourage environmental management and
If a reduction in salary were to be imposed, in part because of
protection in the corporate sector, TERI instituted the Corpo-
factors he could not control, the employer’s reaction to MBO/
rate Environmental Awards last year. Encouraged by the
Rewards would become evident in a number of ways: He
response and interest shown by corporates, TERI has decided
would set easily attainable goals; he would argue that no
to confer the awards annually.
objective can be counted on as being attainable in present-day
circumstances; he would set objectives having due dates months The objective of the awards is to recognise the leadership efforts
past the times when they can be achieved; he might reduce the of corporates in environmental management and sustainable
number of objectives; or he might just plain balk. initiatives, recognise innovative practices that promote sustain-
able development and further encourage and provide
Overcoming the Drawbacks in an MBO/Rewards System:
momentum to environmental initiatives.
Assuming that an MBO/Rewards system is decided on (and
certainly not as the sole evaluation/rewards system), how can The awards are divided into three categories: Category 1:
these problems be solved? First, as is customary in MBO, companies with a turnover of less than or equal to Rs 100 crore
objectives are set by the supervisor and employee together to per annum; Category II: companies with a turnover of between
reflect the unit or corporate objectives. Rs 100 crore and Rs 500 crore per annum; and Category III:
companies with a turnover above or equal to Rs 500 crore per
Ultimately, it’s the boss’ responsibility to see that objectives are
annum. The application fee for category I is Rs 500 per applica-
reasonable and feasible, with dates that are neither too far off or
tion; category II, Rs 2,000, and category III, Rs 5,000.
too close, and that the number of objectives is realistic.
Says R K Pachauri, director general, TERI, “The TERI Corpo-
Second, the number of objectives, their timing, and their
rate Environmental Awards help corporates and Indian society
rationale should be open to later negotiation and adjustment.
in general in two major ways. Firstly, the awards recognise good
Since it is difficult to fix objectives because of the control factor,
practices and excellence in protecting the environment on the
the objectives should be flexible; the MBO process should
part of deserving corporate organisations. Secondly, the awards
allow for the changing of objectives that are “too easy,” but he
help to focus on the responsibility of business in protecting the
should not agree to too-difficult objectives, either.
environment and conserving our natural resources.
To sum up, the points made here are these: MBO without an
Even those organisations that do not participate in the process
incentive program is a system without sound foundation. The
will get to know about these awards and feel motivated to do
individual is self-centered and needs a reward in order to meet
their bit in the same cause. Overall, these awards will help to
management’s expectations of him. There are three types of
prepare businesses for the coming era when the corporate sector
incentive systems that may work along with MBO and make
will have to face very stringent environmental standards to be
MBO a stronger tool. The positive aspects of MBO/Rewards
imposed by the public at large and governments in particular.
outweigh the negative. The negative aspects can be handled.
The bottomline of a company that prepares effectively for such
A crucial step in the MBO process is the discussion between a future will be healthier than that of one that does not.”
supervisor and subordinate in setting objectives, a discussion
Out of 110 applications received by TERI this year, 18 compa-
that should include both the definition of responsibilities and a
nies were shortlisted and the final awards will be given on June
definition of expectations. Expectations are more than
17. The selection of the awards are based on a questionnaire
objectives. They are statements of desired behavior of both
filled by the company and a case study on the environmental
supervisor and subordinate.
initiative undertaken. After shortlisting the companies, experts
While the supervisor has expectations of the employee in terms from TERI visit the site to check on the authenticity of the
of productivity and performance, the employee has expectations environmental initiative.
of the supervisor in terms of direction, support, training, and
The case studies were evaluated on the basis of a few pre-set
so on. If he is to achieve objectives that are aligned with
parameters, like pollution prevention - proactive practices,
corporate or department goals, then he must be given the
process improvements and modifications undertaken resulting
opportunity to explain what he needs from his supervisor in
in environmental improvement, waste reduction and energy or
order to meet those goals.
resource conservation.
And the expectation of the company that he will meet those
Scientific research and technological innovation - research or
goals will be considerably more realistic if the employee himself
technological innovations that have been implemented or
has the expectation of a tangible reward if he does meet them.
demonstrated for addressing environmental issues. Environ-
“What’s there in it for me?” is a very human question.
mental benefits - success and effectiveness of the programme,
both in terms of environmental and economic benefits.
Potential model for business commitment - the replicability or

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136 11.622.1
transferability of the practices, outcomes or experience of the feel proud to be awarded as it recognises our efforts to keep the

COMPENSATITION MANAGEMENT
project. environment clean.”
The jury members for selecting the awards are Justice J S Verma, Please answer the questions below based on the case study
former-chairperson, National Human Rights Commission and above:
former chief justice of India; Vishwanath Anand, vice- 1. What is the objective of the case?
chairperson, National Environment Appellate Authority;
2. Discuss the objective of rewards.
Suman K Bery, director-general, National Council of Applied
Economic Research; Sanjaya Baru, chief editor, The Financial 3. Discuss the 3 categories of awards mentioned in the case.
Express; and R K Pachauri, director general, TERI. 4. What is the another important feature of the award apart
In Category I, five companies were shortlisted: M K Electric; leadership from efforts mentioned in the case?
Chemfab Alakalis Ltd; Shriram Alkali and Chemicals; The
Orchid—An Ecotel Hotel and Hitech Arai.
In Category II, five companies were shortlisted: Andhra Paper
Mills Ltd; Sanghi Spinners India Ltd; Shree Cements Ltd; Star
Paper Mills Ltd and Samcor Glass Ltd.
In Category III, eight cases were shortlisted: Orient Paper Mills;
Grasim Industries Ltd; Bharat Petroleum Corp. Ltd; Hindustan
Lever Ltd; Chennai Petroleum Corp. Ltd; Harihar Polyfibres;
Hindalco Industries Ltd and Hero Honda Motors Ltd.
How are the TERI Corporate Environmental Awards different
from other similar awards? Mr Pachauri explains, “I am not
aware of any other award dealing with environmental perfor-
mance where such rigorous evaluation and objective scrutiny is
carried out in determining the winner.
Not only is the technical and economic evaluation of each entry
carried out by a team of researchers from TERI, but the final
decision is taken by a very eminent panel of judges chaired by a
former chief justice of India. It is the result of the objectivity
and rigour of the process that has given these awards the
prominence they have attained in a short period of time.
Another feature of the award, which is worth mentioning, is
the subdivision of companies on the basis of turnover. Hence,
the performance of a small unit is not evaluated against that of
a large enterprise, which may have very different managerial and
technological capabilities. The awards are differentiated on the
basis of size of the enterprise.”
Last year, TERI received some 89 entries; this year, it is 110. Mr
Pachauri does not think the numbers are low. “Firstly, a jump
of over 25 per cent in the entries received in merely a year is a
very encouraging development, but the figure of 110 entries
consists of very serious contenders. We accept entries only with
a modest processing fee. This eliminates those who may not be
serious and those who have only trivial achievements to claim.
Besides, the process is made known to all potential contenders,
who would be persuaded that this is a high calibre process of
selection signified by the very choice of the judges who form
the selection panel. Also, the companies are aware that any
claims that they make in their entries will be carefully investi-
gated by TERI researchers by site visits and on-the-spot
evaluation for all shortlisted candidates. This helps further to
eliminate doubtful claims and trivial entries.”
Last year, the Phulpur plant of Indian Farmers Fertiliser Co-
operative Ltd (IFFCO) won the first award in category III of
TERI Corporate Environmental Awards for setting up effluent
projects for not only recycling, but also for zero liquid discharge.
Says C P Srivastava, joint general manager, Projects, IFFCO, “We

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11.622.1 137
COMPENSATITION MANAGEMENT
LESSON 22:
INTRODUCTION TO CLASSIFICATION OF REWARDS,
INCENTIVE PAYMENTS AND IT’S OBJECTIVES
Principles of External and Internal Differential
Rewards and Incentives
Learning Objective
• Introduction to classification or types of Rewards
• To understand classification of Rewards or Incentives
• To understand Incentive Payments
• To learn classification of Incentive Schemes
• To know wage Incentives
• To learn the objectives of wage Incentive Schemes
Introduction to Classification or Types of
Rewards
As we all know that reward management is concerned with the
development of appropriate organizational cultures, underpin-
ning core values and increasing the motivation and
commitment of employees. So now let us study below the
classification or types of Incentives/Rewards.
Classification of Rewards or Incentives
i. Direct compensation, and
ii. Indirect compensation.
Direct compensation includes the basic salary or wage that the
individual is entitled to for his job, overtime-work and holiday
premium, bonuses based on performance, profit sharing and
opportunities to purchase stock options, etc.
Indirect compensation includes protection programmes
(insurance plans, pensions), pay for time not worked, services
and perquisites. But these are maintenance factors rather than
reward components.
Since they are made available to all employees, irrespective of
performance, they will tend to retain people in the organization
but not stimulate them to greater effort and higher perfor-
mance.
Sometimes, the rewards are also termed as ‘Intrinsic’
rewards and ‘Extrinsic’ rewards. The former are those that an
individual receives for himself. They are largely a result of the
job that the worker does.
The techniques of job enrichment, shorter work weeks, flexible
work hours, project structures, and job rotation can offer
intrinsic rewards through providing interesting and challenging
jobs, and allowing the worker greater freedom.
On the other hand, the latter rewards refer to direct compensa-
tion, indirect compensation, and non-financial rewards. Fig.
17.1 gives structure of rewards.
Controversy prevails over the issue of ‘money’ only motivates
the individual. The supporters of the view say that money is
potentially an effective motivation. For example:
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138
“Money may potentially be an effective motivator, regardless of
the level one has attained and the organization or the amount
of money he is earning.”
“Money does appear to have a good deal of symbolic value, and
it does mean different people having differing biographies or
backgrounds of training and experience.”
“For some people, money can be instrumental in satisfying
esteemed and recognition need as well basic physical needs.
Motivating people with financial rewards is not a picker’s game.
A company must be willing and able to give certain employees
very large raises and/or bonuses if pay is to motivate perfor-
mance. If a company cannot afford to do this, or is not willing
to do so, it should probably forget about using pay to motivate
performance.”
“Pay in one form or another is certainly one of the main-
springs of motivation in our society. The most evangelical
human relationist insists it is important while protesting that
other things are too (and are perhaps in his view) nobler.
It would be unnecessary to belabor the point if it were not for a
tendency for money drives to slip out of focus in a miasma of
other values and other practices. As it is, it must be repeated:
Pay is the most important single motivator used in our
organized society”.
Contrary to these observations, Allen Port observes: “Money
incentives alone do not bring the desired motivation. Employ-
ees in an industry are not ‘economic men’ so much as they are
‘ego men.’ What they want, above all else, is credit for work
done, interesting tasks, appreciation, approval and congenial
relations with their employers and fellow-workers. These
satisfactions they want even more than high wages or job
security.”
“Workers will normally respond to monetary incentives only to
a certain point. Beyond that point money becomes ineffective as
an inciter of action. This is for two reasons:
i. Money is not foreseen as having the ability to satisfy an
urgent need.
ii. The worker may respond to money as a motivator if he
believes the benefits will be greater than the expenses
incurred by him. If the benefits perceived are less than the
personal cost he will not respond to money as an incentive
any further.
In effect, a break-even point is reached in which additional
money earnings become marginal or even undesirable because
of the efforts and conditions demanded to earn the added
income.”
“Using money as a motivator may decrease intrinsic motivation.
To use money and other extrinsic reward as effective motivators,
they must be made contingent upon performance. “
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It may be summed up that a more reasonable interpretation
would be that intrinsic motivation is increased by money if two
conditions are met:
i. The monetary reward closely follows performance so as to
be reinforcing, and
ii. The monetary reward is perceived by the employee to be a
function of his work behavior. Further, it may be fair to
conclude that pay holds motivational properties. However,
the issue is considerably more complex than merely stating
“money motivates.”
Fig. 17.3 Break Even Analysis of Perceived Personal Cost
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11.622.1
Incentive Payments
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Incentives are monetary benefits paid to workmen in recogni-
tion of their outstanding performance. The “International
labour organization (ILO) refers to incentives as “payment by
results.” But it is appropriate to call them “incentive systems of
payments” emphasizing the point of motivation, that is, the
imparting of incentives to workers for higher production and
productivity.
The primary advantage of incentives is the inducement and
motivation for higher efficiency and greater output. But with
fixed remuneration, it is difficult to motivate employees.
Increased earnings would enable the employees to improve
their standard of living and help the organization to improve
their production capacity. They also help in reduced supervision,
better utilization of equipment, reduced scrap, reduced lost
time, reduced absenteeism and turnover and increased output.
Classification of Incentive Schemes
It has been classified into four categories by ILO. They are
mentioned below as:
1. Schemes in which earnings vary in proportion to output,
2. Schemes where earnings vary proportionately less than
output,
3. Schemes where earnings vary proportionately more than
output, and
4. Schemes where earnings differ at different levels of output.
Wage Incentives
The term wage incentives has been used both in the restricted
sense of participation and in the widest sense of financial
motivation. It has been defined differently by different authors.
We give below a few of these definitions.
“It is a term which refers to objectives in the external situation
whose function is to increase or maintain, some already initiated
activity, either in duration or in intensity.
“According to Hummel and Nickerson: “It refers to all the
plans that provide extra pay for extra performance in addition to
regular wages for a job. “Florence observes: “It refers to
increased willingness as distinguished from capacity. Incentives
do not create but only aim to increase the national momentum
towards productivity.”
In the words of Scott, “it is any formal and announced
programme under which the income of an individual, a small
group, a plant work force or all the employees of a firm are
partially or wholly related to some measure of productivity
Output.”
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 the
present or targeted results.”
“A wage incentive scheme is essentially a managerial device of
increasing a worker’s productivity. Simultaneously, it is a
method of sharing gains in productivity with workers by
rewarding them financially for their increased rate of Output.”
According to Suri, this definition is based on the principle that
“an offer of additional money will motivate workers to work
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 harder and more skillfully for a greater part of their working
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item, which will result in a stepped-up rate of Output.”16
We may define a wage incentive as a system of payment under
which the amount payable to a person is linked with his
output. Such a payment may also be called payment by results.
The term incentive has gradually acquired a wide connotation
and includes all the possible factors, besides economic gains,
which can possibly motivate human beings towards better and.
greater performance.
Objectives of Wage Incentive Schemes
Wage incentive schemes aim at the fulfillment of one or more
of the following objectives:
i. To improve the profit of a firm through a reduction in the
unit costs of labour and materials or both;
ii. To avoid or minimize additional capital investment for the
expansion of production capacity;
iii. To increase a worker’s earnings without dragging the firm
into a higher wage rate structure regardless of productivity;
and
iv To use wage incentives as a useful tool for securing a better
utilization of manpower, better production scheduling and
performance control, and a more effective personnel policy.
Tutorial Activity 1.1
Motivation and Financial and Non-
Financial Rewards
The Objective of the Tutorial Activity
To understand that the development of reward management
policies, structures and practice will be underpinned by assump-
tions about how people can best be motivated to deliver high
levels of performance. These assumptions may not be articu-
lated but the reward philosophies and policies of an
organization can be no better than the motivational theories
and beliefs upon which they are based.
In this activity we therefore examine motivation theory under
the following headings:
• the process of motivation;
• types of motivation;
• the six basic concepts of motivation relating to needs, goals,
reinforcement, expectations, attribution theory and self-
efficacy;
• the implications of motivation theory for those concerned
with the design and management of financial and non-
financial reward policies and practices.
The Process of Motivation
Motivation theory is concerned with what determines goal-
directed behavior. It is about:
how behavior is initiated by needs and by expectations on the
achievement of goals which will satisfy those needs; how the
achievement of goals and/or feedback on their achievement
reinforces successful behavior; how belief in one’s ability to carry
out a specific task will actuate behavior which is expected to
achieve the successful performance of that task.
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140
The process of motivation can be initiated by someone
recognizing an unsatisfied need. A goal is then established
which, it is thought, will satisfy the need, and a course of action
is determined which is expected to lead towards the attainment
of the goal.
Alternatively, someone can be presented with a goal and if it is
expected that achieving this goal will meet an unsatisfied need,
action is taken to reach the goal and thus satisfy the need.
People can be motivated by rewards and incentives which will
enable them to satisfy their needs or will provide them with
goals to attain (as long as those goals are worthwhile and
attainable). But the needs of individuals and the goals associ-
ated with them vary so widely that it is difficult if not
impossible to predict precisely how a particular reward or
incentive will affect individual behavior.
The social context will also affect the level of motivation. This
context will consist of the organization culture generally, but it
also includes management style (the way in which individuals
are managed) and the influence of the group or team in which
the individual works.
Types of Motivation
Motivation at work can take place in two ways:
1. Intrinsic Motivation
This is derived from the content of the job. It can be described
as the process of motivation by the work itself in so far as it
satisfies people’s needs or at least leads them to expect that their
goals will be achieved. Intrinsic motivation is self-generated in
that people seek the type of work that satisfies them, but
management can enhance this process through its empower-
ment, development and job design policies and practices. The
factors affecting intrinsic motivation include responsibility
(feeling the work is important and having control over one’s
own resources), freedom to act, scope to use and develop skills
and abilities, interesting and challenging work and opportuni-
ties for advancement. The concept of empowerment is strongly
influenced by this aspect of motivation.
2. Extrinsic Motivation
This is what is done to and for people to motivate them. It
arises when management provides such rewards as increased
pay, praise, or promotion. When the motivating impact of pay-
for-performance schemes is discussed, this is the type of
motivation to which people are referring.
The extrinsic motivators can have an immediate and powerful
effect, but this will not necessarily last for long. The intrinsic
motivators, which are concerned with the quality of working
life, are likely to have a deeper and longer-term: effect because
they are inherent in individuals and not imposed from outside,
although they may be encouraged by the organization. The
effectiveness of pay as an extrinsic motivator is a matter for
continuing debate, as discussed below.
Basic Concepts for Motivation
The framework for non-financial motivators is provided by
those concepts of motivation which are concerned with needs,
goals, reinforcement, expectations (expectancy theory), attribu-
tion theory and self-efficacy.
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Needs
Needs theory states that behavior is motivated by unsatisfied
needs. The key needs associated with work are those for
achievement, recognition, responsibility, influence and personal
growth.
Goals
Goal theory was developed by Latham and Locke! on the basis
of a 14-year research programme into goal-setting as a motiva-
tional technique. They claimed that the level of production in
the companies they studied was increased by an average of 19
per cent as a result of goal-setting processes with the following
characteristics:
• the goals should be specific;
• they should be challenging but reachable;
• the goals are seen as a fair and reasonable;
• individuals participate fully in goal-setting;
• feedback ensures that people get a feeling of pride and
satisfaction from the experience of achieving a challenging
but fair goal;
• feedback is used to gain commitment to even higher goals.
Reinforcement
Reinforcement theory suggests that successes in achieving goals
and rewards act as positive incentives and reinforce the success-
ful behavior, which is repeated the next time a similar need
arises.
Expectancy Theory
Expectancy theory as originally developed by Vroom states that
for there to be a heightened motivation to perform, individuals
have to:
• feel able to change their behavior;
• feel confident that a change in their behavior will produce a
reward;
• value the reward sufficiently to justify the change in
behavior.
Expectancy theory applies just as much to non-financial as to
financial rewards. For example, if people want personal growth,
they will only be motivated by the opportunities available to
them if they know what they are, if they know what they need
to do to benefit from them (and can do it) and if the opportu-
nities are worth striving for.
Expectancy theory explains why extrinsic motivation - for
example, an incentive or bonus scheme - works only if the link
between effort and reward is clear and the value of the reward is
worth the effort. It also explains why intrinsic motivation
arising from the work itself can sometimes be more powerful
than extrinsic motivation. Intrinsic motivation outcomes are
more under the control of individuals, who can place greater
reliance on their past experiences to indicate the extent to which
positive advantageous results are likely to be obtained by their
behavior.
Attribution Theory
Attribution theory is concerned with how people interpret and
explain their success or failure. If they can attribute their
achievement or lack of achievement to something over which
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11.622.1
they have control they are more likely either to repeat their
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successful behavior (this is a form of reinforcement) or,
alternatively, take steps to behave in ways they believe are more
likely to succeed. Managers can do a lot to influence attributions
through feedback, communication, appraisal and guidance, thus
creating a social context which is more likely to foster high
motivation.
Self-efficacy
Self-efficacy is the belief in one’s ability to perform a specific
task. Those with high self-efficacy will have the capacity to see a
link between their own effort and performance and their
rewards. They are therefore more likely to take action, to persist
in the action and, in the face of failure, to try alternative courses.
of action rather than give up trying. Self-efficacy is socially
learned and developed from personal experience and perfor-
mance feedback, which creates a sense of competence and
reinforces people’s belief in themselves.
Implications of Motivation Theory
Motivation theory conveys two important messages. First, there
are no simplistic solutions to increasing motivation. No single
lever such as performance-related pay exists which is guaranteed
to act as an effective motivator. This is because motivation is a
complex process. It depends on:
• individual needs and aspirations which are almost infinitely
variable;
• both intrinsic and extrinsic motivating factors, and it is
impossible to generalize on what the best mix of these is
likely to be;
• expectations about rewards, such expectations will vary
greatly amongst individuals according to their previous
experiences and perceptions of reward processes;
• equity and fairness - the ‘felt-fair’ principle applies to levels
of pay in comparison with others in accordance with what
people believe to be the relative size or importance of jobs
and their perceptions of relative levels of performance or
contribution. Pay-for-performance schemes, for example,
will only be accepted as fair and may therefore only act as
effective motivators if they are based on acceptable
performance measures which are applied consistently;
• attributions - the subjective and often distorted
explanations people make of their successes or failures;
• self-efficacy - the differences in the degree to which people
believe in themselves;
• the social context where the influences of the organization
culture, managers and co-workers can produce a wide variety
of motivational forces which are difficult to predict and
therefore to manage.
The second key message provided by motivation theory is the
significance of expectations, goal-setting, feedback and reinforce-
ment as motivating factors. The implications of these two
messages are considered below.
Creating the Right Climate
It is necessary in general to create a climate which will enable
high motivation to flourish. This is a matter of managing the
organization culture. The aims would be, first, to reinforce
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 values concerning performance and competence; second, to
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emphasize norms (accepted ways of behavior) relating to the
ways in which people are managed and rewarded; and third, to
demonstrate the organization’s belief in empowerment -
providing people with the scope and ‘space’ to exercise respon-
sibility and use their abilities to the full. Without the right
climate, quick fixes designed to improve motivation such ‘as
performance-related pay are unlikely to make much of an impact
on overall organizational performance, although they may work
with some individuals.
Flexibility
It should be remembered, in the words of McDougall, that:
attempts to apply a standardized, across-the-board system of
remuneration, on the assumption of homogeneity of values
and motives amongst those it is intended to reward, are
unlikely to meet the needs of many of them. There appears to
be a strong case for flexibility, both in terms of the mechanisms
and administration of remuneration systems and in the form
in which individuals receive their remuneration.
Recognizing Complexity
Motivation policies should recognize the complexity of the
motivation process and not attempt to adopt simplistic
solutions to motivational problems. The organization should
provide for a mix of various types of intrinsic and extrinsic
motivation and make use of both financial and non-financial
incentives. But it should be borne in mind that the social
context and the ways in which these incentives are managed for
individuals will be key factors influencing their effectiveness.
Goal-setting, Feedback and Reinforcement
Provision should be made for goal-setting, feedback and
reinforcement to be major features of the management and
reward processes. Performance management processes as
described in Chapters 18 and 19 can fulfil this purpose well.
Managing Expectations
It is necessary to manage expectations. No reward offered
through an incentive, bonus or performance-related pay scheme
will be effective as a motivator unless individuals believe it is
worthwhile and they can reasonably expect to obtain it through
their own efforts.
We discuss these implications as they affect financial and non-
financial reward policies and practices below.
Financial Rewards
Financial rewards need to be considered from three points of
view:
1. The effectiveness of money as a motivator;
2. The reasons why people are satisfied or dissatisfied with
their rewards;
3. The criteria which should be used when developing a
financial reward system.
Money and Motivation
The general theory of motivation described above has produced
the following explanations of the relationship between money
and motivation: the ‘economic man’ approach, Herzberg’s two
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142
factor model, instrumental theory, equity theory and expectancy
theory.
The ‘Economic Man’ Approach
According to this view, which is based on reinforcement theory,
people are primarily motivated by economic rewards. It assumes
that they will be motivated to work if rewards and penalties are
tied directly to the results they achieve. Pay awards are contingent
upon effective performance.
Motivation using this approach has been and still is widely
adopted and can be successful in some circumstances. But it is
based exclusively on a system of external controls and fails to
recognize a number of other human needs. It also fails to
appreciate the fact that the formal control system can be
seriously affected by the informal relationship existing between
employees.
Herzberg’s Two Factor Model
Herzberg’s two factor model of motivation was developing
following an analysis of anecdotes of unusually satisfying or
unusually dissatisfying job events provided by 200 engineers
and accountants. He claimed that money is a so-called ‘hygiene
factor’ which serves as a potential dissatisfier if not present in
appropriate amounts, but not as a potential satisfier or positive
motivator. A further reason given by Herzberg for’ regarding
salary as a ‘hygiene factor’, that is, a factor which prevents disease
rather than promotes health, was because its impact on
favorable feeling was largely short term, while its impact on
unfavorable feelings was long term extending over periods of
several months.
But, as Opsahl and Dunnette point out, Herzberg’s argument
that money acts as a potential dissatisfier is mystifying.
In all of the definitions of unusually good job feelings, salary
was mentioned as a major reason for the feelings 19 per cent of
the time. Of the unusually good feelings that lasted several
months, salary was reported as a causal factor 22 per cent of the
time; of the short-term feelings, it was a factor 5 per cent of the
time. In contrast, salary was named as a major cause of
unusually bad job feelings only 13 per cent of the time. Of the
unusually bad job feelings lasting several months, it was
mentioned only 18 per cent of the time (in contrast with the 22
per cent of long-term good feelings mentioned above).
They Concluded that,
these data seem inconsistent with the interpretations and lend
no substantial support to hypotheses of a so-called differential
role for money in leading to job satisfaction or job dissatisfac-
tion.
Herzberg’s two factor model does not therefore provide a
reliable basis for developing pay policies.
Instrumental Theory
This theory states that money provides the means to achieve
ends. It is an instrument for gaining desired outcomes and its
force will depend on two factors: first, the strength of the need
and, second, the degree to which people are confident that their
behaviour will earn the money they want to satisfy the need.
The instrumental role of money has been stressed by
Gellerman,6 who suggested that money in itself has no
11.622.1
intrinsic meaning and acquires significant motivating power
only when it comes to symbolize intangible goals. Money acts
as a symbol in different ways for different persons, and for the
same person at different times - a man’s reaction to money
‘summarizes his biography to date, his early economic environ-
ment, his competence training, the various non-financial
motives he has acquired, and his current financial status’.
Money is therefore a powerful force because it is linked directly
or indirectly to the satisfaction of all the basic needs. But the
effectiveness of money as a motivator depends on a number of
circumstances, including the values and needs of individuals
and their preferences for different types of financial or non-
financial rewards.
Equity Theory
Equity theory, as developed by Adams, argues that satisfaction
with pay is related to perceptions about the ratio between what
one receives from the job (outcomes in the form of pay) to
what one puts into it (inputs in the form of effort and skill)
compared with the ratios obtained by others.
Equity theory is related to discrepancy theory which, as stated by
Lawlers indicates that satisfaction with pay depends on the
difference between the pay people receive and what they feel they
ought to receive. Equity theory, however, emphasizes that these
feelings are based on comparisons.
The significance of equity was also emphasized by Jaques.9 He
stated that: 1) there exists ‘an unrecognized system of norms
of fair payment for any given level of work, unconscious
knowledge of these norms being shared among the population
engaged in employment’; and that 2) an individual is ‘uncon-
sciously aware of his own potential capacity for work, as well as
the equitable pay level for that work’. Jacques called this the ‘felt-
fair’ principle, which states that, to be equitable, pay must be felt
to match the level of work and the capacity of the individual to
do it.
Application of Expectancy Theory
Expectancy theory as described earlier in this chapter, states that
motivation will be strong if individuals can reasonably expect
that their efforts and contributions will produce worthwhile
rewards.
This theory was developed by Porter and Lawler into an
expectancy model which suggests that there are two factors
determining the effort people put into their jobs:
1. The values of the rewards to individuals in so far as they
satisfy their needs for security, social esteem, autonomy, and
self-actualization.
2. The probability that rewards depend on effort, as perceived
by the individual - in other words, his or her expectations
about the relationships between effort and reward.
Thus, the greater the value of a set of awards and the higher the
probability that receiving each of these rewards depends upon
effort, the greater the effort that will be put forth in a given
situation.
But mere effort is not enough. It has to be effective effort if it is
to produce the desired performance. The two variables addi-
tional to effort which affect task achievement are:
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11.622.1
1. Ability - individual characteristics such as intelligence,
COMPENSATITION MANAGEMENT
manual skills and know-how;
2. Role perceptions - what the individual wants to do or
thinks he or she is required to do. These are good from the
view ‘Point of the organization if they correspond with
what it thinks the individual ought to be doing. They are
poor if the views of the individual and the organization do
not coincide. ‘
Conclusions on the Role of Money as a Motivator
Money is important to people because it is instrumental in
satisfying a number of their most pressing needs. It is signifi-
cant not only because of what they can buy with it but also as a
highly tangible method of recognizing their worth, thus
improving their self-esteem and gaining the esteem of others.
Pay is the key to attracting people to join an organization,
although job interest, career opportunities and the reputation
of the organization will also be factors. Satisfaction with pay
amongst existing employees is mainly related to feelings about
equity and fairness. External and internal comparisons will form
the basis of these feelings, which will influence their desire to
stay with the organization.
Pay can motivate. As a tangible means of recognizing achieve-
ment, pay can reinforce desirable behavior. Pay can also deliver
messages on what the organization believes to be important.
But to be effective, a pay-for performance system has to meet
very stringent conditions as defined by expectancy theory. To
achieve lasting motivation, attention has also to be paid to the
non-financial motivators.
Causes of Satisfaction or Dissatisfaction
with Pay
Reactions to reward policies and practices will depend largely on
the values and needs of individuals and on their employment
conditions. It is therefore dangerous to generalize about the
causes of satisfaction or dissatisfaction.
However, it seems reasonable to believe that, as mentioned
above, feelings about external and internal-equity (the ‘felt-fair’
principle) will strongly influence most people. Research by
Porter and Lawler and others has also shown that higher paid
employees are likely to be more satisfied with their rewards but
the satisfaction resulting from a large pay increase may be short-
lived. People tend to want more. ‘In this respect, at least, the
views of Herzberg have been supported by research.
Other factors which may affect satisfaction or dissatisfaction
with pay include the degree to which:
• individuals feel their rate of pay or increase has been
determined fairly;
• rewards are commensurate with the perceptions of
individuals about their ability, contribution and value to the
organization (Out this perception is likely to be founded on
information or beliefs about what other people, inside and
outside the organization, are paid);
• individuals are satisfied with other aspects of their
employment - for example, their status, promotion
prospects, opportunity to use and develop skills and
relationships with their managers.
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 Financial Rewards Criteria
COMPENSATITION MANAGEMENT
The criteria for assessing the effectiveness of financial reward
practices as means of motivation are that:
• they are, as far as possible, internally equitable as well as
externally competitive (although there will always be a
tension between these two criteria’- paying market rates may
upset internal relativities);
• pay-for-performance systems are, created in the light of an
understanding that direct motivation ‘Only takes place if
the rewards are worthwhile, if they are specifically related to
fair, objective and appropriate performance measures: if
employees understand what they have to achieve, and if
their expectations on the likelihood of receiving the reward
are high;
• employees understand how the financial reward system
operates, how they benefit from it, and how the
organization will help them to develop the skills and
competences they need to receive the maximum benefit.
Non-financial Rewards
Non-financial rewards can be focused on the needs most people
have, although to different degrees, for achievement, recogni-
tion, responsibility, influence and personal growth.
Achievement
Research carried out by McClelland of the needs of managerial
staff resulted in the identification of three major needs, those
for achievement, power and affiliation. The need for achieve-
ment is defined as the need for competitive success measured
against a personal standard of excellence.
Achievement motivation can be increased by organizations
through processes such as job design, performance manage-
ment, and skill or competency-related pay schemes.
Recognition
Recognition is one of the most powerful motivators. People
need to know not only how well they have achieved their
objectives or carried out their work but also that their achieve-
ments are appreciated.
Praise, however, should be given judiciously - it must be related
to real achievements. And it is not the only form of recogni-
tion. Financial rewards, especially achievement bonuses awarded
immediately after the event, are clearly symbols of recognition
to which are attached tangible benefits, and this is an important
way in which mutually reinforcing processes of financial and
non-financial rewards can operate. There are other forms of
recognition such as long service awards, status symbols of one
kind or another, sabbaticals and work-related trips abroad, all of
which can be part of the total reward process.
Recognition is also provided by managers who listen to and act
upon the suggestions of their team members and, importantly,
acknowledge their contribution. Other actions which provide
recognition include promotion, allocation-to a high-profile
project, enlargement of the job to provide scope for more
interesting and rewarding work, and various forms of status or
esteem symbols.
The recognition processes in an organization can be integrated
with financial rewards, through performance management and
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144
pay-for performance schemes. The importance of recognition
can be defined ‘as a key part of the value set of the organization
and this would be reinforced by education, ‘training and
performance appraisals.
Responsibility
People can be motivated by being given more responsibility for
their own work. This is essentially what empowerment is about
and is in line with the concept of intrinsic motivation based on
the content of the job. It is also related to the fundamental
concept that individuals are motivated when they are provided
with the means to achieve their goals.
The characteristics required in jobs if they are to be intrinsically
motivating are that first, individuals must receive meaningful
feedback about their performance, preferably by evaluating their
own performance. and defining the feedback they require,
second, the job -must be perceived by individuals as requiring
them to use abilities they value in order to perform the job
effectively and third, individuals must feel that they have a high
degree of self-control over setting their own goals and over
defining the paths to these goals.
Providing motivation through increased responsibility is a
matter of job design and the use of performance management
processes. The philosophy behind motivating through
responsibility was expressed as follows in McGregor’s theory Y:
‘The average human being learns, under proper conditions, not
only to accept but also to seek responsibility.’
Influence
People can be motivated by the drive to exert influence or to
exercise power. McClelland’s research established that alongside
the need for achievement, the need for power was a prime
motivating force for managers, although the need for ‘affilia-
tion’, i.e. warm, friendly relationships with others, was always
present. The organization, through its policies for involvement,
can provide motivation by putting people into situations where
their views can be expressed, listened to and acted upon. This is
another aspect of empowerment.
Personal Growth
In Maslow’s hierarchy of needs, self-fulfillment or self-
actualization is the highest need of all and is therefore the
ultimate motivator. He defines self-fulfillment as ‘the need to
develop potentialities and skills, to become what one believes
one is capable of becoming’.
Ambitious and determined people will seek and find these
opportunities for themselves, although the organization needs
to clarify the scope for growth and development it can provide
(if it does not, they will go away and grow elsewhere).
Increasingly, however, individuals at all levels of organizations,
whether or not they are eaten up by ambition, recognize the
importance of continually upgrading their skills and of
progressively developing their careers. This is the philosophy of
continuous development. Many people now regard access to
training as a .key element in the overall reward package. The
availability of learning opportunities, the selection of individu-
als for high prestige training courses and programmes and the
emphasis placed by the organization on the acquisition of new
11.622.1
skills as well as the enhancement of existing ones, can all act as

COMPENSATITION MANAGEMENT
powerful motivators.
Questions for Discussion
1. Do you think that non-financial motivators can work more
effectively when integrated with financial rewards in a total
reward process?
2. Do you agree that the needs of individuals vary almost
infinitely depending upon their psychological makeup,
background, experience, occupation and position in the
organization. Therefore it is dangerous to generalize about
which mix of motivators is likely to be most effective in
individual cases. Hence one cannot rely on nostrums such as
performance-related pay, skill-based pay, job enrichment or
performance management to work equally well for every
person or in every organization. These processes need to be
‘customized’ to meet the needs of both the organization
and the people who work there. But this customization win
take place more effectively only if judicious use is made of
achievement bonuses, pay increases related to the acquisition
of specific skills and a performance management and reward
process which concentrates on identifying individual needs
and gaining the joint commitment of employees and their
managers to satisfying them.

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11.622.1 145

LESSON 23:
INTRODUCTION TO WAGE
INCENTIVES IN INDIA
Principles of External and Internal Differential
COMPENSATITION MANAGEMENT
Rewards and Incentives
Learning Objective
• To understand the Prevalence of Wage Incentive Schemes in
India
• To know the Need for introducing Wage Incentive Schemes
in India
Prevalence of Wage Incentive Schemes in
India
In a country like India, the role of financial incentives as a
primary tool for motivating workers cannot be over-empha-
sized. Besides, the necessity of raising the productivity of
Indian labour is also getting due attention.
In this context, the First Plan recommended the introduction
of incentive schemes to promote a more efficient working of
industries with due safeguards for the interests of workers
through the guarantee of a minimum wage and protection
against fatigue and undue speed-up.
The Second Plan recommended that the earnings beyond the
minimum wage should be related to results, and that workers
should be consulted before a system of payment by results was
introduced in an establishment.
The Third Plan emphasized the need for higher productivity
and reduction in the unit cost of production. It put the
responsibility on management to provide the most efficient
equipment, correct conditions and methods of work, impart
training and create suitable psychological and material incentives
for workers.
The Study Group of the National Commission on Labour has
recommended that “under our conditions, a wage incentive is
concerned with an effective utilization of manpower which is
the cheapest, quickest and surest means of increasing productiv-
ity.
The only practicable and self-sustaining means of improving
manpower utilization is to introduce incentive schemes and
stimulate human efforts to provide a positive motivation to
greater Output.”
Need for Introducing Wage Incentive Schemes in
India
The need for introducing wage incentive schemes in India has
been felt on the following grounds:
i. The efficiency of the Indian worker is very low, and needs to
be raised. Wage incentives can play an important part
improving his efficiency.
ii. The average Indian worker is financially very poor. Financial
incentives therefore are likely to tempt him to work better.
iii. India is at a low level of technology, and wage incentives can
help in promoting the use of electronic devices.
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146
UNIT III
iv. A proper application of wage incentive schemes can so affect
the prices that the community would be benefited.
v. In the national interest, it is felt that wage incentive schemes
should be applied to all economic activity.
Tutorial Activity 1.1
Scenario
Agriculture still provides the bulk of wage goods required ...
Moneylenders, banks, government incentive schemes, friends,
relatives ... and analysis of case studies of successful ...
AGRICULTURE has always been INDIA’S most important
economic sector. In the mid-1990s, it provides approximately
one-third of the gross domestic product (GDP) and employs
roughly two-thirds of the population. Since independence in
1947, the share of agriculture in the GDP has declined in
comparison to the growth of the industrial and services sectors.
However, agriculture still provides the bulk of wage goods
required by the nonagricultural sector as well as numerous raw
materials for industry. Moreover, the direct share of agricultural
and allied sectors in total exports is around 18 percent. When
the indirect share of agricultural products in total exports, such
as cotton textiles and jute goods, is taken into account, the
percentage is much higher.
Dependence on agricultural imports in the early 1960s convinced
planners that India’s growing population, as well as concerns
about national independence, security, and political stability,
required self-sufficiency in food production. This perception led
to a program of agricultural improvement called the Green
Revolution, to a public distribution system, and to price
supports for farmers.
In the 1980s, despite three years of meager rainfall and a
drought in the middle of the decade, India managed to get
along with very few food imports because of the growth in
food-grain production and the development of a large buffer
stock against potential agricultural shortfalls. By the early 1990s,
India was self-sufficient in food-grain production.
Agricultural production has kept pace with the food needs of
the growing population as the result of increased yields in
almost all crops, but especially in cereals. Food grains and pulses
account for two-thirds of agricultural production in the mid-
1990s.
The growth in food-grain production is a result of concentrated
efforts to increase all the Green Revolution inputs needed for
higher yields: better seed, more fertilizer, improved irrigation,
and education of farmers. Although increased irrigation has
helped to lessen year-to-year fluctuations in farm production
resulting from the vagaries of the monsoons, it has not
eliminated those fluctuations.
After independence in 1947, the cropping pattern became more
diversified, and cultivation of commercial crops received a new
11.622.1
impetus in line with domestic demands and export require-
ments. Nontraditional crops, such as summer mung (a variety
of lentil, part of the pulse family), soybeans, peanuts, and
sunflowers, were gradually gaining importance.
There are large disparities among India’s states and territories in
agricultural performance, only some of which can be attributed
to differences in climate or initial endowments of infrastructure
such as irrigation. Realizing the importance of agricultural
production for economic development, the central government
has played an active role in all aspects of agricultural develop-
ment.
Planning is centralized, and plan priorities, policies, and resource
allocations are decided at the central level. Food and price policy
also are decided by the central government. Thus, although
agriculture is constitutionally the responsibility of the states
rather than the central government, the latter plays a key role in
formulating policy and providing financial resources for
agriculture.
Agricultural Structure of India
Field crops are planted on about 45 percent of the total
landmass of India. Of this cultivated land, almost 37 million
hectares were double-cropped, making the gross sown area
equivalent to almost 173 million hectares. About 15 million
hectares were permanent pastureland or were planted in various
tree crops and groves.
Approximately 108 million hectares were either developed for
nonagricultural uses, forested, or unsuited for agriculture
because of topography. About 29.6 million hectares of the
remaining land were classified as cultivable but fallow, and 15.6
million hectares were classified as cultivable wasteland.
These 45 million hectares constitute all the land left for expand-
ing the sown area; for various reasons, however, much of it is
unsuited for immediate cropping. Expansion in crop produc-
tion, therefore, has to come almost entirely from increasing
yields on lands already in some kind of agricultural use.
Topography, soils, rainfall, and the availability of water for
irrigation have been major determinants of the crop and
livestock patterns characteristic of the three major geographic
regions of India - the Himalayas, the Indo-Gangetic Plain, and
the Peninsula - and their agro-ecological subregions.
Government policy as regards irrigation, the introduction of
new crops, research and education, and incentives has had some
impact on changing the traditional crop and livestock patterns in
these subregions. The monsoons, however, play a critical role in
determining whether the harvest will be bountiful, average, or
poor in any given year.
Problem Definition
The farm management is the field closely related to agro-
economics. There is no doubt that farmers adopting new
technology are quite conscious about the management of their
farm. However, there is general apathy about the farm manage-
ment amongst the farmers, Agro-scientists and the policy
makers. Being a relatively young since, no much attention is
post to it. There may be some sound reasons for this. How-
ever, with changing scenario in agriculture, the need for guiding
farmers in management of their farms assumes significance.
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11.622.1
In any business proposition, management has to play a
COMPENSATITION MANAGEMENT
significant role. In other sectors of the economy, ‘management’
has become a catchword. In recent years, the irritations giving
training in ‘management’ are increasing by leaps and bounds.
There is good demand for ‘managers’ trained in these institu-
tions. Now, the technical persons having engineering and other
vocational background are turning towards MBA and allied
courses.
However, with rare exceptions, there are no such Institutions
for training persons in farm management. One of the reasons
for this may be that our farming is relatively a small-scale
farming and the scattered one. In agriculture sector, there is need
for guiding the farmers in this economic aspect.
Aim
The aim of our project is to design and develop an agricultural
information system, which will provide an optimum produc-
tion plan for a given farm taking into account the resources and
the limitations in which it is being operated.
Objectives
The main objectives of the project are as follows:
• To provide information to the farmers related to agriculture
and farm management
• To develop a centralized, systematic and a single system to
provide all kinds of information needed by farmers
• To help farmers in decision making in farming business
• To provide a geographical view of the various agricultural
lands in the country to facilitate easier information retrieval
• To focus and provide various decision making tools for
production of crops
Requirement Analysis
Our agricultural scene is a changing rapidly since the mid-sixties
when we experienced the ‘Green Revolution’. It was followed
by the ‘White Revolution’, which brought in the flood of milk
in the country. Now, we are on way to ‘Yellow Revolution’ i.e.
revolution in fruit production.
An important fact behind these revolutions is the economic
consideration. Farmers have been adopting the new technology
in agriculture and related fields mainly because of these
innovations pay more all compared to their tradition crops.
If we analyze, this changing scene in agriculture, we can notice
that the traditional agriculture. Which was a ‘way of life’ for our
farmers is now becoming a ‘business proposition’. In the
traditional farming there was no much change in the cropping
pattern, cultivation practices etc. It was based on the experiences
transmitted from father to the son.
However, with the developments taking place due to five-year
plans and technologies developments in agriculture, traditional
farming is changing into modern farming.
Traditional farming is slowly becoming obsolete and uneco-
nomic. Traditional farming was more or less self-sufficient.
Now farming is becoming market oriented. The needs of the
farmers are increasing. He has to purchase many things such as
high yielding seeds, fertilizers, pesticides, machinery etc. from
147
 the market. As a result, his investment and financial needs are
COMPENSATITION MANAGEMENT
increasing.
Naturally, he has to produce and get income to meet the costs
and also to make some profit. Thus, the costs, returns, markets,
and profits of the enterprise become significantly important.
The considerations of cost of production, income and
profitability are summing significance. This is nothing but
‘Agro-economics’.
With increasing population, rapid urbanization and growing
export markets, the demand for farm products is increasing and
is likely to increase in the near future. However, the competition
is also likely to increase. The consideration of economic aspects
in the production process is inevitable.
Decision Making in Farming Business
Decision making in any business largely depends on the nature
of business. To understand decision-making in farming, it is
necessary to know the nature of Indian farming.
Nature of Indian Farming
Indian farming is basically a subsistence farming. But due to
new technological developments in all the areas of production,
productivity of crops and livestock has increased substantially,
total production has increased several times and marketable
surpluses with the farmers have also increased. As a result
farming has assumed commercial proposition.
Indian farming is a diversified and mixed type of farming. The
farmers grow 5-6 crops or even more on their farms.
1. To meet their Family Requirements
To suit their soils on the farms and considering availability of
resources including irrigation and market facilities.
They also follow mixed farming, that is they keep few milk
animals and follow dairy and also undertake sheep or goat
keeping poultry keeping, etc. to supplement incomes from crop
production. Therefore decision making on such farms is more
difficult and complex than on specialized farming.
Indian farming is a family type farming. Farm family provides
major part of labour and also provides some capital.
2. Role of Farmers
Indian farmer plays following four rules simultaneously:
He is an entrepreneur
He is a Manager
He is a Financer
He is a Labourer or Worker,
He takes decisions in two capacities as an entrepreneur and a
manager.
3. Area of Decision Making
There are four major areas of decision making:
Production of crops and livestock.
Acquiring inputs.
Obtaining credit.
Marketing his produce.
Production: The decisions related to production activity are:-
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148
What to produce ? i.e. selection of crops and live-stock activity.
Whether to have dairy, goat keeping or poultry or their combi-
nation.
How to produce ? Adoption of suitable technology ; whether
to continue old technology or use new technology or combina-
tion of both.
How much to produce ? To consider family requirements in
respect of foodgrain, vegetable, spices, fruits, milk, etc and also
think of producing marketable surpluses. In that case, think of
demand supply position availability of market and prevailing
prices. This will also apply to production of cash/commercial
crops.
Acquiring inputs: In modern commercial farming, wide range
of inputs are required. They include seeds of high yielding and
hybrid varieties, fertilizers, pesticides, plant growth regulators
(hormones), improved implements and machinery, etc. There
are commercial and specialized agencies dealing in these inputs.
The farmer has to take decision and make choices relating to -
From whom to buy ?
At what price to buy ?
How much to buy?
Whether to buy on cash or on credit ?
Obtaining credit: Although the farm family supplies some
finance, it is not adequate considering larger financial require-
ments of modern agriculture. Therefore, farmer has to borrow
from outside sources. In this connection he has to take
following decisions. There is risk in borrowing.
How much to borrow ?
From whom to borrow ? There are some alternative sources
viz. Moneylenders, banks, government incentive schemes,
friends, relatives, traders, etc. He has to make right choice –
At what rate to borrow ?
What security/mortgage to offer ?
How repayments to be made ?
How to face risk situation ?
Marketing the produce: When surplus produce is obtained or
created, its disposal or marketing advantageously becomes
necessary. Following decisions are involved in the marketing of
farm produce.
Where to sell ? This is the most important decision because in
rural areas big, wholesale and organized markets are limited. As
far a individual farmer is concern, his produce is of small
quantity, he has no transport facility, there are no good roads to
go to distant markets. The farmer has to make choice within
limited alternatives.
Whom to sell ? There are various types of agencies such as
villager trader, wholesale cum commission agents, co-operatives,
government (for selected commodities ). He has to make choice
from among them.
When to sell ? Immediately after harvest when pries are the
lowest or wait for better prices. He is also constrained by cash
requirements for family expenditure. He has to take decision
under most unfavourable situation.
11.622.1
At what price to sell ? Here the position of farmer is very India is a vast country with varied climate, soils, and ecological

vulnerable. He has almost no choice. Prices in organized
markets (Regulated markets ) are fixed by open auction and he
has to accept the price quoted by the highest bidder even this
price may not be remunerative. In unorganized markets, prices
are fixed by traders and farmer is hardly consulted. He has very
limited scope for decision making.
Problems Faced by Farmers
As indicated above, there has been a technological break-
through in agriculture in recent years. New non-traditional
crops, new varieties of crops, new methods of cultivation are
coming in very fast and farmers are adopting the same. A large
number of farm products are being produced for exports.
However there are specifications about the size, color, quantity,
taste, packaging etc. Which farmers should know. Farmer has to
consider all these aspects and consider the costs and returns
before entering into the venture.
Farmer has several enterprises (such as crops, dairy, and poultry)
on the farm. He has to consider the economics of each enter-
prise separately also of the farm as a whole. It helps in
decision-making and proper planning of the farm. Now, the
time has come that every activity on the farm has to be viewed
from the perspective of economics.
Along with the adoption of new technology in farming, the
problems faced by the farmer’s fare also increasing. There are
problems of soil and water management, choice of crops,
technical know-how, pests and diseases, natural hazards,
marketing, finance, surplus production, price fluctuations and
so on. In finding the solutions for these problems, economic
criteria are to be applied.
COMPENSATITION MANAGEMENT
conditions. In addition to this, individual farmer is having his
own set up of resources and socio-economic situation. In
solving the problems of individual farmers all these situational
factors are to be taken into account.
An important ray of hope, which one can notice in this
complex changing scenario of agriculture, is that new genera-
tions of farmers who are more educated, young and energetic
have taken up to this enterprise. In addition, many non-
farming community entrepreneurs are also attracted towards
agriculture. They are very keen on getting more knowledge
about the new technology. Many of them are innovative and
experimenting of their own. Naturally, they are more economics
oriented.
Our System as a Solution to the Above Problems
We propose an agriculture information system for guiding the
farmers in this economic aspect. The subject matter covers
several aspects such as decision-making, farm planning, resource
planning (land, labour, capital), farm costing, farm accounting,
marketing, and analysis of case studies of successful farmers.
The use of efficiency measures to evaluate the enterprise is also
an important aspect of our system. The statistical tools such a
production function, linear programming are being used to get
an idea about the resource. We intend to provide an optimum
plan for a given farm taking into account the resources and the
limitations in which it is being operated.
Basic Components identified
The various components/entities that we identified after our
requirement analysis phase are described below in common
language.

Entity Brief description Functions

FARMER An individual person who cultivates land
for his source of income
CROPS Farmers grow different crops. Various
types of crops are sown all over India
depending on a number of circumstances
SOIL Crops are sown in the soil. Various types of
soil are found all over India like alluvial
soil, clay soil etc.
IRRIGATION FACILTIES They are used to grow crops. Farmers
employ different irrigation facilities
depending on number of circumstances
WEATHER CONDITIONS There are different weather conditions like
temperature, humidity etc. in different parts
of the country depending on the
geographical situations.
FERTILIZERS This entity is used by the farmers to
increase their productivity
AGRICULTURAL The farmers to make farming more
TECHNOLOGIES convenient use this entity.
DISEASES The plants suffer from this entity resulting
in less production.
PESTICIDES & This entity is used by the farmers to get rid
INSECTICIDES of various crop diseases and pests
AGRICUTURAL POLICIES The government for various types of crops
AND SUBSIDIES makes this entity for the goodwill of the
farmers.
A farmer is involved in the activities
of agricultural production, marketing,
farm, soil and water management
Decision-making is involved as to
where which crop should be sown.
Decision making is involved as to in
which soil which crop should be
sown
Decision-making is involved as to in
which area for which crop what
irrigation facilities are to be used.
Decision making is involved as to in
which climatic conditions which crop
should be sown
It enhances the fertility of soil and
thus results in increased production.
It helps the farmers in various
agricultural tasks
It harms the crop and decreases the
over all production.
It removes the pests, insects etc that
attack the crops
It helps farmers to increase their
income level.

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11.622.1 149
 Relationships Tutorial Activity 1.1
COMPENSATITION MANAGEMENT

Farmers sow crops

Rewards and Incentives
Farmers buy fertilizers, agricultural technologies, pesticides & What are Strategic Rewards? Let us study in detail about the
insecticides ,irrigation facilities to enhance his production same in the case below that they “are not just about money any
Crops require a particular type of soil, weather conditions, more.”
fertilizers, insecticides & pesticides, irrigation facilities and In today’s competitive employment market, employers know
agricultural technologies. that finding, hiring, and keeping skilled workers is not just
Crops suffer from diseases. about money any more. To attract, manage and retain an
Pesticides & insecticides remove diseases. effective and efficient workforce, Federal employers are learning
to think in terms of broader strategic rewards. This means
Farmers use agricultural policies and subsidies.
rethinking how we can offer talented and highly-skilled
There are different policies for different types of crops employees the rewards that will help keep them engaged and
Software Development Methodology focused on meeting strategic objectives.
We plan to carry the design and implementation of this project What are strategic rewards?
in a completely step-by-step manner. The entire project is How does performance management fit into a strategic
divided in the following phases rewards framework?
Phase 1 What agencies are using a strategic rewards perspective?
Study and Analysis Phase What are strategic rewards? Strategic rewards embrace everything
In this phase we shall visit various websites related to agricul- that employees value in the employment setting, and the term
ture in India and make a thorough study of several books on refers to the complete bundle of all employee reward elements.
agriculture. we also plan to interact with farmers so as to know What makes these rewards strategic is the care employers must
their problems and to collect information regarding our project. take to align their design and effects with strategic objectives.
We shall study the complete agricultural production process and One view of Strategic Rewards as depicted here shows four
analyze the drawbacks of the existing system and propose our quadrants of a strategic rewards framework:
system as a solution to them.Also we shall study the concept of
databases and other material required to design and develop our
Compensation Benefits
system
Base Salary Health Care
Phase 2 Variable Pay Retirement
Job Evaluation Savings
Design Phase Performance Management Other Insurance
Identification of entities and their relationships Paid Time Off
Development of logical n conceptual models
Development of ER model for the proposed system Development and Learning Work Environment
Training Work/Life Balance
Defining hardware and software requirements Career Development Leadership
Learning Experiences Performance Support
Phase 3 Succession Planning Organizational Climate
Coding phase
Implementation of system through actual code
Phase 4 The top two quadrants, compensation and benefits, cover the
areas that we traditionally think of as rewards the employer
Implementation and Testing provides. These are sometimes referred to as transactional
This phase will involve implementation of our system and rewards because they include the tangible results of the
testing it with various test cases n data sets. agreement between the employee and employer.
We shall follow the SDLC model for the development of the In this agreement, or transaction, the employee agrees to
proposed system. provide time, labor and skills in return for salary and benefits.
Gantt Chart
Therefore, these rewards are readily viewed in terms of having a
(14 WEEKS)
monetary value, such as the employee’s base salary or the Federal
Employees Health Benefits Program. Transactional rewards play
ANALYSIS AND STUDY
an important part in an employee’s decision about where to
(4 WEEKS)

DESIGN
work and whether to stay with an organization.
(4 WEEKS) The bottom two quadrants, development and learning and the
CODING work environment, cover areas that are increasingly recognized
(3 WEEKS) as critical contributors to employee satisfaction. They are
IMPLEMENTATION & TESTING
sometimes referred to as relational rewards because they tend to
(3 WEEKS)
represent the relationship (vs. the transaction) between the

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150 11.622.1
employee and employer. They are important additional rewards
that can significantly enhance an employee’s desire to remain
with an organization.
These rewards:
• can emphasize the importance of the employee to the
organization;
• can influence the employee’s sense of loyalty;
Are rarely seen in terms of their cash value, but can have an
equally important impact when an employee is trying to decide
whether to accept other employment or remain with an agency.
Represent those program areas where agencies have the greatest
amount of flexibility to design programs specific to the needs
of their employees.
To many employees, a supportive and engaging work environ-
ment is at least as important as health care benefits and pay. For
example, dependent care support, flexible work schedules,
opportunities to telecommute, flexible leave programs,
meaningful employee involvement, and well-trained supervi-
sors providing quality leadership may make all the difference in
the world when a person with a hard-to-find skill is considering
your job offer or when an employee with valuable institutional
experience is considering a competitor’s offer.
How does performance management fit into a strategic rewards
framework? The performance management policies, programs,
and practices that agencies carry out play an essential role in
strategic rewards. Of course, in the Federal Government,
performance management includes not only planning, monitor-
ing, and rating performance, but also developing and rewarding
performance.
Performance management is listed specifically in the compensa-
tion quadrant to signify that credible measures of performance
and using monetary rewards to reinforce results achievement are
essential parts of effective performance-oriented pay. In
addition, our
General Schedule pay system includes a pay progression feature
where within-grade pay increases are contingent on acceptable
performance and where exceptionally high performance can be
recognized with a quality step increase.
Good performance management practice also plays a vital role in
relational rewards. For example, one of the strategic reward
quadrants is also one of performance management’s key
processes–development. If managers do not develop employ-
ees, they are not effectively managing employee performance and
are not making best use of strategic rewards.
Through monitoring performance, providing feedback,
coaching for improvement, and identifying developmental
needs, managers create a learning environment that can be
enriching and rewarding for employees.
Performance management also plays an important role in the
work environment quadrant. Studies conducted by the Hay
Group, the Gallup organization, and others, show that good
performance management practices create rewarding experiences
for employees. For example, when surveyed about work
environment issues, employees in highly-productive work
© Copy Right: Rai University
11.622.1
groups reported high levels of agreement with the following
COMPENSATITION MANAGEMENT
statements:
I know what is expected of me at work. (planning)
• In the last 6 months, someone at work has talked to me
about my progress. (developing)
• In the last 7 days, I have received recognition or praise for
doing good work. (rewarding)
What agencies are using a strategic rewards perspective? Many
agencies have adopted this approach to help them manage their
workforce. The Defense Contract Audit Agency (DCAA) and
the National Credit Union Administration (NCUA) use
strategic rewards to help attract and retain skilled employees.
As the Defense Department’s audit agency, DCAA’s human
resources managers were faced with the challenge of hiring 600
entry-level auditors within 1½ years. To make the agency more
attractive to potential hires, managers reinvented the way they
recruit. In addition to streamlining their recruitment process,
they also put emphasis on the training new hires will receive, the
tuition reimbursement program, recruitment bonuses, and a 3-
to 5-year career ladder.
In addition to actively recruiting new employees, DCAA’s
managers worked to retain its current workforce. To do this, it
created a work environment of trust, teamwork, and mutual
respect by using effective communication and leadership at all
levels.
NCUA implemented a merit pay system that links annual pay
raises directly with employee performance appraisals. The agency
uses a variety of awards to recognize its employees for their
contribution to its organizational goals and objectives. Using
the strategic rewards approach, NCUA has created programs that
allow its employees to work from home, receive reimbursement
for certain home-office expenses, participate in one of three
flexible work schedules, and receive travel bonuses (i.e., a cash
award to recognize employees who volunteer to be in a travel
status for more than 50 days a year).
NCUA uses its strategic rewards as part of its recruitment
program. The agency works hard to create a work environment
that is family-friendly as well as challenging. For additional
information on NCUA’s strategic rewards programs.
These are only two examples of the ways that Federal agencies
are reexamining the way they think about, design, and deliver
the wide variety of things about the work situation that
employees find rewarding.
Tutorial Activity 1.2
Incentives for Inclusion
By Lalitha Sridhar
Under the Icebreaker scheme, an employer hiring a person ...
can get the person’s wage
paid for ... to all businesses, why not disability incentives and
reservations ...
At least 7 million disabled Indians are waiting for a job. But
only 0.4% of employees in India’s top 100 corporate houses are
disabled. India’s first Draft Incentives Policy for the Disabled
has just been presented to the government. It demands serious
151
 attention from the public and private sectors to the question of
COMPENSATITION MANAGEMENT
incentives and subsidies for the support and employment of
the disabled.
A host of NGOs, senior bureaucrats, representatives from
industrial associations and chambers, financial and corporate
taxation experts and mediapersons recently congregated for the
first time in order to present a Draft Incentives Policy for the
Disabled to the Government of India. Key organisations and
activists from the disability sector have come together to place
the pioneering document before the government, in time to
lobby for its adoption by the Union Budget of 2004-2005.
To prepare the ground, two critical research studies were
commissioned. Firstly, incentive policies in select European
countries to promote the employment of disabled people were
analysed. Secondly, existing incentive policies in the Indian
corporate sector promoting social and economic causes other
than disability were studied.
While 5-6% of India’s population is disabled, less than 1% of
children with disability receive education of any kind. Even
though the first Special Employment Exchange (SEE) for the
physically disabled was established in Mumbai in 1959, and in
1977 the Government of India reserved 3% of vacancies in
identified jobs in government and the public sector, since the
setting up of the first SEE more than 40 years ago, only about
1,00,000 disabled persons have been employed.
Says Javed Abidi, Director of the National Centre for Promo-
tion of Employment for Disabled People (NCPEDP), the
leading advocacy group credited with moving a recalcitrant
government to include disability in the 2001 Census, “There has
been a sustained and overall neglect of the needs of disabled
people in India.”
This Incentives Policy initiative is being spearheaded by the
three Disability Legislation Units set up in Chennai, Mumbai
and Guwahati by the NCPEDP, which also oversees the
National Disability Network to advocate better employment,
awareness, legislation, education and access for disabled people.
Asks Rajul Padmanabhan, Deputy Director of Vidya Sagar
(formerly the Spastics Society of India, Chennai), “When tax
benefits can be given for exports, for infrastructure, for setting
up new units in backward areas etc, why can tax benefit not be
given for employment of persons with disability?
According to the Persons with Disability Act, 1995, the
government should give incentives to employees both in public
and private sectors to ensure that at least 5% of their workforce
is composed of persons with disabilities. But the implementa-
tion of this well-intentioned piece of legislation leaves much to
be desired.”
Weighted deduction is allowed for employment-generation and
scientific research, subsidies are given to sugar, fertiliser,
horticulture and plantations - but not for employment of
disabled persons. Rebates on interest on loans, various
subsidies, duty exemptions, reservations in land allotment and
waiver of charges like electricity are other areas where disabled
people can benefit from incentives, recommend the studies.
In developed countries, disability is tied to the longevity of the
population. In the EU, for example, the vast majority of
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152
disabilities have been acquired in middle or old age - 63% of
people with disabilities are aged 45 or more; almost 40% of
them are age 55 or older.
In India, on the other hand, one in every 10 children is disabled.
Nevertheless, some problems appear to be universal. As many
as 52% of people with disabilities are economically inactive in
the EU, as compared with only 28% of non-disabled people.
Activists believe it is necessary to understand established
models that can be replicated in India. Unlike many people in
developing and transition countries, the majority of workers in
Europe are engaged in formal employment. Benefit systems
involve major investments in funds and manpower of the kind
hardly available in India.
There are important lessons we can learn from Europe. For
example, even though Denmark does not define what consti-
tutes the disabled population, it focuses on compensation for
individual needs. Persons with disabilities have access to a large
number of measures to support them in the event of unem-
ployment and to encourage them to re-enter the job market.
Disability counsellors are assigned to each regional employment
agency in an effort to better match disabled individuals with
jobs in the open labour market via guidance, training and
recruitment.
The Dutch concept of Flexjobs allows for 33, 50 or 67%
subsidy of wages in the event of a disabled employee taking
leave from work. This not only encourages workers to under-
take continued education or rest, if necessary, but provides
temporary employment for (disabled) substitutes. The
subsidies are provided by the State to multiply jobs of this
nature rather than put jobseekers on disability pension.
‘Lenient jobs’ is another supplementary employment scheme: a
disabled person with 33% working ability, for example, receives
1/3 of the minimum wage. Under the Icebreaker scheme, an
employer hiring a person with severe disability can get the
person’s wage paid for during the first 6-9 months. Overall, the
report says, the emphasis is on mainstreaming and that is what
we need to emulate.
In India, the Persons with Disabilities Act has completely left
out the private sector. Experts ask that when taxes and other
laws are uniformly applicable to all businesses, why not
disability incentives and reservations?
But, says Ravi Shankar, Vice-President of Flash Support, an
organisation that hires disabled people, “I don’t mean to
demean incentives but the disability sector can and should
identify areas where their services are most suited and become
available for them in a proactive way. Industries in recession will
not appreciate carrot-and-stick policies.
Companies in the IT (Information Technology), telemarketing
and BPO (Business Process Operations) sectors are particularly
suited for employing disabled persons. Many offer work-from-
home options. A particular strength of the disabled is that they
are loyal employees.” The IT industry has attrition (turnover of
personnel) rates of 30-40%, a problematic issue for corporates.
Adds Anuradha Parakkat, Director of the Confederation of
Indian Industry (CII), “Corporates will be more interested in
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those who can deliver. One good disabled recruit makes a far

COMPENSATITION MANAGEMENT
better impact than any number of policies.”
Countered Poonam Natarajan, Director of Vidya Sagar, “We all
know about recession but let not the disabled be the last in the
queue. I wouldn’t aspire to be a singer because I cannot sing.
Similiarly, the fact that we have to match our ability to the
available job opportunities is true for all of us - not just the
disabled. Also, if somebody gives me an opportunity, I can find
ways and means of doing what is required of me.”
An example can be found in Varada Kutti, a chartered accoun-
tant who was rejected when he applied for a job as a clerk by the
State Bank of India, and now runs a firm that audits some of
their branches.
Activists express concern that persons with mild disability are
being neglected. Also, the vast population of the rural disabled
do not have access to technology and jobs that involve its
application.
The government’s policy of categorising disabled people draws
criticism too. Says Padmanabhan, “A person with cerebral palsy
cannot be slotted into particular options and slotted into ‘can
do’ or ‘cannot do’ generalisations. It doesn’t work like that at
all. The abilities of disabled individuals - even within victims of
cerebral palsy - are often unique. Individualising is happening at
NGO levels anyway. Incentives provide a larger, broader access.”
The next generation of corporate managers can be sensitised by
introducing disabilities as a section in human resource manage-
ment studies. Two things are necessary: shift focus to
employability of the disabled and, at the same time, provide
industry with incentives to hire them.
Says Giridhar, wheelchair-bound advocate with the Forum for
Just Law, “Percentages mean nothing! Three per cent of 20
posts? Disabled people fall out of the net because the number
is not even tangible. An absolute number of positions is what
is required, with options of either that number or a certain
percentage, whichever is lower perhaps. As a disabled person, I
even have to pay a higher insurance premium!”
Recommends Prakash Kuruvilla, Regional Head of HSBC (the
Hongkong and Shanghai Banking Corporation), “The Appren-
tices Act can be explored and amended to include the disabled
too. There is tremendous demand for people who can be hired
with no strings attached. Many companies file ‘nil’ returns in the
Compulsory Notification of Vacancies Act because they are
afraid of the kind of pressure employment exchanges will exert
on them.
Headhunters assume we won’t be interested in the disabled but
many who join as apprentices prove themselves very well. We
have to accept the reality that with outsourcing, very few
permanent jobs are coming out.”
A 1999 study of 100 ‘top’ corporate houses in India showed
that the average percentage of employees with disabilities is a
dismal 0.4%. The National Sample Survey of 1991 (results last
available) itself said that there are 7 million employable disabled
people waiting to get a job. If the Draft Incentives recommen-
dations are accepted in whole, or part, by the government, some
urgently needed difference could be made.

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11.622.1 153
COMPENSATITION MANAGEMENT
LESSON 24:
INTRODUCTION TO TYPES OF WAGE INCENTIVE PLANS
Principles of External and Internal Differential
Rewards and Incentives
Learning Objective
• Introduction to wage Incentive Plans
• To know the Incentive Plans For Blue-Collar Workers: For
Individuals
• To understand what successful wage Incentive Plan consists
of
• To learn important wage Incentive Plans
• To understand Group Incentive Plans
Introduction
Write
Wage Incentive Plans may be discussed as (i) plans for blue-
collar workers; (ii) plans for white-collar workers; and (iii) plans
for managerial personnel - because each of these categories of
employees have separate and distinct I needs and specific plans
tailored for each category may prove beneficial.
Incentive Plans for Blue-Collar Workers: For
Individuals
a. Short-Term Plans
b. Long Term Plans
Description
Short-Term Plans
These systems may be broadly classified into three categories:
a. Systems under which the rate of extra incentive is in
proportion to the extra output;
b. Systems under which the extra incentive is proportionately
at a lower rate than the increase in output; and
c. Systems under which the rate of incentives is
proportionately higher than the rate of increase in output.
Every employer wants his workmen to do the maximum work
they are capable of doiri3. On the other hand, there is a feeling
among the workers that an increase in effort benefits only the
employer even when they are employed on a piece-rate basis.
The result is that they never produce to their full capacity, and; in
most cases, put in the minimum necessary work. This feeling
on the part of workers may be removed either through fear or
through expectation of gain.
It has been found that fear can never produce the desired effect;
but a hope of earning a bonus does induce them to work
harder and produce more. Incentive plans are, therefore, known
as premium plans because they offer a premium for outstand-
ing performance.
All bonus of premium plans relate to two factors: one, they set
a standard time for the completion of a definite output or piece
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154
of work for a fixed wage; two, the fixing of a rate of percentage
by which bonus would be earned by a worker over and above
his set wage, if the standard time is saved or the standard
output is exceeded.
Merits
The chief advantages of an incentive-wage plan are:
i. When well-designed and properly applied, payment by
results may generally be relied upon to yield increased
output, lower the cost of production, and bring a higher
income to the workers.
ii. A works study associated with payment by results is a direct
stimulus to workers to improve the organisation of work
and to eliminate lost time and other waste.
iii. Labour and total costs per unit of output can be estimated
more accurately in advance.
iv. Less direct supervision is needed to keep output up to a
reasonable level.
v. The conflicting interests of employers and employees are
unified. Increased. efficiency and smooth working can
therefore be promoted and sustained.
Demerits
The plan suffers from the following defects:
i. Quality tends to deteriorate unless there is a stricter system
of checking and inspection.
ii. Payment by results may lead to opposition or restriction on
output when new machines and methods are proposed or
introduced. This is because of the fear that the job may be
restudied and earnings reduced.
iii. When paid by result, workers tend to regard their highest
earnings as norms, and therefore, press for a considerable
higher minimum wage.
iv. The amount and cost of clerical work increases, if done
manually.
v. There is a danger of disregarding safety regulations and
thereby increasing the rate of accidents.
vi. Jealousies may arise among workers because some are able
to earn more than others or because fast workers are
dissatisfied witJ:l the 310wer or older workers in the group.
vii. It is difficult to set piece or bonus rates accurately. If they are
too low, workers may be under pressure to work too hard
and become dissatisfied; and if too high, they may slacken
their efforts to avoid a revision of rates.
A Successful Wage Incentives Plan Should Consist of
the Following Key Points
i. The management should recognise that the effectiveness of
an incentive depends on the total situation, which includes
worker-management confidence, relations with the trade
11.622.1
 union, the quality of communication and of supervision Then, the working of the scheme will be: 14

COMPENSATITION MANAGEMENT
and the traditions in an industry. Time taken (hrs)... 6
ii. Management should not introduce an incentive system until No. of hrs saved...Rs. 3.50
it has taken action to ensure full understanding of what is
Amount of wages recvd... Re. 0.75
involved. This may call for procedures for the participation
of employees and negotiations with the trade union. Amount of bonus... Re.0.75
iii. The management should avoid any action that may ire Total earnings...Rs.4.25
interpreted unfair. There must be a proper machinery for Example
handling grievances. The management should avoid action If 8 hours is the standard time of a job, and Re. 0.50 is the
that resemble “rate cutting” because of the need to change guaranteed wage per hour, the worker, if he takes 8 hours to
method and rates from time to time. perform the work, receives Rs. 4.00. If he performs the task in
iv. It is essential that the management pay in proportion to less than 8 hours he receives an extra premium on the time
output, once this output has risen above that required saved (i.e., for 2 hours).
amount for guaranteed pay. Table 1
v. The management should train supervisors all the way down Premium Total Wages
the line so that foremen and department managers are able
(Half of the Time Saved) Rs.
to deal with problems within their own departments.
If the work is completed in 6 hours 0.66 4.66
vi. Great care should be taken in setting up standards to avoid
rates that are too loose or too right. -do- in 4 hours 2.00 6.00
-do- in 2 hours 6.00 10.00
Some Important Wage Incentive Plans
The chief incentive plans are: -do in 1 hour 14.00 18.00

i. Halsey Premium Plan. Timesaved

ii. Halsey Weir Premium Plan.
iii. Rowan Premium Plan.
iv. The 100 Per cent Premium Plan.
v. The Bedeaux Point Plan.
vi. Taylor’s Differential Piece Rate Plan.
vii. Merrie’s Multiple Piece Rate Plan.
viii.Gnatt Task Plan.
ix. Emerson Efficiency Plan.
x. Co-Partnership System.
xi. Accelerating Premium Systems.
xii. Profit Sharing.
Description of Each Wage Incentive Plan
Halsey Premium Plan
This is a time-saved bonus plan which is ordinarily used when
accurate performance standards have not been established.
Under this plan, it is optional for a workman to work on the
premium plan or not. His day’s wage is assured to him whether
he earns a premium or not, provided that he is not so incompe-
tent as to be useless.
A standard output within a standard time is fixed on the basis
of previous experience. The bonus is based on the amount of
time saved by the worker. He is entitled to a bonus calculating
on the basis of 331/3 per cent of the time saved. He thus gets
wages on the time rate basis. If he does not complete the
standard output within the stipulated time, he is paid on the
basis of a time wage. The plan is a combination of the day
wage and the piece wage in a modified form.
Example
Suppose the standard time is 20 hours, the number of units to
be completed is 10, and the hourly rate is 25 paise.
formula: Bonus = 1/2 of × Daily wage
Time taken
Merits
The merits of this plan are:
a. It guarantees a fixed time wage to slow workers’ and, at the
same time, offers extra pay to efficient workers.
b. The cost of labour is reduced because of the percentage
premium system; the piece rate of pay gradually decreases
with increased production.
c. The plan is simple in design and easy to introduce.
d. As the wages are guaranteed, it does not create any
heartburning among such workers as are unable to reach the
standard.
Demerits
The disadvantages of the plan are:
a. It depends upon past performance instead of making new
standards.
b. The workers can beat the game by spurting on certain jobs
to capture a premium and soldiering on other jobs to rest
under the protection of the guarantee of day wages.
c. From the point of view of the administration, the policy is
one of drift, for, in this plan, the worker is left alone to
decide whether or not to produce more after the standard
has been reached.
Halsey-Weir Premium Plan
This plan is similar to the Halsey Premium Plan except that 50
per cent of the time saved is given as premium to worker.
Bonus = 1/2 × Time Saved × Hourly Rate
Rowan Premium Plan
This plan differs from the Halsey Plan only in regard to the
determination of the- bonus. In all other respects, the two are

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11.622.1 155
 the same. In the Rowan Plan, the time saved is expressed as la Weir or the Rowan Plan is equal; but above 50 per cent of the
COMPENSATITION MANAGEMENT

percentage of the time allowed, and the hourly rate of pay is time saved, the Rowan Plan pays more than the Halsey Plan.
increased by that percentage so that total earnings of the worker However, under, the Rowan Plan a worker gets his maximum
are the total number of hours multiplied by the increased bonus when he completes the task in half the standard time
hourly wages. allowed. If he saves more than 50 per cent of the time, the
The plan aims at ensuring the permanence of the premium rate, bonus he earns decreases, and his increase in wage is at a
which is often cut by the employer when the worker’s efficiency diminishing rate. But under the Halsey and Halsey-Weir Plan, it
increase beyond a certain limit. The premium is calculated on the is progressively higher.
basis of the proportion which the time saved bears to standard
The 100 Per Cent Premium Plan
time.
Under this plan, task standards are set by time study or work
Example sampling, and rates are expressed in time rates rather than in
If 8 hours are the standard time for doing a job and Rs. 4.00 money (e.g., 0.20 hour per piece). A definite hourly rate is paid
per day wage, the premium and total wages would be as for each task-hour of work performed. The plan is identical
follows: with the straight piece-rate plan except for its higher guaranteed
Table 2 hourly rate and the use of task time as a unit of payment
instead of a price per piece.
Premium Total Wages
Rs. Rs. The worker is paid the full value of the time saved. If he
completes the tasks of 10 hours and if the hourly rate is Re.
If the job is completed in 5 hours 0.66 5.66
0.50, his total earnings will be Rs. 8 x 0.50 + (10 - 8) x 0.50 =
-do- in 4 hours 2.00 6.00 Rs. 4.00 + 100 = Rs. 5.00.
-do- in 3 hours 6.00 7.00
The Bedeaux Point Plan
-do in 1 hour 14.00 7.50 This plan is used when careful assessed performance standards
have been established. It differs from the 100 per cent plan in
that the basic unit of the time is the minute termed as B. Every
Time saved
Formula: Bonus = × Time taken × Hourly rate job is expressed in terms of Bs (after Bedeaux), which means
Time Allowed that a job should be completed in so many minutes.
The Rowan Plan has all the merits and demerits of the Halsey If a particular work is rated at 60 Bs (or one B hour), the worker
Plan except that, because of the limitation on earnings, it does is allowed one hour for its completion and receives a bonus of
not provide an incentive for maximum productivity. 75 per cent for the number of Bs, i.e., time, saved. Suppose a
Moreover, the complex method of premium calculation is worker earns 600 Bs in a day; if the rate per point is Re. 0.01, his
generally unintelligible to the worker. He cannot, therefore, be total earnings would be:
expected to take much interest in the plan. Rs. 4.80 x 0.01 + 3/4 (600 - 480) x .01. = Rs. 480 + Re. 0.90 =
These premium plans may be classified as differential piecework Rs. 5.70.
systems and have been evolved with a view to giving the benefit The chief advantage of this plan is that it can be applied to any
to both parties. They are based on the fundamental principle kind of a job. It is particularly suitable for plants in which
that a worker’s earning should increase when his production workers are assigned diverse kinds of jobs, shifted from one
rises above a pre-determined target. As his extra earning is not job or department to another. All the points which a worker
in proportion to his usual wage rate, the overall production cost earns in a day are recorded, and the bonus is calculated on that
per piece falls when the output increases. basis.
The bonus paid and the total earnings under each of these three
Taylor’s Differential Piece-Rate Plan
schemes are given in Table 3
This system was introduced by Taylor with two objects: First, to
Table 3 give sufficient incentive to workmen to induce them to produce
Plan Bonus (B) Total Earnings (E) up to their full capacity; and second, to remove the fear of wage
cut.
Halsey B = 1/3 (Hs - Ha) Rh E= Ha. Rh + 1/3 (Hs - Ha). Rh.
= (Hs + 2 Ha) Rh. There is one rate for those who reach the standard; they are
Halsey-Weir B = ½ (Hs – Ha) Rh E= Ha. Rs + 1/2 (Hs - Ha). Rh.
= 1/2 (Hh + Ha) Rh. given a higher rate to enable them to get the bonus. The other
Rowan (Hs − Ha) ( Hs − Ha)
B=
Hs
× Ha. Rh E = Ha − Rh +
Hs
Ha.Rh is the lower rate for those who are below the standard, so that
=
Ha
Hs
(2 Hs.Ha ) Rh the hope of receiving a higher rate (that is, a bonus) may serve
as an incentive to come up to the standard.
Hs = the hour allowed or standard time. Workers are expected to do certain units of work within a
Ha = the actual time taken on a job. certain period of. time. This standard is determined on the basis
Rh = the worker rate per hour. of time and motion studies. Such scientific determination
ensures that the standard fixed is not unduly high and is within
It will be seen that, for a little time saving Rowan Plan gives
the easy reach of workers. On a proper determination of the
more bonus than the Halsey or the Halsey-Weir Plans. Up to 50
standard depends the success of the scheme.
per cent of the time saved, the bonus earned under the Halsey-

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156 11.622.1
This system is designed to encourage the specially efficient ii. at the standard performance, this wage + 20% of time-rate

COMPENSATITION MANAGEMENT
worker with a higher rate of payment and to penalise the will be paid as a bonus; and
inefficient by a lower rate of payment. In practice, this plan is iii. when the standard is exceeded, a higher piece rate is paid but
seldom used now. there is no bonus.
Example Example
Let the standard time for the completion of 10 pieces of a job If the standard task for a day is 8 units and the day wage is Rs.
be 8 hours and the piece rate be Re. 1.00. Then the basic hourly 4, the bonus at 50 per cent and the total wages would be:
rate comes to 12.5 paise. The one who completes the work
Example: If the standard task for a day is 8 units and the day
within the allotted time is paid wages at a rate which is 320 per
wage is Rs. 4, the bonus at 50 per cent and the total wages
cent higher than the basic one.
would be:
Table 4
Table 5
(Amount in Rs.)
Worker No. of units % of Total Amt. Basic Effective Unit of work Task Wages Bonus Total Wages
completed in efficiency Received Piece piece Rate (Rs.) (Rs.) (Rs.)
Allotted time Rate If 6 units are completed 4.00 Nil 4.00
A 10 100 1.20 0.1 0.12
in a day
B 9 90 0.90 0.1 0.10
C 8 80 0.80 0.1 0.10 If 8 units are completed 4.00 2.00 6.00
D 11 110 1.32 0.1 0.12 If 10 units – do – 4.00 2.50 7.50
E 12 120 1.44 0.1 0.12 If 12 units –do – 4.00 3.00 9.00

It is evident that workers A, Band C are better off, and for them
the system is good; but for D and E, who are more than 100
per cent efficient, the effective piece rate remains the same when
compared with that of A, who is just 100 per cent efficient.
Merrie’s Multiple Piece Rate System
This system, too, is based on the principle of a low piece rate
for a slow worker and a higher piece rate for higher production;
but the plan differs from Taylor’s Plan in that it offers three
graded piece rates instead of two.
i. Up to, say 83% of standard output a piece-rate + 10% of
time rate as bonus;
ii. Above 83% and up to 100% of standard output ~ same
piece rate + 20% of time rate; and
iii. Above 100% of standard output - same piece rate but no
bonus.
Such a scheme is usually introduced in an organisation where
the performance level is already high and management is aiming
at 100% efficiency. Management has some discretion in distrib-
uting the 20% of time rate over 17% of production above
83%.
The Gnatt Task and Bonus Plan
This plan has been devised by H.L.Gnatt and is the only one
that pays a bonus percentage multiplied by the value of
standard time. Under this system, fixed time rates are guaran-
teed. Output standards and time standards are established for
the performance of each job.
Workers completing the job within the standard time or in less
time receive wages for the standard time plus a bonus which
ranges from 20 per cent to 50 per cent of the time allowed and
not time saved. When a worker fails to turn out the required
quantity of a product, he simply gets his time rate without any
bonus.
Under this plan, there are also three stages of payment:
i. Below the standard performance, only the minimum
guaranteed wage is to be paid;
This system is most profitable for workers whose efficiency is
very high. The basic wages rise proportionately as under
ordinary piece wage system, and the bonus is allowed on the
increased wage. In addition to this workers with lower efficiency
are not penalized, as they are in Taylor’s Differential Piece Rate.
Emerson Efficiency Plan
Under this system, a standard time is established for a standard
task. The day wage is assured. There is no sudden rise in wages
on achieving the standard of performance. The remuneration
based on efficiency rises gradually. Efficiency is determined by
the ratio between the standard time fixed for a performance and
the time actually taken by a worker.
Thus, if the period of 8 hours is the standard time for a task
and if a worker performs it in 16 hours, his efficiency is 50 per
cent. He who finishes the task in 8 hours has 100 per cent
efficiency, at which stage he receives a nominal bonus.
This bonus goes on increasing till, when he achieves 100 per
cent efficiency, the bonus comes to 20 per cent of the guaranteed
wage. At 120 per cent efficiency, a worker receives a bonus of 40
per cent and at 140 per cent efficiency the bonus is 60 per cent of
the day wage.
Co-Partnership System
This system tries to eliminate friction between capital and
labour. Under this system, not only does a worker share in the
profits of the undertaking but he also takes part in its control
and, therefore, shares responsibilities.
There are different cases; but in a complete co-partnership
system, the following factors are present:
a. The payment of the existing standard wages of labour;
b. The payment of a fixed rate of interest on capital;
c. The division of the surplus profit between capital and
labour in an agreed proportion;
d. The payment for a part of the worker’s labour by the
allotment of a share in the capital;

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11.622.1 157
 e. The sharing in the control of the business by the
COMPENSATITION MANAGEMENT
representatives of labour.
The system arouses and sustains the interests of the workers in
their work. By giving them a voice in the management of the
factory it raises their status as well. As they have become
partners in the business, they try to make it a very profitable
enterprise.
Accelerating Premium Systems
There are the system which provide for a guaranteed minimum
wage for output below standard.
For low and average increases in output above the standard,
small increment in earnings are allowed. Increasingly large
earnings are conceded for above average output, the increment
being different for each 1% increase in output. Very significant
increases in earnings are given for really high output.
In this system, the production is pushed up higher and higher
by discouraging low output and rewarding at an increasingly
effective rate higher outputs.
Such schemes are generally adopted when much higher outputs
than what are currently obtained are to be achieved.
Long -Term Wage Incentive Plans
Under such plans, each member of the group receives a ‘bonus’
based on the output of the group as a whole. There are several
reasons for adopting such a plan. Sometimes (as on assembly
lines) several jobs are inter-related. Here one worker’s perfor-
mance reflects not only his own effort but that of his
co-workers too. In such cases, group incentive plans are
advantageous.
Secondly, such plans also encourage co-operation among group
members. There tends to be less bickering among group
members as to who has “tight” production standards and who
has “loose” ones.
Thirdly, the groups can bring pressure to bear on their members
(through badgering, ostracism, etc.) and help keep shrinkers in
line. This, in turn, can help eliminate some of the need for close
supervision.
Fourthly, group production levels tend to be more stable than
individual ones; and group incentive payments vary less than
individual ones.
Finally, group incentive plans also facilitate on-the-job training,
since each member of the group has a vested interest in getting
a new group member trained as well as quickly as possible.
The chief disadvantages of the group plans are:
i. Each worker’s rewards are no longer based solely or directly
on his own efforts. To the extent that person does not see
his effort leading to the desired reward a group plan is
probably not as effective as an individual plan.
ii. There is unevenness of performance of different members
of the group and this may have resentment of active
members against mere ‘passengers.’
iii. Ill-feeling may be generated among the groups themselves
where the technology is such that one group’s earnings
depend on the performance of another group.
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158
Group incentive Plans are usually applied to small work
groups, for example, 5 or 6 people who must assemble a
component together.
The incentives usually take three forms.
a. A standard output, i.e., target production, may be laid
down for a month or a larger period and bonuses are paid
if this is achieved; and
b. A standard output per man-hour is laid down for a
department or for the plant as a whole, and the bonus is
paid in proportion to which the actual output per man-
hour exceeds the standard, the other conditions of work
remaining the same.
2. The ‘Value added’ by manufacture at factory cost leading to
cost reduction forms the basis for calculating the bonus. If
the actual cost of production is lower than the ‘standard
cost’ to the extent the workers are able to influence such
reduction - by harder working, saving in materials, fuels,
lubricants, etc. - a bonus whose money value is a percentage
to the cost reduction is paid.
3. Bonus can also be calculated on the increased value of sales
where this result is obtained by increased production.
The Group Incentive Plans are usually:
i. The Profit-sharing schemes, and
ii. The Scanlon Plan.
Profit-Sharing
Profit-sharing is regarded as a stepping stone to industrial
democracy. Prof. Seager observes: “Profit-sharing is an arrange-
ment by which employees receive a share, fixed in advance of
the profits.”
The International Co-operative Congress held in Paris in 1889
considered the issue and defined profit-sharing as “an agree-
ment (formal or informal) freely entered into, by which an
employee receives a share fixed in advance of the profits.”
Profit-sharing usually involves the determination of an
organization’s profits at the end of the fiscal year and the
distribution of a percentage of the profits to workers qualified
to share in the earnings. The percentage to be shared by the
workers is often predetermined at the beginning of the work
period and is communicated to the workers so that they have
some knowledge of their potential gains.
To enable the workers to participate in profit-sharing, they are
required to work a certain number of years and develop some
seniority. The theory behind profit-sharing is, that management
feels its workers will fulfill their responsibilities more diligently
if they realize that their efforts may result in higher profits,
which will be returned to the workers through profit-sharing.
Features of Profit-sharing
The main features of the profit-sharing schemes are:
a. The agreement is voluntary and based on joint consultation
made freely between the employers and the employees.
b. The payment may be in the form of cash, stock of future
credits of some amount over and above the normal
remuneration that would otherwise be paid to employees in
a given situation.
11.622.1
c. The employees should have some minimum qualifications,
such as tenure or satisfy some other condition of service
which may be determined by the management.
d. The agreement on profit-sharing having been mutually
accepted, is binding and there is no room on the part of the
employer to exercise discretion in a matter which is vital to
the employees.
e. The amount to be distributed among the participants is
computed on the basis of some agreed formula, which is to
be applied in all circumstances.
f. The amount to be distributed depends on the profits
earned by an enterprise.
g. The proportion of the profits to be distributed among the
employees is determined in advance.
It should be noted that profit-sharing is not a system of wage
payment as such; it is something else. Profit-sharing and bonus
(also known as Profit-Sharing bonus) are two different things,
for the former sharing implies sharing on an equal footing
rather than yielding on the part of a management to a persistent
demand.
Profit-sharing bonus on the other hand refers to the distribu-
tion of profits on the basis of a certain percentage of one’s
monthly wages. Moreover, it is not voluntary and is not based
on agreement.
Profit-sharing is a distinctly progressive measure towards
industrial harmony. It may be considered as a step short of
joint consultation or co-partnership schemes.
Wage business affairs are managed and shared on a footing of
equality. Essentially this means “the creation of a mental climate
in which a strong sense has to grow that the business is the
business of all, since it is the joint effort of the workers and the
management and since the one cannot carry on a business
without the help of the other. This is the inner essence of
profit-sharing which has often been overlooked.”
There are three main characteristics of labour remuneration in
the form of profit-sharing, which distinguish it from gain-
sharing and from an ordinary system of wage payment.
These features are:
a. A share in profits is payable at long intervals when the final
accounts of a firm are prepared and its profit or loss
ascertained.
b. The payment is of an uncertain nature because of the
uncertainty of profits. Sometimes there may be no profits
or very high profits; in other cases, there may actually be
some losses.
c. The payment is not based on individual work, efficiency or
merit, but is a remuneration for collective effort, the total
remuneration due to workers being equally divided among
them or in some agreed proportion.
d. The payment is sometimes regarded as windfall gain or as
something to which a worker is entitled and not as
something in recognition of his efficiency.
Types of Profit-Sharing
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11.622.1
Employee profit-sharing is often regarded by employers as a
COMPENSATITION MANAGEMENT
supplementary benefit programme. Although plans differ
widely as to specific details, three basic types of profit-sharing
plans are in use:
a. Current (cash) profits are paid directly to employees in cash
or by cheque or in the form of stock as soon as profits are
determined (e.g., monthly, quarterly, biannually or annually).
b. Deferred profits are credited to employee accounts to be
paid at the time of retirement or in particular circumstances
(i.e., disability, death, severance or under withdrawal
provisions during employment).
c. Combination by which a part of the profits is paid in cash
and a part is deferred and placed in the employee’s account
in a trust fund.
Objectives of Profit-Sharing
Profit-sharing is more than just another employee benefit. It
may be the most important part of a progressive personnel
policy. It may incorporate incentive features and produce results
not possible by the implementation of other programmes.
Companies which offer this incentive have realized higher
profits and increased efficiency, and have created a climate for
better employee relations.
The critical ingredient in profit-sharing is the desire of the
employees and the management to ensure the success of a
programme. The programme is formulated at the top because
profit-sharing is first and foremost, a principle and technique of
leadership.
The real objective of profit-sharing is to foster “the unity of
interest and the spirit of co-operation.” From the point of view
of the employees, profit-sharing may serve a multiple of
objectives, depending upon the type of plan which is adopted.
A cash plan contributes directly to an employee’s immediate
economic gain. Deferred plans and combination plans contain
features very similar to benefit plans which provide for retire-
ment benefits and against loss of income following disability,
for benefits to dependants in the event of the death of an
employee, and for other related benefits.
From the view point of the organization, employee productiv-
ity is the overriding objective of profit-sharing. At the same
time, it may contribute to employee satisfaction because profit-
sharing provides for rewards which are related to employee
needs.
A profit-sharing scheme is generally introduced to achieve
the following objectives:
a. To promote industrial harmony and stabilization of the
work force;
b. To eliminate waste in the use of materials and equipments;
c. To instill a sense of partnership among employees and
employers and to increase employee interest in the company
in which he works;
d. To attract desirable employees and retain them, thereby
reducing the rate of turnover;
e. To encourage employee thrift;
f. To provide a group incentive for a larger output;
159
 g. To ensure employee security; and
COMPENSATITION MANAGEMENT
h. To demonstrate some measure of social justice to
employees.
The purpose of profit-sharing is the achievement of industrial
harmony.
Forms of Profit-Sharing
Profit-sharing may be on -
Industry Basis
Here the profit of a number of industrial units in the same
industry may be pooled together to determine the share of
labourers. Such a scheme has the advantage of putting the
whole labour force in a particular industry on a uniform basis.
Moreover, if a certain industrial unit somehow shows a loss in
a particular year, its workers are not deprived of their remunera-
tion because other units have made a good profit.
Locality Basis
Industrial units in a particular locality may pool their profits to
determine labour’s remuneration by way of profit-sharing.
However, if there are heterogeneous industrial units in a locality,
where labour’s work is for a widely divergent nature, there may
be great difficulties in bringing about an adjustment in their
share.
Unit Basis
This is the simplest way of giving a labourer a share in the
profits of the individual undertaking in which he is employed.
This mode of profit-sharing establishes a close relationship
between the efforts of labour and rewards it receives. In the first
two schemes, the reward of workers depends on the combined
efforts of all in a number of units.
Department Basis
Sometimes the various departments of an industrial unit may
have their separate profit-sharing schemes. The workers in a
particular department share in the profits made by that depart-
ment. This aims at bringing about an even closer relationship
between a worker’s efforts and the reward he receives.
Individual Basis
A worker receives a proportion of the profit which may have
been earned by a business through the efforts of that particular
worker. This aims at bringing about a direct and most intimate
relationship between individual effort and reward. In practice, it
is impossible to determine such profits.
Requisites for Profit-Sharing
To be effective, profit-sharing schemes should be based on the
following considerations:
Profitability of Industrial Units
Industrial units should be profitable for, without profitability
the profit-sharing scheme would not succeed. No scheme
should be launched until business conditions are favorable.
A business or any industry may be stabilized by an expansion in
production, by the adoption of sound distribution methods
and by keeping constant vigilance over its functioning. In other
words, there should be comprehensive and flexible schemes for
incentives and other kind of bonus which promote productiv-
ity.
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160
Until these essentials have become permanent features in an
industry, unless working conditions in a business have been
stabilized, the purchasing power of the people has considerably
increased, and profits are sufficiently high to ensure their
distribution between workers and shareholders, no profit-
sharing scheme would be sound or anything more than a paper
scheme.
Computation of Surplus Profit
The computation of surplus profit for distribution should be
arrived at by deducting from it normal and additional deprecia-
tion and initial or development rebate, so that the replacement
or modernization cost of plant and equipment is properly
provided for. Losses, when they occur, should also be deducted
before the profits for the subsequent year are declared.
If additional bonus is to be paid, its payment will have to be
made out of the balance left over after the above deductions.
The margin of profits should be adequate and substantial so
that, after providing for all these expenses, there must be a
surplus of a sizable amount to be distributed among the
workers.
Fair Return on Capital
The return on the capital invested in an enterprise should be
that which would encourage partnership investment. It should
be at least 6 per cent on paid-up capital, with a charge of 10 per
cent to be made for reserves.
The Scanlon Plan
This plan was developed in 1937 by Joseph Scanlon, a lecturer at
the Massachusetts Institute of Technology and a trade union
leader in a steel mill. The plan was designed t to involve the
workers in making suggestions for reducing the cost of
operation and improving working methods and sharing in the
gains of increased productivity.
The plan has two basic features:
1. Financial incentives aimed at cutting cost and thereby
increasing efficiency are installed.
2. A network of departmental and plan screening committees
are set up to evaluate employee and management cost-
cutting suggestions. The plan is essentially a suggestion
system and assumes that efficiency requires company-wise/
plant-wise co-operation.
Usually all employees in the plant participate in the plan.
Workers, supervisors, and managers make cost-cutting sugges-
tions that are screened and evaluated by the various screening
committees. If a suggestion is implemented and successful, all
employees usually share in 75% of the savings, and the rest
20% is set aside for the months in which labour costs exceed
the standard.
The Scanlon plan has been successful where adopted. It tends
to encourage a sense of partnership and sharing among
workers, less over-time and employee insistence on efficient
management.33
Certain conditions need be fulfilled to make the plan
successful:
i. They are more effective where there is a relatively small
number of participants, generally less than 1,000.
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ii. It is more successful where there are stable product lines and on total budget: sales, costs, profits, etc. = Scanlon and Rucker

COMPENSATITION MANAGEMENT
costs. plans), not IE work measurement based.
iii. There should be good supervision and healthy labour Some odd variations include: extra incentive in the form of a
relations. kicker, a flat section so that company doesn’t lose money
iv. There should be a strong commitment to plan on the part known as a leveler, a 2-piece plan is known as a Taylor plan, a 3-
of management particularly during the confusing phase in piece plan is known as a Merrick plan.
period. Group incentive schemes -
Summary of Wage Incentive Schemes Group output is measured and used to determine each group
A critical analysis and practical realities of the wage payment members pay. This is especially useful for work cells or situa-
system The Extremes: tions where individual performance can’t be easily measured
Day work - (e.g. shipbuilding, construction, etc.). These schemes have
advantages in allowing greater flexibility, reducing competition
Worker is paid the same constant hourly rate (guaranteed and encouraging group spirit. On the other hand, the individual
minimum wage - GMW, regardless of performance. incentive is reduced (lab groups) and better workers may
Piecework (incentive with 100% participation) - become discouraged
Worker is paid directly for each piece produced (i.e. directly
proportional to performance). At first glance this appears to
produce no benefit for the company. However, this is not true,
since overhead is a constant and will decrease as it is normalized
per unit production.
Also note, that true piecework is not legal, as there is a guaran-
teed minimum wage (in 1997 GMW =$5.25/hr) under U.S. law.
This means that a worker will typically receive a base rate times
the hours worked. Any benefits above standard performance,
will then be paid directly to the worker.
Standard hour plan -
Day work up to 100% performance, piecework (or a sharing
plan) above 100% performance.
Measured day work -
A progressive record of a worker’s performance is used
determine base pay for the next pay period. Regardless of the
person’s performance during that period, that person will
receive the new base rate.
Example
Worker performance = actual output/expected output = 175/
160 = 1.09
new base rate = base rate × 1.09 = $10.00 × 1.09 = $10.90
If the worker’s performance deteriorates, the new base rate also
drops. However, some companies will maintain a lower
threshold (at least the GMW), below which the base rate can
not drop. With this plan, day-to-day pressures are taken off the
worker. However, the incentive is not as strong as for other
plans, and it requires extra bookkeeping.
Gain Sharing plans - (incentives with other than 100%
participation) -
These are practically always less than 100% participation and are
called sharing plans. (Plans with more than 100% participation
is negative sharing and the company would typically loose
money). The most common plan is Improshare, a fifty-fifty
sharing plan that gained in popularity in the 1970’s.
With this plan standards are frozen in a base period and any
increased productivity is shared with no attempt to pinpoint
whether employees and managers created the savings. If based

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11.622.1 161
COMPENSATITION MANAGEMENT
LESSON 25:
INTRODUCTION TO PREVALENT SYSTEMS AND GUIDELINES
FOR EFFECTIVE INCENTIVE PLANS
Principles of External and Internal Differential
Rewards and Incentives
Learning objective
• To know the Prevalent Systems of wage Incentives in India
• To understand the Precautions against ill effects of
Incentive Systems
• To learn the Prerequisities of a Good Wage Incentive
Scheme
• To know the reasons of the failure of Incentive Plans
• Requisites or guidelines for effective Incentive Plans
Interaction
Before discussing the prevalent systems & guidelines for
effective incentive plans
Let us first discuss that can workers be motivated with wage
incentives?
- Yes/No/Depends
What do blue collar and white collar employees hunt in
motivating jobs?
1. Blue collar: pay, job security, interesting work
2. White collar: interesting work, pay, job security
What Else they All Look for?
Direct financial plans - wage incentives, pay proportional to
output
Indirect financial plans - fringe benefits, vacation, promotions;
stimulates morale, but could be taken for granted
The Prevalent Systems in India
The most widely prevalent incentive scheme in Indian indus-
tries is the piece-rate system. In industries like iron, steel and
chemicals, however only a small percentage of workers are paid
on piece-rate basis.
Another incentive system that is prevalent in Indian industries
is the payment of production bonus usually at a differential rate
for the output produced in excess of the normal output for a
unit of time. The norms are generally fixed on the basis of job
anaylsis and/or time studies.
The incentive scheme operates on a group or individual basis,
depending on the measurability of the work of individual
workers and the inter dependence of their output performance.
Engineering and chemicals have mostly the group system, while
textiles have mainly the individual system of incentives.
The group incentive system is more widely prevalent in the
Indian industry than the system of individual incentive or a
combination of both.
Wage incentive plans, other than the piece-rate system, bristle
with some problems in their operation.
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162
First, incentive earnings, as a percentage of the total wages of
workers covered under the incentive plans, are very low. In 1961,
it was 10.9 per cent. There may be several reasons for this
situation: either the norms of standard work are fixed high and
it is not possible for a worker to exceed them by a sizable
percentage; or the fall-back on time rate wage is sufficiently high
and workers do not have much inducement to put in greater
effort beyond the standard norms; or the rate structure of
incentive wage is not adequately progressive.
In any case, this situation reflects the relative ineffectiveness of
incentive plans. Moreover, the percentage of workers paid by
results is around 31 in India as compared to 42 per cent in the
U.K., 45 per cent in the U.SA and 77 per cent in USSR for iron
and steel industry. For cotton textiles, the percentage of workers
paid on piece-rate in India is 70 against Britain’s 63, America’s
36, and Russia’s 87.
Second, a number of units may have unnecessarily complex
incentive plans, probably transplanted from European firms,
which are not easily comprehensible to illiterate or semi-literate
workers on the one hand, and which do not have a direct
relationship between effort and wages on the other.
In addition to numerous slabs in the rate structure, there are
often changing bases of calculation and distinctions between
different types of employees - permanent, temporary staff,
workmen, etc.
Third, in cases where group incentive plans are in vogue, a
system becomes difficult to operate effectively, for the direct link
between effort and earnings is lost.
Fourth, while there is no need for the rate structure of incentive
wages to be progressive from the beginning, it needs to be so
when workers show high levels of productivity.
Some of the incentive plans actually turn out to be regressive in
practice in these final stages. These maladies of the incentive
plans betray a lack of wage to make them an effective tool of
increasing productivity.
Precautions Against Ill Effects of Incentive Systems
Experience has shown that incentive schemes are not an
unqualified blessing in themselves. They are fraught with some
dangers that have to be guarded against during the course of
their evolution and implementation.
First, there is a tendency amongst workers to sacrifice quality for
quantity. This calls for a strict system of checking and inspec-
tion.
Second, incentive schemes bring about a certain fixity in the
operations and undermine flexibility, which is an essential
requirement in view of the rapid progress in technology. Such
changes in technology, methods, machines and materials
involve a revision of norms and rates. The incentive schemes
11.622.1
should, therefore, be adequately provided with such revision in
case of significant changes.
Thirdly, there is a .danger that safety regulations would be
disregarded by workers and this may result in higher accident
rates. This may be solved by greater vigilance on the part of
workers concerned.
Fourthly, there is a danger that workers would tend to
overwork and undermine their heal. This may be checked by
fixing a ceiling on incentive earnings.
Finally, incentive schemes sometimes lead to jealousies and
misunderstanding among the workers because the difference in
their earnings.
However, differences in earning will differ for workers according
to the differences in their abilities and efforts. Moreover, trade
unions discourage ill feelings or jealousies amongst its mem-
bers.
Prerequisities of a Good Wage Incentive Scheme
The installation of an incentive scheme presupposes the
existence of certain prerequisities, which are, more often than
not, ignored.
Quite often, incentive payments are just taken to be necessary
part of the total wage packet, and hastily conceived schemes are
introduced primarily because of pressures from workers and
trade unions. such schemes naturally result in a number of
personnel problems which may, in fact, be impediments to
improve productivity.
It is, therefore, advisable to ensure that a proper climate exists
for the introduction of such schemes.
Some important considerations, which should ordinarily be
taken into account while choosing a particular type of wage
incentive scheme, are:
i. The management should strive to create a proper climate by
adopting sound policies of recruitment, promotion, trading
etc., right from the inception of an enterprise.
Unless there is mutual understanding and concern for
improving productivity, even a well-conceived incentive
scheme may not yield the optimum results. Therefore, the
management must concentrate on creating a proper
industrial relations climate before’ introducing incentive
schemes.
ii. The objectives of the scheme must be clear, and these
should be well understood at the levels of management
and of workers. Certain specific factors may be selected as
the basis for a scheme. Too many factors selected at a time
may make it complicated.
The scheme should suit both the particular enterprise and
its workers. At every stage, right from the conception of the
scheme to conducting studies, etc., all the workers and
supervisors should be consulted so that they understand
the objectives and benefits of the scheme and may
contribute to its success.
iii. Incentive schemes should be installed only when
production has reached 60 per cent of the rated capacity.
Care should be taken to provide a suitable gestation
mechanism in the scheme on a time-bound basis so that
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11.622.1
incentive payments at a lower level of the performance are
COMPENSATITION MANAGEMENT
allowed only for limited time periods.
The quantum of incentive paid at the low levels of
production and efficiency should be such as to ensure that
earnings continuously increase when the targets are raised.
iv. The scheme chosen should be one which would result in
overall economy for the establishment. Incentives should
not only increase production but also result in higher
productivity and lower cost per unit; and the gains of
increased productivity should be shared both by the
employer and the employed.
v. The scheme should not be very’ costly in operation, i.e., it
should not involve the maintenance of very elaborate
records, complicated calculations, and too much material
handling.
vi. The scheme should be based on a work study, and the work
contents of various jobs should be stabilised.
vii. In principle, each individual or group should be paid
according to effort and productivity, for disparity in earnings
may create discontent. Unless the scheme i.e. welldefined, it
may turn out that indirect groups may receive higher
incentive earnings than the main production group.
viii.The scheme should have elasticity to take care of
technological and other changes taking place from time to
time and rectify errors that may have crept in at the time of
its initial introduction.
ix. The scheme should not undermine co-operation amongst
the workers. It should rather stimulate co-operation with a
view to achieving the common objective of increasing the
well-being of the business and, therefore, of the workers in
general.
x. Performance standards and norms ‘for incentive payments
should be set up at the average performance level of the
employees, i.e., they should not be too high nor too low.
Such performance standards should be set as are within the
control of employees. The adoption of objective
assessment procedures and the use of functional
responsibility are to be advocated in addition to such indices
of productivity as wage cost per unit sale, salary savings on
inventory, etc.
xi. To make the scheme effective, a climate should be created in
which the employees feel that the management is fair and
just in its dealings with them on wage incentive matters.
For this purpose, mutual discussions and appropriate
management action would be called for.
xii. Incentive payment should be made as soon as possible after
a job is completed.
Any hastily conceived or haphazardly introduced incentive
scheme does more harm than good. Therefore, it should be
introduced after a proper consideration of the various prepara-
tory measures.
Incentive Plans for White Collar Workers/
Salesmen
The salesmen are usually given incentives in the form of sales
commissions. One study reported that almost 75% of the
163
 rganisations surveyed paid salesmen on some type of incentive Under this, salesman not only get a fixed salary but also a
COMPENSATITION MANAGEMENT

basis. This is due to three factors: commission in proportion to the sales effected. The advantages
i. The unsupervised nature of most sales work; of this method are:
ii. Tradition in the market and i. Since salesmen are assured of minimum earnings, they are
re!ieved of financial worries.
iii. The assumption the incentives are needed to motivate
salesmen. ii. The company has more control over its salesmen, as there is
sizable salary component in most combination plans. So
The are several incentive plans, each appropriate for different
that it can direct salesman’s activities by detailing what
markets, products, etc., but all plans are basically variations of
services and salary component is being paid for.
three types of plans: straight salary, straight commission, and
combination plans. But the main disadvantage is that salary is not related to
performance; only incentive value of money is being traded off
Table 17.6 : Firms Using Incentive Plans for Salesmen37
for its security value. Such plans also tend to become very
complicated, and misunderstanding often results in frustration.
% of Companies In spite of these disadvantages, these plans are widely used
Incentive Plan Consent Industrial Other All
Products Products Commerce Industries with several basic variations, like:
and Industry
Salary Plus Commission
1. Straight salary 20.1 t25.6 56.5 27.6
2. Straight commission 2.1 1.3 2.2 1.5
Commission Plus Drawing Account where not only commis-
3. Draw straight commission 7.5 1.3 - 20.1 sion is paid but the salesman is also allowed to draw on future
4. Salary + commission 19.2 21.1 13.0 17.7 earnings to get him through low sales period; commission plus
5. 21.3 10.8 8.7 17.7
Salary + Individual bonus
----------- bonus, where salesmen are paid primarily on the basis of
6. Salary + group bonus 8.5 4.4 6.5 5.4 commission but they are also given a bonus for activities like
7. Salary + commission + individual
bonus 7.5 5.3 2.2 5.4 “slow moving” items; and salary plus bonus, wherein salesmen
8. Salary + commission + group bonus 1.1 0.6 - 0.6 are paid a basic salary; and also given a bonus for carrying out
9. More than one method of payment 12.7 22.4 10.9 19.3 specified activities.
Total 100.0 100.0 100.0 100.0
Incentives for Management Employees
In many orgnisations, the managers are paid bonus. There are
Straight Salary Method two types of bonus plans: one determined by formula (i.e.,
Is not an incentive plan; the salesman is simply paid on weekly, some criteria like increased sales) and two, determined by some
monthly, or on yearly basis. The advantages of this method are discretion used in allocation of bonus (i.e., paid on more or less
that: permanent basis). The bonus plans are generally reviewed
i. The salesmen know in advance what their income will be; annually to make them more effective.
ii. The expenditure on salesmen is known beforehand. For top level management, bonuses are generally tied to overall
corporate results. The size of bonus is much higher for top
The disadvantage are:
level executives, and lower for the lower level executives.
(i) This method tends to shift salesman’s emphasis to just
making the sale rather than prospecting and cultivating Failure of Incentive Plans
long-term customer; and Many of the incentive plans, aimed at increasing the motivation
of employees, often fail to have their desired impact. This is
(ii) Pay is not related to results. This lack of relationship
due to several reasons, most of which become apparent when it
reduced salesmen’s performance.
is considered that for motivation to take place, the worker must
Straight Commission Basis believe that his effort will lead to rewards and that he must
Under this method the salesmen are paid on the basis of sates want that reward. In most cases incentives plans fail because one
effected, i.e., they are paid for results and only for results. or both of these facts are not met.
Therefore, high performance salesmen are generally attracted. The principal reasons of failure are:
But the disadvantages are:
1. Unfair Standards are a great hindrance in the way of
i. Salesman focusses on making a sale on high volume items. motivating employees. In order to motivate them, the
Cultivating dedicated customers and working to “push” standards must be viewed as fair and attainable.
hard-to-sell items are often neglected,
2. Fear of Rate Cut: There is fear in the minds of the
ii. Salesmen tend to be less company-oriented and more employees that standards will be raised high or rates will be
money-oriented, and the company has less control over cut if they earn too much.
them;
3. Group Restrictions: Peer pressure is a double-edged sword
iii. Salesmen’s income generally fluctuates widely. when it comes to incentive plans. If the group views the
Combination Method of Salary and Commission plan as fair, it can keep “Loafers” in line and maintain high
Basis production.
If the group feels that plan is not in its interest it will
through education, ostracism, or punishment - see that

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164 11.622.1
 production levels of group members is kept at a minimum.
4. Employees do not understand the Plan: This happens
when either the details of the plans are not communicated
to employees or if communicated, the employees do not
clearly understand them. If employees cannot understand
how performance will lead to rewards, the plans would not
prove fruitful in motivating them.
5. Lack of Require Tools, Training, Equipment etc: The
lack of required machines and tools, equipment and absence
of a sound organisation structure often break the effort -
reward link; and without that link, incentive plan fails.
6. Other Causes: The inequitable wage structure with the
organisation and the inter-group conflict also lead to non-
cooperation of the employees.
When to Use ‘Time’ or ‘Output’ Basis as an Incentive
Plan?
The employees may be paid on a ‘time’ basis under following
circumstances:
1. When units of output are difficult to measure;
2. When employees have little control over the quantity of the
output, such as on much-paced assembly lines;
3. When there is no clear direct relationship between the
worker’s effort and his output, such as when jobs are highly
interrelated;
4. When delays in the work are frequent and beyond
employee’s control;
5. When quality is a primary consideration as with engineering
and other professional personnel; and
6. When precise advance knowledge of unit labour costs is not
required by competitive conditions.
On the other hand, payment on ‘output’ basis would be
preferable if:
1. Units of output can be measured.
2. There is a clear relationship between employee effort and
quantity of output.
3. The job is standardised, the work-flow is regular, and delays
are few or consistent.
4. Quality is less important than quantity or, if quality is
important, it is easily measured.
5. Competitive conditions require that unit labour costs be
definitely known and fixed in advance of production.
Requisites or Guidelines for Effective
Incentive Plans
Monetary incentive plans do motivate employees. Robert
Opsahl and Marvin Dunnettee have concluded: “There is
considerable evidence that installation of such plans usually
results in greater output per man hour, lower unit cost, and
higher wages in comparison with outcomes associated with the
straight payment systems.”
But these plans will not be effective unless a careful planning is
done and the plans properly implemented.
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11.622.1
Several authors have suggested a list of requisites that monetary
COMPENSATITION MANAGEMENT
incentive plans should meet if the incentive method is to be
attractive to the employee; and at the same time administratively
sound. Some of the more important requisites/ specific
guidelines for developing effective incentive plans are:
Insure that Efforts and Rewards are Directly Related
The incentive plan should reward employees in direct propor-
tion to their performance and increased productivity. Employees
must also perceive that they can actually do the tasks required.
This standard set has to be attainable; necessary tools, equip-
ment, training etc. should be timely provided and the employee
should have adequate controls over the work process.
The Reward Must be Valuable to the Employees
Increased monetary earnings must have the potential to satisfy
the existing needs of the worker if the worker is to be attracted
to them. In other words, the monetary incentives offered must
be relative to current or visible future needs.
The Reward Must be Clearly Identifiable
Individual’s or groups’ contributions and efforts must be clearly
identifiable, if rewards are to be given for specific performance. .
Methods and Procedures Must be Carefully Studied
Since effective incentive plans are generally based on a meticu-
lous work methods study, the services of an Industrial
Engineer or other Methods’ expert should be obtained who
may” through careful observation and measurement, define fair
performance standards on which the. plan is to be based.
The Plan Must be Understandable and Easily
Calculable by the Employees
The incentive plan should be easily understood by the workers
so that they can easily calculate personal cost benefit for various
levels of effort put by them.
Effective Standard Must be Set
The standards of which the plan is to be based should be
effective, i.e., they should satisfy these conditions:
i. Standards are viewed as fair by the subordinates;
ii. They should be set high, but reasonable (i.e., there should
be about a 50-50 chance at reaching it);
iii. They should be specific; and
iv. They should be complete. “Do not just focus on quantity
and disregard quality, unless that is the intention.”
Standards Must be Guaranteed
The standard should be viewed as a contract with the employ-
ees. Once the plan is operational, great caution should be used
before decreasing the size of the incentive in any way.
An Hourly Base Rate Must be Guaranteed
At least the plant employees should be guaranteed the base rate.
Moreover, there should be one base rate for a job regardless of
whether or not it is on ‘incentives.’
Clear Policies and Rules Must be developed
Specific policies and rules concerning how employees will be
paid, and the rules for attaining the standard (and incentives)
should be clear to both manager and employees.
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 Rewards Must be Consistent with Government
COMPENSATITION MANAGEMENT
Regulations
The incentives offered must govern regulations regarding
compensation. The level of the reward and the frequency of it
must meet minimum wage guidelines.
Rewards Must be Granted Promptly
The incentive plan should provide for rewards to follow quickly
after the performance that justifies the reward.
The Plan Must be within the Financial and
Budgetary Capacity of the Organisation
It must be compatible with the financial resources available.
Additional Reinforcement Must be Provided
The incentive plan can be more effective if high performance is
encouraged and reinforced by management and subordinates.
Reinforcement, in terms of points accumulated or incentives
given, should be as frequent as possible preferably daily, or (at
least) weekly.
It Must Minimise Frictions between Workers
Ideally, the plan encourages workers to support each other
rather than to be non-eo-operative.
Employee Participation May be Useful for Increasing
the Effectiveness of Incentive Plans
In sum, it may be said that each incentive method must be
weighed to determine its ability to meet the criteria stated above.
Some piece-rate methods meet most of these requirements
successfully. Others do not. Bonus paid after a period often fails
to meet criterion 11 - in many cases there is a time lag between
the performance bonuses. The cause-effect relationship may
become muddled and confused, and the desired reinforcement
effect can be lost.
Profit sharing programmes also suffer weaknesses at times,
particularly in meeting criteria 1, 3, 5 and 11. Often a worker sees
little relationship between his own efforts and the rewards he
receives. He also feels, that there are many things affecting
profits that are outside his realm of control.
Tutorial Activity 1.2
We all know that Indian economy is still a developing
economy so with regard this particular topic, let us go
through the case study below on a prevalent system of
wage structure and wage level.
Girl Bonded Labour in Hybrid Cottonseed
Production
Davuluri VenkateswarluCotton production in India underwent
a revolution with the introduction of hybrid seeds in the fag
end of the sixties. Not only did these seeds improve the quality
and production of cotton but also created many more jobs
relating to agriculture, this being a highly labour intensive
activity. However, here a devastating irony raises its head: how
something so beneficial could give rise to an exceedingly
harmful practice of labour – Girl Child Bonded Labour. Girls
are hired on the basis of a long-term agreement in return for
loans advanced to their parents by local seed producers in the
employ of large national and multinational seed companies.
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166
The Magnitude of the Problem
Approximately 4 lakh girl children (between the ages of 7 –14)
are hired to work in cottonseed fields. Out of which, 2.5 lakhs
are employed in Andhra Pradesh. This figure surpasses the total
number of children employed in industries such as the carpet,
glass bangles, gem polishing and limestone. Moreover, girls
form 85-90% of the workforce employed in cottonseed fields
which exceeds the girl: boy employment ratio of any other
industry.
What is even more startling is the fact that even the industries
that are most likely to employ children don’t have more than
25% of their workforce belonging to that age group. Further-
more, even in this figure of 25%, the bulk of the children
employed are girls, making the Hybrid Cotton Seed Industry
literally one of a kind where child employment is concerned.
This industry depends practically entirely on girl children for its
perpetuation.
How Children Get Involved and Become Bonded
Labour
The production of Hybrid Cottonseeds is extremely labour
intensive and capital intensive as well. Ergo, demand for labour
is immense. Local farmers who produce the seed, enter into
contracts and agreements with big seed companies through
middlemen called seed organizers. The contracts are framed in
such a way that the local farmers are under a great deal of
pressure to
execute production while exerting a great deal of control over
the labour process. This accounts for the practice of hiring
young children in this industry.
Most of the children employed in this industry belong to the
Scheduled Caste/Scheduled Tribe families; 60% of whom could
be classified as landless/marginal farmers who possess two
acres of land or less. Being economically at a disadvantage, many
farmers are thus forced to take loans and advances from seed
producers treating their children literally as collateral. This is
evident in the fact that 95% of children employed in the area of
study were bonded labourers working laboriously to pay off
their parents debts. Debt bondage, although generally binding
for one crop season only, still manages to extend into years at a
time till the loan is repaid. This is reflected in the fact that:
• 70% of the children employed currently were working in the
same fields as the year before
• Out of the above, 57.5% have been employed for the last 2
years and
• 12.5% have been employed by seed producers for the last
five years.
How and Why Female Children are Involved In the
Production Process
To begin with, there is a perception that the work of hybrid
seed production can only be done by girl children. Largely the
farmers are the main cause for such perceptions claiming that it
was not fitting for adult males, boys and adult females to work
in hybrid seed fields. In fact, they even claim that a menstruating
woman was found to be ‘unfavourable’ or ‘inauspicious’ for
doing the work.
11.622.1
The reality however is an altogether different story. Employers
have a strong bias towards the employment of girl children as
the wages that are needed to be paid to them, as compared to
boys and adults, are much lower. They also get the added
benefit of more hours of work that these girls put in. Ulti-
mately, thus, the local farmers get the advantage of cheap labour
that translates into larger profit margins for them. Moreover,
girls aren’t rebellious, do not raise issues about the working
conditions and can be kept in check by employers. Such are the
motives behind the employment of girls which in reality has
nothing to do with the ability to perform the task. It was found
that even adults and boys performing the same tasks could
deliver the same results.
Recruitment, Wage Rates and Working Hours
The process of recruitment of girls for Hybrid Cotton Seed
Production entails prospective employers scouting around
villages to find out whether there are prospective girls who
could be employed. Based on the findings, employers then
cultivate in the area/village where the supply of young female
labour is abundant. They then proceed to enter into contracts
with the parents of these girls to ensure themselves of a regular
labour supply. The areas of Kurnool and Mahaboobnagar in
Andhra Pradesh have been witness to elaborate methods of
recruiting children. Here, the employers are known to invite
children from other areas for a ‘labour camp’ and enforce a 12
hour workday.
The most attractive prospect of hiring girls is undoubtedly the
fact that their remuneration can be fixed at a rate lower than that
of any adult or boy. These wage rates, fixed either monthly or
daily are deducted from loans extended to their families. The
wage rate currently hovers at around 70% of the adult female
wage. The working hours aren’t specific although they average
out to approximately nine to nine and a half hours a day,
peaking at 11-12 hours during the winter
Recruitment, Wage Rates and Working Hours
The process of recruitment of girls for Hybrid Cotton Seed
Production entails prospective employers scouting around
villages to find out whether there are prospective girls who
could be employed. Based on the findings, employers then
cultivate in the area/village where the supply of young female
labour is abundant. They then proceed to enter into contracts
with the parents of these girls to ensure themselves of a regular
labour supply. The areas of Kurnool and Mahaboobnagar in
Andhra Pradesh have been witness to elaborate methods of
recruiting children. Here, the employers are known to invite
children from other areas for a ‘labour camp’ and enforce a 12
hour workday.
The most attractive prospect of hiring girls is undoubtedly the
fact that their remuneration can be fixed at a rate lower than that
of any adult or boy. These wage rates, fixed either monthly or
daily are deducted from loans extended to their families. The
wage rate currently hovers at around 70% of the adult female
wage. The working hours aren’t specific although they average
out to approximately nine to nine and a half hours a day,
peaking at 11-12 hours during the winter season when the work
is maximum.
© Copy Right: Rai University
11.622.1
Health Hazards
COMPENSATITION MANAGEMENT
Girls who work in the cottonseed fields are exposed to
numerous health risks and complications, which include
exposure to pesticides that cause severe headaches, weakness,
convulsions and respiratory depression.
Impact of Education on These Children
Education for these girls has taken a back seat, as 60% of the
girls currently employed in cottonseed fields are school drop-
outs (taking into account the area under study). There is also a
rising trend of girls abandoning their studies for more perma-
nent employment.
Possibility of Adults Replacing Children
Most employers are of the opinion that replacing child labour
with adult labour would lead to escalating production costs and
an ultimate increase in the market price of the product. How-
ever, according to the various surveys conducted, the rise in cost
of production would not be phenomenal and could be borne
by various people together: seed producers, organizers and seed
companies could all reduce their margins of profit by a bit to
accommodate these increased costs.Moreover, poverty is not the
only driving force behind parents who send their children to the
cotton fields. The income that is brought by these young girls
can be done away with, especially in the light of the fact that it is
used for alcohol by adult males who are generally under
employed and while away their time. If underemployed adults
would be taken on at appropriate wages, it would totally
obviate the need for girls to work.Thus, for every problem, a
solution poses itself. However, the issue of girl child labour is
yet not receiving its due attention. If more NGO’s would get
into the fray, it would definitely be a step in the right direction.
The girl child would then use her hands to write instead of
using them to perpetuate an existing and discriminatory system
of labour.
Answer the Following the Questions Based on the
Above Case Study
1. What do you understand by the term bonded labor?
2. How do children get involved and become bonded labor?
3. How and why female children are involved in the
production process?
167
COMPENSATITION MANAGEMENT
LESSON 26:
INTRODUCTION TO NON-MONETARY INCENTIVES
Principles of External and Internal Differential
Rewards and Incentives
• To understand what are Non-Monetary Incentives?
• To know examples of Non-Monetary Incentives
• To understand the Aims of Reward Management
What are Non-monetary Incentives?
While monetary incentives often appear as important motiva-
tors, many factors unrelated to money can also serve as
‘attention-getters’ and ‘encouragers of action.’ “The classifica-
tion of such non-financial incentives tends to a smorgasbord
of desirable ‘things’ that are potentially at disposal of the
organisation.
The creation of such rewards is only limited by managers’
ingenuity and ability to assess ‘payoffs’ that individuals within
the organisation find desirable and which are within the
managers jurisdition.”
As the old proverb goes: “One man’s food is another man’s
poison” certainly applies to rewards. What one employee views
as “something I have always wanted”, another finds superflu-
ous. Therefore, care must be taken in providing the “right”
reward for each person.
Some examples of non-monetary incentives:
The need-motives for affiliation, power and recognition in
particular can be appealed to by such incentives.
For example,
1. A person with strong need for affiliation may respond
readily to job assignments that provide with opportunities
to relate to socially attractive and satisfying individuals or
groups.
2. The opportunity to communicate with and relate to others
is a factor many workers emphasize and seek.
3. Persons who are very status conscious, can be motivated
with the availability of a panelled office, a carpeted floor and
wall paintings, a large desk and aristocratic furniture or a
private bathroom, impressive job title, their own visiting
cards, their own secretary and telephone, or a well located
parking place with their name clearly painted underneath the
“Reserved” sign - all of which are status symbols.
4. An employee with high-level desires for power may respond
easily to opportunity whereby he can gain leadership and
administrative responsibilities. He may be stimulated by
participative or free rein leadership in the decision-making
process.
The use of job enlargement provide added incentive to
some employees because they feel capable of controlling
wider sets of activities than they previously performed.
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168
5. Persons interested in enhancing their reputations and
receiving recognition in the eyes of others may respond to
verbal ‘praise’ or two publicized ‘awards.’
6. Persons proud pf their long service may be attracted by
awards recognising their seniority.
7. Workers in safety minded organisation are often attracted by
competition on awards for best safety performance records.
8. Individuals proud of their past accomplishments may feel
recognised and rewarded if their superiors extend
opportunities for participation on more complex and more
important job assignments.
In short, management may look to many non-monetary
incentives for effective motivation of those who are most need-
conscious. In many cases, these non-monetary incentives might
stimulate even more attention than the monetary ones.
Aims of Reward Management
Reward management aims to:
1. To support the achievement of the organization’s strategic
and shorter term objectives by helping to ensure that it has
the skilled, competent, motivated and committed workforce
it needs;
2. To help to communicate the organization’s values and
performance expectations;
3. Support culture management and change by matching pay
culture to organization culture and ensuring that reward
management underpins the existing or desired organization
culture and helps the organization respond to change.
But pay itself, as Flannery state: ‘cannot drive change or lead
the change process. It cannot define what the change should
be. It cannot establish values. It cannot replace effective
leadership, drive and support desired behaviour by
indicating what sort of behaviour will be rewarded and how
this will be done through performance or variable pay and
performance management processes;
4. Encourage value-added performance by focusing
performance pay and gain sharing schemes on areas where’
the maximum added value can be achieved;
5. Promote continuous development through competence-
related and skill-based pay schemes, broad banding and
effective performance management;
6. Compete in the employment market by paying competitive
rates which attract and retain good-quality employees;
7. Motivate all members of the organization from the shop-
floor to the board room through the judicious use of a
combination of financial and non-financial rewards;
8. Promote teamwork through the use of team pay, the
encouragement of multiskilling and by rewarding
collaborative behaviours;
11.622.1
9. Promote flexibility by replacing unduly hierarchical and rigid
pay structures with more flexible and, typically, broad
banded structures, treating job evaluation as a process which
can be adjusted to meet specific needs rather than a package
which has to be applied rigidly, avoiding the use of over-
mechanistic pay-for-performance schemes, making greater
use of variable or ‘at risk’ pay and allowing employees more
choice over the benefits they receive;
10. Provide value for money by evaluating the costs as well as,
the benefits of reward management practices and ensuring
that they are operated cost effectively.
11. Achieve fairness and equity by rewarding people consistently
according to their competence and contribution.
12. Pay can play a significant part as an investment which will
support the long-term success of the organization.
As Flannery points out: “Organizations are beginning to
understand that pay should no longer be considered? Only in
terms of specific jobs and current financial results. Compensa-
tion must inextricably be tied to people, their performance and
the organizational vision and values that their performance
supports.
It is an important tool for communicating and reinforcing new
values and behaviours, supporting accountability for results and
rewarding the achievement of, new performance goals.”
Tutorial Activity 1.1
Evaluating Reward Process
The Objective of the Tutorial Activity
To understand that the evaluation of reward processes is best
carried out by a diagnostic review which, as set out below, could
cover the following areas:
• Basic philosophy and strategic principles;
• Overall reward policies;
• Individual reward policy and practice areas;
• Cost considerations;
• Overall reward management;
• Overall perceptions;
• communications.
The diagnostic review should be carried out by examining
written strategy and policy statements, details of structures,
procedures, processes and schemes, any reports and records on
reward matters and discussions with managers, HR staff,
employees and union representatives. It is also highly desirable
to conduct an attitude survey (as illustrated in Appendix A);
this can be supplemented by focus group discussions with
managers and employees to understand views in greater depth.
Reward Management: Diagnostic
Checklist
Basic Philosophy and Strategic Principles
These questions deal with the high level, strategic issues facing
organizations.
© Copy Right: Rai University
11.622.1
1. Are the Fundamental Principles on Which the System
COMPENSATITION MANAGEMENT
and its Development is Based Linked to:
a. the organization’s current needs and goals;
b. HR management strategy (see also 3 below);
c. policy on pay levels needed to recruit and retain high-quality
and committed staff (see also below);
d. policy on assessing the pay market practice needed to achieve
recruitment and retention:
• locally (for locally recruited staff);
• regionally (for regionally recruited staff);
• nationally (for nationally recruited staff);
• internationally (where the, market is for specific ‘world-
class’ individuals);
e. equal pay for work of equal value;
f. avoidance of discrimination other than differences
warranted by job/role size, responsibility, complexity and
valid responses to market pressures?
2. Have these Principles Been Developed:
a. in consultation with key stakeholders (management, staff,
unions);
b. on the basis of current and future business strategies;
c. by reference to any projected changes in the culture of the
organization?
3. Is there a Clear and Articulated Link Between
Reward Strategies and HR Strategy On:
a. organization design: the structures and processes needed to
deliver organization strategy and’ the levels and distribution
of work needed to do this;
b. recruitment: a reasonably attractive total package;
c. training: rewarding skills acquisition and use;
d. development: rewarding the behaviours or competences
associated with good performance and continued learning;
e. performance improvement: delivering an effective and
efficient personal contribution;
f. effective team/group working;
g. promotion: rewarding the acceptance and successful delivery
of greater responsibilities;
h. reinforcing loyalty, integrity and commitment?
4. Is there a Strategy for Ongoing Reward
Management Which:
a. is based on the organization’s:
• mission;
• culture;
• operating values;
• current and future needs;
b. staff at all levels understand, at least in outline, and believe
to be fair and rational;
169
 c. provides for a flexible response when different parts of the
COMPENSATITION MANAGEMENT
organization have different needs or face different
pressures?
5. Does the Strategy Provide a Sound Basis for the
Development of Reward Policies, Systems and
Procedures, i.e:
a. provision for proper responses to changing circumstances;,
b. management of the system to protect its integrity and
validity;
c. monitoring and management of the cost of managing the
system with a focus on:
• cost effectiveness;
• avoiding duplication of effort;
• using new technology, notably IT support to enable
greater efficiency?
6. Is the Strategy Congruent with the Culture of the
Organization?
a. Are there any conflicts between practice and organization
values, e.g.:
• rewarding service and experience rather than
continuous performance improvement;
• providing long-term benefits when shorter term
contracts are becoming more common;
• becoming increasingly complex or cumbersome when
the organization is trying to simplify the way it
manages itself in other ways;
• focusing too much on equity beyond what is feasible
within the judgmental frameworks on which effective
reward management depends?
Overall Reward Policies
These questions focus on the articulation of overall reward
policies.
7. What is the policy on levels of rewards, e.g.:
1. The chosen place in a well defined, surveyed and
comparable pay market for-different grades, levels and
specialisms;
2. The need to attract and retain high quality staff;
3. The need for stability and sustained staff commitment?
8. What is the Policy On-market Rates and Responses to
Market Pressure?
a. Is the organization subject to skill shortages and areas of
market pressure?
b. How are these tracked, eg through:
• analysis of leavers or exit interviews;
• analysis of recruitment issues;
• analysis of where people come from and where they
go; pay surveys;
• other market intelligence?
c. Are pay responses the only way to retain people ‘at risk’?
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170
d. Have other strategies, such as improved performance
management and development or improved working
conditions, been tried?
e. At what stage are specific market responses or market
premiums paid?
f. Is it clear to staff that market premia can go down as well as
up?
g. Is this specifically communicated with market adjustments?
h. If not, how will the cost implications be managed when the
market declines?
9. Are, or Should, Reward Levels be Linked to the
Organization’s Performance?
a. Are there identifiable performance measures for the
organization?
b. Can these be tracked without undue effort?
c. Are they subject to external or political influences in the
short, medium or long term that take sensitive handling?
d. Would better performance actually generate more money for
rewards?
e. Is there scope for rewarding specific individual or team
achievements?
f. Would this be culturally appropriate?
g. Who will assess and manage performance?
h. Are they close enough to employees - especially those out in
the field - to be able to judge performance effectively?
i. Is there trust in the current performance management
processes?
j. Are people given the training and development needed to
help improve performance?
10. What is the Policy on Equity?
a. How important is equity in the organization’s culture?
b. Is there a focus on complete equal treatment for similar
jobs/jobs of the same size?
c. Or, is there a preference for equal treatment in relation to
contribution and performance?
d. How is equity measured and tracked?
e. Does this ensure reasonably fair and equal treatment:
• by location;
• by region;
• across the whole organization?
Individual Reward Policy and Practice
Areas
These questions concentrate on specific areas of reward policy
and practice.
Job evaluation
11. Is a Formal System of Job Evaluation Used to
Determine Internal Relativities? If not, How are They
Determined?
a. Is this analytical?
b. Is it related to skill sets/competences?
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c. Is it defined in terms of relevant factors?
12. Are the Factors Used for Job Evaluation
a. relevant to the organization;
b. relevant to the jobs they cover;
c. unbiased in terms of sex, race or disability;
d. relevant individually and not subject to ‘double counting’
(looking at the same areas from a different angle)?
13. Is the Scoring System
a. weighted effectively to reflect organizational values;
b. able to provide sensible grade breaks between distinct levels
of work?
c. Do grade breaks fall into natural gaps in job scores?
Pay Structure
14. What is the Overall Policy on the Pay Structure?
a. What is the rationale for the current pay/grade structure?
b. Did it/does it reflect practice in comparable organizations in
terms of:
• actual levels of work performed;
• the needs of any specialist/professional groups which
are different in character from the mainstream of staff,
if these exist;
• union bargaining units, if relevant;
• the need to progress staff spending several years in
grade to reflect experience, performance and service in
grade?
c. Is the structure- flexible enough to cater for:
• the current pattern of career development and
promotion;
• changes in pay/job market conditions?
d. Or are there:
• too many people with no further progression or
promotion opportunities, stuck on the grade
maximum (even if well paid);
• few opportunities to respond to changes in market
circumstances?
15. What Type of Specific Pay and Grade Structure or
Structures Exist in the Organization?
a. Graded salary scales?
b. Pay spines?
c. Spot rates?
d. Pay curves?
16. Is the Pay Structure Relevant to the Needs of the
Organization as a Whole or the Part of the
Organization in Which They Operate, i.e. do they:
a. fit the circumstances and culture of the organization, in that
it is flexible in organizations subject to rapid change or well
defined and rigorously applied where order and
predictability are of paramount importance;
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11.622.1
b. provide a logical framework or system for enabling
COMPENSATITION MANAGEMENT
consistent and defensible decisions to be made on the levels
of pay and differentials of all the employees to be covered
by the structure;
c. make provision for the reasonable and sometimes inevitable
fact that external market rate considerations may have to
prevail over the requirements of strict internal equity,
especially in the areas of skill shortage?
17. Is the Grade Structure Designed and Administered
Properly?
a. Are the grades clearly defined? Do they fit the way work is
currently organized (eg) the number of levels in the
organization)?
b. Are the pay ranges wide enough to allow scope for pay
progression in accordance with service (where relevant),
competence and performance?
c. Is there an adequate differential (say 15 to 20 per cent)
between grades?
d. Is there an overlap between grades to provide some
flexibility and recognize the fact that an experienced
individual at the top of one grade may be of more value to
the organization than a newcomer in the grade above?
e. Are consistent methods used to allocate jobs into grades,
including decisions on recruitment, promotion and
upgrading because of greater responsibility?
f. Is there any evidence of inequities in the pay structure
because of wrongly graded jobs?
g. Are pay scales regularly reviewed against external data? If
not, what are the factors which are used to determine annual
adjustments in pay scales? Are these factors consistent
across grades?
h. Is there a balanced and cost-effective approach to the
provision of employee benefits with status distinctions
dictated only by ‘good’ market practice?
i. Is there a consistent and fair basis for allocating benefits?
j. Is there any evidence of salary levels falling ahead of or
behind the market rates?
k. If so, what are the causes and are they short term or long
term in nature?
18. Is the System Regularly Maintained and Updated:
a. to take account of new jobs;
b. to take account of the structural change in the organization?
19. Is ‘Grade Drift: a Problem (Are People Always Trying
to Get Jobs Upgraded to Improve Pay Levels Without
Sufficient Reason)?
a. How is this controlled?
b. Are the controls adequate or are inconsistencies emerging?
Pay Progression
These questions consider all types of pay progression schemes
within a graded structure, up a pay spine ‘or along a pay curve.
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 20. Is There a Consistent Method of Progressing Pay, eg
COMPENSATITION MANAGEMENT
According to:
a. length of service;
b. experience (how is this assessed?);
c. performance or contribution;
d. work level;
21. Is the Rate of Progression Based on Fair and
Consistent Methods of Assessment?
a. Are there effective links between performance-based
progression and .the performance management and any
competency framework that exists and related development
planning?
b. Does the approval process for any service-based progression
ensure that under-performers do not get undeserved
increments?
22. If a Performance-related Pay System is in Use
a. Is the relationship between contribution, effort and reward
clearly defined and understood?
b. Is there a credible, well-established and managed process of
performance management to support pay decisions, as well
as deliver the organization’s performance goals?
c. Is the amount of performance-related pay sufficient to
recognize the contribution not only of high-flyers but also
of the reliable ‘core’ performers on whom most
organizations depend?
d. Do employees have a reasonable degree of control over the
results which determine their reward levels?
e. Do bonus earnings (if any) fluctuate too much or too little?
f. Is the system easy to understand and administer?
g. If it is causing problems, how are these being addressed?
Pay Reviews
23. How are Pay Reviews Conducted?
a. What arrangements are made for cost of living awards?
b. To what extent are pay levels reviewed on the basis of
market rate movements?
c. Are there satisfactory arrangements to track market rates,
both generally and for specific occupations?
d. How much money, in terms of payroll percentage, has been
and is likely to be made available for pay reviews?
e. What arrangements are made to provide guidance on
individual reviews related to performance or competence (if
applicable)?
f. How are budgets for pay reviews set and controlled?
g. Are the budgeting arrangements satisfactory?
h. What freedom do managers have to make their own pay
decisions or recommendations at the annual pay review’?
i. How is consistency and equity achieved?
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172
Total Remuneration and Employee Benefits
24. What is the Policy on the Structure “And Balance of
the Reward Package?
a. What is the mix between:
• base salary;
• other cash rewards, eg bonuses (if paid);
• allowances of various kinds to compensate for specific
circumstances;
• benefits, eg pensions and related relevant provisions,
loans, mortgage assistance, moving allowances;
• sick pay and long-term disability provisions;
• medical provisions;
• leave;
• meals;
• employee advisory services,
• other non-cash items?
b. Are any choices over the mix available?
• Why?
• Is this cost effective?
• Do staff like having a choice over their package to meet
personal requirements?
c. Is the balance between different elements felt by
management and staff to be:
• about right;
• in need of change?
Pensions
25. Does the Pension Scheme Properly Reflect Current:
a. employment patterns and demography;
b. levels of employee mobility;
c. comparable practice in similar organizations?
26. Can Pensions be ‘Topped Up’ Where Individuals Have
Insufficient Service or Previous Provisions?
a. Do the mechanisms reflect good market practice?
b. Do they make sound financial sense for both employer and
staff?
27. Are there Provisions for Partners/Dependants?
a. How do these compare against the market?
b. Are the rules concerning their entitlements regularly
reviewed?
c. How is this communicated alongside the overall pension
scheme?
28. Is the Pension Scheme Cost-base Sound or Will
Demographic Change or Changing Employee Profiles
Put Pressure on Affordability?
a. How are changes in this area being tracked?
b. Who will decide on change and how?
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Cost Considerations j. How well or regularly is information gathered on this?

COMPENSATITION MANAGEMENT
These questions focus on the way costs are understood and k. Is there a sensible level of information sharing between
managed. comparable organizations?
29. What is the Level of Employment Costs and How are Overall Perceptions and communications
Costs Managed? These questions focus on perceptions and understanding.
a. What proportion of operating costs are employment costs? 31. Management Perceptions
b. How does this compare to other comparable organizations
a. Does top/operational management believe that the pay
in terms of magnitude?
system is:
c. Are equivalent costs increasing?
• effective;
Why?
• supporting the way people are recruited, managed and
Is this acceptable and defensible in current circumstances? developed;
d. How are pay budgets for the organization and its • giving the right messages to staff and potential
constituent parts compiled and agreed? recruits?
e. Are effective costing/modelling procedures in place? b. If not, what changes would they want to see and why?
f. Is there IT support for this so that ‘what ifs’ can be tested? 32. Staff/Union Perceptions
g. How are the costs of benefits/allowances monitored? a. Do staff-and or unions like and wish to keep the current
h. How are approvals given for progression/promotion? reward system?
i. Which elements of the system have to change with any pay b. Do they find it motivational in most aspects?
adjustment? c. Has the organization tracked/measured these perceptions
j. How complex is this change process? recently through:
k. Could it be simplified without causing undue inequity? • attitude surveys;
l. How often are changes in the system required and what • interviews;
does the process of change cost in (if known): • focus groups;
• man hours; • informal testing of views?
• computer time; d. If they do not like the current system:
• communications to staff? • What do they want to change?
Ongoing Reward Management • Why?
30. How Well is Reward Management Carried Out? • Is this realistic, given current affordability/financial
a. Are responsibilities for elements of the system properly circumstances?
distributed and managed within the pay management • How is the organization planning to respond?
department? Communications
b. Do the people who operate the pay system fully understand
33. How Well are Reward Policies Communicated to
its purpose and operating principles and methodologies?
Employees?
c. Are full records/definitions of practice kept?
a. How well are managers briefed on current reward practice?
d. Are decision-making processes about updating or changing
the system straightforward and designed to produce robust b. Are staff aware of the total value of their pay and benefits
and acceptable results? package?

e. Are the right checks and balances in place at top executive c. What improvements in communication would they like to
levels and through the organization? see?

f. Are computers effectively used to increase responsiveness,

accuracy and effective modelling of policy changes?
g. Are sound cost-management processes in place for pay
budgeting, monitoring spend and controlling outcomes
centrally and in local offices, where needed?
h. Could any of the processes be simplified or made more
efficient?
i. What lessons are available from improvements already
achieved in comparable organizations?

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11.622.1 173
COMPENSATITION MANAGEMENT
LESSON 27:
INTRODUCTION TO CAFETARIA STYLE OF COMPENSATION
Principles of External and Internal Differential
Rewards and Incentives
Learning Objective
• To know the concept of Cafeteria Style Compensation
• Features of a Cafeteria Style Compensation
• An Article On Cafeteria Plans Grow in Popularity
Cafeteria Style Compensation
It is a type of compensation which refers to compensation
programmes that allow employees to choose what type and
how much of each reward is desired during the coming year.
This programme is based upon the assumption that every
employee’s needs are different and he has flexible arrangements
that meet individual needs, and for that he is permitted to select
that combination of rewards that is most attractive to him.
Cafeteria benefit plan also called smorgasbord benefits plan is
any program that permit employees to choose their fringe
benefits within the limits of the total benefits dollars for which
they are eligible. This helps each employee to have, in effect, his
own individualized benefit program
An organization might run what has been called a cafeteria
system, whereby a range of benefits are on offer, and employees
can choose from among them up to their allowed budget. This
offers the clement of choice and may increase the value of the
benefit to the individual, since it answers his real needs or
wants.
According to an article in Personal management in December
1994, ‘The number of firms offering their employees flexible
benefits has risen by more than 50% in the last year, with perks
ranging from childcare vouchers to personal pensions.’
A scheme at Admiral Insurance, for example, allows employees
to spend a sum worth up to 13% of the basic salary on benefits
from a menu including an extra day’s annual leave (valued at
£9.32 per month), members of a sports club (£20 per month)
or vouchers: ‘unspent’ allowance can be taken in cash. All staff
receive ‘care’ benefits, including 20 days’ holiday discounts on
motor insurance, death-in-service and sickness benefits, interest-
free seasons ticket loans and loans for work-related training.
Features of a Cafeteria Style Compensation
Under this programme, the employee is told that his total
compensation is made of say Rs. 2000/- and that he can choose
a mix of salary life insurance, deferred compensation, and other
benefits that suit his particular needs. Each of these options
carries a price and the employee can select upto Rs. 2000/- of
salary - those items that he feels best suit his personal needs.
The philosophy of this approach is that workers will be more
highly motivated if they can select those rewards that have the
greatest payoff for them. If the organisation’s benefit
programmes are such because they have been designed for the
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174
“average employee” in the organisation, by giving the employee
the option to develop his own flexible compensation package,
each package should be ideally tailored to the needs of the
employee. In other words, cafeteria compensation can make
maintenance items motivators.
While adopting the programme, the management should
remember that the most of younger employees are more
concerned with “take-home pay” than with “retirement
benefits.” On the other hand, older employees are “more
concerned about retirement and pension programmes.”
One of the major problems with compensation programme is
that employees tend to think in the short rather than the long
term. Hence, the management may be forced to pressure
workers to make a decision that directly affects their”take-home”
pay.
Robert Good has observed: “If an employee selects the ‘wrong’
benefits package, the motivational purpose for the company is
defeated. Moreover, even just a few bad choices can put the
company at severe risk.
It is a crushing de-motivator throughout the company when
the news spread that X was laid up for weeks without pay or
that Y is destitute because Z choose cash over survivors’
benefits. Even though the employees made these choices
themselves, the company simply cannot allow such situation to
come about.
If a company undertakes the heavy and costly administration
burden of installing a cafeteria compensation programme, it
will be forced to step in and rectify ‘inequities’ even though the
circumstances were created by the employees’ own free choice.”
For an effective and successful working this programme requires
more information to be provided to employees by management
so that they will have adequate data with which to make their
decision. This might increase administrative cost. Further, each
employees benefits have to be carefully priced out and updated
periodically.
This programme has not gained much success even where it has
been introduced.
Tutorial Activity 1.1
An Article on Cafeteria Plans Grow In
Popularity
Warner Norcross and Judd, LLP
By Sue O Convoy
Since their introduction in the early 1980'’s, cafeteria plans (also
called “flexible benefits plans” or “Section 125 plans”) have
become a popular method for employers to provide health and
other benefits in a way that results in employee choice as well as
tax savings for both the company and its workers.
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Types of Cafeteria Plans
The two most popular types of cafeteria plans are pre-tax
premium conversion plans and flexible spending arrangements
(FSA’’s). Many employers combine both in their plan design. A
third type, the “full-flex plan,” offers true cafeteria-style choices
that may include multiple health plan options, different levels
of life and disability insurance coverages, vacation days or cash.
Because the full flex plan is administratively complex and
generally used only by larger companies, it is not discussed here.
Premium Conversion
Premium conversion, the simplest type of cafeteria plan,
permits employees to pay their share of premiums for health
coverage, life insurance and other qualified benefits such as
disability insurance on a pre-tax basis. The plan “converts” what
would otherwise be after-tax employee contributions to pre-tax
contributions by means of an employee’’s election, prior to the
beginning of the year, to reduce pay and to have the company
contribute the amount of the reduction to pay for the coverage
selected by the employee.
Flexible Spending Arrangements
Flexible spending arrangements (FSA’’s) are also popular. FSA’’s
enable employees to set aside money on a pre-tax basis to pay
medical and dependent care expenses. Prior to the beginning of
the plan year, employees decide whether and how much to
contribute to an available FSA based on the expenses they
anticipate during the upcoming year.
These are two types of FSA’’s — health and dependent care.
Health FSA. Employees may set aside money in a health FSA to
pay health plan deductibles and co-payments as well as other
uninsured medical care expenses, such as dental or vision
expenses, on a pre-tax basis.
Under IRS rules, the full amount elected for the plan year must
be available to reimburse the employee’’s medical expenses at all
times during the year (less any amount already reimbursed).
This is the “uniform reimbursement” rule.
In addition, the elected amount cannot be changed during the
plan year unless the employee experiences a “change in status”
(such as the birth or death of a dependent, marriage, divorce,
etc.) and the plan permits the change. Finally, unused funds
remaining in an employee’’s account at the end of the plan year
may not be refunded to the employee or carried over to the next
year. This is the “use it or lose it” rule.
Dependent Care FSA. Employees may be reimbursed under this
FSA for dependent care expenses that enable the employee (and
spouse) to work. Dependent care FSA’’s are not subject to the
uniform reimbursement requirement. However, they are subject
to the “use it or lose it” and “change in status” rules.
Legal Requirements
Section 125 of the Internal Revenue Code contains the legal
requirements for a cafeteria plan. There must be a written plan
document meeting specified requirements and all participants
must be employees. For employees to obtain maximum tax
advantages, the plan must not discriminate in favor of highly
compensated persons as to eligibility to participate, employer
contributions or benefits. In addition, each cafeteria plan must
file an annual informational report (Form 5500) with the IRS.
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11.622.1
Pros and Cons of a cafeteria plan
COMPENSATITION MANAGEMENT
Pay Less Tax: Employers do not pay FICA or FUTA taxes on
salary reductions amounts. Employees do not pay federal
income tax, FICA tax, and, in Michigan and most other states,
state and local income taxes on their salary reduction amounts.
Address Employee Needs: Employees can choose benefits
that meet their individual needs and adjust those choices
annually as needs change.
Cost Control: Cafeteria plans help employers control costs by
ensuring that money is not spent on benefits that employees
neither want nor need.
Competitive Benefit Program: By offering more flexible
cafeteria-type benefits, employers gain an edge in attracting and
retaining valuable employees.
Improve Employee-Employer Relationship: Giving
employees control over their benefits promotes goodwill and
creates a partnership in the benefit program between employer
and employee.
Respond to Work-Force Diversity: Cafeteria plans address the
wide variation in benefit needs of diverse employees.
Better Understanding of Benefits: A better understanding of
the benefits package results when employees are actively
involved in the selection process.
While cafeteria plans are advantageous to both employers and
employees, some drawbacks exist.
The uniform reimbursement rule can put the employer at risk if
an employee in a health FSA quits before contributing the full
amount for which she has been reimbursed, and, under the
“use it or lose it” rule, an employee must forfeit unused FSA
contributions. However, with proper planning and good
communication, the effect of any disadvantages can be greatly
minimized.
Conclusion
The advantages of establishing a cafeteria plan are many for
both employer and employee and significantly outweigh any
perceived disadvantages. Employees can receive the benefits they
want while at the same time lowering their and their employer’’s
tax liability and helping to control benefit costs.
Tutorial Activity 1.2
An Article on the benefits of Employees
By Michelle Collins
Cash is not enough today to recruit and retain top talent for
your business. Providing an attractive benefits plan is just as
important.
While the costs can be exorbitant and the choices overwhelm-
ing, you can and should find ways to build a benefits program
that works for your company. Here’s help.
Find out what your employees want.
It’s critical to recognize just how important a competitive
benefits package can be in recruiting the best staff possible.
Gone are the days when salary in and of itself was lure enough.
“Competitive organizations, whether they are big or small, with
benefits programs will be able to attract employees away [from
you] - especially if you don’t provide the most fundamental
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 programs such as health care, disability insurance and things like
COMPENSATITION MANAGEMENT
that. It’s almost mandatory,” says Lloyd Foight, a benefits
consultant with the Ross Companies in New York.
The next step in providing a winning benefits program is to
find out what your group is looking for. It’s possible that
subsidized or free parking could be more important to them
than life insurance.
“Go to your employees and find out what they want,” says
Fred Lange, president of HR Architect in Los Angeles. “Give
them a list of a dozen or so things that they can choose, and
leave them room to fill in things. You’ll find those unique
quirky things that are related to your population.”
The two essentials for every plan:
While you might be faced with a variety of requests, experts say
that there are two essentials for every plan: medical coverage and
a retirement plan. Other coverage such as dental, disability and
life insurance often are considered extras.
“Most people want to know that they’re covered when they go
into the hospital. So that’s one of the things on the top of our
list,” says Larry Landes, president of Garden State Brickface,
Windows & Siding in Roselle, N.J.
Meanwhile, retirement plans offer an opportunity to hang onto
valued employees. You should offer to match or contribute
some additional portion to what your employees put in, with
the stipulation that the money will mature over a certain period
of time. “The longer that people stay, the more likely they are to
stay,” Foight says. “The chance of them leaving a year from now
is less than it is today.”
Who Pays for All of This?
One way or another, someone has to foot the bill for your
employee benefits. However, it doesn’t have to be you who
picks up the entire check. You could even pass on the entire cost
to your employees.
Here are three other options:
1. High Deductible Plan
Offer to help with medical costs once they go beyond a certain
dollar amount, such as $2,000. Foight says this approach will
cut down on the administration expenses and reduce the overall
costs of the plan.
2. Cafeteria-style Benefits
Here, employees pay for the benefits that they want on a pretax
basis. The only costs that you will have to deal with are
administrative.
3. Split the Cost
Another effective strategy is sharing the cost of essentials - such
as medical care and retirement - between the company and its
employees. Extra coverage such as disability and life insurance
are available at the employee’s expense.
Communication matters, too
Once you’ve arrived at a plan that suits both you and your
employees, let your people know about it. “People need to
know that you’re spending money on these things. They need
to realize that and know that it is a benefit for them even if they
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176
choose not to participate in it,” says Bruce Wynn, a compensa-
tion and benefits lawyer in Atlanta.
Lange recommends taking this level of awareness a step further
and providing an itemized list with yearly tax statements. This
way, the employees will know just what they’re getting and what
you’ve spent on them.
Michelle Collins is a staff writer at CanadaOne.com, Canada’s
premier business channel on the Internet, with articles, tools
and other resources.
Tutorial Activity 1.3
An Article on Challenges of People
Management
In many Indian organisations, government- or privately-
owned, the most difficult decisions pertain to people-related
issues. While similar issues may be prevailing in other countries,
in my perception the problem is more pronounced here. For
example, whenever I ask my clients to put together a group of
people that would serve as a crack team for participating in an
exercise on thinking about the future of the company, the
discomfort is palpable.
The concern is not about the availability of such people but
about the criteria for inclusion. Considerations of seniority,
competence, commitment and acceptability come into play and
create problems for the decision maker.
Usually a compromise is struck and we end up having a team
significantly larger than it should have been. Surprisingly, the
top man also agrees that some of those who have been
included ought not to have been.
Of course, how the brainstorming exercise progresses is
another matter. Similarly, compromises are made in respect of
decisions pertaining to performance management, identification
of non-performers, and even for rewarding exceptional
performance. It is compromise all the way.
It is popularly believed that private sector organisations are
objective and clear in their people management decisions and it
is the public enterprises that suffer from this malaise. I do not
think the difference is significant and the reasons for such
behaviour are common to managers across all ownership
patterns of business.
The promotion of personnel to top management positions in
many public enterprises is done based on interviews and other
evaluation methods. Most of these officers are those who have
served in these organisations for two decades or more and yet
need to be assessed by measures such as these!
It appears that the performance and exhibited competencies of
these individuals have little or no bearing on their career
mobility. Assessment techniques used for relatively junior
personnel are used for evaluating the suitability of senior
managers for top management positions.
In many private sector organisations, too, one finds that there is
an apparent clamour for objectivity in appraising senior level
personnel. Usually this objectivity takes the form of a battery of
tests and interviews.
The curious aspect in this whole exercise is the implicit naivete
that most organisations display in equating quantification of
11.622.1
subjective aspects with objectivity. Relying on assessments made

COMPENSATITION MANAGEMENT
in a few days in preference to performance of large number of
years is a pervasive organisational pathology. Why is this so?
In my view, a majority of Indian managers avoid confronting
the reality of making choices. As choice-making and accountabil-
ity are two sides of the same coin, it is indeed a difficult task.
More so if such choices deal with people.
Whether it is a recommendation for a specific prestigious
assignment or promotion, most managers find it difficult to
stick their necks out for their juniors. They are more comfort-
able if the whole process is system driven.
But without making a choice and taking sides, managers can
neither drive their organisation in a specific, desired direction
nor make their team members do so. It is exactly this
behavioural aspect that people in organisations perceive as
unfair performance management processes.
It has to be realised that any people management process is one
of engagement. Whether it is performance management or
career planning of people, it is necessary for senior management
personnel to accept ownership for their actions. Avoiding the
discomfort of confronting affected employees cannot be termed
as responsible managerial behaviour.
To avoid such eventualities it is necessary for senior managers to
realise that they have to be transparent and consistent in their
people-related interactions and actions at all times.
The engaging relationship of people management demands
such effort and sensitivity. It has to be understood that
performance management is not a year-end effort when the
whole organisation goes into a tizzy and somehow gets over it
leaving some happy and many unhappy, but everybody
guessing.
Specifically, at the senior levels of management, it is essential
that there is continuous and credible sharing of expectations
and feedback on performance throughout the year. Only
through such an engagement can it be expected that managers
will own up their decisions on people, which the assessed will
also accept.

Notes:

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11.622.1 177
COMPENSATITION MANAGEMENT
LESSON 28:
INTRODUCTION TO PROBLEMS OF EQUITY & BONUS
Principles of External and Internal Differential
Rewards and Incentives
Learning Objective
• Introduction To Compensation Policy
• To understand the Base Compensation – Job
• To know significant Significant Factors Affecting
Compensation Policy
• To learn Equity and Compensation
Introduction to Compensation Policy
It is a general practice all over that employees make comparisons
between themselves and their co-workers. They perceive what
they get from a job situation (outputs) in relation to what they
must put into it (inputs). They also compare their output-input
ratio with the output-input ratio of their fellow-workers.
If a person’s ration and that of others are perceived to be equal
a state of equity is said to exist. If they are unequal, inequity
exists i.e., the individual considers himself as ‘under rewarded’
or ‘over-rewarded’ when an employee envisions an equity, he
may choose anyone or more of five alternatives:
i. distort either his own or other inputs or outputs;
ii. behave in the same way as to induce others to his own
inputs or outputs;
iii. behave in some way as to change his own inputs or
outputs;
iv. choose a different comparison referent; and
v. leave the job.
Equity approach recognises that individuals are concerned not
only with the absolute amount of money they are paid for their
efforts but also with the relationship of this amount to what
others are paid.
They make judgement as to the relationship between their
inputs and outputs with those of the others. Based on one’s
inputs such as effort, education and competence - one compares
outputs - such as salary levels, raises and other factors.
When people perceive an imbalance in their input output ratio
relative to others tension is created. It may result in lower
productivity, more absenteeism, etc. This tension provides the
basis for motivation, as one strives for what he perceives as
equity and fairness.
To get relief, the employee may decrease his inputs while
holding his output constant, or increase his outputs while
holding inputs constant - possibly resulting in fighting the
system, increased absenteeism, or other undesirable behaviours.
Base Compensation - Job
One of the most difficult functions of personnel management
is that of determining rates of monetary compensation. Not
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178
only is it one of the most complex duties, but it is also one of
the most significant to both the organization and the employee.
It is important to the organization, because wages and salaries
often constitute the greatest single cost of doing business; in
1929 employee compensation amounted to 58 percent of the
nation’s income, as compared with 75 percent in recent years. It
is important to the employee because the paycheck often is the
sole means of economic survival: it is also one of the most
influential factors determining status in society.
As far as the organization is concerned, employee compensation
programs are designed to do three things:
1. to attract capable employees to the organization,
2. to motivate them toward superior performance,
3. to retain their service over an extended period of time. As a
consequence, our discussion is divided into three chapters
with the first subject being that of determination of base
pay. Though no science of pay exists, systems of job
evaluation are widely used to make this first important
decision.
When coupled with surveys of rates paid by competing firms;
the organization can establish a pay policy that will meet its
desired goal of attracting sufficient personnel to accomplish
work tasks.
In many cases, organizations prefer that their employees
perform at a rate higher than average. In the following chapter,
we shall examine methods of varying individual through merit
evaluation and incentive pay plans, as well as systems of
promoting group productivity through profit sharing and
production bonuses.
Finally, the third chapter in this part will deal with the fastest-
growing segment of total compensation, the provision of all
types of supplementary pay or fringe benefits. Such programs
are more effective in maintaining a work force that they are in
motivating higher levels of performance.
Significant Factors Affecting Compensation Policy
Though a considerable amount of guesswork and negotiation
areinvolved in salary determination, certain factors have been
extracted as having an important bearing upon the final dollar
decision. Among these factors are the following:
1. Supply and demand for employee skills,
2. Labor organizations,
3. The firm’s ability to pay,
4. Productivity of the firm and the economy,
5. Cost of living, and
6. Government.
Each of these will be discussed briefly in order to demonstrate
the exceedingly complex nature of compensation. Perhaps a
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realization of these complexities will lead to a greater apprecia- substitution of capital for labor through technology, and

COMPENSATITION MANAGEMENT
tion and acceptance of job evaluation despite its arbitrariness controlled entry into apprenticeship programs. All compensa-
and scientific failings. tion must come from products sold in a market that is usually
Supply and demand through the commodity approach to labor, competitive in nature.
as discussed earlier, is not completely correct, it is nevertheless Inequitable compensation to any or all will create trouble in
true that a wage is a price for the services of a human being. The maintaining the health of the organization. The increase in the
firm desires these services, and it must pay a price that will bring strength of labor unions is due, in part, to the fact the employ-
forth the supply, which is controlled by the individual worker or ees’ interests had not been receiving attention equal to that
by a group of workers acting in concert. given to other components of the enterprise.
The primary practical result of the operation of this law of The impact of this strength is shown in Figure 12-1. In the six
supply and demand is the creation of the “going-wage rate.” It highest-paying industries, approximately half of the full-time
will be demonstrated later how the wage and salary survey of workers are organized. In the six lowest-paying industries, only
this going rate is incorporated into a job evaluation approach to 14 per cent are recognized. It should also be noted that the
wage determination. We shall discuss the charges of certain percentage of female employees is lowest among the highest-
groups that the market going rate reflects fundamental biases paying industries.
towards female employees. Ability to pay Labor unions have often demanded an increase in
This simple statement of the effect that the demand and supply compensation on the basis that the firm is prosperous and able
of labor have on wages belies its complexity. It is not practicable to pay. However, the fundamental determinants of the wage
to draw demand-and-supply curves for each job in an organiza- rate for the individual firm issue from supply and demand.
tion, even though, theoretically, a separate curve exists for each If the firm is marginal and cannot afford to pay competitive
job. rates, its employees will generally leave it for better-paying jobs.
But in general, if anything works to decrease the supply of Admittedly, this adjustment is neither immediate nor perfect
labor, such as restriction by a particular labor union, there will be because of problems of labor immobility and lack of perfect
a tendency to increase the compensation,. If anything works to knowledge of alternatives.
increase the employer’s demand for labor, such as wartime If the firm is highly successful, there is little need to pay far
prosperity, there will be a tendency to increase the compensa- more than the competitive rate to obtain personnel. Such a
tion. firm, however, may choose to adopt a policy of paying above
The reverse of each situation is likely to result in a decrease in the competitive rate in order to attract a superior calibre of
employee compensation, provided other factors, such as those personnel. If firms in general are prosperous and able to pay,
discussed below, do not intervene. the tendency is to bid up the price of labor as a whole.
Figure 12-1 : Labor Union and Earnings Productivity Beginning with the famed General Motors
Contract with the United Automobile Workers (UAW) in 1948,
Median Percent Percent Who much attention has been paid to the effect of general productiv-
Weekly Represented are Women ity increases in the economy upon the specific compensation of
Earnings by a Union
All full-time workers $289 29 39 huge aggregations of employees.
Highest-paying industries
Petroleum and coal products 433 36 20
In the battle against inflation, representatives of the federal
Mining 423 36 15 government have attempted to use computed productivity
Railroad transportation 422 82 7 gains as guidelines in the settlement of wage disputes between
Aircraft and parts manufacture 414 50 23
Ordnance 410 37 22
managements and unions. Between 1947 and 1966, the
Motor vehicle and equipment 407 63 15 computed average annual productivity increases in manufactur-
manufacture
Lowest-paying industries 114 1 90
ing was set at 2.9 per cent, leading to the establishment of a
Private households 170 27 79 ‘noninflationary’ guideline for wage increases of 3.2 percent.
Apparel manufacture 174 8 55
Eating and drinking places 185 24 61 With growing inflation, resulting briefly in short-term wage and
Leather and leather products 188 18 59
Personal services 189 4 16
price controls, the validity of this guideline suddenly vanished.
Agriculture With inflation reaching double digit levels, the government
approach of “jawboning” to influence negotiated settlements
has been placed under serious handicaps.
Labor Unions In the structure of economic relationships, the
labor union attempts to work primarily on the supply side. An even more serious problem is that the average annual
productivity increase in the United States during a recent 11-year
In a strike for higher wages, the employer’s demand for labor to
period has sunk to 1.9 percent as compared with 9 percent In
meet a market need is pitted against a supply withheld by the
Japan, 5.5 percent.
union. Union leaders are often very adroit in selecting the
appropriate time to strike as judged by the markets for the In West Germany, 5.1 percent in France, and 2.8 percent in Great
employer’s products. Britain.2 During this same period, however, hourly pay has
increased over 100 percent. A part of this problem of pay
To strengthen their control over the supply of labor, unions
speedup and productivity slowdown is characteristic of a
seek such goals as union or closed shops, regulated or restricted
maturing economy; service businesses now account for 70

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11.622.1 179
 percent of an jobs. Productivity advances in services are more
COMPENSATITION MANAGEMENT
difficult to effect than in manufacturing.
Though some have hailed the widespread use of productivity
index as a major breakthrough in compensation, these are
several serious drawbacks to its use. Among these are the
following:
1. there is no precise and accurate measure of productivity
acceptable to all;
2. the reported percent increases are generally a long-term
average and are not achieved each year;
3. not all industries participate equally in productivity gains
and
4. use of any index does not materially reduce controversy in
bargaining since the index is used as the base from which to
bargain.
Cost of living
Another formula hailed by many as the answer is the cost-of-
living adjustment of wages. Among the problems engendered
by this approach are the following:
1. no cost-of-living formula will indicate what the base
compensation should be- it merely indicates how that rate
should vary;
2. this approach tends to vary monetary income but freeze real
income, a result with which labor is not content; and
3. as in the case of productivity indexes, there are certain
measurement problems in ascertaining cost-of-living
increases. The Consumer Price Index of the Bureau of
Labor Statistics, however, is widely accepted and followed by
many’ employers and labor organizations.
Cost-of-living adjustment of compensation constitutes no
fundamental solution to equitable compensation to employees.
It is useful as a stopgap device in times of inflation when labor
is pressed to keep up with the rise In prices.
It is an essential ingredient of long-term labor contracts unless
provision is made to reopen the wage clause periodically. The
United Auto Workers agreement, for example, provides for
quarterly cost-of-living adjustments amounting to a I-cent
increase for every 0,3 percent advance in the Consumer Price
Index.
Government
Our varying levels of government often have very specific things
to say about wages and salaries despite the theoretical and
nebulous nature of equitable compensation. There are at least
three major federal laws that deal directly with the subject of
compensation.
The Fair Labor Standards Act, often called the Wage and Hour
Law, specifies a minimum hourly wage and a standard work-
week for all firms engaged in interstate commerce. Since the
law’s inception in 1938, the minimum wage has moved from
25 cents to 53.35 per hour in 1982. The law applies to enter-
prises engaged in interstate commerce with gross annual
volumes of sales of at least $362,500. Over 50 million employ-
ees are covered.
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180
The Equal pay Act of 1963 is an amendment to the Fair Labor
Standards Act and specifies that equal work requiring equal skill,
effort, and responsibility under equal working conditions shall
be accorded equal pay, regardless of sex of employee.
Any differences must be rationally justified through systematic
study,’ usually in the form of a job evaluation plan. Adjust-
ment of differences cannot take the form of reducing pay of
the higher-paid person.4 One airline has been ordered to pay
about $25 million in back wages to stewardesses who since 1968
were paid less than male employees doing the same work.
Hours worked in excess of 40 per week must be compensated
at the regular rate plus a penalty of half time. Thus, if an
employee’s rate is $4 an hour, a 50-hour workweek would result
in straight-time pay of $200 (50 x $4) and overtime pay of $20
(10 x $2) for a total of $220.
Employees assigned to executive, administrative, or profes-
sional positions are usually excluded from coverage by the act.
Labor organizations constantly press for increases in the
minimum wage, decreases in the standard workweek, and
increases in the penalty for overtime hours, all in the interest of
increasing total compensation for labor.
The Walsh-Healey and Davis-Bacon Acts apply to employees
dealing with the federal government as contractors, the former
applying to those with contracts whose value is in excess of
$10,000 and the latter to those having public works contracts
with values in excess of $2,000. Under these two acts, the
minimum wage is a rate established by the Department of
Labor; it has been higher than that set by the Fair Labor
Standards Act.
The prevailing minimum wage is paid to a majority of workers
in a particular craft in a specific geographic area. If there is no
prevailing wage for a majority, the amount is determined on a
weighted-average basis.5 The standard straight-time period is
the 8 hour workday rather than the week. Hours worked in
excess of this standard must be compensated with the half-
time penalty.
In addition to these three acts, there are numerous state laws
specifying minimum wages. Usually these rates are lower than
those placed in federal legislation, but some 20 states have
minimums of $3.35 or higher. It can also be contended that the
federal government is instrumental in salary determination
through its insistence upon collective bargaining with organized
labor as required by the Wagner and Taft-Hartley Acts.
Equity and Compensation
If our first goal of attracting capable employees to the organiza-
tion is to be achieved. personnel must perceive that the
compensation offered is fair and equitable. Equity is concerned
with felt justice according to natural law or right.
Homans’s exchange theory predicts greater feelings of equity
between people whose exchanges are in equilibrium. When an
employee receives compensation from the employer, percep-
tions of equity are affected by two factor:
1. the ratio of compensation to one’s inputs of fort,
education. training, endurance of adverse working
conditions, and so on
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2. the comparison of this ratio with the perceived ratios of
significant other people with whom direct contact is made.
Equity usually exists when a person perceives that the ratio
of outcomes to inputs is in equilibrium both internally
with respect to self and in relation to others.
In Figure 12-2, nine different situations are proposed. Equity
theory would hypothesize that the correlation of pay and
contribution that exists in cells 3, 5, and 7 would result in
feelings of equity. In all other cells, feelings of dissonance are
likely to exist. Research conducted with respect to under-reward
situations (6, 8, and 9) clearly indicates that employee satisfac-
tion is lower than in either the equity or over-reward situations.
Employee contributions exceed their outcomes of money.
Resulting dissatisfaction often leads to efforts to reestablish
equilibrium, such as “borrowing” from the supply room to
increase rewards, trying to adversely affect the effort and pay of
others, convincing self that pay is not out of line, quitting or
frequently absenting oneself from the organization, promoting
labor organization, and so on.
Concerning the over-reward situations (cells I, 2, and 4), original
research conducted by Adams suggested - that feelings of
discomfort and guilt resulting from inequitably higher pay
would lead-.to actions to reduce dissonance. He led an experi-
mental group of employees to believe that the pay allocated was
significantly in excess of their qualifications.
Figure 12.2 : Equity in Compensation
Gross moderated
Equity
Over reward over award
(1) (2) (3)
Moderated moderate
Equity
Over reward under reward
(4) (5) (6)
Equity
Moderate under reward gross
Under reward
(7) (8) (9)
(output background etc)
————( line of equity)
In one experiment, the overpaid group, compensated on an
hourly basis, produced a quantity significantly in excess of an
appropriately paid control group. In a second experiment under
a system of incentive piecework, the overpaid group tended to
reduce dissonance by restricting output so that total pay was
more in line with equity expectations. And in a final experiment,
the overpaid group restricted its quantity but increased its
quality in order that total pay received might be in line with
contributions.
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11.622.1
Other research has not demonstrated the same strength of
COMPENSATITION MANAGEMENT
impact upon an overpaid group as for an underpaid one. For
example, a second study supported hypotheses with respect to
underpaid personnel; they tended to decrease inputs over a
period of time in comparison with those equitably paid as well
as with those overpaid.
The overpaid group however, tended to parallel the equity
group in output. Concerning satisfaction, however. overpaid
did express more overall dissatisfaction than did those from
equitably paid groups. Thus, there is some indication of guilt
from receiving more compensation than deserved, but such
feelings were not translated into action.
It has been observed that many organizations pursue a pay
increase policy characterized by cells 4, 5, and 6. The employee of
average contribution is accorded an average’ increase in pay, but
those above and below average are allocated compensation
amounts not significantly different.
Thus superior personnel are moderately under-rewarded,
leading to lower contributions or withdrawal from the firm.
Inferior personnel are moderately over-rewarded, leading to
little or no change in behavior but effecting acceptable levels of
employee satisfaction.
It is this condition that led Herzberg to conclude that pay
cannot be; an effective motivator of employee behavior. 10
Figure 12-2 and equity theory would suggest that the problem
may be one of improper design of compensation systems,
rather than the fundamental inability of pay to motivate.
To cope with possible feelings of inequity, various organiza-
tions follow a practice of imposing secrecy with respect to
compensation received. This is particularly true for salaries of
executives and other personnel not covered by union contracts.
Research has shown that personnel often underestimate pay of
higher-level managers and overestimate the pay of both peers
and those one level below.
Thus even if conditions exist that would favor equity, it will not
be perceived if compensation is kept secret. On the other hand,
if a firm desires to “go public” with its salaries, it had better be
able to evaluate performance levels in an objective manner.
There are many situations where job outputs are both intan-
gible and intertwined in a dependent fashion with other jobs.
Unless some form of acceptable objective assessment can be
developed, public pay systems may well lead to lower perfor-
mance and morale, accompanied by strained relationships
between superiors and subordinates.
Tutorial Activity 1.1
An Article on Pay Equity
For all the problems of pay equity today there were similar
schemes in operation in the British Civil Service, Post Office and
Schools by the end of the Second ...
Incomparable Worth: Pay Equity Meets the Market
Equal pay for equal value, or comparable worth, or pay equity, as
it is variously called, is becoming increasingly common in a
world where any kind of administered intervention in the
workings of the free market are regarded as inherently suspect.
Steven Rhoads attempts to demonstrate in this book why the
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 market is right and pay equity wrong. Based on case studies in And it cannot be claimed that ‘free markets’ generate objective
COMPENSATITION MANAGEMENT

England, Australia and particularly Minnesota, Rhodes argues criteria for rewards - or are we back to the functionalist argu-
that the arbitrariness of all pay equity systems inevitably dooms ments many of us thought we had left many years ago? The
them in the same way that the Soviet command economy was point is not that administered markets are subjectively governed
doomed - they both proved to be uneconomic and, in the long and free markets objectively governed but that both forms are
term, destroyed the interests not just of those administering social constructions, the whim of politics and power as much as
the schemes but also those for whom the schemes were demand and supply.
designed. One might also want to suggest that a little history might not
For those ‘suffering’ from pay equity the result may appear to go astray here. For all the problems of pay equity today there
be a sudden boost in wages as the scheme drags the wages of were similar schemes in operation in the British Civil Service,
women up to the level of men but, in the long term, it merely Post Office and Schools by the end of the Second World War,
means that employers of female labour up sticks and go and in the Post Office case by the end of the First. These may
elsewhere in search of the cheap labour they originally had. not have been perfect but they certainly provided equitable pay
For those readers whose comparisons extend beyond pay equity without self-evidently undermining any of the institutions
there is a strong historical resonance here: all institutions that involved.
‘interfere’ with the workings of the free market allegedly pose In sum, this is an interesting book and one well worth reading
problems for all involved. Trade unions were similarly accused for those researching or implementing or suffering from pay
of boosting wages beyond the going rate to the extent that equity; but like the topic it covers, it is not without problems.
employers would simply go elsewhere for labour. Keith Grint
If governments tried to intervene and stop children working Templeton College, Oxford.
for long hours then factories and mines would be uneconomic
and close down. Wage councils provide pay in excess of market
conditions and the result is catastrophic for the very workers
that councils seek to protect. In sum, pay equity, here, becomes
just another interference with efficiency.
The question arises, but is not directly asked by Rhoads and
therefore not answered by him: to what extent is pay equity
itself a particular problem or just another alleged example of
the Canute-like exercise by some to hold back the unstoppable
sea of the free market?
Rhoads’ work is primarily based on a series of case studies of
existing pay equity schemes, examined through documentation
and interviews, and it is, therefore, difficult to compare the
specific effects of pay equity with other forms of market
intervention. One might want to take this issue further since it
seems that the argument rests on the less than ideal nature of
these schemes against two mythical alternatives: the perfect
equity scheme which does not and probably cannot exist, and
the perfect market - which is similarly problematic.
In the absence of any examples of that most elusive creature,
the perfect market, one is surely right to remain sceptical of the
claims that pay equity schemes (albeit flawed schemes) interfere
with ‘normality’.
That said, Rhoads’s argument is not without its merits. His
review does indeed suggest that pay equity schemes are likely to
go astray (as indeed are all pay schemes eventually), and he is
surely right to question the utility of job evaluation consultants
who seem to operate on faith rather than science.
On the other hand, his claim that the problem lies in the
absence of objective criteria for job evaluation is double edged.
It is the case that no consensus exists on what to measure, let
alone how to measure. Yet the subjectivity of evaluation should
not be counterpoised to the objectivity of the free market
operations. If economics was an objective exercise in mapping
and measuring it is doubtful whether our collective economies
would be in such a dire state.

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182 11.622.1

LESSON 29:
PROFIT SHARING AND STOCK OPTIONS
Principles of External and Internal Differential
Rewards and Incentives
Learning Objective
• To know the concept of Profit Sharing
• How is Stock Option a Tool of Employee Motivation?
• Kinds of ownership
Profit Sharing
This method of profit sharing is usually applied only to
managerial and executive personnel to avoid dealing with vast
numbers. ...
Human Resource Management Approach
Stock option is a right issued by a corporation to an individual
or an entity to buy a given amount of shares of company stock
at a stated price ...
Introduction
Stock ownership plans enables employees to acquire company
stock often at concessional rate. Companies set limits to the
amount of stock that employees can buy, which is usually
related to the wage or salary earned by the employees or it may
be restricted to above certain wage levels.
There may be certain conditions with regard to the resale of the
stock also - such as agreeing to sell to the issuing company first
until a stated period or until he is no longer with the firm. The
cost of shares is usually deducted from the pay at source.
Sometimes, the worker’s share of profits is utilized to pay for
the stock purchases.
This method of profit sharing is usually applied only to
managerial and executive personnel to avoid dealing with vast
numbers.
This method of profit sharing comes with its own merits and
demerits. They merits are:
• Links compensation package closely to performance.
• Offers a way for an organization to retain the best of the
employees.
• Motivates recipients to perform even better.
• Inculcates a sense of ownership and responsibility.
• Establishes importance of team effort among employees.
The demerits associated with the scheme are:
• Only profitable companies can use the tool.
• Stock prices do not always reflect fundamentals of an
organization.
• Falling share price could mean losses for employees
• The inability to cash in quickly can dampen the interest.
• Lack of transparency can earn accusations of favoritism.
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11.622.1
COMPENSATITION MANAGEMENT
Inspite of the above associated demerits, this option is being
increasingly used by companies to command loyalty in indus-
tries marked with high managerial mobility as the scheme links
a manager’s reward to his efficiency.
How is ESOP a Tool of Employee Motivation?
The option of providing an employee with this benefit is done
in two ways:
A stock option is a right issued by a corporation to an indi-
vidual or an entity to buy a given amount of shares of
company stock at a stated price within a specified period of
time. Employee stock options are options issued to employees
as a form of incentive compensation.
A stock option gives an employee the right to purchase a set
amount of shares at a fixed price for some years into the future.
Generally speaking, the rules for who gets options and how
much they get are much looser than for ESOPs. In the past,
companies usually gave stock options only to “key” employees.
Nowadays, more and more companies give options to most or
all employees.
Until a few years back, the general idea amongst employees was
to get a good job, preferably in an MNC, stay around till
retirement and lead a happy life. It was a situation like “Em-
ployment for Life” ( or imprisonment for life, depending on
how one views it ! ). Employees were loyal to the Company
they served and Companies, by and large did not retrench
employees.
Suddenly, in the last few years, lots of things have changed. No
longer are employees willing to stay in the same company for
life unless they are satisfied with the returns they get from their
jobs. This could range from better remuneration to growth
prospects to a better working environment.
Employers, also do not want to be stuck with inefficient
employees but would like to have the best people around. They
have been forced to find innovative ways to attract and retain
good people. Companies, particularly new economy companies
have been forced to rejig their work culture to become more
employee-friendly, or as one may put it, “ finding ways to get
‘with it’ “. One of the most common employee motivation
and retention methods is through ESOPs or Employee Stock
Options.
An ESOP is nothing but an option to buy the company’s share
at a certain price. This price which could be the market price or
some other price. Normally, to make an ESOP attractive, the
option price is lower than the market price.
The option to acquire shares is generally exercisable over a
period of time, known as vesting period ( generally ranging
from 1 to 5 years ). The first options are exercisable generally
after a year. Since options lapse if the employee leaves employ-
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 ment before the vesting period is over, ESOPs work as an
COMPENSATITION MANAGEMENT
incentive for the employee to stick around for that time.
ESOPs are a good motivation tools. The knowledge that if he
does well, the company will prosper and eventually the shares
will yield a higher return motivates the employee to put in more
efforts. This has a multiplier effect since with highly motivated
employees, the chances of the company doing well are extremely
high. Efficiency enhances, productivity increases & profits rise. It
is a win-win situation for all.
ESOPs are good tools for companies at the growing stage to
attract good employees. Typically, new companies do not have
much resources and paying ability. ESOPs make a lot of sense
to such companies to get good employees since there is no cash
outlay involved for the company.
While the major beneficiaries are employees of software and
internet companies who get the shares of a company at a
comparatively lower rate, other sectors are gradually becoming
aware of the benefits of ESOPs. In fact, even companies like
ICICI and Hindustan Lever have an employee stock option
plan.
Kinds of Ownership
There are two main types of stock options:
Incentive Stock Options (ISO’s)
They must satisfy the conditions of the Internal Revenue Code
for preferential tax treatment. An ISO generally allows the
employee to defer taxation until the date the shares bought
with the option are sold and to pay tax at the applicable capital
gains tax rate rather than the (higher) ordinary income tax rates.
The company does not get a tax deduction.
Nonqualified Stock Options (NSOs)
They are options that do not satisfy the Internal Revenue
Code’s conditions for preferential tax treatment. When the
employee “exercises” the option by buying the stock, he or she
pays ordinary income tax on the “spread” between the value of
the stock and the price paid for it. However, the company
receives a tax deduction on the spread. Unlike ISOs, NSOs can
be given to non-employees.
Other Types of Stock Options
Phantom Stock
This is another kind of stock option. This is a bonus that
rewards employees based on the increase in value of the
company’s stock, the dividend performance of the stock, or
both.
Stock Appreciation Rights (SARs)
They are similar, and in effect consist of phantom stock
without phantom dividends. Employee Stock Ownership Plans
(ESOPs)
Employee stock ownership plans (ESOPs), are retirement plans
in which a trust funded by the employer owns company stock
and employees cash out after they leave.
The ESOP is the most tax-advantaged mechanism for compa-
nies to share ownership with employees. An ESOP is an
employee benefit plan operating through a trust that accepts
tax-deductible contributions from the company to accumulate
company stock, which is then allocated to accounts for indi-
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184
vidual participants. The ESOP can acquire both new and
existing stock.
The trust can borrow money to purchase the stock, with the
company repaying the loan by making tax-deductible contribu-
tions to the ESOP. ESOPs can be used for a variety of
purposes, such as:
Broadly most companies follow two models.
Beneficial Ownership
Under this scheme, the company allocates a number of shares
to an employee at a price, which is the 52-week average of the
market price. This generally comes at a 10 to 15 percent discount
over the market value. The shares are, however, held by a trust.
The employee has rights over the shares only after a lock-in
period of one year. After 12 months, most companies allow the
employees to either sell 25 percent of their shares and pocket
the difference or the employees can buy those shares from the
trust at the price quoted when the shares were first allocated. Or
else the trust continues.
Such schemes generally extend over a period of five years. Each
year, a certain percentage of shares is freed up for employees to
exercise their options which are three: sell, buy or instruct the
trust to hold them. At the end of the five-year term, the
employee will have to either offload all the shares or buy them
from the company at the original price.
If the employee resigns before the one-year lock-in period, the
employee forfeits all the shares. If he resigns after one year, he
can exercise his option of selling or buying 25 percent of the
shares. Similarly, after two years there are other alternatives and
so on and so forth . Most companies do not allow the employ-
ees who have left them to hold such shares beyond five years.
They have to sell them back to the trust at a price that is an
average of the eight preceding weeks.
Shadow Ownership
This second scheme is offered by multinationals in India.
Under this scheme, staff are allocated shares of the parent
company which may be listed abroad - usually Wall Street or the
London Stock Exchange. But here, the stocks are never
transferred in your name because Indians are not allowed to
hold foreign stocks in their name.
Under this too, staff are allotted many shares through a trust
with lock-in periods between one and five years. The only
option an employee can exercise is to sell the shares at the end
of the lock-in period and encash the difference.
11.622.1
The two approaches help an organization in different ways. They are
ESOP
Selling of Ownership An ESOP allows owners of closely held companies
to sell to an ESOP and reinvest the proceeds from
the sale on a tax -deferred basis, providing the ESOP
owns at least 30% of the company and certain other
rules are met. The company can use tax-deductible
dollars to make the purchase.
Requirement of It is very rarely practical for ESOPs to allow
Employees to Invest employees to purchase shares through the plan.
in the Company
Finance Growth An ESOP can borrow money to buy newly issued
shares. The company uses these funds to buy other
companies, buy new equipment, or any other
corporate purpose. The company repays the loan in
pretax dollars by making contributions to the ESOP.
Motivation of There is considerable research linking employee
Employees ownership to substantially improved corporate
performance, provided that companies make
financially significant contributions to the ESOP (at
least 5% of pay per year), share corporate
performance information, and get employees
involved in decisions at the work level.
Attraction/Retention An ESOP does not allow for discretion in who gets
of Selected how much ownership. Allocation of shares must be
Employees by relative pay or some more level formula. It
cannot be based on individual merit.
Implementation of a stock option plan
© Copy Right: Rai University
11.622.1
COMPENSATITION MANAGEMENT
STOCK OPTION
Stock options do not work for this purpose. Employees
are buying either new shares of stock issued by the
company or existing shares at a bargain price. If they are
buying existing shares, the price would rarely be
acceptable to the seller.
The exercise of an option brings cash into the company
if new shares are bought, but the shares are bought at a
discount.
Stock options bring an infusion of cash when
employees exercise their options, but only if the
employees are buying newly issued shares. That,
however, dilutes other owners. Many companies buy
back existing shares equal to the number of options
exercised, bringing in no new capital.
There is not any research on how employees react to
options, although there is a great deal of anecdotal
evidence that options do motivate people. There is
good theoretical reason to think that options would
have the same effect as ESOPs, but there is no hard
evidence yet.
Options allow you to provide however much ownership
you want to whomever you want. In many industries,
offering options has become a prerequisite to getting
good people, or sometimes any people.
185
 Tutorial Activity 1.1
COMPENSATITION MANAGEMENT
Latest Updates on Profit-sharing, Dividend Norms
for Undertakings may be Revamped
by Santanu Saikia
New Delhi, June 3: The finance ministry wants a revamp of the
profit sharing and dividend paying policy in all undertakings in
which the Government has substantial shareholding. These
include the three development financial institutions, General
Insurance Corporation (GIC) and its subsidiaries, all
nationalised banks and central public sector undertakings
(PSUs).
It has rooted for a switch to a sector-wise profit-sharing
formula and segmented dividend payment criteria for all PSUs.
In a meeting with top North Block officials presided over by
finance secretary Vijay Kelkar last week, the ministry has decided
to ask for maximum 25 per cent share in the profit after tax of
PSUs as standard payout criteria. But sector-wise profit sharing
norms, depending upon profits generated, are also to be laid
down.
The ministry plans to fix a Rs 1000-crore additional
mobilisation target for the next fiscal by demanding higher
payouts from its undertakings. The estimated profit and
dividend income in the current year,including surplus profits of
the RBI, is Rs 9482 crore.
While profit sharing is the norm with banks, GIC and its
subsidiaries and the three DFIs, PSUs share their profits with
the Government by way of dividends. The ministry claims that
the percentage profit share can be translated in terms of
dividend on a proportional basis on equity held by the Govern-
ment.
The ministry is willing to grant exceptions to the 25 per cent
ceiling on a a sectoral and case-by-case basis. Since the payout
policy of an individual corporate entity is not always a function
of profit after tax, North block is willing to accept a lower return
on equity in case internally generated funds are required to
finance genuine expansion projects. Similarly, certain sectors may
not be able to provide the high 25 per cent share.
The ministry is expecting opposition from PSUs and adminis-
trative ministries to its new proposal. The argument against
laying down a specific dividend payment criteria is that a
corporate entity should be providedthe freedom to chose its
own payout policy without having to think of contributing to
the government’s resource kitty.
The ministry claims that the payout policy of several public
sector banks, FIs and a host of PSUs, some operating in the
infrastructure sector, is not aligned with their profitability
patterns and the anamoly needs to be rectified even though the
aggregate figures do show that gross payout is roughly 20 per
cent of the overall net profit. Public sector banks provide a
measly 384 crore share of total profits while LIC and GIC
contribute only 264 crore.
North block sources said that the proposals would be discussed
with other ministries and taken to the cabinet, if necessary. A
cabinet nod is, however, not a requirement for laying down a
new dividend policy. An administrative fiat is enough.
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186
Move may Boost Revenues
Increasing the dividend payout from Government companies is
a thinly veiled attempt at raising flagging Government revenues.
The idea may sound good on paper, but the companies paying
up will be the exception rather than the norm as most, with the
exception of wholly-owned entities such as the insurance
companies, will seek an exemption under the proposed norms.
In case of listed Government companies with a minority
shareholder interest, a dividend payout becomes a sensitive
corporate finance tool, where the company signals its immediate
potential. By being forced to hike its dividend payout it could
send out wrong signals to minority shareholders.
Taxation of ESOPs
Until last year ( F.Y. 1999-2000), income tax on ESOPs was
levied at the time of issue of shares to the employee. As such
ESOP was considered as a perquisite forming part of salary and
was taxed as salary income at the time of exercising the option.
Section 17(2)(iiia) of the Income Tax Act, 1961 provided that,
the value of any specified security allotted or transferred, directly
or indirectly, by any person free of cost or at a concessional rate
to an individual who is or has been in employment of that
person, shall be treated as a perquisite.
This implied that the difference between the market price of
such shares at the time of their issue to the employees and
option price ( price at which the employee is entitled to get the
shares ) was treated as a perquisite in the hands of employees at
the time of exercise of the option and the employee had to pay
income tax on this perquisite.
E.g. if the market price at the time of exercising the option was
Rs.100/- per share and the option price is Rs.75/-, Rs.25/- will
be treated as taxable perquisite on which income tax has to be
paid.
Since tax was imposed at the time of acquisition of shares,
most employees had to sell the shares to pay the income tax.
This lead to situation where a part of the option shares, had to
be sold just to pay the tax.
Besides, when the employee had to sell the shares, the difference
between his sales proceeds and the market price at the time of
issue of shares to him was treated as capital gains on which he
has to pay capital gains tax.
Continuing the above example, if the employee actually sold
the said shares later at Rs. 150, he would have to pay capital
gains tax on Rs.50/-.
Besides, the employee was not entitled to any relief, if after
paying income tax at the point of subscription, the value of
shares went below the option price and he made a loss on sale
of the shares. E.g., having paid the tax on Rs.25/-, suppose the
employee could sell the shares for Rs.80/- only. Though his
gain was only Rs.5/-, tax on Rs.25/- would already have been
paid by him. And what if the employee can sell the shares at a
price below Rs.75/-. In such cases, he would have paid tax on
Rs.25/- even when he has actually made a loss.
Most employees were not happy with this scheme of things.
Industry made representations to the Finance Minister to
change the said provisions and provide for levying income tax at
11.622.1
one point only, i.e. at the time of actual sale on the difference Conclusion

COMPENSATITION MANAGEMENT
between actual sale price and the option price. i.e. no taxation at In a nutshell, Employees’ Stock Option Scheme helps a
the time of exercising of options but only on final sale. E.g., if company to enter into a strategic and robust relationship with
the shares were sold for Rs.150/-, the employee would be liable their employees on a voluntary basis and in a gracious manner
for tax on Rs.75/- (Rs.150/- less Rs.75/-) and not at the time for their genuine benefit and thereby encouraging other sectors
of exercising the option. also to utilise this option. Properly used, this tool can be used
Considering the facts of the case, Finance Minister Yashwant for creating a win-win situation of all concerned.
Sinha conceded the industry’s long pending demand for taxing
ESOP at the time of sale, rather than imposing the levy of tax
at the time when the shares are issued to the employees. Instead
of considering ESOP as a perk and imposing tax on it, the
government will w.e.f. F.Y. 2000 - 2001 only impose capital
gains tax at the time of sale of shares by the employee.
The taxable capital gains would be the difference between the
sale price and the issue price and such tax liability would be
discharged from the sale proceeds of shares so sold. Moreover,
the rate at which tax liability would be calculated depends upon
whether it is a long-term capital gains or a short term capital
gains. In case of long term capital gains, such gains shall be
taxed at the rate of ten percent without indexation or at the rate
of 20 % with indexation of acquisition price.
Can ESOPs be Gifted?
The answer to this is, ‘Yes’. The employee who is entitled to
the ESOP may gift the options to any person. However, the
donor will have to pay income tax on the notional gains on the
date of gift i.e. he will have to pay capital gains tax on the
difference between the fair market value of the gifted shares /
warrants on the date of gift and the option price, if it has
already been paid.
The donee, if and when he actually sells the shares will have to
pay capital gains tax on the difference between the actual sale
proceeds and the fair market value on the date of gift.
The reason for having this provision is that, in the past, many
employees gifted the option shares / warrants to relatives /
friends without paying any tax. These friends / relatives sold
the shares / warrants and either, gifted back the sale proceeds to
the employee, or in case of a close relative such as spouse, let the
money remain with the spouse.
Demerits
With so many merits, are ESOPs the ultimate tool for company
prosperity? Do ESOPs have no demerits ? Like most things in
life, excess of anything has its own problems. When ESOPs are
exercised, it leads to a further issue of equity shares of the
company. This means that the equity of the company is being
diluted further and has an adverse effect on the EPS (Earning
Per Share).
Besides, ESOPs are nothing but an alternative employee
remuneration plan for employees. The difference between
market price and the option price is nothing but a cost to the
company and should be charged to the profit and loss account.
However, there are no Indian Accounting Standards which
require the company to treat the option cost as any expenditure.
The US GAAP has recognized that the option price is nothing
but part of manpower costs and should be charged to the
profit & loss account over the vesting period of the ESOPs.

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11.622.1 187
COMPENSATITION MANAGEMENT
LESSON 30:
INTRODUCTION TO FEATURES OF FRINGE BENEFITS, OBJECTIVES
OF FRINGE BENEFITS AND SERVICES PROGRAMME
Principles of External and Internal Differential
Fringe Benefits
Learning objective
• Introduction to the concept of Fringe Benefit
• To know the Terminology and Meaning of Fringe Benefit
• To learn Special Features of Fringe Benefit and Service
Programmes
• Objectives of Fringe Benefit and Service Programmes
Introduction to the Concept of Fringe
Benefit
Management is concerned with attracting and keeping employ-
ees, whose performance meets at least minimum levels of
acceptability; and at keeping ‘absenteeism’ and ‘turnover’ to
tolerable levels.
The provision of ‘benefits’ and services’ can be and are
important in maintaining the employees and reducing or
keeping turnover and absenteeism low.
It is important to note that ‘financial’ incentives are paid to
specific employees whose work is above standard. ‘Employee
benefits and services’ on the other hand, are available to all
employees based on their membership in the organization.
The purpose of such benefits and services is to retain people in
the organization and not to stimulate them to greater effort and
higher performance. They foster loyalty and act as a security base
for the worker.
Terminology and Meaning
These benefits are usually known as “fringe benefits” - as they
are offered by the employer to the employee as a “Fringe.”
Different terms have been used for these benefits, such as
“Fringe Benefits,”. “Welfare Expenses,” “Wage Supplements,”
“Subwages;” or “Social Charges,” “Perquisites other than
Wages,” or “Transpecuniary Incentives.”
The other terms used are: “Extra Wages,” “Hidden Payroll,”
“Non-Wage Labour Costs” or “Selected Supplementary
Compensation Practices.”
It is difficult to define what a fringe benefit is, for there is no
agreement among the experts on its precise meaning, signifi-
cance or connotation.
The chief area of disagreement is between “wages” and “fringe”
on the one hand and between “fringes” and “company
personnel services” on the other.
There are also differences on whether the benefits which have
been legally provided for should be included among the
“fringes.”
The Glossary of Current Industrial Relations and Wage Terms
has defined fringe benefits as “Supplements to wages received
by workers at a cost to employers. The term encompasses a
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188
number of benefits - paid vacation, pension, health insurance
plans, etc. which usually add up to something more than a
“fringe,” and is sometimes applied to a practice that may
constitute a dubious benefit for workers.”
The International Labour Organization has defined “fringe
benefits” as under:
“Wages are often augmented by special cash benefits, by the
provision of medical and other services, or by payments in kind
that form part of the wage for expenditure on the goods and
services. In addition, workers commonly receive such benefits as
holidays with pay, low-cost meals, low-rent housing, etc. Such
additions to the wage proper are sometimes referred to as
‘fringe benefits.’ Benefits that have no relation to employment
or wages should not be regarded as fringe benefits, even though
they may constitute a significant part of the workers’ total
income. This is fairly obvious in the case of public parks,
sanitation services, public and fire protection.”
The United States Chamber of Commerce includes five
categories of services and benefits under the term fringe
benefits. These are:
i. Legally required payments - old-age pension, survivor
benefits, disability pension, health insurance,
unemployment insurance, separation pay, and payments
made under the Workmen’s Compensation Act;
ii. Pension and group insurance; and welfare payments;
iii. Paid rest periods, waste-up time, lunch periods;
iv. Payment for time not worked - vacations and holidays, for
example; and
v. Christmas bonus.
Belcher defines these benefits as “any wage cost not directly
connected with the employees, productive effort, performance,
service or sacrifice.”
According to the Employers’ Federation of India, “fringe
benefits include payments for non-working time, profits and
bonus, legally sanctioned payments on social security schemes,
workmen’s compensation, welfare cess, and the contributions
made by employers under such voluntary schemes as cater for
the post-retirement, medical, educational, cultural and recre-
ational needs of workmen. The term also includes the
monetary equivalent of free lighting, water, fuel, etc., which are
provided for workers, and subsidized housing and related
services.”
Cockman views employee benefits as “those benefits which are
supplied by an employer to or for the benefits as “those
benefits which are supplied by an employer to or for the
benefits of an employee, and which are not in the form of
wages, salaries and time-rated payments.”
We may define fringe benefit thus:
11.622.1
It is a benefit which Supplements the employees’ ordinary
wages, and which is of value to them and their families in so far
as it materially increases their retirement benefit.
Fringe benefits help build up a good corporate image. Schemes
like housing, educational institutional and recreational activities
bring benefits to the society at large. An organization with the
introduction of Fringes seeks to enhance employee morale,
remain cost effective, and introduce changes without much
resistance.
Special Features of Fringe Benefits
It will be noted that there is some difference between ‘wages
and fringe benefits.’ Firstly, wages are directly related to the work
done and are paid regularly - usually weekly, fortnightly or
monthly. Fringe benefits, on the other hand, are those pay-
ments or benefits which a worker enjoys in addition to the
wages or salary he receives.
Secondly, these benefits are not given to workers for any
specific jobs they have performed but are offered to them to
stimulate their interest in their work and to make their job more
attractive and productive for them. They boost the earnings of
the employees, and put extra spending money in their hands.
Thirdly, fringe benefit represents a labour cost for the em-
ployer, for it is an expenditure which he incurs on
supplementing the average money rates due to his employees
who have been engaged on the basis of time schedules. In the
circumstances everything which a company spends over and
above “straight time pay” should be considered a fringe benefit.
A labour cost is a “fringe” only when it is an avoidable factor;
that is, when it can be replaced by money wages without
determent to a worker’s productive efficiency. Only the legal or
union-imposed or voluntary non-wage costs, which can be
computed into money wages, are considered to be fringes.
Fourthly, a fringe is never a direct reward geared to the output,
effort or merit of an employee. It is offered, not on the basis of
the hard work or long hours of work put in by an employee
but on the basis of length of service, his sickness, sex, the
hazards of life he encounters in the course of his work, etc.
For example, maternity benefits are offered to female workers
who have put in a prescribed period of service with a particular
employer. Sometimes, the longer an employee’s period of
service, the larger the fringe benefits he enjoys. But wages are
always fixed and paid regularly.
Fifthly, to be termed a ‘fringe benefit,’ a labour cost should be
intended by an employer as a benefit desired by his staff. It is a
fringe benefit when it is enjoyed by all the employees.
For example, a fringe benefit - subsidizing non-vegetarian meals
taken in the factory canteen - is not a fringe benefit for vegetarian
employees.
Sixthly, a fringe must constitute a positive cost to the employer
and should be incurred to finance an employee benefit. If the
benefit increases a worker’s efficiency, it is not a fringe; but if it is
given to supplement his wages, it is.
For example, the expenditure incurred on providing better
lighting arrangement with a view to increasing a worker’s
efficiency is not counted as expenditure incurred on fringe
© Copy Right: Rai University
11.622.1
benefits, even though the workers may gain financially as a
COMPENSATITION MANAGEMENT
result of their increased efficiency flowing from the provision of
better lighting facilities. Subsidized meals, however, definitely
constitute a fringe benefit.
Though these benefits are known as fringes, they are not merely
so but are a substantial part of the expenditure incurred on
wage and salary administration. They are better known now as
‘Benefits and services’ rather than as ‘Fringe Benefits.’ But since
the terms are also used interchangeably, they are synonymous.
The word ‘Benefit’ applies to those items for which a direct
monetary value to the employee can be easily ascertained, as in
the case of holiday pay, pension, medical insurance or separation
pay.
The word ‘Services,’ on the other hand, refers to such items as
athletics, company purchasing service, worker’s medical exami-
nation, legal aid, housing, etc.
Objectives of Fringe Benefit and Service
Programmes
An organization designs and establishes a benefit-and-service
programme to achieve the following ends:
a. To keep in line with the prevailing practices of offering
benefits and services which are given by similar concerns;
b. To recruit and retain the best personnel;
c. To provide for the needs of employees and protect them
against certain hazards of life, particularly those which an
individual cannot himself provide for;
d. To increase and improve employee morale and create a
helpful and positive attitude on the part of workers
towards their employers;
e. To make the organization a dominant influence in the lives
of its employees with a view to gaining their loyalty and co-
operation, encouraging them to greater productive efforts;
f. To improve and furnish the organizational image in the
eyes of the public with a view to improving its market
position and bringing about product acceptance by it;
g. To recognize the official trade union’s bargaining strength,
for a strong trade union generally constrains an employer to
adopt a sound benefits-and-services programme for his
employees.
In other words, fringe benefits satisfy three goals, viz:
1. Social Goal
Human resource is the most precious of all resources. In the
words of the Philadelphia Charter, 1944, “Labour is not a
commodity. It is entitled to a fair deal as an active participant in
any programme of economic development and social recon-
struction.”
Article 43 of the Constitution of Indian provides:
“... All workers should be given a living wage, conditions of
work ensuring decent standard of life and fuller enjoyment to
ensure social and cultural opportunities.”
The fringe benefits act as a social lever in helping conservation
of this precious resource, by guarding against its unnatural
erosion and providing the climate for its development in a
working environment.
189
 2. Human Relations Goal
COMPENSATITION MANAGEMENT
The management, through motivation, tries to develop and
maintain “human relations”, i.e., “mutual interest, individual
differences, motivation and human dignity.” The management
provides with an environment which will reasonably meet the
economic, social and psychological needs of the employees so
that their cooperation could be obtained and productivity of
the organization enhanced.
3. Macro-Economic Goal
For maintaining the growth and stability in the economy of a
country, ideal utilization of the non-human and human
resources is imperative. Fringe benefits do provide protection,
during periods of contingencies of life, for training and
development of the employees, and for good working
conditions and assistance to supplement their main income,
opportunities for social interaction through cultural recreational
facilities, etc.
Tutorial Activity 1.1
Can college tuition be a fringe benefit? Ask HR Guy ... Hello
HR guy, I was wondering if tuition could be treated as a fringe
benefit for working for a company. ...
Can College Tuition be a Fringe Benefit? Ask HR Guy
Hello HR guy,
I was wondering if tuition could be treated as a fringe benefit
for working for a company. I have been working for the same
research and development company for almost five years now
and now have applied to go to graduate school. I will continue
to work at the company while in school at a reduced percentage.
I would like to ask the company if it would consider paying for
my tuition since what I would be studying would be parallel
with my work. Of course I must consider the company’s
position of not having a lot of extra money for G and A
(general and accounting) funds and none of the projects have
the funds for my tuition right now. So I was wondering if
tuition could be a fringe benefit. In addition, what other
options could I suggest?
Thank you,
James
James,
The short answer is: It depends on the company - and even,
sometimes, the individual situation. Many firms will cover
courses taken that have direct relevance to the job description,
especially if you’re in a tech-related field. But it’s different if
you’re working on a degree, as there are many non-course
expenses involved. Nevertheless, it’s always in a company’s best
interests to invest in their employees, though there’s usually a
catch: Employers are afraid to see such employees leave after
their studies are complete. After all, if it pays for your degree
only to see you go to another employer soon after graduation,
it’s suddenly lost an enormous investment. So to boost your
chances of getting tuition assistance, suggest drawing up a
contract that commits you to working for the firm for X years
after graduation. Also, be willing to negotiate on how much the
firm chips in - with this economy, you’d be very lucky to get it to
cover everything, but with some good negotiating, you might
be able to get a good chunk of your expenses covered.
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190
Emphasize how long you’ve been there, as well as the direct
benefits your training will provide the company - not just vague
“I’ll be a smarter, better worker,” but the sort of knowledge
base you’ll acquire and the kinds of projects you’ll be able to
work on. And, yes, there could be a better chance if you could
work it into your benefits package - this might mean a reduction
in salary, but it would also lock in the tuition assistance. Go into
it with several options and a willingness to compromise, and
you should get something of what you’re after.
Good luck,
HR Guy
Tutorial Activity 1.2
Health Insurance: Fringe Benefit or Dead
Weight
By Mark Battersby
Although health care costs may continue to rise, there are
some steps you can take to offset some of this necessary
burden.
It is a sad reality that few sign shops or sign-related businesses
can afford to offer their employees healthcare insurance.
Double-digit increases in the cost of medical insurance are
driving others to severely limit this popular fringe benefit, if
not discarding it altogether.
A Tillinghast-Towers Perrin survey showed that in 2002, a
whopping 88 percent of the corporate respondents predicted
even more large increases in employee health care costs through
2006. That means that by 2007, many companies, large and
small, will be looking at health care costs almost double of
what they were at the start of the century.
What can any sign professional or sign business owner or
manager do to fight this tide? Clearly there is no silver bullet.
No one wants the government to step in with convoluted
solutions. Fortunately, several unique strategies developed in
recent years, combined with our tax laws, may help make
healthcare insurance an affordable option for many sign
businesses - and their owners.
Instead of focusing on making the system cut costs through
managed care of HMOs alone, many large companies are
focusing on making the consumer more cost sensitive and
health-conscious. In other words, many companies are begin-
ning to empower their employees to take charge of their own
health care as you’ll see.
Contain the Costs
As many sign professionals are all-too-aware, insurance carriers
that write policies for small businesses tend to charge very high
premiums. Often they demand extensive medical information
about each employee. If anyone in the group has a pre-existing
condition, the carrier may refuse to write a policy. Or, if
someone in the sign business becomes seriously ill, the carrier
may cancel the policy the next time it comes up for renewal.
Fortunately, many states are trying to ease this burden by
passing laws that make it easier for small businesses to get
health insurance and to prohibit insurance carriers from
discriminating against smaller firms. However, until such time
as more of these favorable laws are passed, there are a number
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of cost-cutting options that every sign professional should
explore.
A growing number of small businesses are, for example,
banding together with other businesses to enjoy economies of
scale and gain more clout with insurance carriers. Many business
leagues, trade organizations and groups offer health insurance
plans for small business owners and their employees at lower
rates.
Your sign business may have only a few employees, but united
with other members of a group or association and their
employees, you’ve got substantial clout. The carrier issues a
policy to the whole association, your business’s coverage can’t be
terminated unless the carrier cancels the entire association.
Associations are able to negotiate lower rates and improved
coverage because the carrier doesn’t want to lose such a big
chunk of business. This way even the smallest one-person
company can choose from the same menu of healthcare
options that big companies enjoy.
Associations aren’t the only route to take. In some states,
business owners or groups have set up health insurance
networks among businesses that have nothing in common but
their size and their location. Chambers of commerce, tenants
and merchants’ associations, etc. are among the possibilities that
every sign professional should explore.
Consumer-driven Health Care
A few, larger sign businesses are experimenting with so-called
“defined contribution” products. These plans typically grant
employees an annual cash allotment, called a persona account or
something similar, to spend as they please for health. If that
money is used up, employees face a fairly high deductible before
more conventional medical coverage kicks in.
In many of these plans that are offered by insurance companies,
trade-groups and others, any unused portion rolls over and is
added to the following year’s allotment. In some areas and
some fields they are already available to small businesses.
Employers hope to see savings from employees who, when
confronted with the real price tag for their medical services,
decide to shop for better value. Under today’s systems, the
employee pays his or her $15 co-pay and the doctors and
hospitals have an employer’s blank check from there on in.
One midwest company added just such a personal health
account plan last year. Single workers pay about $450 to
participate in the plan provided by a private administrator, one
of a growing number of companies offering defined contribu-
tion products to employers. Participants buying coverage for
one person have a yearly allotment of $750. If their medical
spending exceeds that, they are responsible for the next $500.
Once the employee hits $1,700 in annual health care expenses, a
more traditional managed care plan kicks in, generally, giving full
coverage to those who use “in network” medical services.
Carrots and Sticks
One employer recently dangled a temporary monetary incentive
in front of employees willing to make staying healthy a priority.
For those who stopped smoking, received regular screenings for
breast and prostate cancer and took other common sense health
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11.622.1
measures, the company agreed to pickup 75 percent of their
COMPENSATITION MANAGEMENT
health insurance tab, compared with 60 percent for others. That
offer prompted 90 percent of the company’s employees to opt
for health.
Although this was a large business, the payoff with this strategy
also applies to smaller sign businesses, even those with only a
few employees. In this situation, the operation’s workers’
compensation bill was close to 10 percent lower that it was less
than a decade earlier. What’s more, even in today’s environment
of steadily escalating costs, the company faces only a three
percent increase in health care premiums instead of the com-
monplace multi-year, double-digit hikes that others face.
Would a similar strategy, worked out with the help of compe-
tent advisers or your insurance company, be just as effective in
your workplace?
Uncle’s Helping Hand
Although tax deductible by a sign professional, contributions
made by the business to provide (through insurance or
otherwise) accident and health benefits are not taxable to the
employees. An employer’s deduction for contributions to a
funded welfare benefit plan for sickness, accident, hospitaliza-
tion or medical benefits is governed by the tax law
Group health plans that fail to provide continuing coverage to
qualified beneficiaries may subject employers to an excise tax. In
fact, any group health plan that fails to satisfy the continuation
coverage requirements or which discriminates in favor of key- or
highly-compensated employees may be subject to penalties in
the form of an excise tax - or denied a tax deduction.
If the sign business’s so-called “welfare benefit plan” involves
self-insurance, amounts added to a self-insurance reserve
account are not currently tax deductible. Actual losses charged to
that reserve account are, of course, deductible.
Under our income tax laws, self-employed sign professionals
may deduct 100 percent of any amounts paid for health
insurance coverage for themselves, spouses and dependents.
This deduction is limited to the actual income earned from the
sign business and reduced by a deduction for contributions
made by the self-employed professional to a retirement plan.
Only those benefits received by employee-shareholders owning
two percent or less of an S corporation’s stock are tax deductible
by the corporation as a business expense. Employee-sharehold-
ers owning more than two percent of the S corporation stock
are treated in the same manner as partners in a partnership.
Today, an employee-shareholder who owns more than two
percent of the S corporation’s stock and who is thus treated as a
partner, is entitled to deduct 100 percent of the amount paid
for medical insurance for himself, his spouse and dependents.
For purposes of this deduction, a two percent plus
shareholder’s wages from the S corporation are treated as the
shareholder’s earned income derived from the trade or business
with respect to the plan providing the health insurance coverage
is established.
Finally
If sign business owners and managers are waiting for Washing-
ton to solve their health care problems, many experts say that
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 the wait may be a long one. Health care continues to be the
COMPENSATITION MANAGEMENT

subject of vigorous debate on Capitol Hill. Some Democrats

are talking about universal health care although the plans are
short on detail and few of them offer much hope for smaller
businesses.
Congress may consider passing legislation that will create tax
credits for uninsured individuals. Other items on the agenda
include expanding medical savings accounts and increasing
prescription drug coverage for seniors. All of which puts the
question of health care insurance or coverage squarely back on
the shoulders of every sign shop owner and manager.
The self-employed sign business owner, partners and share-
holders in sign businesses operating as S corporations can today
deduct 100 percent of the amounts they spend on health care
insurance for themselves, their spouse and dependents. The
business itself, may claim a tax deduction for amounts spent on
healthcare for employees. Employees, of course, can safely
ignore health care payments made by their employer for tax
purposes. But, the question remains, can anyone really afford
healthcare protection and, if they can, for how long?

Notes:

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192 11.622.1

LESSON 31:
INTRODUCTION TO HISTORY AND GROWTH FACTORS,
COVERAGE OF BENEFITS
Principles of External and Internal Differential
Fringe Benefits
Learning Objective
• History And Growth factors of Fringe Benefits
• Contribution Of Other Factors On The Concept Of ‘Fringe
Benefits
• Coverage of benefits
Interaction
After studying rewards and incentives in detail now let us study
further the growth of Fringe benefits.
History and Growth Factors of Fringe
Benefits
Belcher says that “A Fringe is a catchword attributed to the
Regional Director of the War Labour Board (USA) during
World War II. The idea caught on and is now widely used in
spite of its limited value in describing the present practice.” It
sprang up as off-shoot of the industrial wage system.
In the U.K., fringe benefits germinated as the byproduct of
Industrial Revolution. In member countries of the I.L.O., the
Philadelphia Declaration did influence the origin of these
benefits.
In India, the Directive Principles of State Policy enshrined in the
Constitution and the subsequent Five Year Plan documents laid
considerable emphasis on improvement of wages, social
security benefits and other welfare measures, for it was rightly
recognized in the words of Peter Drucker, “Larger part of the
industrial growth is obtained not from more capital investment
but from improvements in men. We get from men pretty much
what we invest in them.”
Contribution of Other Factors on the
Concept of ‘Fringe Benefits’
For instance,
i. Rising prices and cost of living has brought about incessant
demand for provision of extra benefits to the employees.
ii. Employers too have found that fringe benefits present
attractive areas of negotiation when wage and salary
increases are not feasible.
iii. As organizations have developed more elaborate fringe
benefits programmes for their employees, greater pressure
has been placed upon competing organizations to match
these benefits in order to attract and keep employees.
iv. Recognition that fringe benefits are non-taxable rewards
has been a major stimulus to their expansion.
v. Rapid industrialization, increasingly heavy urbanization and
the growth of a capitalistic economy have made it difficult
for most employees to protect themselves against the
adverse impact of these developments.
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11.622.1
COMPENSATITION MANAGEMENT
Since it was workers who were responsible for production,
it was held that employers should accept responsibility for
meeting some of the needs of their employees. As a result,
some benefits-and-services programmes were adopted by
employers.
vi. The growing volume of labour legislation, particularly
social! security legislation, made it imperative for employers
to share equally with their employees the cost of old age,
survivor and disability benefits.
vii. The growth and strength of trade unions has substantially
influenced the growth of company benefits and services.
viii.Labour scarcity and competition for qualified personnel has
led to the initiation, evolution and implementation of a
number of a compensation plans.
ix. The management has increasingly realized its responsibility
towards its employees and has come to the conclusion that
the benefits of increase in productivity resulting from
increasing industrialization should go, at least partly, to the
employees who are responsible for it, so that they may be
protected against the insecurity arising from
unemployment, sickness, injury and old age. Company
benefits-and-services programmes are among some of the
mechanisms which managers use to supply this security.
A “tripartite” concept of individual protection has developed
in recent years. First, every individual is expected to be at least
partially responsible for his own present and future well-being.
Second, industry is now expected to protect its workers from
the hazards of life. Finally, the government is involved in
supporting and financing worker assistance programmes. The
contribution of these three parties varies in accordance with the
nature and purpose of the various employee benefits-and-
services programmes.
A number of factors influence the decision to set up a particular
employee benefits and services programme. According to
Nielson, the criteria governing such a programme are:
a. Cost;
b. The ability to pay;
c. The needs of the employees;
d. The bargaining strength of the trade union;
e. Tax considerations;
f. Public relations;
g. Social responsibility; and
h. The reactions of the employees.
The following table summarizes the factors, key forces and their
potential impact on benefits:
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 Table 1 : Factors Likely to Shape Future Benefits and Their
COMPENSATITION MANAGEMENT
Relative Impact
Relative Impact of Forces on Benefits
Some Moderate
1. Better labour-force edu cation 1.Rise in individual
2. Growth in white-collar influence
versus-blue-collar occupations
3. Relative growth of minorities 2. Extension of
and increased participation in unionization, new unions
work force
4. Growth in relative 3. Medical advances (e.g.
youthfulness of work force transplants, life extension) programme
5. Growth in female compo-
nent of work force 4. Participative planning
6. More technological changes with institutional members
7. More urbanization
Coverage of Benefits
Benefits consist of items or awards which are supplementary to
normal pay. Some – such as pensions and sick pay - are essential
entitlements, so the common term ‘fringe benefits’ is perhaps
misleading.
Certain provisions of the maintenance of adequate standards
of living have been underwritten by the state, which has
legislated for employees and employers alike to, bear some of
the cost. They are awarded to anyone who meets certain
qualifying conditions and as such are independent of the
employer’s discretion and performance considerations.
Other benefits such as cars, medical insurance and ‘perks’, are
more in the nature of optional extras and as such may be part
of the recruitment retention and incentives strategies of the
organization,
Entitlements include the following:
Pension Provisions
Pensions are generally regarded as the most important benefit
after basic pay: they are a kind of deferred pay, building up
rights to a guaranteed income on retirement (or to dependants,
on death) They are financed by contributions from the com-
pany, with facilities for contribution by employees as well.
Sick Pay
It is understandable that sickness or other enforced absence
from work would haunt workers with the prospect of lost
earnings, unless there was some son of provision for genuine
sufferers. Many employers supplement the state benefit by
additional sick pay schemes, which may be tailored to the
organization’s particular objectives (looking after long serving
employees, or generosity from the outset to attract recruits’
Maternity Leave and Maternity Pay
Benefit given to the female employees of the organization.
Holidays
This is a benefit which is very much taken for granted, but it
was only recently working Time Regulations 1998) that any
formal entitlement to annual leave was formulated. Employees
who have been continuously employed for 13 weeks are entitled
to 15 days’ leave per annum, rising to 20 days for leave
commencing after November 1999.
There is no statutory right to ‘customary’ holidays (public
holidays, Christmas etc) although these may be granted by
194
Strong
1. More leisure time,
vacations, holiday
2. Pressure from
established unions
3. New public welfare
4. Minority, frustrations
and pressures.
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contract terms. Additional holiday entitlements may be regarded
as a fringe benefit, including sabbaticals and long-service leaves.
Other benefits which may be offered include the following:
Company Cars
It is a highly-regarded benefit in the UK, especially among
managerial staff for whom they have connotations of status,
despite the reduction in tax incentives over the years - and those
whose work requires extensive road travel (eg. sales and service
staff).
Transport Assistance
Examples may include loans for the purchase of annual season
tickets, or bulk buying of tickets by employers for distribution
to staff.
Housing Assistance, Perhaps in the Form of
Allowances to staff who have been transferred or relocated –
removal and traveling expenses, lodging, convincing fees and so
on or assistance with house purchase – bridging loan, preferen-
tial mortgage terms.
Medical Benefits
Say private medical and/or dental insurance. Some medical
services may also be provided at the workplace: for example eye
and hearing tests (where relevant to the industrial context).
Catering Services
Most commonly, subsidized food and drink at the workplace or
Luncheon Vouchers.
Recreational Facilities
It is a subsidy and organization of social and sports clubs or
provision of facilities such’ as a gymnasium or bar.
Allowances
For telephone costs, professional subscriptions or work related
reading matter.
Discounts or preferential terms on the organization’s own
products services.
Bank employees, for example, may receive: a mortgage subsidy:
discounts on unit trusts or insurance products; bonus interest
on accounts or savings plans; or reduced interest rates on
overdrafts and loans.
Educational Programmes
In-house study opportunities, or sponsorship of external
study (not necessarily work-related).
Family-friendly Policies
Such as workplace nurseries, term-time hours contracts, career
break schemes.
It has been recognized that certain benefits must be supplied by
the organization for its employees, regardless of whether it
wants to or not. With few exceptions, the hiring of any
employee requires the organization to pay social security
premiums, workmen’s compensation, etc.
Similarly, the payment of these costs by the organization
provides the employee with financial protection at retirement,
termination, or as a result of injury, and it also provides to the
workers’ dependants in case of the employees’ death.
11.622.1
The National Association of Manufacturers has indicated
the following classification of fringe benefits:
a. Premium Payments for the period of time a worker has
worked; for example, payment on daily or weekly basis,
holidays, overtime pay, shift differentials, the cost of living
bonus, bonus in lieu of vacation.
b. Payment for special duties, such as working on grievance
redressal procedures and labour contract negotiations.
c. Payment for health and security benefits: These include
retirement plans, social security payments, savings plans,
profit-sharing plans, group life insurance, medical, surgical
and hospital insurance, accident and sickness insurance,
supplemental employment benefits, payments under the
Workmen’s Compensation Act, disability insurance, old age
and survivor insurance, and unemployment compensation.
d. Payment for time not worked, which includes payment for
sick leave and for time during which an employee is under
medical care, payment for holidays, vacations, witness time,
voting time, excused absence, lunch periods, rest periods,
work-up time, reporting pay, severance pay, payment for call-
all-time, call-back time, dressing time, portal-to-portal time
and wet-time.
e. Payment for employee services, including cafeteria subsidies,
union credit, house financing, parking space operations, etc.
f. Other expenditure, such as that incurred on making
Christmas gifts or offering Christmas bonus, on
educational reimbursements, employee uniforms, work
clothes, safety equipment or allowance, laundry allowance,
supper money or meal allowance.
The United States Chamber or Commerce classifies benefit
items into five categories.
These are:
a. Payments that have to be made under any specific
legislation;
b. Pensions and such other payments as have been agreed
upon;
c. Paid rest period, lunch periods, wash-up time, travel time,
time taken to change clothing, and get-ready time;
d. Payments for time during which an employee has not put in
any work at all; and
e. Other items, including profit-sharing payments, bonus, etc.
Cockman, however, has made a two-fold classification of
fringe benefits:
i. Those which are offered on the basis of status - car,
entertainment facilities, holiday, foreign travel, telephone,
security - insurance and medical benefits, children’s
educational facilities; and work benefits - office
accommodation, secretarial services, management training,
company scholarships; and
ii. Those which are key benefits, that is, share schemes, profit
sharing, retirement, benefits, counseling services, and house
purchase facilities.
On the basis of their identification, however, benefits may be
classified as under:
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11.622.1
a. Employee Security Payments: These include:
COMPENSATITION MANAGEMENT
i. Employers contribution stipulated in legal enactments:
old age, survivor, disability, health and unemployment
insurance;
ii. Payments under the Workmen’s Compensation Act;
iii. Supplemental unemployment benefits;
iv. Accident insurance;
v. Pensions;
vi. Contributions to saving plans and health and welfare
funds.
b. Payment for Time not Worked
Under these are included call-back and call-in pay; clean-up time;
health-in-the-family leave; family allowance; holiday pay; layoff
pay; medical time; paid lunch periods; portal-to-portal time; pay
for religious holidays; reporting pay; pay for rest periods;
severance pay; paid sick leave; payment for time spent on
collective bargaining and on the redressal of grievances; vacation
pay; pay for the time spent in offering evidence in a court of a
law or other statutory bodies; and payment for the time spent
on casting one’s vote at election time.
Rest Period: Among office jobs and those jobs requiring heavy
exertion, high repetition, or diligent concentration, certain
“breaks” - popularly known as a ‘Rest period’ or a ‘Coffee beak’
- are allowed during the day to allow the worker to rest. The
idea is to allow the worker some mental and physical diversion
from his job.
Holidays: Certain days in the year are stipulated as paid holidays.
In Western, Countries like USA, USSR and U.K., Christmas,
New Years,’ Thanks giving, Labour day, are particularly included,
on which the employees are paid and they do not have to work.
In India, Independence Day, Republic Day, Gandhi Jayanti,
Deepavali, Dashara, Holi, Id, Christmas, Gurunanak Jayanti,
Mahaveer Jayanti are gazetted holidays.
Vacations: Paid vacations vary from 15 days to 1 month in a
year. These are given to the employee after he has put in a
specific period of time. The rationale behind the paid vacation is
to provide a break in which the employee can refresh himself.
Sick Leave: provides an employee pay when he is out of work
due to illness. Full pay for a specified number of “permissible”
sick days are granted to the employees.
Severance Pay: This provides a one-time payment when an
employee is terminated. This is done on humanitarian ground.
Leave of Absence: This covers leave of absence for which pay is
provided. Educational leave is given to managers or manage-
ment trainees during the training period.
Pension Programmes: A pension represents a fixed payment,
made regularly to a former employee or his surviving
dependants, provided an employee has fulfilled specific
conditions of employment for a specific length of time.
Insurance: Which may be life, health and accident. It may be for
individual or the group.
c. Bonus and Awards
These consist of such financial amenities and advantages as
holiday, over-time and shift premiums; attendance bonus;
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 Diwali bonus; bonus for good quality workmanship; safety
COMPENSATITION MANAGEMENT

awards; profit-sharing bonus and service bonus; suggestion

awards; waste elimination bonus; and year-end bonus.
Tutorial Activity 1.1
(Exercise: 15 minutes)
There are a number of reasons why organizations offer benefits
packages.
Which, of all the benefits mentioned below would you
think were the most important to people?
1. To attract and retain staff by the generosity and/or relevance
of benefits offered, and buy facilitating career longevity (eg.
by allowing career breaks and sabbaticals).
2. To encourage commitment to, and consumption of the
organization’s own products (at a discounted rate) by
employees.
3. To demonstrate care for people and social responsibility (by
giving above statutory sick pay, paternity leave, pensions and
so on).
4. To encourage desirable behaviors/values in employees (by
subsidizing clothing, fitness programmes, education and so
on).
5. To offer rewards of perceived high value to the employee
with discounted or marginal cost to the employer.
It must always be recognized, nevertheless, that however
generous they are (benefits) can never be an adequate substitute
for an Inadequate base rate or an illogical salary structure or for
tangible recognition of the effect of inflation.

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196 11.622.1

LESSON 32:
INTRODUCTION TO EMPLOYEE SERVICES
& FRINGE BENEFITS IN INDIA
Principles of External and Internal Differential
Fringe Benefits
Learning Objective
• Introduction to the Concept of Employee Services
• Special Features of Employee Service Programme
• Drawbacks of Employee Service Programme
• Fringe benefits in India
Introduction to the Concept of Employee
Services
In addition to the above fringe benefits, organizations also
provide a wealth of services that employees find desirable.
These services are usually provided by the organization at no
cost to the. employee or at a significant reduction from what
might have to be paid without the organization’s support.
These services are provided at the discretion of the manage-
ment and are generally of some concern to trade unions when
they engage in collective bargaining with the employees. These
services include:
i. Services related to the type of work performed, including
subsidies for the purchase and upkeep of work clothing and
uniforms and of the various types of tools used by a
worker in the course of his work;
ii. Eating facilities, which include the provision of company
restaurants, cafeterias, canteens, lunchrooms, vending
machines, and fully or partially subsidized food;
iii. Transportation facilities, including parking lots and bus
services;
iv. Child care facilities, comprising nurseries and day care centers
for children;
v. Housing services, including company-owned housing
projects and subsidized housing;
vi. Financial and legal services, including sponsoring of loan
funds, credit unions, income-tax service, legal aid, saving
plans, and group insurance plans;
vii. Purchasing services, such as company-operated stores and
discounts on company products and services;
viii.Recreational, social and cultural programmes, including
athletics, beauty parlors, social clubs, recreational areas,
orchestras, entertainment programmes, parties, picnics,
libraries and reading rooms;
ix. Educational services, which include sponsorship for off
duty courses, educational leave, tuition fee refunds, and
scholarships for employees and their children;
x. Medical services, including plant infirmaries, clinics and
hospitals, counseling services and referrals to community
social services;
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11.622.1
COMPENSATITION MANAGEMENT
xi. Outplacement services, which include contacts with other
employers in the area, help in writing up resumes, and
secretarial assistance.
xii. Flexitime: The workers are permitted to build up their
‘flexible work day’ around a core of mid-day hours (such as
11.00 to 2.00). It is called ‘flexitime’ because the workers
themselves determine their own starting and stopping time.
For example, they may opt to work from 7.00 to 3.00 or
11.00 to 7.00.
Special Features of Employee Service
Programme
1. Since less time is lost due to tardiness, the ratio of man-
hours worked to man hours paid increases.
2. Absenteeism is reduced and sick-leave cut down.
3. The hours actually worked seems to be more productive,
and there is less slowing down toward the end of the work
day.
4. It reduces the tedium associated with the timing of the
employees’ work and democratizes the work.
5. The distinction between the management and professional
workers is reduced and more authority is delegated by
supervisors.
Drawbacks of Employee Service
Programme
i. Flexitime is complicated to administer and may be
impossible to implement where large group of workers
must work independently.
ii. It requires the use of time-clocks or other time records,
which might irritate the workers.
iii. Cafeteria Services: one of the recent developments in this
field has been the formulation of the cafeterial
compensation concept or what is known as ‘smorgasbord.’
Depending on their age, their educational and income levels,
their life styles and other forms of preference, different catego-
ries of employees need and demand different combinations of
benefits and services.
It may be pointed out here that no company provides all these
benefits and services. Those that are provided are determined by
the needs of employees and the preferences of a company.
Among the benefits and services which are most commonly
offered are life insurance, health insurance, pension, unemploy-
ment compensation, protective clothing and equipment, rest
periods and vacations.
Some benefits, such as holidays, vacation and pension, enable
employees to meet their self-actualization needs; they make it
possible for them to be away from their job, participate in other
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 activities and share in other experiences even while they continue
COMPENSATITION MANAGEMENT
to receive their wages or salaries.
These benefits, moreover, satisfy one’s need for esteem in that
they are often looked upon as indicators of one’s personal
worth.
For example, a typical young man generally desires to have direct
wages and educational assistance, while an older employee often
opts for pension and health insurance services.
The cafeterial compensation concept generally involves the idea”
that each employee ought to design and tailor his own indirect
compensation programme by personally picking and choosing
the benefits and services he would desire to have from among
the many such benefits and services provided by his company.
Choice and decision generally depend upon the discretion of
each individual employee and not on a management fiat or a
centralized collective bargaining agreement.
Fringe Benefits in India
When the Employers’ Federation of India conducted a study
of fringe benefits in this country, it was revealed that, in
1960,981 companies, which were included in the survey, paid a
little over Rs. 2,148.3 million in wages and fringe benefits, and
that the latter was about 21.3 per cent of their total wage bill in
that year.
The fringe benefits were high in the mining (24.84 per cent of
the wage bill) and plantations industries (24.3 per cent of the
wage bill), and were comparatively low in the manufacturing
sector (19.99 per cent of the wage bill).
In each of these three sectors, however, variations were
considerable. In the mining industry, the percentage of fringe
benefits varied from 24.5 to 27.88, while in the manufacturing
sector it varied between 13.42 and 32.11, followed by the
cigarette industry (31.42) and aluminum, brass and copper
industries (30.56).
A break-up of fringe benefits by types revealed that, of the total
amount paid on fringe benefits, that which was paid for the
time not worked and for profits and bonus was the highest,
accounting for a little more than 9 per cent of the total wage bill.
Payments which had to be made under legislative enactments
were between 6.1 per cent and 7.5 per cent of the total, while
voluntary welfare schemes accounted for 5.36 per cent of the
wage bill.
In the plantation industry, however, these welfare schemes
formed 9.4 per cent of the wage bill, while in the other two
(mining and manufacturing industries), they respectively
accounted for 4.12 per cent and 3.4 per cent of the total wage
bill.
A considerable proportion of fringe benefits was in the shape
of monetary bonus and constituted about 5 per cent of the
wage bill. The bonus was of various kinds - profits bonus,
attendance bonus, service bonus, gratuity payments, etc. The
quantum of the bonus varied from sector to sector.
Payments for Time not Worked
These payments were fairly substantial in the manufacturing
industry (5.35 per cent), the mining industry (4.81 per cent) and
plantations (3.24 per cent). In the manufacturing sector, the
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198
percentage of expenditure on this item varied between 3.06 and
10.42.
Industries which spent a relatively larger sum on this item were
cigarette manufacturing and distributing (10.42 per cent),
petroleum refining and selling (7.15 per cent), chemicals and
allied industries (7.11 per cent) and shipbuilding (6.60 per cent).
Statutory Fringe Benefits
These benefits are generally social security, and include gratuity
and pension payments, the employer’s contribution to the
employees’ provident fund account and health insurance
scheme.
The employers’ contribution to statutory provident fund
constitutes by far the largest item of expenditure, accounting for
4.23 per cent of the total wage bill in the plantations, mining
and manufacturing industries put together.
The expenditure on employees’ state insurance contributions by
the manufacturing industries was 0.36 per cent, while that on
gratuity account was 0.59 per cent.
The “other expenditure” incurred under statutory regulations
and tribunal awards was on compensation paid to workers,
welfare cess payments in the coal mining industry and on the
supply of protective clothing in the plantations industry. The
expenditure on maternity clothing in the manufacturing and
mining industries.
Voluntary Benefits
Retirement benefits, medical care, compensation for injuries and
disablement, subsidized food and housing, educational and
cultural facilities, payment on life insurance premia, the mainte-
nance of canteens, cafeterias, assistance to co-operative societies -
these are some of the benefits accounted for 9.40 per cent of
the total wage bill in the plantations industry against 3.74 per
cent and 4.12 per cent in the mining and manufacturing
industries respectively.
The social security benefits voluntarily provided by companies
include provident fund, gratuity and pension.
The medical assistance schemes voluntarily provided by
employers were the largest single item of expenditure, and
accounted for 1.80 per cent of the total expenditure of 5.36 per
cent voluntarily incurred by them.
The plantations industry spent 4.78 per cent of its total wage
bill on this particular voluntary service against only 0.84 per cent
spent by the manufacturing industries. The latter’s expenditure
on canteens, however, was about 0.70 per cent of its total wage
bill against that of 0.07 per cent spent by the mining industries.
In the manufacturing industries, nearly two-thirds of the
benefits were in the form of profit and bonus, of payments for
time not worked and of contributions by employers to social
security benefits. In the plantations and mining industries,
however, this percentage was 57 and slightly more than 50
respectively.
Apart from the general fringe benefits for employees, there was
a wide range of other benefits as well.
Some of these benefits are: Rifle allowance to watchmen, cycle
allowance to peons, free driving licences for drivers, compensa-
tion for a waiting period of three days, free quarters, water and
11.622.1
electricity; free uniforms to certain categories of employees,
conveyance allowance when no transport is provided by the
company, travel concessions, assistance to buy spectacles,
provision of snacks during night shifts, shoe allowance of 20
paise and an allowance of 37 paise per hour if a worker attends
education classes; sale of company products at concessional
rates, benevolent fund assistance if a worker is struck down by
tuberculosis or cancer, scholarships to employees’ children;
employees’ tours of government projects, study leave, gift of a
wrist watch after a meritorious service of ten years, presents to
employees on the occasion of their marriage, co-operative bank
facilities, festival allowance, free libraries and facilities for
inpatient hospital accommodations.
Tutorial Activity 1.1
Free Job Descriptions
Good Interview Questions
The Executive shall be ... salary and commissions and expenses
and benefits which have ... entity) which engages anywhere in
India in a ...
Free Psychometric test examples
Sample Employment Agreement for Executives
Employment Agreement for Executives
This Agreement (hereinafter referred to as the “Agreement”)
made and executed at [Place] this [Date], by and between
[Company’s Name] a company incorporated under the Compa-
nies Act, 1956 and having its registered office at
[address](hereinafter referred to as the “Company”, which
expression shall, unless it be repugnant to the context or
meaning thereof, be deemed to mean and include its successors
and assigns) of the ONE PART AND [Employee’s Name],
Indian Inhabitant residing at [address](hereinafter referred to as
the “Executive”, which expression shall, unless it be repugnant
to the context or meaning thereof, be deemed to mean and
include its successors and assigns) of the OTHER PART.
WHEREAS the Company is desirous of employing the
Executive and the Executive wishes to accept employment with
the Company, on the terms and subject to the conditions set
forth in this Agreement.
Now it is agreed by and between the parties hereto as follows:
1. Employment
The Company shall employ the executive and the Executive
shall serve the Company, as a (specify the category of employ-
ment/service) of the Company, with such duties and
responsibilities as may be assigned to the Executive by the
President/CEO of the Company and as are normally associated
with a position of that nature.
The Executive shall devote her best efforts and all of her
business time to the performance of her duties under this
Agreement and shall perform them faithfully, diligently and
competently and in a manner consistent with the policies of the
Company as determined from time to time by an officer of or
President/CEO of the Company. The Executive shall report to
the General Manager, (specify) Office of the Company.
The Executive whilst working in the Company shall not engage
in activities outside the scope of her employment if such
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11.622.1
activities would detract from or interfere with the fulfillment of
COMPENSATITION MANAGEMENT
her responsibilities or duties under this Agreement or require
substantial time or services on the part of the Executive. The
Executive shall not serve as a director (or the equivalent
position) of any company or other entity and shall not receive
fees or any other remuneration for work performed either
within or outside the scope of her employment without prior
written consent of the President/CEO of the Company. This
consent shall not be unreasonably withheld.
2. Term of Employment
The Executive’s employment by the Company under this
agreement shall commence on the date of this Agreement and
subject to earlier termination pursuant to Clause 5 or 7, shall
terminate on (specify date). This Agreement may also be
extended as needed by a written amendment as discussed in
Clause 8.
3. Compensation
As full compensation for all services rendered by the Executive
to the Company under this Agreement, the Company shall pay
to the Executive the compensation set forth in Schedule A
attached hereto. This schedule may be amended from time to
time in writing by the Company and the Executive.
4. Fringe Benefits; Expenses
a. The Executive shall be entitled to receive all health and
pension benefits, if any, provided by the Company to its
employees generally and shall also be entitled to participate
in all benefit plans, if any, provided by the Company to its
employees generally.
b. The Company shall reimburse the Executive for all
reasonable and necessary expenses incurred by her in
connection with the performance of her services for the
Company in accordance with the Company’s policies, upon
submission of appropriate expense reports and
documentation in accordance with the Company’s policies
and procedures. The Company will reimburse the Executive
for the expenses involved with her acquisition and
business-related use of a portable cellular telephone.
c. The Executive shall be entitled to Three (3) weeks paid
vacation annually, to be taken at times selected by her, with
the prior concurrence of the General Manager to whom the
Executive is to report.
5. Disability or Death
a. If, as the result of any physical or mental disability, the
Executive shall have failed or is unable to perform her
duties for a period of Sixty (60) consecutive days, the
Company may, by notice to the Executive subsequent
thereto, terminate her employment under this Agreement as
of the date of the notice without any further payment or
the furnishing of any benefit by the Company under this
Agreement (other than accrued and unpaid basic salary and
commissions and expenses and benefits which have accrued
pursuant to any plan or by law).
b. The term of the Executive’s employment under this
Agreement shall terminate upon her death without any
further payment or the furnishing of any benefit by the
199
 Company under this Agreement (other than accrued and
COMPENSATITION MANAGEMENT
unpaid basic salary and commissions and expenses and
benefits which have accrued pursuant to any plan or by law).
6. Non-competition; Confidential Information;
Inventions
a. During the term of the Executive’s employment under this
agreement, the Executive shall not, directly or indirectly,
engage or be interested (as a stockholder, director, officer,
employee, salesperson, agent, broker, partner, individual
proprietor, lender, consultant, or otherwise), either
individually or in or through any person (whether a
corporation, partnership, association, or other entity) which
engages anywhere in India in a business which is conducted
by the Company on the date of termination of her
employment, except that she may be employed by an
affiliate of the Company and hold not more than 2% of
the outstanding securities of any class of any publicly held
company which is competitive with the business of the
Company.
b. The Executive shall not, directly or indirectly, either during
the term of the Executive’s employment under this
Agreement or thereafter, disclose to anyone (except in the
regular course of the Company’s business or as required by
law), or use in any manner, any information acquired by the
Executive during her employment by the Company with
respect to any clients or customers of the Company or any
confidential or secret aspect of the Company’s operations or
affairs unless such information has become public
knowledge other than by reason of actions (direct or
indirect) of the Executive. Information subject to the
provisions of this paragraph shall include, without
limitation:
i. procedures for computer access and passwords of the
Company’s clients and customers, program manuals,
user manuals, or other documentation, run books,
screen, file, or database layouts, systems flowcharts, and
all documentation normally related to the design or
implementation of any computer programs developed
by the Company relating to computer programs or
systems installed either for customers or for internal
use;
ii. lists of present clients and customers and the names
of individuals at each client or customer location with
whom the Company deals, the type of equipment or
computer software they purchase or use, and
information relating to those clients and customers
which has been given to the Company by them or
developed by the Company, relating to computer
programs or systems installed;
iii. lists of or information about personnel seeking
employment with or who are employed by the
Company;
iv. prospect lists for actual or potential clients and
customers of the Company and contact persons at
such actual or potential clients and customers;
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200
v. any other information relating to the Company’s
research, development, inventions, purchasing,
engineering, marketing, merchandising, and selling.
c. The Executive shall not, directly or indirectly, either during
the term of the Executive’s employment under this
Agreement or for a period of One (1) year thereafter, solicit,
directly or indirectly, the services of any person who was a
full-time employee of the Company, its subsidiaries,
divisions, or affiliates, or solicit the business of any person
who was a client or customer of the Company, its
subsidiaries, divisions, or affiliates, in each case at any time
during the past year of the term of the Executive’s
employment under this Agreement.
For purposes of this Agreement, the term “person” shall
include natural persons, corporations, business trusts,
associations, sole proprietorships, unincorporated
organizations, partnerships, joint ventures, and
governments, or any agencies, instrumentalities, or political
subdivisions thereof.
d. All memoranda, notes, records, or other documents made
or composed by the Executive, or made available to her
during the term of this Agreement concerning or in any way
relating to the business or affairs of the Company, its
subsidiaries, divisions, affiliates, or clients shall be the
Company’s property and shall be delivered to the Company
on the termination of this Agreement or at any other time
at the request of the Company.
e. i. The Executive hereby assigns and agrees to assign to
the Company all her rights to and title and interest to
all Inventions, and to applications for Indian and
foreign patents and Indian and foreign patents granted
upon such Inventions and to all copyrightable material
or other works related thereto.
ii. The Executive agrees for herself and her heirs, personal
representatives, successors, and assigns, upon request
of the Company, to at all times do such acts, such as
giving testimony in support of the Executive’s
inventorship, and to execute and deliver promptly to
the Company such papers, instruments, and
documents, without expense to her, as from time to
time may be necessary or useful in the Company’s
opinion to apply for, secure, maintain, reissue, extend,
or defend the Company’s worldwide rights in the
Inventions or in any or all Indian patents and in any or
all patents in any country foreign to the Indian, so as to
secure to the Company the full benefits of the
Inventions or discoveries and otherwise to carry into
full force and effect the text and the intent of the
assignment set out in Clause 6E(i) above.
iii. Notwithstanding any provision of this Agreement to
the contrary, the Company shall have the royalty-free
right to use in its business, and to make, have made,
use, and sell products, processes, and services to make,
have made, use, and sell products, processes, and
services derived from any inventions, discoveries,
concepts, and ideas, whether or not patentable,
including, but not limited to, processes, methods,
11.622.1
 formulas, and techniques, as well as improvements
thereof and know-how related thereto, that are not
inventions as defined herein, but which are made or
conceived by the Executive during her employment by
the Company or with the use or assistance of the
Company’s facilities, materials, or personnel.
If the Company determines that it has no present or
future interest in any invention or discovery made by
the Executive under this paragraph, the Company
shall release such invention or discovery to the
Executive within Sixty (60) days after the Executive’s
notice in writing is received by the Company request
ing such release. If the Company determines that it
does or may in the future have an interest in any such
invention or discovery, such information will be
communicated to the Executive within the 60-day
period described above.
iv. For purposes of this Clause 6E, “Inventions” means
inventions, discoveries, concepts, and ideas, whether
patentable or not, including, but not limited to,
processes, methods, formulas, and techniques, as well
as improvements thereof or know-how related thereto,
concerning any present or prospective activities of the
Company with which the Executive becomes
acquainted as a result of her employment by the
Company.
f. The Executive acknowledges that the agreements provided
in this Clause 6 were an inducement to the Company
entering into this Agreement and that the remedy at law for
breach of her covenants under this Clause 6 will be
inadequate and, accordingly, in the event of any breach or
threatened breach by the Executive of any provision of this
Clause 6, the Company shall be entitled, in addition to all
other remedies, to an injunction restraining any such breach.
7. Termination
The Company shall have the right to terminate this Agreement
and the Executive’s employment with the Company for cause.
For purposes of this Agreement, the term “cause” shall mean:
a. Any breach of the Executive’s obligations under this
Agreement;
b. Fraud, theft, or gross malfeasance on the part of the
Executive, including, without limitation, conduct of a
felonious or criminal nature, conduct involving moral
turpitude, embezzlement, or misappropriation of assets;
c. The habitual use of drugs or intoxicants to an extent that it
impairs the Executive’s ability to properly perform her
duties;
d. Violation by the Executive of her obligations to the
Company, including, without limitation, conduct which is
inconsistent with the Executive’s position and which results
or is reasonably likely to result (in the opinion of the
President of the Company) in an adverse effect (financial or
otherwise) on the business or reputation of the Company
or any of its subsidiaries, divisions, or affiliates;
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11.622.1
e. The Executive’s failure, refusal, or neglect to perform her
COMPENSATITION MANAGEMENT
duties contemplated herein within a reasonable period
under the circumstances after written notice from the
General Manager, or the President of the Company,
describing the alleged breach and offering the Executive a
reasonable opportunity to cure same;
f. Repeated violation by the Executive of any of the written
work rules or written policies of the Company after written
notice of violation from the General Manager or the
President of the Company;
g. Breach of standards adopted by the Company governing
professional independence or conflicts of interest.
If the employment of the Executive is terminated for
cause, the Company shall not be obligated to make any
further payment to the Executive (other than accrued and
unpaid base salary and commissions and expenses to the
date of termination), or continue to provide any benefit
(other than benefits which have accrued pursuant to any
plan or by law) to the Executive under this Agreement.
8. Miscellaneous
a. This Agreement shall be governed by and construed in
accordance with Indian laws, applicable to agreements made
and performed in Indian, and shall be construed without
regard to any presumption or other rule requiring
construction against the party causing the Agreement to be
drafted.
b. This agreement contains a complete statement of all the
arrangements between the Company and the Executive with
respect to its subject matter, supersedes all previous
agreements, written or oral, among them relating to its
subject matter, and cannot be modified, amended, or
terminated orally. Amendments may be made to this
Agreement at any time if mutually agreed upon in writing.
c. Any amendment, notice, or other communication under
this Agreement shall be in writing and shall be considered
given when received and shall be delivered personally or
mailed by Registered AD Post with, Return Receipt to the
parties at their respective addresses set forth below (or at
such other address as a party may specify by notice to the
other): (specify addresses)
d. The failure of a party to insist upon strict adherence to any
term of this Agreement on any occasion shall not be
considered a waiver or deprive that party of the right
thereafter to insist upon strict adherence to that term or any
other term of this Agreement. Any waiver must be in
writing.
e. The invalidity or unenforceability of any term or provision
of this Agreement shall not affect the validity or
enforceability of the remaining terms or provisions of this
Agreement which shall remain in full force and effect and
any such invalid or unenforceable term or provision shall be
given full effect as far as possible. If any term or provision
of this Agreement is invalid or unenforceable in one
jurisdiction, it shall not affect the validity or enforceability of
that term or provision in any other jurisdiction.
201
 f. This Agreement is not assignable by either party except that
COMPENSATITION MANAGEMENT

it shall inure to the benefit of and be binding upon any

successor to the Company by merger or consolidation or the
acquisition of all or substantially all of the Company’s
assets, provided such successor assumes all of the
obligations of the Company, and shall inure to the benefit
of the heirs and legal representatives of the Executive.

Note:

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202 11.622.1

LESSON 33:
INTRODUCTION TO BENEFIT PROGRAMS FOR MANAGEMENT
& ADMINISTRATION OF BENEFITS AND SERVICES
Principles of External and Internal Differential
Fringe Benefits
Learning Objective
• To know Benefit Programmes for Management
• To understand problems raised by Benefit Programmes
• To learn administration of Benefits and Services
Introduction to the Concept of Benefit
Programmes for Management
Special considerations and policies apply to the benefit
programmes for the management, for which a different benefit
structure is provided because of the fact that many legal
considerations do not operate in their case.
For example, management personnel do not receive overtime
allowance or payment; nor are they governed by trade union
considerations or agreements. Managers generally are not
entitled to, nor do they expect, many of the benefits and
services to which employees in general are entitled.
However, management personnel are generally required to
contribute in part to their insurance, gratuity, pension and
provident fund. Tax exemptions become more important and
meaningful for them as they advance in the management
hierarchy.
The personnel department is generally responsible for the
coordination of the plans for the administration of these
benefits and services. For this purpose, it seeks the advice of the
various departments, calls for their suggestions and anticipates
the emergence bf possible problems.
The final approval of the plans formulated for the management
personnel, however, is the preogative of the top authority of an
organization.
Problems Raised By Benefit Programmes
Many problems arise when these programmes are adopted and
administered. These are:
i. Charge of Paternalism
When too many benefits and services are offered to employees,
a feeling develops that employers are playing the role of parents
and the workers are looked upon as their children. Moreover,
the latter sometimes develop the feeling that these benefits and
services are their “right” - which is not really so.
ii. Excessive Expenditure
The administration of these benefits and services is a fairly
costly affair, involving large outlays of direct and indirect
financial expenditure, and often involves a great deal of paper
work.
iii. Fads Become Fashionable
With the introduction of these benefits and services in one
company, other concerns vie with one another to introduce
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11.622.1
COMPENSATITION MANAGEMENT
them as well. Credit unions and severance pay are examples of
benefits which were once considered to be novel but are now
commonplace in industry.
iv. Maintenance of the Least Productive Workers
With an increase in benefits and services, employees, particularly
when they are not very productive, tend to stick to their jobs,
and are not interested fn changing them.
v. Neglect of Other Personnel Functions
When a management becomes more concerned about the
provision and administration of benefits and services, it often
pays very little attention to other aspects of personnel
programmes. Over-emphasis on these benefits and services
may often develop a concern among the employees for their
future security rather than for their present productivity.
The relationship between a company’s benefits-and-services
programmes and employee motivation for increased produc-
tion is what weak.
Administration of Benefits and Services
Organizations fumble while administering employee benefits
and services. Organizations have seldom established objectives,
systematic plans and standards to determine the viability of the
programmes.
The main problem is the lack of employee participation.
Managers, too, take little interest in the benefits programme and
trade unions are almost hostile to the schemes. Managers are
not even aware of the organization’s policy towards benefits
and their contribution to the quality of corporate life.
Trade unions entertain a feeling of alleviation as the benefits are
likely to erode their base. These problems can be avoided if
steps are taken:
i. to establish benefit objectives;
ii. to assess environmental factors;
iii. to assess competitiveness;
iv. to communicate benefit information;
v. to control
Future Trends in Reward Management
The considerable developments in reward management that
have taken place recently are associated with changes in the
economic and competitive environments in which businesses
operate and the ways in which they respond to these external
challenges.
Reward management strategy is an extension of the
organization’s business strategy. trends in reward practices can
only be forecast in the light of predictions on how business
strategies and the programmes flowing form them are likely to
develop. There is no doubt that changes in reward management
over the last decade have been in response to changes in
203
 business strategies and practices which in turn have responded
COMPENSATITION MANAGEMENT
to changes in the competitive environment.
These changes have been well summarized by Rosabeth Moss
Kanter when she defines her model of the post entrepreneurial
corporation as a leaner organization with fewer ‘extraneous’
staff which ‘focuses on doing only those things in which it has
competence’ she suggests that the post entrepreneurial
compotation ‘represents a triumph of process over structure…
in contexts requiring speed and dexterity, what is important is
not how responsibilities are divided but how people can pull
together to pursue new opportunities’.
Increasingly, people have had to learn how to function in
constantly changing roles; indeed, how to carry out simulta-
neously a number of different roles. They have to achieve a
balance between concentrating on their own areas of skill and
responsibility and working together with others.
Businesses have had to look very hard at the ways in which they
employ people, using value-added analysis techniques to ensure
that each step carried out in a work process and decision
sequences augment the previous step.
In developing business strategies and the HR and reward
strategies that flow from them, organizations have been driven
by the need to satisfy demands for flexibility, continuous
development and team work. To make the best use of their
distinctive competences they have had to attract, retain motivate
and develop distinctive people. And, importantly, they have to
ensure that they get value for money from their reward practices.
It is these business trends which., have .governed the most
important reward management developments in recent years,
namely: a more strategic focus, a more flexible approach to job
evaluation, greater focus on external relativities, job family
modelling, broad banding, the assessment of inputs
(competences) as well as outputs in performance management
processes, competence-related pay, team pay and flexible
benefits.
So far as business change is concerned, there is no evidence that
there will be any significant future difference in its nature or
direction, at least in the short to, medium term. Of course the
pace of change will vary; governments and recessions will come
and go; and the ED and the possible single currency will make a
difference. And, following the change in Government, there
may be changes in the attitudes to corporate governance’ and an
increased emphasis on the responsibility of businesses to their
stakeholders.
It is interesting to remember the CBI/Hay 1995 survey
findings2 that almost half the 480 UK organizations surveyed
had changed some aspect of their pay strategy or policy in the
previous two years. The areas most affected were pay structure,
pay progression and the introduction of profit related pay.
For these organizations, the emphasis in the next few years is
more likely to be on consolidating and testing innovations
rather than on seeking new nostrums. This will particularly
apply to such developments as broad banding, competence-
related pay and team pay.
The CBI/Hay survey established that ‘the most significant
factor driving change in pay and benefit policy are the need to
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204
strengthen the link to business performance, cost control,
support for organizational change, and recruitment and
retention pressures...
The need for more flexibility in pay and benefits is likely to
become more urgent. Businesses which are still contemplating
the changes required to improve the effectiveness of their
reward processes will be taking account of these factors.
The CBI/Hay survey found that:
13 per cent of responding organizations planned to introduce
team pay;
30 per cent were making changes in their benefits packages,
mainly to allow more flexibility; 17 per cent planned to intro-
duce a broad banded pay structure;
13 per cent intended to introduce a formal performance
management process.
The 1996 IRS survey of 270 private ‘sector companies3 found
that 54 per cent intended to revise their reward practices in the
next 12 months. The initiative most often mentioned was PRP,
cited _y 36 per cent of those contemplating a change, followed
by competence-related pay (33 per cent).
So the future does not necessarily include any quantum leaps in
reward management policy and practice. But environmental and
organizational demands are encouraging developments such as
those set out by Murlis.
Well-developed career management programmes that enable
employees to see how they can manage their own progression
in an environment where promotion’ is rarer and more
significant when it happens, and when building experience in
different roles is the way to progress;
Well-designed and implemented performance management
processes that often embrace the use of competences and ‘so
support development, as well as the achievement of objectives,
and which link credibly to performance-related pay progression
and other variable pay schemes;
Line management skilled in interpreting market data, making
local pay decisions and operating and communicating the
policies needed for this new environment;
Well-validated salary market ‘anchors’ for the new roles, which
managers can review and use as background for pay budgeting
and pay progression decisions;
Strong, locally based financial control and modelling systems to
support decision making and help ensure the prevention of pay
drift.
Tutorial Activity 1.1
Thermax India
A small fringe of dubious, irresponsible entrepreneurs and ...
in authority, political or administrative, does not ... anticipate
and adapt his management style, can ...
Neuroses of Growth
This paper, presented at the Ahmedabad Management Associa-
tion in 1976, is trying to get back to a stage in our company’s
growth when we were moving into adolescence with all its
anguish and angularities. The backdrop to this setting is the
controlled economy with a marginal income tax rate of 77 per
11.622.1
cent at the corporate and 85 per cent at the individual tax level,
and many an entrepreneur would ask the basic question: Why
grow at all?
When you asked me to talk of building an enterprise, my
immediate reaction was one of surprise. You have, in
Ahmedabad, a concentration of entrepreneurs of all shapes and
sizes, perhaps unsurpassed anywhere in the world. Why would
you want to import a half-baked product from Pune?
They say when a child is born in Ahmedabad, he lisps percent-
ages before he can say ‘mamma”, he can multiply in fractions of
halves, quarters, 1/8ths and 1/16ths when his counterparts
elsewhere are still learning that 2+2 make 4, that he has
internalised the marginal costing principle long before most of
us are initiated into the basics of accounting and that he is
trained to smell an unwary buyer or an anxious seller with
almost the same sureness as my pet Labrador puppy can sniff
adrenalin.
Being the seasoned, natural entrepreneurs that you are, I hope
you will extend your indulgence to a somewhat raw amateur at
the game.
I call my paper ‘The Neuroses of Growth’. Psychologists define
neurosis as a functional derangement arising out of a series of
unresolved conflicts between an organism and its environment.
The theme of my paper is quite simply this: as an industrial
unit grows, a number of conflicts and contradictions emerge-
conflicts between the entrepreneur and the organisation and
between the organisation and the environment-which, unless
resolved, can lead to problems of maladjustment and erratic
behaviour, and perhaps threaten the growth and survival of the
organisation. I shall attempt to explore some of these conflicts
and hopefully draw conclusions which rnay be of help to policy
planners in Delhi and corporate head shrinkers in Ahmedabad.
As a small industrial unit grows in terms of turnover, number
of employees, complexity of manufacture, diversity of
products and markets and levels of organisational hierarchy, the
entrepreneur who started it all suddenly face to face with four
basic issues.
Has this activity helped him fulfil his personal objectives? If
not, would future growth enable him to find fulfilment? I call
this the Sour Grapes Syndrome and I will shortly explain why.
If the organisation grows, it needs more funds. If he borrows
more, he is enlarging his risks beyond what he considers a
desirable level. If he does not borrow more, he must be
prepared to dilute his ownership and control. Let us call this the
Generation Gap.
As the unit grows, the leadership style which gave the
organisation its earlier vitality, drive and singleness of purpose,
now becomes ill-adjusted to the needs and concerns of a
complex organisation. The entrepreneur is faced with the
difficult choice of allowing the situation to drift into chronic
maladjustment or consciously reorient his style or pass on
leadership to an individual more in tune with the changed
situation.
This is an exceedingly traumatic experience for any entrepreneur,
almost of the magnitude of an Identity Crisis.
© Copy Right: Rai University
11.622.1
And finally, in desperation he turns from consultant to
COMPENSATITION MANAGEMENT
consultant who promise the ultimate solution-18 holes of golf
a day and complete control on the enterprise-only to find that it
replaces old problems with new ones. This we shall call the
Doctor’s Dilemma.
Let’s examine each of these crises in some detail. The first
concerns values, the second resources, the third management
style and the fourth information and control systems.
The Sour Grapes Syndrome
First of all, why does a person start an industry? The usual
answer is that he comes from a family or community of
entrepreneurs or traders or that he has surplus funds and
would like a fling or that he has access to a technology he would
like to exploit. These, however, are merely facilitating factors-
they are not the motivators. The basic motivation for any one
entering industry is very simple and clear.
In doing so, he hopes to earn a better reward for his talents and
resources than by putting them to any alternative use. The
reward can take many forms: the satisfaction of being one’s
own boss, increased ownership of assets, increased control over
assets, power over other people, a status in society.
Assuming our entrepreneur is successful and the pleasant
euphoria that accompanies success gradually subsides, he begins
to ask himself some very searching questions. Has he fulfilled,
is he in the process of fufilling or is he ever to fulfil any of the
personal objectives that led him to be an entrepreneur? Let’s
look at this a little closely.
He had hoped to build some assets he could call his own. I do
not think he ever aspired to become a millionaire, that would
have been a foolish pipe-dream. But at least he wanted to
provide security and comfort for himself and his family, to
generate resources that would nourish the growth of his
enterprise and provide a cushion for lean years.
In fact, he soon finds that this is impossible with corporate tax
at a marginal rate of 77 per cent and personal taxation at a
marginal rate of 85 per cent. What is worse, if he continues to
be successful and grow, the nominal value of his shares keeps
rising with all the attendant liabilities of wealth tax and estates
duty without any personal assets which are either liquid or
which can be easily liquidated to meet these liabilities.
Income Taxes In the current year (1992-1993) are 57.5 per cent
for corporations and 56 per cent for personal incomes.
Even more annoying is that his plans and policies begin to be
dictated not by the needs of the market or by compulsion of
technology, but by the clever machinations of his tax consult-
ant-the deployment and distribution of resources in a manner
designed to extract the last little ounce of benefit from the
plethora of punitive tax legislation.
If he is denied ownership, does he at least have control over
assets? Control over assets implies freedom to use these assets.
If our entrepreneur has been an honest tax payer, he has no
personal assets worth talking about. So let us consider the
corporate assets. If they are productive assets, their use requires
three other inputs: raw material, labour and working capital.
And a conflict emerges.
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 With raw material availability being uncertain and outside his
COMPENSATITION MANAGEMENT
control, with labour laws being what they are, and constraints
on retrenchment and layoffs, with credit restrictions and
options for converting loans to equity, does it make sense to
enlarge the use of productive assets? If they are non-productive
assets-perhaps a well-laid out garden or a comfortable executive
office or a holiday home at Mahabaleshwar-he is conditioned to
feel guilty for indulging conspicuous consumption.
Consider the satisfaction of being his own boss. How very
illusory! His salary requires the sanction of an authority that
cannot be expected to know the degree of his contribution; he
cannot take a personal loan from his company without such
borrowings being treated as dividends; his raw material and
credit allocation is done on ground rules that change frequently
and unpredictably and by people who can exercise discretion
without being accountable except in an ultimate sense; he
cannot employ a relative (and there are 22 relationships defined
in the Companies Act) without invoking Section 314 (1) (b) of
the Companies Act, and so on.
Status in society: the most painful thing for any sensitive
entrepreneur (and I don’t know how many there are) is that he
is always expected to prove his Innocence. A small fringe of
dubious, irresponsible entrepreneurs and populist political
statements have conspired to create an atmosphere where every
entrepreneur is suspect, is considered an asocial (if not anti-
social) profit-making machine.
Hardly a day goes by when someone in authority, political or
administrative, does not admonish entrepreneurs like errant
school children.
With all this one wonders why entrepreneurs continue to
remain in business and grow, why companies vie with each
other in comparing turnover and growth rates. I think part of
the answer lies in what I call the Sour Grapes Syndrome.
You have all heard of Aesop’s fable of the Fox and the Sour
Grapes. What is more interesting and insightful is the sequel to
the fable. The poor fox is being teased by his friends every day
about the sour grapes until he develops an inferiority complex.
While his friends are relaxing, playing or feasting on fat chickens,
our poor fox sweats and struggles with climbing lessons till
one day he manages to reach the grapes only to find that they
really are sour. But he dare not tell this to anybody. Day after day
he continues to jump and eat the sour grapes until he finally
dies of gastric ulcers.
I sometimes wonder if the growthmanship game in industry is
not an exercise in self-deception of a similar kind. We sweat and
struggle at growing bigger only to find that we are nowhere
near the fulfilment of our objectives. But we dare not tell this
to anybody. We dare not face it ourselves. And we continue
playing the game with all its fret and fury without realising why.
The Generation Gap
As the organisation grows, so does the need for funds. But the
interesting point is that this growth in the requirement of
funds is not linear. One of the main arguments in favour of
the small-scale industry as a sector, is the supposedly high
output to capital ratio and the supposedly low capital-labour
ratios.
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206
For example in the engineering industry, according to some
statistics compiled by the Association of Indian Engineering
Industry (now CII), the ratio of gross output to fixed capital is
3.7 for small-scale units as against 1.8 for large units (more than
double), the ratio of value-added to fixed capital is 0.9 for
small-scale units against 0.5 for large units (a little less than
double) and the fixed capital per employee is Rs 3,623 in small
scale units against Rs 12,095 in the large units (less than a third).
It is often deduced from this that small-scale units are more
efficient in the utilisation of fixed capital resources than their
larger counterparts. Nothing could be more fallacious. One can
have other indices of efficiency. What these figures reveal is that
small units are involved in a technology which lends itself to
higher output to capital ratios, for example the assembly of
radios as distinct from making transistors.
The point at issue is that as an industrial unit grows, the need
for funds increases in quantum jumps as the technology
changes from one of simple assembly to progressive manufac-
ture. On the other hand, the meagre plough back of around 25
per cent of profits (allowing for corporate tax at 77 per cent and
a modest dividend equal to about 5 per cent of the profits),
while it may sustain the linear growth, is totally inadequate for
the quantum jumps.
And this question of plough back of resources becomes even
more serious when one considers the enactment which requires
compulsory distribution of 40 per cent of the profits in closely-
held companies. This would reduce the plough back to about
18 per cent of the profits. (For purposes of this calculation I
am ignoring depreciation.)
Here is a striking example of a conflict of objectives in the body
politic. If I were the finance minister, I would be hard put to
reconcile the conflicting objectives of my revenue department
and my department of economic affairs. My revenue depart-
ment, being concerned single-mindedly with amassing revenue,
tells me about those wily capitalists who escape its net by not
giving themselves a dividend.
So I say, make it compulsory for closely-held companies to
distribute 40 per cent of their profits. My department of
economic affairs, concerned primarily with containing inflation,
says we must have a dividend freeze if we are to have a wage
freeze, so I restrict dividends to 12 per cent of the paid-up
capital. And my task is not rendered easier when my banking
division, whose prime objective is to ensure optimal utilisation
of credit, announces a policy of less dependence by industry on
bank credit and a greater reliance on self-generated resources.
As the unit grows and reaches a level where the resources
generated cannot sustain the next jump in turnover, the
entrepreneur has two options; increase the debt-equity or obtain
outside equity finance. Most small entrepreneurs opt for the
first alternative because taking outside equity finance has many
other repercussions. This is the main reason for a high debt-
equity in the small and medium sector. In an article in the
Financial Express recently, the chairman of one of our
nationalised banks writes:
The poor equity base of the small-scale units and their high
debt-equity ratio have been diagnosed as the important reasons
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for their financial troubles and their relatively high mortality.
Taking advantage of the liberal credit facilities available to them,
a number of small units and also medium-size projects have
recourse to large borrowings.
I would like to ask this chairman: where else can a small or
medium unit turn? It has no recourse to the capital market, an
efficient tax harvesting machine ensures inadequate plough
back-so what alternative other than borrowing.
In the last one year. there has been a sea-change: small compa-
nies can have recourse to the capital market and closely-held
companies can go public with a share premium that recognises
their real worth.
The same article goes on to say that “the interest burden
becomes too heavy for such units to achieve viability.” This I
don’t think is true, because in most industries interest is a small
part of the total cost. But what is more important is that the
increase in debt-equity compounds the risk factor very substan-
tially.
The survival of an industrial unit, in the last resort, is a matter
of solvency not on paper, but in terms of meeting its obliga-
tions as they arise. And a high gearing, particularly where the
maturity of borrowings do not coincide in time with cash
inflows through the application of these borrowings, can be
disastrous.
We have a classic case in Pune, not very far from where we are
located, of a highly successful medium-sized industrial unit
which financed its growth in fixed assets through short-term
fixed deposits at attractive rates, reached an impasse when these
deposits matured, had a sudden run through loss of confi-
dence of the depositors and ended by becoming a subsidiary of
a large business house. So when our entrepreneur has to take
resort to borrowings, he encounters a distinct conflict between
growth and the level of risk he feels comfortable with.
Take the alternative: widening the equity base. If our entrepre-
neur has been honestly paying his taxes, he has no personal
assets worth the name except the paper assets represented by
the notional value of his shares. So he has to invite outside
participation. Outside participation through a small number of
large shareholders requires that he barter his independence.
On the other hand, a public issue which would ensure a large
number of small shareholders can only be justified, in terms of
the cost of managing and underwriting the issue, if it is of a
magnitude of at least Rs 2.5 million. However, the important
point is this: the moment our entrepreneur decides to invite
outside participation, he will never get the book value of his
shares, because the guidelines on issue of bonus shares will
always ensure a substantial reserve, which no outside subscriber
will be prepared to compensate.
The recent revision of the guidelines permitting issue of bonus
shares in excess of 1: 1 and reducing the time lag between two
consecutive issues from 40 to 24 months is an exceedingly
welcome step. (But I may add by way of a personal note: when
we approached the Controller of Capital Issues-this anachro-
nism called the Controller of Capital Issues has since
disappeared for capitalisation of reserves in excess of 1: 1, we
were told that this would be considered favourably only if we
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11.622.1
intended to invite public subscription.)
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In summary, then, as he grows, our entrepreneur faces a
situation where ploughbacks will not finance further growth.
Further borrowings compound risks beyond a desired limit;
and outside participation, apart from compromising his
independence, will not compensate him for his present worth.
The Identity Crisis
The entrepreneur who starts a company is usually technically or
entrepreneurially oriented. His entire focus of attention is on
making and selling a product, communication is informal and
control is exercised through an immediate feedback either from
the shopfloor or the market.
As the organisation grows production becomes more complex;
a batch or assembly line replaces the one of item. A production
plan with manufacture in anticipation of orders replaces the
earlier method of manufacture against orders. Marketing
becomes more complex as business has to be anticipated and
competition becomes keener with a larger output.
As the number of employees increase, so do the levels of
hierarchy. New employees are not motivated by the same
dedication to the product or organisation as the original small
team that founded the organisation. Back of the envelope
accounting gets replaced by systems that must reckon with
product diversity and overheads.
What Happens in this Process?
The entrepreneur begins to get more and more remote from
the scene of action.
His decisions tend to become less sure. While he delegates out
of necessity, he still keeps a number of key areas under his
control. This results in delays in decision making as no action
can be taken without his final seal of approval.
Internal politics begin as each of the senior managers tries to get
the ear of the boss.
Our entrepreneur finds that he is spending a disproportionate
amount of time resolving interdepartmental conflicts.
He finds that he is called upon to manage people instead of
doing things-something that he is not equipped by tempera-
ment or training to do.
And the unkindest cut of all. The personal patronage which
built up a small well-knit team is replaced by an objective system
of rewards that leaves him out in the cold.
There is a theory about organisation growth which all entrepre-
neurs may well ponder on: “Growing organisations move
through distinguishable phases of development, each of which
contains a relatively calm period of growth that ends with a
management crisis.”
Organisations go through relatively quiet periods of evolution
where only marginal adjustments are needed for maintaining
growth under the same overall pattern of management. Then
suddenly there are periods of turbulence when traditional
management practices, which were valid for a smaller size, begin
to be questioned by frustrated top managers and disillusioned
subordinates.
Prof. Larry Greiner of the Harvard Business School postulates
that organisations go through five phases of growth and
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 tabulates the organisational practices during each of these
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phases as follows.
Phase 1 Phase 2 Phase 3 Phase 4
Management Make Efficiency Expansion of Consolidation Problem
Focus and sell of market of organisation solving and
operation innovation
Organisation Informal Centralised Decentralised Line staff and
Structure and and production
functional geographical groups
Control Market Standards Reports and Plans and
Systems results and cost profit centres investment
centres centres
The moral for entrepreneurs is simply this: there is no single
management style that is appropriate for all sizes of the
organisation and at all stages in the organisation’s growth. The
forceful leadership style that creates an organisation may have to
give way to a management style that directs without being too
involved, which in turn may have to yield to a system of
delegation with accountability for results. This is the moment
of truth-and anguish-for most entrepreneurs.
The enlightened entrepreneur may ponder over an important
point. In a controlled economic environment like ours, where
outside forces operate with almost equal distribution on all
organisations, the future of an organisation may be determined
less by outside forces than by its own history. And an entrepre-
neur with a sense of his organisation’s history, who can
anticipate and adapt his management style, can have a headstart
over his counterpart who does not.
The Doctor’s Dilemma
There was a time when the organisation started when our
entrepreneur could walk down the shopfloor and have a
reasonably accurate feel about productivity of labour and
machines and quality of work. The cost of manufacture was
simple arithmetic. His customers were his friends and pricing of
the product was a matter of covering all costs and a little
besides.
Then he begins to grow. And he finds that he has no time to
walk down the shopfloor. And even when he does, he sees
unfamiliar faces. He has no time to meet customers except
those who insist on meeting him to complain about his
products. Pricing of products, which was a simple matter of
adding raw material, labour, overheads and profits, is now
compounded by such things as distribution of overheads over
different products, cost-volume analysis, machine utilisation
and the like.
At this stage, he is likely to encounter some of the following
phenomena.
His marketing manager will complain that he could sell more if
only the factory would produce more, give better deliveries and
pay attention to quality.
His production manager will grumble that he can produce more
if only marketing could give him a firm long-term programme
and not quote unrealistic deliveries. He could also build in
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quality if marketing would absorb additional costs and recover
higher prices.
His finance manager tells him that it is difficult to control
Phase 5 overheads because every departmental head appears to have
valid reasons for side-stepping the budget.
At this stage he gets back to the marketing manager with a plea
for production runs and higher prices only to be told what
Matrix of competitors are offering in terms of price and delivery.
teams
A second round with the production manager on the scope for
cost reduction and faster process time, only to be informed that
Mutual goal
setting we have no record of man-hours per product because labour
costs are a small part of the total costs and the cost of installing
and maintaining a system would far outweigh the benefits.
A circular issues from the fountainhead that budgets are
sacrosanct and no deviation will be permitted without prior
sanctions. And a whole series of meetings begin to discuss and
permit exceptions to this fiat.
As the boss is reminiscing about the good old days when life
was simpler and wondering why his managers can’t see each
other’s point of view, he comes across a little brochure an-
nouncing an advanced management programme at Srinagar,
which says that the programme is intended for senior managers
who are specialists in their functional areas to understand and
appreciate other disciplines. Here at last is the solution. So he
sends his managers to Srinagar. They return with their vocabu-
laries enriched. They are now able to talk each other’s jargon, but
the problem of communication persists.
Sadder and wiser, our poor entrepreneur is wondering if it is
perhaps a more deep-seated personality problem when, lo and
behold! a circular arrives announcing a sensitivity training
programme in Mussoorie which says that if only individuals
can see themselves in a group as the group sees them, all would
be bliss. This must be the answer. So a whole round of
exposures to experiments in behaviour. They return with a
beatific look on their faces and for some time all is sweetness
and light. But alas! Habits die hard and soon the old games
reappear.
And now, enter the consultant. The boss narrates his woes
about how all his time is taken in resolving interdepartmental
transactions, leaving him no time to plan the organisation’s
future. Each manager complains to the consultant about the
other department’s failing and the chiefs indecision. And the
financial controller bemoans the erosion of all financial
discipline. The consultant has the ultimate solution.
The boss has too wide a span of control. So he must be
insulated with one more level in the hierarchy. Three persons
reporting to him and controlling the ten who originally
reported to the boss. What happens? The boss gets more
remote and less sure of himself as the data fed to him passes
through yet one more filter. Meetings get fewer but longer.
If the organisation survives all this and still grows (and
organisations like the human organism, can take a surprising
amount of abuse), it will no doubt encounter a second
consultant whose ultimate solution is the division of the
organisation into profit centres with the head of each centre
responsible for a certain quantum of profits or return on
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11.622.1
investment. At last the entrepreneur will realise one of his life’s
ambitions: the leisure to play 18 holes of golf every alternate
day.
Perhaps this is an oversimplified model of the dynamics of
change. The point at issue is simply this: in a large number of
growing organisations, the basic problem I find is one of
having the right information at the right place at the right time
and the solution is in the area of initiating and improving the
system of information gathering and information flow rather
than in reorienting managers and restructuring organisation
charts.
Where do we go from here? From this rather impressionistic
sketch of a growing organisation, let us draw some tentative
conclusions.
Can we rethink our values and objectives so that we are more in
line with the social and political environment in which we live
and operate? What I had in mind were some of the following:
The satisfaction of a job well-done, the yearning for thorough-
ness and excellence.
The joy of a repeat order from a happy customer the focus on
quality and service.
The thrill of exporting successfully against global competition.
The glow of seeing members of the corporate family improve
their standard of life.
The fulfilment that comes from sharing one’s time, energy and
resources for larger causes.
Can we learn to become aware of our leadership style so that we
are more in tune with the changing needs of our growing
organisation?
To bankers and financial institutions, I have one suggestion to
offer. It seems fashionable these days to talk of bank lending
being directed towards the most productive use of assets than
being dictated by considerations of security. Operationally,
however, it makes little difference because banks still insist, and
rightly so, on adequate margins. My suggestion is that when
lending to the small and medium sector, the only real security is
a periodic cash flow that establishes the continued solvency of
the unit.
If I were a banker, I would ask my client to give me a monthly
revolving projection of their funds flow for the next six
months, instead of statements of raw materials and work-in-
progress and finished goods and book debts, and if I am
convinced that the client knows his cash management, I should
completely relax on margins and put into effect my stated
objective of directing credit towards the most productive use of
assets.
To management consultants and thinkers, a humble plea. Please
try and understand the entrepreneur’s dilemma and help him in
the process of adjustment towards a more complex
organisation, not merely by courses in general management and
behavioural sciences, nor by restructuring organisation charts,
nor even by importing systems tailored for large organisations
which need an infrastructure that smaller organisations cannot
support, but by developing insights on information nerve
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11.622.1
centres, information channels and norms of control appropriate
COMPENSATITION MANAGEMENT
to the size and befitting the style of smaller organisations.
To the policy planner, be he a politician or an administrator, I
would appeal for an understanding of the motivations and
climate that make and nourish entrepreneurs. I understand,
marvel at and sympathise with the tremendous conflicting
pressures under which the policy planner in Delhi must operate.
I would, however, like him to reflect on the following.
Biology provides a better guide to the understanding of long-
term forces in society than mechanics. If I wish to divert the
flow of water in a certain direction, I can obstruct its present
course and channelise it in the direction I choose but the water
will still continue to flow.
But if I obstruct penguins from flying for whatever short-term
reason and tenaciously pursue this, I shall create a generation of
penguins who will have wings but cannot fly. We have in our
country a long rich tradition of entrepreneurship. In the process
of controlling and directing it, please ensure that you do not dry
up the resource.
Figuratively speaking, penguins have lost the power of flight
during the course of evolution.
When drawing up an industrial policy, consider the wisdom of
motivating the strongest rather than protecting the weakest.
The paternalistic policy of protecting the weak is perhaps
necessary when you are dealing with the deprived or handi-
capped sections of society such as landless labour or scheduled
castes or hill tribes. But when it comes to industry only the
strongest deserve to survive in the national interest.
For example, why should certain industries be reserved for the
small-scale sector? As I mentioned earlier, the scale of opera-
tions is determined by the logic of technology which permits of
a small capital investment and a high output to capital ratio.
In such an operation, an efficient small-scale unit will beat a
large one hands down. I say this from personal experience. And
if it cannot, a policy that protects it and allows it to survive
inefficiently can only be at the cost of the country’s economic
growth.
Or again, why have preferential rates of interest? Or a price
preference on governmental purchases? When the minimum
wages legislation was extended to the engineering industry in
Maharashtra all the small-scale sector units in Pune rose up in
arms and said they should be exempt from the operation of
the Minimum Wages Act or they will not survive. I strongly
believe that any industry which cannot pay for its borrowings or
make a product at a competitive price, or give its workers a fair
wage, has no business to be in business whether small or large.
On the other hand, think of positive motivators. For example,
accessibility to loans on a proven cash flow basis, or a tax rate
that permits adequate ploughback to finance growth or a capital
market that gives the small entrepreneur an opportunity to
liquidate his assets.
Psychology can provide you better clues for manipulating
behaviour than jurisprudence. There is a well known school of
thought which believes that behaviour in an individual or
group reflects the expectations of those with whom the
individual or group interacts and has demonstrated that by
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 changing expectations you can influence behaviour. If you dub
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every businessman a callous profiteer and develop sharper and

more sophisticated legislation to correct his errant ways, you
reinforce precisely the sort of behaviour you would like to
correct.
If, on the other hand, you recognise that enterprise is a good
thing: that our economic growth requires nurturing of this
talent: that a reasonable profit is a just compensation for
services rendered and risks taken; that private ownership of
assets is not a crime provided it is legally acquired and in return
for a contribution to society; that all businessmen are not black
marketeers any more than all politicians are power-hungry and
corrupt or all administrators, time-serving bureaucrats: that
entrepreneurs can make a contribution outside their
organisation-not in terms of donations, but in terms of their
leadership skills and organising abilities.
Then you will generate behaviour that is responsive, socially
conscious and politically sensitive and the megawatts of human
energy that are used today in breaking and making laws or in
pleading for favours and distributing patronage will be directed
towards the more constructive business of building our nation.

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210 11.622.1

LESSON 34:
INTRODUCTION TO COMPENSATION SURVEYS AND METHODOLOGY
Latest Trends in Compensation Management
Learning Objective
• To know the Concept of Compensation Survey
• To understand the Pay-for-Performance Model
• To study an Article on WageAccess
• To know Compensation Survey Methodology
Introduction to the Concept of
Compensation Survey
Salary survey provides employers with the current and accurate
compensation information needed to attract and retain quality
employees. The survey allows competitors to share current wage
information with each other while maintaining complete
participant confidentiality.
Management Matters
The Pay-for-Performance Model
During the last 15 years there has been increased debate about
refining the role of employee compensation in ensuring
performance. Practitioners and academics have been working on
various models and innovative ideas relating to compensation
methodologies. The profession of compensation experts has
seen its custom build rapidly.
In order to build databases and provide benchmarks for
corporations, compensation surveys have become very common
and are sold for a price. Human Resource departments of most
mid-sized and large corporations have worked hard to enhance
their knowledge and skills in designing appropriate compensa-
tion models. The key question they have been trying to answer
is: What would be the appropriate basis for rewarding a person?
The concern has shifted from paying enough to rewarding right.
The increasing marketisation of economies has had an impact
on the labour market and its reward systems, too.
Compensation systems have started reflecting higher levels of
discrimination, and large variation in pay packages are now
accepted by managers in many corporations and professions.
Growth of the people-intensive service industry has furthered
fuelled this process.
Expectedly, Indian corporations have also been affected
significantly. Compensation systems are getting rigorous
attention in many Indian corporations. One outcome of this
continuous search for an appropriate compensation concept has
been the pay-for-performance system. This system is gaining
popularity in India in the more knowledge-intensive firms such
as consultancy, investment banking and IT. Others in the old
economy businesses are attempting to change over to it too.
Pay-for-performance is essentially trying to move away from the
seniority-based compensation system that has prevailed in the
corporate world. Its main payment logic is variable pay. The
compensation package is divided into a fixed and a variable
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11.622.1
COMPENSATITION MANAGEMENT
component. The variable component is linked, through a
formula, to the performance of the company, of the group or
team with which the individual works, and of the individual.
Organisations may have a variant of this system but the concept
is the same - individual compensation is linked to the perfor-
mance of the group and company in addition to her or his
performance.
The pay-for-performance concept as manifested in the variable
pay system is posited on certain behavioural assumptions
regarding the company and its people. The primary assumption
is that the variable pay model is very transparent and consistent.
As the compensation is linked to the performance of the
company, it is very important that there is a clear understanding
of which performance parameters will be considered for the
purpose of evaluation. This has to be temporally consistent.
Another important behavioural aspect is that any variable pay
system has an inherent potential to reduce the pay of an
individual as much as it can increase. This is something that
most employees would not be prepared for, given their earlier
experience of a fixed pay system. The fall in pay has led to
serious critiquing of this system by HR practitioners and
academics in the US over the two years or so. It is very much like
the stock markets, which come under intense public scrutiny
only when there are steep falls. Yet, there are lessons to learn
from these critiques.
A key lesson has been that the sharing of data with individuals
on their, and company, performance is either infrequent or done
only at the end of the year. This defeats the purpose of the pay-
for-performance concept which seeks to enhance the
performance of the individual by engaging her or him in the
company’s performance. For this, frequent sharing of perfor-
mance is an essential pre-requisite. Most companies do not
realise this.
There is adequate evidence of companies in the US and in India
of sharing bad news about variable pay cuts in an abrupt and
non-transparent manner without adequate warning to the
individual, which leads to the individual feeling short-changed.
Such surprises undermine the trust in the process and the
organisation completely.
Although nobody likes a pay cut, being forewarned about it
dampens the adverse effect. Mutuality, trust, transparency, and
engagement are the cornerstones of the pay-for-performance
concept. Indian corporations should assess themselves on these
sensitive aspects before adopting such a concept; otherwise they
may face a disaster on the human resource front.
Wage Access
What it is?
The WageAccess Compensation Survey is an Internet-based
multi-industry salary survey that provides employers with the
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 current and accurate compensation information needed to
COMPENSATITION MANAGEMENT
attract and retain quality employees.
WageAccess provides employers with the current and accurate
compensation information needed to make critical wage-related
decisions.
Finally, there’s a wage survey that delivers the results you’ve
been looking for...
• Comprehensive
• Current
• Accurate
• Convenient
• Confidential
...the way surveys should be done.
WageAccess is Comprehensive
The WageAccess survey contains over 500 benchmark positions.
Each position includes a detailed job description to ensure a
comparable match is made during the survey data entry process.
Custom Results
Survey results are calculated based on the criteria selected and are
displayed as mean, weighted mean, median, average low and
average high rates of pay.
The results also include summary statistics on a number of
useful job parameters such as pay type and FLSA status, as well
as average compensation for bonuses, commissions and tips.
The innovative WageAccess Internet-based reporting feature
allows users to create customized reports from current or
historical survey data. Users may select and filter results by using
any combination of the following criteria:
• Geographic Location (region, state and metropolitan area)
• Industry
• Annual Revenue
• Number of Employees
Quartile Analysis
Participants have the opportunity to run a personalized quartile
analysis against the survey results and obtain a detailed report
of their organization’s wage level percentile ranking against
comparable companies in the selected market.
Pay Practices
The pay practices report allows users to analyze formal pay grade
data collected through the survey. These results offer users a
direct comparison of their own pay grade start rates and rate
ranges to the pay grade levels reported in the survey results.
Summary Report
The WageAccess survey results also include a summary report
on trends in turnover, merit increases and pay grade level
movement.
WageAccess is Current
Survey participants may contribute data to the survey at any
time during the year. All data is collected confidentially though
the WageAccess web site. Upon completion of their survey,
participants may immediately access results from data collected
in previous quarters of the survey.
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212
Survey data is compiled each quarter of the year and combined
with data collected in previous quarters for calculation of
annualized results. An aging factor is applied to all previously
collected data to adjust for the movement of salaries through
the year. This aging process provides users with a much more
accurate representation of current pay levels than conventional
paper surveys.
Since survey data is collected year-round and previously collected
data is appropriately aged, survey results are effectively never
more than 90 days old.
WageAccess is Accurate
All survey participants are required to provide actual pay
information in addition to salary grade ranges. This allows for
an accurate and detailed picture of current wage levels for the job
market.
To assure the validity of the survey results, participants are
encouraged to review the job descriptions and provide survey
data for only those positions that match their own with at least
75% accuracy.
At the close of each quarterly collection period, an extensive
review and audit of the raw survey data is conducted to ensure
its accuracy and consistency.
WageAccess is Convenient
Companies can participate in the survey by clicking on the
‘Sign-Up Now’ button at the top of the page and providing
some basic information. Participants will then receive an e-mail
containing a login ID and password to get started with the
survey.
All survey data entry can be completed at any computer with
access to the Internet. The survey does not need to be com-
pleted in one session; the survey entry function is designed to
allow participants to start, stop and restart the process without
losing previously input data.
WageAccess is Confidential
Participants can be assured that the WageAccess survey results
are reported maintaining complete confidentiality.
Individual participant data is never displayed as part of the
survey results nor is raw survey data transmitted over the
Internet during the reporting process.
The WageAccess Internet web servers, databases and networks
are designed to ensure the reliability, performance and security
necessary to provide survey data when and how you want it,
and to ensure that the transmission of your sensitive and
confidential compensation data is protected.
For More Information
Synergy Management Solutions, Inc. is dedicated to providing a
quality survey results that can be relied on, year after year. You
will find that our attention to detail and data quality is unparal-
leled in the industry.
Please feel free to browse through the web site and learn more
about WageAccess and the invaluable information the service
provides.
You are encouraged to view the fully-functional demonstration
of WageAccess capability by clicking on the ‘Demo’ button at
11.622.1
the top of this page. The demo will lead you through the
process of entering salary information into the database and
allow you to retrieve fictional survey data using the WageAccess
state-of-the-art custom results.
Our next survey deadline is .
So, don’t hesitate... sign up today!
Survey Methodology
The WageAccess Compensation Survey is designed to be easy to
use and provide the most accurate and valid results possible.
The survey methodology details the special attention given to
how survey data is collected and audited, and how the survey
results are calculated, analyzed and presented.
Collection of Data
Survey data is collected from participants annually and may be
submitted to the survey via the Internet web site at
www.wageaccess.com at any time during the calendar year.
Participants are required to report accurate and actual rates of pay
to the survey. A key factor for ensuring the collection of valid
survey data is the requirement that participants calculate and
submit the actual average rates of pay for employees in a
position as well as the highest and lowest rate of pay. Estimates
are not acceptable.
At the end of each calendar quarter (March 31, June 30,
September 30 and December 31), survey data that has been
collected during that quarter is compiled for reporting purposes.
It takes approximately one month to audit, validate and
calculate the survey data before the results become available on
the WageAccess web site. The results for that collection period
are available on the first day of the month following the close
of the calendar quarter (February 1, May 1, August 1 and
November 1). However, once a participant has signed up for
membership and submitted their survey data, they will have
immediate access to survey results collected in the previous
quarterly collection period.
Quality Match Rating
A rating scale is used to identify job matching errors and reveal
discrepancies in position responsibilities and functions.
Participants are asked to rate by percentage of accuracy how their
position matches the survey job description (75%, 85%, 95%
and 100% accuracy). Participants should only report data to a
particular position in the survey if they feel their position
matches the survey job description with an accuracy of least
75%.
Auditing
Since data is submitted to the survey directly by the participants,
it is assumed that the participants have completed the survey in
an accurate and thorough manner. However, occasionally errors
in input may occur. Once survey data has been collected, it is
reviewed by the Synergy staff and a thorough statistical analysis
and auditing process is performed to identify any discrepancies
in the data. Individual participants may also be contacted to
verify the accuracy of this data.
Aging the Data
New survey data is compiled quarterly and combined with
previously collected data to calculate the results for each quarter
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11.622.1
of the year. An aging factor is applied to all previously collected
COMPENSATITION MANAGEMENT
data for the year to adjust for the movement of salaries through
the year. Since the survey data is collected from each participant
annually, previously collected data is never aged past one year.
The aging factor is proprietary to Synergy. It is derived from a
combination of statistical metrics, including the Consumer Price
Index (CPI) as reported by the Bureau of Labor Statistics (BLS),
BLS-reported annual changes in national salary data, actual
reported WageAccess salary data trends and other economic
parameters. For example, assume that the aging factor is
calculated at 4% for the current year. All data previously collected
during the first quarter of the year would be increased by 1%
before it is combined with the data collected in the second
quarter of the year.
This aging process provides participants with a much more
accurate picture of the market’s current level of pay, thus
resolving the ‘stale’ data problem that occurs with most
surveys.
Calculating the Results
WageAccess state-of-the-art Internet-based reporting feature
allows participants to create custom reports from current and
historical survey data. Users may select and filter data by using
any combination for the following factors:
• Geographic Location (Region, State and Metropolitan Area)
• Industry
• Annual Revenue
• Number of Employees
After executing the query, the names and locations of the
corresponding companies are displayed to allow users to
validate their selection. If the selection yields fewer than five
companies, for confidentiality and statistical accuracy, the data
will not be made available and the user must broaden the
selection.
Based on the user’s selections, the following statistical calcula-
tions are available:
General Survey Results
The survey results allow participants to view the survey data
based on the selected criteria through a number of commonly
used descriptive statistics.
Mean
The mean is the calculated average of pay for a position as
reported by the selected group of companies. This calculation is
obtained by dividing the sum of the average rates of pay for the
selected position from each company by the number of
companies. The mean is generally the preferred measure of
central tendency in that each company is treated with equal
weight and it reflects the value of each average rate of pay in the
sample.
Median
The median is the midpoint or center rate in a series of average
of rates of pay as reported by the selected group of companies
that have been organized from lowest to highest rate. The
median is also a good representative of central tendency,
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 however, it is not affected by extremely high and low rates of
COMPENSATITION MANAGEMENT
pay for a position.
Weighted Average
The weighted average is another type of calculated average of
pay for a position as reported by the selected group of compa-
nies. The weighted average is obtained by first multiplying the
number of incumbents in the position by the average rate of
pay at the company and then dividing the sum of that product
by the total number of incumbents at all selected companies.
This measure is useful in that it provides a higher weighting to
larger companies employing larger quantities of employees in a
position.
Average Lowest Rate of Pay
The average lowest rate of pay is the calculated average of lowest
pay for a position as reported by the selected group of compa-
nies. The calculation is obtained by dividing the sum of the
lowest rates of pay for the selected position from each company
by the number of companies.
Average Highest Rate of Pay
The average highest rate of pay is the calculated average of
highest pay for a position as reported by the selected group of
companies. The calculation is obtained by dividing the sum of
the highest rates of pay for the selected position from each
company by the number of companies.
Average Start Rate
The average start rate is the calculated average starting rate of pay
for a position as reported by the selected group of companies.
The calculation is obtained by dividing the sum of the highest
rates of pay for the selected position from each company by the
number of companies.
Average Rate Range Min
The average rate range minimum is the calculated average
minimum rate of pay in a structured pay grade system for a
position as reported by the selected group of companies. The
calculation is obtained by dividing the sum of the highest rates
of pay for the selected position from each company by the
number of companies.
Average Rate Range Max
The average rate range maximum is the calculated average
maximum rate of pay in a structured pay grade system for a
position as reported by the selected group of companies. The
calculation is obtained by dividing the sum of the highest rates
of pay for the selected position from each company by the
number of companies.
Job Data Parameters
Job data parameters are reported as the percentage of the
selected companies whose employees in this position normally
match the following parameters:
• Pay Type (Hourly or Salary)
• FLSA Status (Exempt or Nonexempt)
• Eligible for Bonus
• Average Bonus Percentage Received (of those eligible for
bonus)
• Receives Commission
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214
• Commission Rate Received
• Receives Tips
• Average Tip Rate Per Hour Received (of those who receive
tips)
• Supervisory Position
• Union Position
Quartile Analysis
The quartile analysis allows users to make a direct comparison
of their own data to the survey results, including a detailed
report of their company’s percentile ranking in the selected
market.
Percentile
Percentile is calculated as follows: in a series of average of rates
of pay that have been organized from lowest to highest rate, a
percentage of the average rates of pay will fall below this
number and the remaining percentage will fall above this
number. Based on the selection criteria, the quartile analysis will
show average rates of pay for the position at the 10th, 25th,
50th, 75th and 90th percentiles.
Pay Practices
The pay practices section allows users to compare their own
methods of compensating employees through a formal pay
grade system to the methods of other survey participants in the
selected group of companies.
Compa-ratio
The compa-ratio is a tool that is used to compare average rates
of pay with the midpoint of a rate range. A score of 1.0
indicates that the average rate of pay for this position is the
same as the midpoint of the rate range. A score that is greater
than 1.0 indicates the average rate of pay exceeds the midpoint
of the rate range. Likewise, a score of less than 1.0 indicates the
average rate of pay is lower than the midpoint of the rate range.
Rate Range Comparison
These results offer a direct comparison of the participant’s own
pay grade Start Rates, Minimum, Midpoint and Maximum rates
to the pay grade levels reported in the survey results.
Data Quality
The WageAccess Compensation Survey has been designed to
ensure the collection of quality survey data, which will, in turn,
yield extremely accurate and valid results.
Auditing
A thorough statistical analysis and auditing program is run on
all survey data submissions to flag possible errors due to data
entry, incorrect position matches and outliers. Survey partici-
pants may be contacted to verify the accuracy of this data.
In addition, audit control procedures are employed to eliminate
any possibility of system errors, calculation errors or data
corruption.
Job Descriptions
The WageAccess survey contains over 500 benchmark positions.
Each position includes a detailed job description, including
levels of responsibility, autonomy and knowledge required, to
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ensure a comparable match is made during the survey data entry
process.
Match Quality
To assist in the validity analysis, a rating scale is used to help
identify discrepancies in position responsibilities and functions.
Participants are asked to rate, by percentage of accuracy, how
their position matches the survey job description (75%, 85%,
95% and 100% accuracy). Participants should only report data to
a particular position in the survey if they feel their position
matches the survey job description by at least 75% accuracy.
Participant Education
Throughout the WageAccess survey, participants are provided
with detailed instructions, examples and tools to assist them in
accurately completing the data entry process.
Participant Responsibility
Finally, survey participants are reminded that it is their responsi-
bility to ensure that the data they provide is accurate. Other
participating companies have put a lot of time and effort in
contributing to this survey and expect that the information they
receive will be based on quality data.
It is imperative that participants report actual and accurate rates
of pay to the survey. To achieve accurate results that reflect the
current market trends, participants must do the calculations and
report actual average rates of pay. It may seem like more work,
but the results are worth it!
Uses of Compensation Surveys
Write Intro
• To know what the competitors are paying;
• Development of more integrated pay structures covering all
categories of employees;
• Extend flexible benefit schemes;
• Align pay strategy more systematically with business
strategy;
• Treat employees as stakeholders who have the right to be
consulted on and involved with any reward management
developments;
• Achieve the integration of reward and other HR processes
and practices for example, human resource development;
• Use variable pay rather than consolidated pay increases;
• Examine more rigorously the cost effective schemes of
payment;
Tutorial Activity 1.1
Nightmare No More !
A survey conducted by AIMA (The All India Management
Association) on retention served to identify ... Granting
periodical promotion and adequate salary raise to ...
High employee turnover is every manager’s nightmare, especially
when trained manpower is hard to get. There may not be a
‘quick-fix’ to this problem, but implementing a good number
of retention strategies can definitely work for you.
Career counselling, conflict resolution and employee welfare
programmes are some benefits being offered to employees.
© Copy Right: Rai University
11.622.1
Companies who are innovative where retention strategies are
COMPENSATITION MANAGEMENT
concerned finally emerge as winner.
The Survey
A survey conducted by AIMA (The All India Management
Association) on retention served to identify the most prevalent
practices in retention management. Companies that have a
turnover of 25 crore with an employee strength of 50 were
chosen and grouped into 4 categories, manufacturing, market-
ing, services and hi-tech.
The Results
• Out of 135 companies that participated, one in four
software companies and one in two manufacturing
companies admitted to facing a problem related to
employee retention.
• Career shift is a common feature in the junior management
of every organisation. The turnover may be as high as 7%
in hi-tech firms and may figure around 7% in
manufacturing companies.
• Vibrant work atmosphere, dress code and flexi timings are
some popular factors that favour employee retention.
Retention Strategies that Work
Providing in-house training facilities, change management
coaching, and leadership skills and personal development plans
for key employees.
Providing performance bonuses
Providing memberships at health clubs, and organising social
events at regular intervals, conduct sporting events sponsored
by the company.
Providing subsidised food
Increasing organisational transparency to allow employees to
understand the importance of different roles in the
organisation.
Granting periodical promotion and adequate salary raise to
motivate and enthuse employees.
Provide Employee Stock Options (ESOPS) to encourage joint
ownership in the organisation.
Human capital is the most important resource of any company
and high flyers play a big role in its success and effective
retention management is the only way to ensure you have the
best minds on working for you!
215
COMPENSATITION MANAGEMENT
LESSON 35:
INTRODUCTION TO PLANNING COMPENSATION FOR EXECUTIVES
AND KNOWLEDGE WORKERS
Latest Trends in Compensation Management
Learning Objective
• To understand who are Executives and knowledge workers?
• To know What is Knowledge-Work?
• To understand the Total Compensation Approach
• To Link Pay to Business Objectives
• To know Sales Management & Selling Skills
Interaction
Human Resources Management
This activity of the HR person deals with the design of a
remuneration system. There are various factors affecting this
such as the size and structure of the organisation and the
industry in which it operates, strength of employee unions, the
position of the person and his importance to the organisation,
the demand of particular skill sets in the industry and above all
the profits of the company.
The aim of the HR person would be to formulate a remunera-
tion policy in such a way that employees give optimal
performance and feel they get a fair deal, new employees are
attracted to the organisation, and the organisation is able to
retain existing employees. It is also designed in such a way that
it serves as a motivation tool for employees to perform better.
In order to arrive at a value for a job, companies carry out an
exercise called as job evaluation. Job evaluation tries to address
the following issues:
1. What is the value of the job to the organisation?
2. How to arrive at this value in a fair manner so that it is
accepted by employees?
The job analysis and performance appraisal, which we have
discussed earlier, also contributes a lot to the job evaluation
process.
Who is an Executive?
A person or group having administrative or managerial
authority in an organization.The chief officer of a government,
state, or political division.
Who are Knowledge Workers?
As we enter the knowledge-era, one of the critical challenges for
HR professionals would be to design practices and systems for
managing the “Knowledge Workers.” However, even after forty
years when Peter Drucker had coined the term, the definition of
knowledge worker - and the understanding of the professionals
it describes - remains far from clear. More so, because it is
loosely used to describe a wide array of people ranging from a
software professional to the operator who works with a CNC
machine. It is not surprising that many consider it just another
buzzword popularized by the skilled and tech-savvy, upward
mobile professionals to enhance their own market value.
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216
So who are the knowledge workers? To equate the terms with
specific professions like IT professionals or consultants is too
limiting and narrow a definition. On the other hand, using it to
describe anyone who uses brain instead of muscles to do work
- as Drucker did - is too general (obviously, a software program-
mer or an investment analyst cannot be put in the same basket
as an accountant who only totals up the ledger).
What is Knowledge-work?
It may be more appropriate to first define and understand what
“knowledge-work” is all about in order to understand those
who do it, and the implications for managing them. There are
three key features, which differentiate knowledge-work from
other forms of conventional work.
Firstly, while all jobs entail a mix of physical, social and mental
work, the basic task in knowledge-work is thinking - it is mental
work, which adds value to work. Unlike the salesman who
interacts, negotiates and persuades to achieve his targets, or the
shop floor operator who performs physical operations (does
things), the knowledge worker adds value to work through
mental activities. Knowledge-work involves activities such as
analyzing and solving problems, deriving conclusions, and
applying these conclusions to other situations.
Naturally, the effectiveness of the knowledge worker would
depend on the mental skills and mastery of certain intellectual
discipline and expertise (e.g., knowledge of theoretical frame-
works, model-building, problem-solving techniques, etc.). This
is a key factor, which distinguishes a punch-key operator sitting
in front of a PC terminal from a software programmer.
Secondly, the kind of thinking involved in knowledge-work is
not a step-by-step linear mental work. For instance, the
accountant who calculates the payroll knows the exact mental
steps to follow to achieve the desired results. Payroll calculation
involves thinking, but only to the extent of processing
information; it is not knowledge-work. But this may not be
true of the work of a consultant, who has to be creative and
non-linear in his thinking (i.e., work out how to think) to
develop solutions for the client.
The third distinctive feature of knowledge-work is that it uses
knowledge to produce more knowledge. When the software
professional uses his knowledge of writing codes to increase the
efficiency of the programme, or when the investment analyst
uses his knowledge of markets to develop an investment
strategy, they are creating new ways of applying knowledge.
Thus, knowledge-work is more than mere application of
known knowledge; the outcome of knowledge-work is creation
of new knowledge.
A Total Compensation Approach
Executive Compensation and knowledge workers needs a
range of compensation planning, and services in such vital
11.622.1
areas as salary administration, organisation structure, short and
...
Companies of all size may wonder about the direction that
executive pay will take over the coming years, and what trends
will emerge that could impact not only on corporate success, but
survival as well.
An organisation understands that effective compensation and
benefits plans are critical to success in today’s highly competitive
business environment. A shortage of qualified talent and
demands for more stringent executive accountability and long-
term commitment, conventional has quickly become obsolete,
requiring a more creative approach as well as new compensation
techniques and vehicles.
As HR professional, needs to recognise the trends, develop
effective programmes to meet executive compensation objec-
tives and build company value. Compensation package
combines typically two distinct disciplines, Executive Compen-
sation and Executive Benefits.
Executive Compensation needs a range of compensation
planning, and services in such vital areas as salary administra-
tion, organisation structure, short and long term incentive plan
design sales compensation, executive perquisites, and retirement
benefits.
Executive Benefit practice focuses on design, funding and
implementation of nonqualified executive benefit plans. Before
revising the existing benefit programme, HR team provides a
critical analysis of current programmes to identify potential cost
savings and ways to improve benefit design.
HR team quantifies executive’s perceptions of various benefits
so that corporate funds are used in the most efficient, meaning-
ful and motivating manner possible. HR team also needs to
look at offering significant wealth accumulation strategies and
programmes without seriously impacting corporate finances.
A six-step process method to deliver and administer executive
benefits more effectively: -
• Discussion of objectives of the executive benefit
programme
• Planning the preliminary design
• Exploring funding and security alternatives
• Developing a final plan
• Analysing and selecting funding vehicles
• Developing Implementation Plans and Executing Effective
Plan Administration
The HR team member together weighs the tax and accounting
effects, as well as the cost and benefit tradeoffs of each plan,
resulting in a total executive compensation programme that is
strategically, economically and culturally sound.
Results of these studies are then combined to create strategic
recommendations in such areas as pay positioning relative to
the competitive environment, the right mix of salary, benefits
and incentives and the timing of short vs. long term incentives;
linkage of incentives to corporate, business unit and individual
performance; the relationship between performance and
incentive plan payouts; and the role of benefits and perquisites
© Copy Right: Rai University
11.622.1
in compensation programmes. Based on these recommenda-
COMPENSATITION MANAGEMENT
tion, HR Team designs specific, strategic changes to existing
programmes and implements.
Begin with Objective Review
The compensation design process must include an objective
review of existing practices. Invariably, some plans should be
retained as is, because they are working well and serving a useful
purpose. But there will be others that should be axed, because
they no longer fit your needs, or are being abused. And there
will third group, namely whose practices that serve good
purpose, but may require re-design. Perhaps their objectives can
be achieved in a different way, or at a lower cost or by combining
them with other programmes.
Link Pay to Business Objectives
Once this review is complete, the next step is to develop a series
of pay programmes linked to specific business programmes
linked to specific business objectives. This will send a clear
message about the firm’s direction and performance expecta-
tions throughout the management structure. At the same time,
it will also reassure even the most daring and productive
executives who also appreciate financial security and stability.
This is a fundamentally shift in thinking and it gains ground, it
promises to result in equally fundamental shift in the competi-
tiveness of Industries worldwide.
A Company that is in short term financial trouble or heading
toward bankruptcy needs effective short-term solutions to
enhance the likelihood of survival. Some value added compen-
sation plans actually undermine a troubled company’s
survivability because they encourage management to take on
debt.
Since debt is often available at a cost below that of equity, the
formula’s underlying assumption is that good management will
use that capital to create returns that exceed the associated
interest of debt. However, a company in trouble is often over-
leveraged, and additional debt could force into bankruptcy.
Other value-added compensation plans measure only long-term
results. Whatever management does over the short term has
little effect on the plan’s measurement criteria.
But it is over the short term that the company’s fate hangs in
the balance.
So for the financially troubled companies, the compensation
programme should encourage the company’s short-term
survival. Once that is ensured then the company can adopt a
value added compensation plan that will improve long term
results.
Hence, Executive pay is a discipline that requires a concentration
of creative energies, not unlike those invested in the develop-
ment of a product line. In fact, one should think of pay
programmes as a product they require constant new thinking to
keep up with the competition; they must be sold to customers
and they have varying shelf lives.
Sales Management & Selling Skills
The Best Laid Plans
Sales Compensation is what it’s all about!...
217
 When it comes to paying sales professionals, there is no one-
COMPENSATITION MANAGEMENT
size-fits-all. Some companies pay commission based on sales,
while others blend in stock options, incentives and special
bonus plans. Options abound, yet the common thread that
runs through all successful sales compensation plans are the
corporate goals.
Sizing It Up
Sales managers must consider many variables when tailoring a
compensation plan. Compensation plans must take into
consideration the overall industry and the company’s position.
Are your sales goals based on orders or bookings? Are you a
start-up? Is your objective to secure new clients, increase average
order size or reduce selling expenses? Do you want to introduce
new products, focus on existing profitable products or increase
activities like cold calling? The compensation plan to adopt
would depend on your answers.
Cost of Sales
Calculating the Cost of Sales (COS) is an important part of
planning a compensation package. For a quick COS ratio, simply
take the salary plus commissions earned and potential bonus
opportunities, and divide by the revenue generated by the sales
professional.
Examining the Styles
Compensation plans can be based on a periodic review of
results, but must include several measurements of revenue and
profitability. All compensation plans should include “accelera-
tors” such as increased commission rate when salespeople
achieve target levels. Here are a few examples:
Profit-Based Plans
Commission rates change as profit levels increase. These may be
based on invoice, product or monthly averages. Revenue Quota
or Unit Placements Plans: Compensation is based on sheer
volume achieved over the previous sales period or on a
percentage of quota achieved.
Break-Point Plans
Break points or target levels are based on attaining specified
levels of production. Balanced Plans: Compensation based on
profit, revenue and growth is provided in these plans.
Customer Service and Customer Satisfaction
These plans are based on improvement as shown in customer
surveys and account growth.
Third Party or Distribution-Supported Sales
Compensation
Most of these plans include a base salary with a limited
commission linked with revenue growth over previous periods.
Choosing the Best Match
With these compensation options in mind, let’s look at some
scenarios to see what type of plan works best:
1. If your company has high revenue growth objectives with
little competition, use Break-Point plans or programmes
with high base salaries and low commission plans.
2. If your company has a “protect and grow” revenue
objective, slow growth and many competitors, use a profit-
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218
based plan and ensure that compensation accounts for
growth, with bonuses being provided for new accounts.
3. If your company’s goal is to maintain revenue and focus on
new account conversion programmes, focus on growth or
quota-based compensation. Remember that compensation
includes not just salary or commission, but the overall
package of benefits. A good package may include profit-
sharing, stock options, vacation, insurance and other
company-sponsored plans.
Organisations in transition or positioned for high growth
should develop programmes based upon a six-month period.
This time length allows management to test theories, make
adjustments and still protect the company. This also protects
the salesperson from unrealistic programs that limit their
income opportunity. Don’t ask salespeople to do too many
things at once. Most compensation and incentive plans link
rewards to only two or three aspects of job performance. They
should be linked to the firm’s highest-priority sales and
marketing objectives. Get input from your sales team prior to
the rollout of the new plan.This will ensure their buy-in and
raise questions and concerns. Taking time to create an effective
plan that fits properly and pays off in earned commission and
achieved corporate goals.
Tutorial Activity 1.1
The performance management system at Enron allowed
executives, managers and ... Compensation and incentives.
Having a percentage of your pay based on ... by Dr John
Sullivan
Did HR Cause the Downfall of Enron?
HR professionals continually claim that they are “strategic” and
that they have business acumen but almost universally, the
response of HR professionals to the collapse of Enron has
been silence. Why the silence? What current business issue could
have more strategic relevance then one of the top10 biggest
firms in the world declining into bankruptcy?
The failure of Enron not only resulted in a decrease in share-
holder value but essentially in the elimination of it! Employees
have lost most if not all of their retirement funds, job security
(and maybe their jobs,) and possibly part of their employability
due to the “tainted reference” of being associated with the
Enron debacle. Maybe HR professionals failed to see the impact
that HR had on the failure?
This article is designed to make you think
You won’t agree with everything in this “think piece” but that is
not the goal. If you only take away a few new thoughts, then it
has served its purpose. . Are you are one of the few HR
executives that upon hearing the story of Enron’s collapse
immediately thought about the significant role (and responsi-
bility) the HR team could have played? If so then you are clearly
already a strategic HR thinker.
If your next thought was “I need to re-look at my own people
systems within my own organization to identify and prevent
similar problems, then you need to read no further. If however
your thoughts were then (and maybe still are now) that this was
an “accounting and vendor problem” then you should read
11.622.1
further and hopefully begin to think differently. This article is an
outline of how HR failures, omissions and a narrow “tactical
view” of the HR role contributed to a catastrophic company
failure.
“Bad people management practices caused the biggest bank-
ruptcy in U.S.history... about that, there can be no doubt”
I’m still not buying into HR taking responsibility! Now before
you dismiss this notion take a step back and think. Did Enron
fail because of bad equipment, actions by the competitors or a
collapse in the financial markets or the economy? The answer,
of course, is no.
Did the collapse come from:
A one time slip in judgment
A few unrelated mistakes or
A pattern of unethical and possibly illegal acts coupled with a
series of deceptions that can only indicate that the culture and
values of Enron had degenerated
A pattern of errors this broad could only result from manage-
ment systems with serious flaws.
Ok, if you are not buying into HR’s responsibility then answer
the question “who is responsible for developing systems to
build and maintain a companies value and culture”? Since there
is no “values and culture” department the answer lies with the
only department with company wide responsibility for develop-
ing systems to measure and reward behaviors, values and
performance...HR. And yes, of course other functions contrib-
uted (for example accounting and finance) but such a wide
spread series of errors in judgment can only result from poorly
designed or implemented reward, training and performance
management systems.
Wide spread errors like these can only be caused by badly
designed people processes and systems If you think of HR in
the more traditional backroom “overhead” role with no direct
responsibility then now might be the time to re-think that
attitude and approach. If a large number of people in many
different departments makeindependent errors (and when
those errors have similar characteristics) the “cause” can’t be
random. A large volume of similar bad “judgments” and
violations of company values can only be as a result of bad
processes and systems. In this case, the only systems that can
cause this wide of a range of similar errors can only be reward,
performance appraisal, communications, hiring and training.
What did HR do Wrong?
HR took too narrow of a view of its job. “Just talking about”
the culture and values is not the same role as developing people
management systems that actively reinforce those values
through metrics, rewards and punishments. It developed
human resource systems within Enron that:
Measured and incented the wrong things.
It’s benefits systems failed to meet its fiduciary duty to protect
its employee’s retirement earnings.
Its performance management system did not punish (and may
even have encouraged) workers, managers and executives who
took unreasonable risks.
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11.622.1
In brief, Enron failed because of the people it hired (or failed to
COMPENSATITION MANAGEMENT
terminate) and the HR systems it implemented that incorrectly
appraised and incented risky and unethical behavior. The failure
occurred because the different departments within HR failed to
follow through with their jobs as stewards of the company (A
more detailed list of each HR failure is found later in this
article).
How HR Could Have Saved Enron ?
Enron’s fall was not really a rapid one. The stock had dropped
from 80 to 10 over the course of several months (prior to the
ultimate crash), so there was time for managers and HR to
identify problems and act to correct them. Obviously I don’t
have time to go into the hundreds of possible errors that can
cause a company’s downfall, but given what we currently know
from public information, here are some likely failures and
missteps by the HR function. It’s important that you look at
these failures not just because they happened at Enron, but also
because they could help identify similar problems at your own
organization.
Because not all of the evidence against Enron is in yet (and I
have not been a consultant to Enron) I have made estimates
about what happened. However, I believe that you will find
that the following list is a reasonable estimate of what HR did
wrong and what you might be able to do to prevent such
catastrophe at your organization.
Benefits Mis-management
The most obvious mis-management error is the appearance of
inequity by setting retirement fund rules that restricted employ-
ees from selling holdings in Enron stock, while allowing senior
management to sell large volumes of theirs.
It is also clear that the message sent to employees (by HR and
the executives) about the need to diversify their 401(k)’s was
clearly ineffective because some employees had Enron stock as a
majority of their 401(k) portfolios. Because HR has a fiduciary
responsibility to adequately represent and protect the interests
of shareholders, many of whom were employees and retirees,
benefits departments need to take a more active role in ensuring
that the message gets through. This means benefits must
proactively “run the numbers” to monitor the percentages of
their own company’s stock that is held in 401(k)’s until average
holdings fall below 20 percent, and where necessary, strengthen
the message that is sent to employees outlining the negative
consequences of holding too much of any company’s stock in
401(k) portfolios.
The Company Culture and Values
HR often assumes the role of the “builder and maintainer” of
the culture and the organization that is responsible for main-
taining values and ethical behavior within the company. Clearly
the Enron culture “got out of hand” and HR failed to keep it
within reasonable parameters. The “new” culture that evolved
(grow the business at any cost) from their original mission
clearly killed the company. HR must realize that when the size
of “new hire” group in a rapid growth company exceeds the
size of the “long tenure” group, the company’s culture (which
originally made the company strong) will invariably become
“diluted” due to an over-abundance of outside influences.
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 Performance Management and Appraisal
COMPENSATITION MANAGEMENT
The performance management system at Enron allowed
executives, managers and employees (who made major errors)
to go unidentified and unpunished. HR developed a perfor-
mance appraisal system that filed to immediately identify
potential problems and it failed to put “teeth” in its perfor-
mance management systems that would severely punish (or
fire) individuals that kept secrets, took excessive risks or that
violated the company’s values or ethics.
As a result, HR inadvertently sent a message to employees and
managers that results, regardless of how they are obtained, are
all that matters. ?”Blind faith” and a reliance on value state-
ments and a once a year performance appraisal system must be
supplemented by safeguards and precision performance
monitoring systems when the company’s business model shifts
from a normal risk to a high-risk one. HR leaders in companies
operating SPE’s (special purpose entities) and trading deriva-
tives can’t be naive about the risks involved. Performance
management and monitoring systems must be designed to fit
the level of risk that’s established in the company’s business
model.
Compensation and Incentives
Having a percentage of your pay based on performance is an
excellent practice. However making the rewarded percentages
“too high” can essentially “over incent” employees to take
unreasonable risks. The large incentives for rapid growth, stock
price growth and short-term gain drove behavior beyond
reasonable limits at Enron.
Employees must be able to make mistakes and then to report
them rapidly. That’s how organizations learn. In reverse, having
large penalties for failure can encourage secrecy and the “hiding”
of mistakes, so that no one learns from them.
It’s also highly likely that the executive compensation packages
at Enron (especially the CFO) were so large and focused on
short-term results and stock price increases that they incented
(or even hiding) risks that would not have occurred without
such benefits.
HR should have known that risks could be outrageously high
in the derivative trading and offshore investment business. As a
result, they should have taken a conservative approach toward
incenting and rewarding “risk taking” and “results” (regardless
of how you got them).
Senior executives were continually telling employees (errone-
ously) about the high likelihood of large stock price growth and
HR clearly failed to recognize and communicate that their
message needed to be toned down.
HR and other communications systems failed to incent or
encourage “whistleblowers” to criticize or speak out about
questionable business practices. Only a single employee’s
warning message (which happened to be at a vice presidential
level) reached the top.
A culture that castigates or stifles individuals who criticize
management or questionable practices needs to be monitored
and changed. If HR is to have an impact on business decision
making practices, it must develop formal and informal feedback
and communication mechanisms that ensure that the “alterna-
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220
tive perspective” is always heard. HR must make it easy for
employees to anonymously complain as well as proactively
“seek out” employee opinions and concerns.
HR must develop systems that encourage employees to identify
and “out” employees and managers that take unacceptable risks
and that violate our values.
In another communications failure, HR allowed the wrong start
date of the 401(k) stock selling freeze to be announced, so that
even when employees were actually free to sell stock...they didn’t
know it.
Training
Clearly the training provided in the areas of acceptable risks,
ethics, reporting and performance monitoring were either
ineffective or the incentives to ignore the training were so
strong, that they negated any impact it might have had. HR
must ensure that training effectiveness is measured based on
performance, results and an actual change in behavior
Hiring and retention
With its dramatic growth and large-scale hiring, Enron’s hiring
standards could not always be met while their assessment tools
were inadequate (especially in the areas of ethics, risk-taking and
honesty in communications). Clearly the new breed of “traders”
that were hired differed significantly from the old “oil drillers”
that previously dominated the company.
HR hiring and retention systems that worked with the “oil
drillers” became ineffective when the company’s business model
shifted into a riskier “trading” mode. The lesson to be learned
by HR is that the people management systems that “worked”
when the company was smaller and had a different “mix” of
employees must evolve with the changing business model and
employee population mix.
Conclusion
The many human resource failures that contributed to Enron’s
demise should send a powerful message that an opportunity
for HR to become as prominent as other recently popularized
business functions. Although the final determination of which
factors contributed the most to Enron’s failure might take years
to resolve. But it is already clear that the human element in
Enron’s failure played the largest part. Numerous individuals
made bad decisions that resulted in a catastrophic failure. All
companies make bad decisions. But, those companies who have
effective HR departments also tend to have performance
management systems and metrics that catch errors early.
HR must learn to become proactive and to develop “smoke
detectors” which can help identify “bad people and people
processes” long before they can have a major negative impact on
their company. HR must also look more closely at the design of
compensation systems to ensure that the incentive to “speak
out” (about unreasonable risks and ethical concerns) is at least
as high as the incentive to keep quiet.
It’s also clear now that the 64 page ethics manuals and crystal
clear value statements (that include respect and integrity) are not
enough to change everyone’s behavior from bad to good -
especially when huge egos are involved. Unfortunately, the cost
for learning that lesson will be thousands of jobs, many ruined
retirements and the loss of billions of dollars.
11.622.1
”Business is not unlike sports. When a team loses big you can’t

COMPENSATITION MANAGEMENT
blame the equipment, the fans or the accounting department.
It’s the people on the team and the systems that manage them
that “cause” failure (and success)! Any questions?” If you’re one
of the many that initially viewed the Enron disaster as an
accounting problem I hope this article has changed the way you
evaluate future business events.
May be you didn’t buy all of the arguments but I hope it did
make you think. And one last thought. Does you HR depart-
ment currently have systems that would “warn” you if your
own firm had the same problems occurring as Enron did? We
all know that the answer in most cases is sadly...No!

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11.622.1 221

LESSON 36:
INTRODUCTION TO TAX PLANNING
Latest Trends in Compensation Management
COMPENSATITION MANAGEMENT
Learning Objective
• Introduction Indian Income Tax law
• To know Tax Structure in Indian Environment
• To learn Components of Indian Tax Law
• To know how do we compute taxable income in India?
• To understand how do we file returns in India?
• To know what is Permanent Account Number?
Income Tax: Legal
Introduction Indian Income Tax law
The Indian Income Tax law is a highly complicated and
confusing piece of document. For the common man the task
of understanding the procedure and provisions of law is
daunting, to say the least. Not only is the process of tax
calculation very difficult, its practical implementation is tedious
and cumbersome. However, under the law, the taxpayer is
legitimately entitled to plan his taxes in such a manner that his
tax liability is minimal.
Tax Planning can be defined as an arrangement of the financial
affairs within the scope of law in a manner that derives
maximum benefit of the exemptions, deductions, rebates and
relief and reduces the tax liability to minimal. As long as you are
within the framework of law, you can plan your financial affairs.
However, in the name of tax planning, you can not indulge in
Tax Avoidance or Tax Evasion. And the line between Tax
Planning and Tax Avoidance is very thin, so you need to tread
carefully.
When financial transactions are arranged in a way that it
becomes obvious that they were entered with a malafide
intention of either not paying taxes or with a view to defeat the
genuine spirit of law, they can not be accepted as legitimate Tax
Planning. Twisting of facts or taking a very strict and literal
interpretation of law without understanding the basic purpose
of the law can only lead to punishable Tax Avoidance and not
Tax Planning.
An attempt is made in the following pages to present a bird
eye’s view of the Indian Income Tax laws so that you can avoid
making trips to your chartered accountant and by taking
advantage of the available legal avenues for tax planning, reduce
your tax liability. This material does not deal in procedural
matters such as assessment, appeals and revisions.
To begin with lets understand the structure of tax regime in the
country. Taxes are the basic source of revenue to the govern-
ment. Revenue so raised is utilised for meeting the expenses of
government as well as to carry out developmental works.
There are basically two types of taxes, Direct and Indirect taxes.
Direct taxes are those, which are, collected by the government
directly from the tax payer through levies such as income tax,
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222
UNIT IV
wealth tax and interest tax. Whereas indirect taxes comprise of
excise duty, sales tax, customs duty and value added tax. While
direct taxes form 30 per cent of government’s revenue indirect
taxes contribute a larger chunk of 70 per cent. Gift tax and estate
duty were part of the direct tax revenue. As an ongoing process
of simplification and rationalisation of the direct tax structure
in India, the government repealed the Gift Tax Act in 1998 and
the Estate Duty Act in the late eighties.
Tax Structure in Indian Environment
Introduction
The average age of citizens in the country has gone up substan-
tially, since independence. In fact, it is improving with every
passing year. Today, persons deriving income from pension and
other related sources constitute a significant segment of
population and consequently of taxpayers in the country. These
people, who have either retired or are on the verge of retiring,
require special attention. In the absence of an organized social
security system in the country, the Government has felt
compelled to address the special problems for this group of
people. Their problems are variant. These senior citizens, who
have lived comfortable lives, post-retirement, are usually
constrained to depend upon fixed monthly incomes by way of
pension. This, even as, they continue to discharge important
responsibilities, such as acquiring a residential accommodation,
marriage of children, education of grown-up children, looking
after sick spouse, etc. In these circumstances, it is important for
such persons to know how much money they will be left with
each year after paying taxes to meet their varied needs.
An attempt has been made here to illustrate to the senior tax
payers what their rights are and their obligations under the
Income-tax and Wealth Tax Acts. This will help them plan for
their future in an organized manner and discharge their tax
liability under the Direct Tax Laws correctly and in time without
any hitches.
The basic scheme of taxation under Income-tax Act, 1961
envisages a single annual tax on the total income of the
previous year at the rates indicated in the relevant Finance Act
for the assessment year in accordance with the law applicable to
the latter. In the case of a resident, the scope of total income
includes all incomes of the previous year earned by the tax
payer, regardless of where these incomes accrued, arose or were
received.
On the other hand in the case of a non-resident, or a person
who is “resident but not ordinarily resident”, only the follow-
ing incomes earned by him are includible in his total income.
A. Incomes which accrued or arose to him in India during the
previous year or which are deemed to have so accrued or
arisen or;
11.622.1
B. Incomes which were received in India during the previous
year or which are deemed to have been so received.
C. Incomes which accrued or arose to him outside India if
derived from a business controlled in, or a profession set
up in India (applicable only in the case of a person who is
resident but not ordinarily resident).
Thus these concepts viz., residential status, previous year and
assessment year are very relevant in determining the tax liability
of a taxpayer including a pensioner.
Analysis
Taxes are the basic source of revenue to the government.
Revenue so raised is utilized for meeting the expenses of
government as well as to carry out developmental works.
There are basically two types of taxes:
• Direct Taxes
• Indirect Taxes
Direct Taxes are those, which are, collected by the government
directly from the taxpayer through levies such as income tax,
wealth tax and interest tax.
Indirect Taxes comprise of excise duty, sales tax, customs duty
and value added tax.
In India direct taxes form 30 per cent of government’s revenue
while indirect taxes contribute a larger chunk of 70 per cent. Gift
tax and estate duty were part of the direct tax revenue. As an
ongoing process of simplification and rationalization of the
direct tax structure in India, the government repealed the Gift
Tax Act in 1998 and the Estate Duty Act in the late eighties.
To understand Income Tax law in India, the first step is to
identify what constitutes Income Tax law.
Components of Indian Tax Law
Income Tax Law in India consists of the following: -
The Income Tax Act, 1961
The Indian constitution has empowered only the Central
Government to levy and collect Income Tax. The Income Tax
Act was enacted in 1961. The Act come into force from the 1st
of April 1962 and extends to the whole of India. It consists of
over 400 sections and 12 schedules. The Income Tax Act
determines which persons are liable to pay tax and in respect of
which income. The various sections lay down the law of income
tax and the schedules elucidate certain procedures and give
certain lists, which are referred to, in the sections. However, the
Act does not prescribe the rates of Income Tax.
These rates are prescribed every year by the Finance Act (popu-
larly known as “The Budget”) This is done mainly to give
incentives for investment in priority sectors, to discourage tax
evasion, to remove loopholes in the law and to synchronize the
law with the existing economic situation.
The Income Tax Rules, 1962
The Income Tax Act empowers the Central Board of Direct
Taxes (CBDT) to formulate rules for implementing the
provisions of the Act. Income Tax Rules have been kept
separate from the Act as the rules can be amended more easily
than the Act. Rules can be amended by merely publishing a
notification in the Official Gazette of the Government of India
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11.622.1
whereas to amend the Income Tax Act, Amendment to the Bill
COMPENSATITION MANAGEMENT
has to be passed in the Parliament. However, in case of conflict
between the Act and the Rules, the provisions of the Act shall
prevail.
Circulars Issued by the CBDT
For the guidance of the Income Tax Officers and the general
public, the CBDT issues circulars on certain taxation matters.
These circulars are binding on the Income Tax Officers.
However, circulars cannot change the provisions of law; they can
merely clarify the law or relax certain provisions in favor of the
taxpayers. In event of a dispute, the Courts are not bound by
the circulars.
Case Laws and Doctrine of Precedents
Decisions of the tax tribunals and courts on disputes pertaining
to aspects of the income tax law form case laws. Case laws result
in formation of precedents in law. i.e. in case a similar dispute
arising in future, the decision of the court on that point may be
used to decide the current dispute. The decisions of the
Supreme Court, however, are binding on all lower Courts and
tax authorities in India. High Court decisions are binding only
in the states, which are within the jurisdiction of that particular
High Court. However, decision on one High Court has
persuasive power over other High Courts when deciding similar
issues.
Basic Terms & Definitions in used in the Income Tax Act
i. The term “person” under U/s 2(31) includes an individual,
a Hindu Undivided Family, a Partnership Firm, a Company,
an Association of Persons, a Body of Individual, a Local
Authority and every other Artificial Juridical Entity.
ii. The term “assessee” is a person by whom any tax or any
other sum of money (for example interest, penalty, fine, etc)
is payable under the Income Tax Act and includes: -
A person in whose respect proceedings for determining
income has commenced by the Income Tax Department.
Thus, a person may become assessee even if no amount is
payable by him under the Income Tax Act.
A Deemed assessee is a person who is himself not an
assessee but is treated as an assessee for the purposes of the
Income tax Act. For example the trustee of a trust is a
deemed assessee in respect of the trust. The income earned
is the income of the trust but is assessed in the hands of
the trustee as his income.
An assessee in default i.e. a person on whom certain
obligations have been imposed under the Income Tax Act
but who has failed to carry out those obligations. For
example any person who employees another person has to
deduct income tax at source from the taxable salary of the
employee and pay the tax deducted at source to the
government within the prescribed time as income tax paid
on behalf of the employee. In case the employer fails to
carry out these obligations, he becomes an assessee in
default.
iii. The term “Assessment year (AY)” means the period of 12
months commencing on the 1st day of April each year.
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 iv. The term “Previous year (PY)” means the financial year
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immediately preceding the assessment year. In case of a
business or profession that is newly started, the previous
year commences from the date of commencement of the
new business or profession up to the next 31st day of
March, unless the person is an existing assessee.
v. The term “Assessment” includes re-assessment. It is the
process of determining the income of an assessee earned
during any previous year and finding out the income tax,
interest or other sum payable under the Act.
vi. The term “ income” as defined in the Income Tax Act is of
an inclusive nature i.e. apart from the items listed below in
the definition, any receipt that satisfies the basic condition
of being income is also to be treated as income and charged
to income tax accordingly.
Income Includes
Profits or Gains from business or profession including any
benefit, amenity, perquisite obtained in the course of such
business or profession.
Salary Income including any benefit, allowance, amenity or
perquisite obtained in addition to or in lieu of salary.
Dividend Income
Winnings from lotteries, crossword puzzles, races, games,
gambling or betting
Capital Gains on sale of capital assets.
Amounts received under a KeyMan Insurance Policy i.e. a life
insurance policy taken by a person on the life of another person
who is or was the employee of the first mentioned person or is
or was connected in any manner whatsoever with the business
of the first mentioned person.
Voluntary contributions received by a religious or charitable
trust or scientific research association or a sports promotion
association. Between themselves, these heads of income
exhaust all possible types of income that can accrue to or be
received by taxpayers.
Residential Status
Residential status of an assessee is important in determining
the scope of income on which income tax has to be paid in
India.
Broadly, an assessee may be resident or non-resident in India in
a given previous year.
An individual or HUF (Hindu Undivided Family) assessee who
is resident in India may be further classified into Resident and
ordinarily resident Resident but not ordinarily resident.
Under the Income Tax Act, the incidence of tax is highest on a
resident and ordinarily resident and lowest on a non-resident.
Therefore, it is in the assesses advantage that he claims non-
resident status if he satisfies the conditions for becoming a
non-resident.
Scope of Total Income and Incidence of Tax
As already discussed, the incidence of income tax is highest in
the case of ROR and lowest in case of NR. While the residential
status of an assessee will determine the scope of his income the
legal status (i.e. individual, HUF, firm, company, AOP, etc) will
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224
determine the rate of income tax applicable to the assessee. The
following chart indicates the tax incidence on income in different
situations depending on the residential status of the assessee:-
Analysis of tax incidence in various cases
ROR RNOR NR
Income received in India Yes Yes Yes
Income deemed to be received in India Yes Yes Yes
Income accruing or arising in India Yes Yes Yes
Income deemed to accrue or arise in India Yes Yes Yes
Income received/ accrued outside India from a Yes Yes No
business in India
Income received/ accrued outside India from a Yes No No
business controlled outside India
Income deemed to be received refers to income, which is not
actually received in the hands of the assessee but is nevertheless
his income and is to be treated as if it has been actually received
by him.
The following incomes are deemed to have been received in
India: -
1. Income Tax deducted at source from income received by the
assessee
2. Annual accretions to the balance of an employee-assessee
with a recognized Provident Fund to the extent such
accretions are taxable. Any contribution by the employer in
excess of 12 per cent of the employee’s salary to the PF and
interest payable on the balance in excess of 12 per cent paid
accordingly deemed to be received in India and taxed
though there is no actual receipt.
Income deemed to accrue refers to income, which has not
actually accrued in the hands of the assessee but is nevertheless
his income and is to be treated as if it has actually accrued in his
favor.
The following incomes are deemed to have been received in
India:
All income accruing or arising, whether directly or indirectly:
Through or from any business connection in India
Through or from any property in India
Through / from an asset / source of income in India
Through transfer of capital asset in India
Salaries earned in India or for services rendered in India. Income
payable for service rendered in India and for the rest period
preceded and succeeded by services rendered in India and
forming part of the service contract of employment shall be
treated as income earned in India.
Salaries payable by the government to an Indian citizen for
service outside India.
However any allowance or perquisite paid abroad is fully exempt
from tax under section 10(7).
Dividends paid by an Indian Company outside India.
Interest/Royalty/Fees for Technical Services payable by:-
The government
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Any resident person, (unless the interest is payable on any debt

COMPENSATITION MANAGEMENT
for a business or profession carried on by him outside India or Net income range Rates of income-tax
Assessment year 2000-2001 & 2001-2002
for earning any income from any source outside India), or Up to Rs. 50,000 Nil:
Any non-resident person, when the interest is payable on any Rs. 50,000-Rs. 60,000 10 per cent of the amount by
which the total income exceeds Rs.
debt incurred or moneys borrowed and used for a business or 50,000;
profession carried on by him in India. Rs. 60,000- Rs.1,50,000 Rs. 1,000 plus 20 per cent of the
amount by which the total income
For example: excees Rs. 60,000
Mr. Nagpal has the following income during financial year 1999- Rs. 1,50,000 and above Rs. 19,000 plus 30 per cent of the
amount by which the total income
2000. Compute his taxable income if he is (i) ROR (ii) RNOR exceeds Rs. 1,50,000
(iii) NR for that year.
Interest from Bank Deposit in UK (1/3 received in India) - Surcharge in Financial Year 2000-2001 (Assessment year
Rs6,000 2001-2002)
Rent from property in UK received in India - Rs12,000 In respect of income of all categories of tax payer, the rates of
Pension from a former Indian employer received in UK - income-tax have undergone little modification for the F.Y 2000-
Rs50,000 2001. The table below gives the income slabs and the proposed
rates surcharge on tax payable that is applicable for the F.Y 2000-
Income earned from a business set up in UK and controlled
2001.
from UK - Rs.25,000
Income earned from a business set up in UK and controlled
from India- Rs50,000
Existing rate Surchage Marginal
Taxable Income in India will be as follows:- of for A.Y. relief for
Income slab surcharge (2001- A.Y.
ROR RNOR NR (A.Y 2000- 2002) (2001-
2001) 2002)
Interest from Bank Deposit in UK 6000 2000 2000
Rent from property in UK 12000 0 0 Total Income upto
NIL NIL NIL
Pension from Indian employer 50000 50000 50000 60,000/-
Income from business in UK and 25000 0 0
controlled from UK Total Income
Income from business in UK but 50000 50000 0 exceeding Rs
controlled from India 60,000/- but not 10% 10% Note1
exceeding Rs
Total income 143000 102000 52000
1,50,000/ -.

How do We Compute Taxable Income in India? Total Income

Income is first to be computed in accordance with the provi-
sions governing a particular head of income.
The final figures of income or loss under each head of income,
after allowing for stipulated deductions, allowances and other
adjustments, are then aggregated to arrive at the gross total
income. From the latter, further deductions are allowed in
respect of certain kinds of income and expenditure under
Chapter VI-A of the Act. The resultant figure is then, in terms
of Section 288A, rounded off to the nearest ten rupees.
Rates of Income Tax
Individuals, HUF, Association of Persons & Body of Individu-
als. The tax rates applicable to indivuduals are also applicable to
Hindu Undivided Family, an Association of Persons and Body
of Individuals. Though certain specified incomes like long term
capital gains, winnings from lottery etc. are taxable at the rate
specified in the Income tax Act itself, the general tax rates
applicable for the assessment year 2000-2001 and 2001-2002 are
as follows :
exceeding Rs 10% 15% Note 2
1,50,000/ -
* Note1 :- If the net income exceeds Rs. 60,000 the total
amount payable as Income Tax and Surcharge on such income
shall not exceed the the total amount payable as income tax on
the net income of Rs.60,000 (i.e Rs. 1,000) by more than the
amount of income that exceeds Rs. 60,000.
** Note 2 :- If the net income exceeds Rs. 1,50,000 the total
amount payable as Income Tax and Surcharge on such income
shall not exceed the the total amount payable as income tax on
the net income of Rs. 1,50,000 (i.e. Rs. 20,900) by more than
the amount of income that exceeds Rs. 1,50,000.
The surcharge is payable after calculating rebate u/s 88 and 88.B.
However, no change is proposed in the rate structure.
Surcharge on the excess of Income over Rs 60,000/- is limited
to the amount by which the income is more than Rs 60,000/-
Surcharge on the excess of Income over Rs 150000/- is limited
to the amount by which the income is more than Rs 150000/-.
In the case of Cooperative societies surcharge at the rate of 10%
of tax payable is proposed for F.Y 2000-2001.

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11.622.1 225
 In the case of Resident Firms, surcharge at the rate of 10% of 2nd Step
COMPENSATITION MANAGEMENT

tax payable is proposed for F.Y 2000-2001. We will aggregate the income under each head to arrive at the
In the case of local authorities, surcharge at the rate of 10% on gross total income
tax payable is proposed for F.Y 2000-2001. I Income from Salaries Rs. 28,000
In the case of Companies, existing surcharge at the rate of 10% Income from other
II Rs. 15,000
on tax payable is retained. No surcharge is payable in the case of sources
Foreign Companies. ________
Gross total income
Rs. 43,000
Calculation of Taxable Income of Mr. Shrikant
I can take an example for the previous year 1.4.2000 to 1.4.2001 3rd Step:
corresponding to the assessment year 2001-2002. Mr. Shrikant, a Then we will allow deductions from Gross total income under
pensioner had four sources of income viz. Salary (Rs. 6000), Chapter VI-A of Income Tax Act
pension (Rs. 36000), dividend (Rs. 3000) and bank interest (Rs. Deduction under
15000). Less: section n 80L for bank Rs. 12,000
The figure of total income under the Income-tax Act may not interest
always coincide with the figure based on the popular conception _________
Total income
Rs. 31,000
of the term.
The two computations below will indicate the difference Now if we suppose further that the assessee also owns a self-
between the concept of total income in popular sense and for occupied house in respect of which he has to pay interest of Rs.
tax purposes. 30,000 p.a. on capital borrowed for the construction or purchase
of the house (before 1.4.99). He will, in that event be allowed a
Name of the assessee Mr. Shrikant deduction of Rs. 30,000 (the maximum admissible u/s
Assessment year 2001-2002
24(l)(vi) read with Section 24(2) for the assessment year 2001-
Previous year 2000-2001
2002.
Computation of income
in popular sense: The gross total income will thus come down to Rs. 13,000 and
Pension Rs. 36,000 taxable income to Rs. 1,000. Since this would be very much
Salary Rs. 6,000 below the taxable limit for the year 2001-2002 of Rs. 50,000, no
Dividends Rs. 3,000 tax would be payable by this person.
Bank interest Rs. 15,000
From the figures as given earlier, it would be seen that as against
Total income the receipts of Rs. 60,000, the taxable income is reduced to Rs.
Rs. 60,000
1,000 only, because of benefits/ concessions available under the
Income-tax Law.
Computation of Total Income for Tax Purposes
(Interest on borrowing can be claimed as deduction only by the
1st step person who has acquired or constructed the property with
We will do the computation of income under each head borrowed fund. It is not available to the successor to the
separately. property. If the successor has not utilized borrowed funds for
acquisition or construction of property).
In the context of benefit of interest concerning self-occupied
I Salaries:
residential property it needs to be mentioned that deduction
a) Pension Rs. 36,000
regarding interest relating to borrowed funds for construction
b) Salaries Rs. 6,000
or acquisition of such property have been substantially liberal-
________
ized as under:
Rs. 42,000
Less: Standard deduction u/s 16(i) Rs. i. Where the property is acquired or constructed with capital
25000 or 33.33 % of income borrowed on or after 1.4.1999 and such acquisition or
Rs. 14,000 construction is completed before 1st April 2003, the figure
whichever is lower 33.33 % being
lower is deductible Rs. 14000 of Rs. 30,000 would get increased to Rs. 1,00,000
Income under the head 'Salaries' Rs. 28,000 (maximum amount deductible).
ii. With effect from 1.4.2002 i.e. for the assessment year 2002-
II Other sources: 2003, the figure of Rs. one lakh has been increased to Rs.
Bank interest Rs. 15,000 One lakh fifty thousand, if the conditions mentioned at (i)
dividend from Indian Companies are satisfied.
(NIL being exempt under section
NIL Who has to File Return!
10(33) presuming that it satisfies
condition of section 115-O Every person being a company and every other person who has
Income from other sources Rs. 15,000 taxable income during any previous year must furnish a return
of income in the prescribed form and verified in the prescribed

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226 11.622.1
manner giving the prescribed details on or before the due date The requirement for applying for allotment of PAN under the

COMPENSATITION MANAGEMENT
for such furnishing. New Series has now been extended to the whole of India.
Every person who satisfies any one of the following six criteria PAN is required to be quoted in all the transactions mentioned
will also have to file a return of income:- below:
He is in occupation of an immovable property exceeding a In all returns and in all correspondence with the department.
specified floor area, whether by way or ownership, tenancy or In all challans for payment of any tax or sum due to the
otherwise department.
He is the owner or the lessee of a motor vehicle (Owner of a In certain notified transaction.
two wheeler is not considered for this purpose)
Findings
He is a subscriber to a telephone, including a mobile phone
The Indian Income Tax law is a highly complicated and
He has incurred expenditure for himself or any other person on
confusing piece of document. For the common man the task
travel to any foreign country other than neighbouring countries
of understanding the procedure and provisions of law is
or to such places of pilgrimage as the CBDT notify (Pilgrimage
daunting, to say the least. Not only is the process of tax
to Nepal or Hajj)
calculation very difficult, its practical implementation is tedious
He is the holder of a credit card other than an add-on credit card and cumbersome. However, under the law, the taxpayer is
issued by any bank or institution legitimately entitled to plan his taxes in such a manner that his
He is a member of a club where entrance fee charged is Rs tax liability is minimal. Tax Planning can be defined as an
25,000 or more arrangement of the financial affairs within the scope of law in a
manner that derives maximum benefit of the exemptions,
How do We File Returns in India?
deductions, rebates and relief and reduces the tax liability to
Due date for this purpose means:-
minimal
31 October of the relevant AY where the assessee is a company.
Conclusion
Where the assessee is not a company and his accounts are
required to be audited under the Income Tax Act or any other As long as we are within the framework of law, we can plan our
law for the time being in force or where an accountant’s report is financial affairs. However, in the name of tax planning, we
required u/s 80 HHC or 80HHD or where the prescribed cannot indulge in Tax Avoidance or Tax Evasion. And the line
certificate is required to be furnished u/s 80 R or 80 RR or 80 between Tax Planning and Tax Avoidance is very thin, so we
RRA or where the assessee is a co-operative society or in case of need to tread carefully. When financial transactions are arranged
a working partner of a firm whose accounts are required to be in a way that it becomes obvious that they were entered with a
audited, 31 October of the relevant AY Also in the case of an malafide intention of either not paying taxes or with a view to
assessee to whose return such audited accounts are to be defeat the genuine spirit of law, they can not be accepted as
attached. legitimate Tax Planning. Twisting of facts or taking a very strict
and literal interpretation of law without understanding the
31 July of the relevant AY in all other cases. basic purpose of the law can only lead to punishable Tax
What is Permanent Account Number? Avoidance and not Tax Planning
Permanent Account Number is a number by which the Recommendations
Assessing Officer can identify any person. Presently the Income
The law should not be highly complicated and confusing. The
Tax Department is allotting PAN under the New Series to all
common man should be able to understand the procedure and
assessees, which consists of ten alphanumeric characters and is
provisions of law The practical implementation and the process
issued in the form of a laminated card. The PAN is ultimately
should be easily accessible to every citizen of the country.
meant to supplant the General Index Register Number, which
is currently in use. The General Index Register Number is a
number given an Assessing Officer to the assessees in the
General Index Register maintained by him which also contains
the designation and the particulars of the Assessing Officer. As
per section 139A of the Act obtaining PAN is a must for the
following persons:
1. Any person whose total income or the total income of any
other person in respect of which he is assessable under the
Act exceeds the maximum amount that is not chargeable to
tax.
2. Any person who is carrying on any business or profession
whose total sales, turnover or gross receipts are or is likely to
exceed Rs. 5 lacs in any previous year.
3. Any person who is required to furnish a return of income
under section 139(4) of the Act.

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11.622.1 227
COMPENSATITION MANAGEMENT
LESSON 37:
COMPARATIVE INTERNATIONAL COMPENSATION
Latest Trends in Compensation Management
Learning Objective
• To understand the Concept of International Remuneration
• To know Contract work
• To understand Human Resource Operation (HRO): IT in
HR? – Infotech
• To know Executive Compensation Review
• To study a Case Study of an Internation
Concept of International Remuneration
The continuing development of emerging markets and
improved global communications have made it essential for
UK companies to compete with an international market in
order to survive. UK staff in many organizations will, there-
fore, find themselves sent abroad to further the development
of their employer’s overseas interests.
International companies will also increasingly expect senior
employees to be mobile across geographical areas to gain
international experience as part of their management develop-
ment programme.
Most employers remain wedded to the traditional home-based
method of expatriate pay. This is despite a growing desire to
inject a degree of innovation and alignment with business
strategy into the complicated area of international reward.
It is becoming more apparent that the ‘one size fits all’ ap-
proach to expatriate remuneration is not necessarily the most
effective. In recent years the rapid growth of emerging markets
and the need to develop employees for management roles
across ‘global’ organizations has highlighted many of the
shortcomings of adhering to remuneration methods with
colonial roots.
In short, managing an increasing number of nationalities, from
both developed and developing countries, at different stages of
their careers, highlights the difficulty of imposing a single
remuneration system across the expatriate work-force.
Terms and Conditions of Employment
The terms and conditions of employment while abroad
typically depend upon the nature of the work as in the follow-
ing two examples:
Feasibility Studies
Where an employee or team of employees visits a territory to
assess the potential market for their company’s goods or
services. These visits rarely last longer than a month and the
method of payment is usually no more sophisticated than a
reimbursement of expenses.
Contract Work
Construction or civil engineering companies typically recruit
contract staff for specific projects. Food and accommodation is
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228
often provided on site in which case there might be no local
currency payment. A lump sum for the contract, agreed in
advance, is then paid in the UK.
Alternatively, or additionally, terms and conditions of employ-
ment may be determined by the type of assignment as in the
following four examples:
Commuter Assignments
The commuter assignment has mainly developed in response
to the growing unwillingness of employees to disrupt
children’s education or the career of a spouse for the sake of full
expatriate assignment. Such assignments are usually confined to
European countries where it is relatively manageable to work in
one country during the week and travel home at weekends.
Although it is not unheard of for ‘Eurocommuters’ to sustain
this pattern of work indefinitely, it inevitably puts a strain on
family life and can also make it difficult for the employee to feel
truly integrated into the work environment.
However, one of the main advantages for the employer is that
it can be significantly cheaper than a full expatriate assignment.
Small, serviced apartments can be rented instead of larger, more
costly family homes and the added cost of moving children to
international schools or boarding schools is avoided.
Short-term Assignments
The definition of a short-term assignment varies from
company to company but often refers to a period which does
not exceed six months. Some companies choose to make the
break point at three months: others ‘at the point where the
employee becomes liable for tax in the host country.
Managers from company headquarters frequently spend periods
of approximately six months in the offices of an overseas
subsidiary when it. is newly acquired or established and, in this
capacity, are typical short-term assignees. If the assignment does
not exceed three months or so, these employees are usually
retained on their UK salary and given a ‘daily rate’ (‘per diem’
allowance) in local currency calculated to incorporate the likely
costs of hotels, meals, taxis and sundry items such as laundry.
In cases where assignees rent serviced apartments instead of
staying in a hotel, the per diem rate will be modified to reflect a
different lifestyle. It is unusual for a short-term assignee to be
accompanied by family in the host location and as a result it is
normal for the employer to pay for a reasonable number of
flights home which can be used either by the employee or
family.
Any additional tax liability arising from the assignment is
usually met by the employer.
Quite often short-term assignments develop into much longer
assignments. For this reason it is recommended that the terms
and conditions be compatible with any existing long-term
11.622.1
policy, so allowing one assignment effectively to ‘dovetail’ into
another and avoiding an administratively complex transition.
Expatriate Status
Employing local nationals is usually much cheaper and has
distinct local political advantages (eg in the Middle East, where
‘localization’ is a strong national imperative for many countries)
by comparison with expatriation. but many multinational
companies adhere to a policy of mixing the local work-force
with at least some management from UK headquarters.
These managers arc still usually employees of the parent
company and may be kept on the UK payroll although it is
increasingly common for expatriates to be transferred to the
local payroll in ‘developed’ countries.
The length of an assignment is usually linked to the business
purpose. Assignments intended for training purposes are
usually of the shortest duration, typically lasting around one
year. Assignees performing a management function. or who are
on assignment to train and identify a local successor, usually last
considerably longer.
Such assignments can last from three to five years and are
sometimes even longer in emerging markets where the time
necessary to achieve business objectives is often underestimated.
For example, in South-East Asian countries, it can take a long
time to win the loyalty and trust of local management who take
a dim view of what might be considered to be a too rapid
turnover of expatriate staff.
Secondment
Secondment is frequently confused with expatriation and some
companies do not distinguish between the two. However, it is
generally accepted that the difference is contractual; for the
duration of an assignment, a secondee is employed by the
subsidiary company rather than the parent company and the
source of remuneration is local.
HRO: IT in HR? - Infotech
And given their minimum salaries and establishment costs ...
Anderson, which recently launched its international e-HR ...
backup required to install the latest in HR
How much expatriates are paid depends upon their job and
status, personal commitments, the territory to which they are
assigned and other variables.
An expression commonly found in the policy documents of
multinational companies runs approximately thus: ‘the aim of
the expatriate remuneration policy is to ensure that individuals
are neither better nor worse off’ as a result of their overseas
tour of duty’.
However, more and more companies are now increasingly
unwilling to commit to such statements faced with the
spiralling cost of expatriate assignments and an increased focus
on the real cost value to the company of sending employees
abroad. It is often only possible to maintain an expatriate’s
home standard of living at significant cost to the company.
The cost of sending an employee abroad far exceeds the salary
outlay. In addition, the company must consider the air fares to
and from the destination which are not insignificant when
individuals are accompanied by their families and may return
© Copy Right: Rai University
11.622.1
once or twice a year for leave, or need to go to a holiday resort
COMPENSATITION MANAGEMENT
for rest and recuperation.
Accommodation costs, relocation expenses, language training
and UK boarding school fees are further financial burdens to be
carried by the employer.
Enter a new animal called human resources outsourcing, which
promises to be just that. Fed with new software technology and
attitude, it’s happily chewing away at the traditional HR
department setup, paring it down to the bone.
You’re posted in a new city. You’re harassed and distressed, and
unable to find a house to stay in. Who do you call? The boss at
headquarters? The human resources guys?
You might as well call up your mother and pour your heart out.
Wouldn’t it be nice if there was someone, somewhere, whose
sole business was to look after you, the (temporarily) hapless
employee?
Enter a new animal called human resources outsourcing, which
promises to be just that. Fed with new software technology and
attitude, it’s happily chewing away at the traditional HR
department setup, paring it down to the bone.
Starting from basic payroll administration, HRO firms in India
are now nibbling at higher-end functions like recruitment,
training, appraisals, counselling, compensation and career
planning. Thereby setting a new agenda for HR professionals in
the corporate sector.
As Manish Sabarwal, managing director of the Rs 20 crore India
Life Hewitt (ILH), pithily puts it: “We’re there to take care of
the backroom. Company HR can now move to the board-
room.”
Ideally, corporate HR departments should consist of a few
good men who will devote their time to organisation design,
competency development, talent and motivation management,
and all those other processes that form chapters of
organisational behaviour texts in business schools. Are
company HR departments ready to play?
RPG group president (HR) Arvind Agarwal, who is also
president of the National HRD Network, says human resources
outsourcing could definitely give a boost to the profession.
“HR professionals will have to start adding value to the
organisation. For too long they’ve pretended to be busy doing
utterly routine tasks,” he says.
Agarwal first initiated HRO at e-RPG, a company that didn’t
survive the dotcom shakeout. But the experiment convinced
RPG of the benefits, and the group has now implemented it at
one of its oldest companies, the Calcutta-based Phillip Carbon
Black.
Not every corporate house is as enamoured. The AV Birla
group has brought in HR consultants for limited periods to
design and implement compensation structuring and 360-
degree feedback systems, but Santrupt Misra, Director (HR),
Birla Management Corporation, is wary about taking it too far.
“HRO is fashionable and I personally have nothing against it.
But there’s been no proper research into the cost benefits. For
the time being, we don’t plan to use it in a major away,” he says.
229
 In all fairness, the original USP of human resources
COMPENSATITION MANAGEMENT
outsourcing as being a cost saver may not sway established
manufacturing companies of the kind that make up the Birla
group.
They may also not be swayed by the argument that HRO can
handle it better, but that’s what HRO firms are currently hard-
selling.
Says Ajit Kumar, partner at Accenture, which has estimated the
current Indian BPO market at Rs 325 crore, and growing at 50
per cent annually: “Business process outsourcing (BPO) is no
longer cost-driven but value-driven. What’s a back-office cost for
a corporate is transformed into front-office revenue for a BPO
firm, which will naturally deliver better value. They would have
better technology and better practices.”
HR outsourcing has best thrived in a scenario of change:
startups, mergers and acquisitions, and voluntary retirement
schemes. When the financial sector was opened up in the 90s,
the transnationals that moved in had no inclination, time or
office space for HR, a function they gladly outsourced to
accountancy firms.
Says Harish Chopra, whose firm Harish Chopra & Associates
has garnered a large chunk of financial sector HRO over the
years: “An investment bank would prefer to recruit investment
bankers rather than HR specialists. And given their minimum
salaries and establishment costs, HR administration would cost
them twice as much.”
Firms like ILH and HCA are trying to add depth to their
services. For one, they now interact directly with employees of
client organisations, considered taboo in the past.
While Chopra has restricted the interaction to e-mail, ILH has
set up a call centre hub in Bangalore where 2.8 lakh employees
from 270 client companies can call with questions on tax, perks,
provident funds, investments and loans. In an average
organisation, these are actually the queries that keep most of the
HR departments staff busy.
A year ago, ILH took over benefits and payroll administration at
Pfizer just after the company had implemented VRS. Similarly,
Ma Foi Management Consultants took over the entire HR
function at ICI’s plant in Mumbai soon after Huntsman
acquired its industrial chemicals business worldwide.
CHENNAI-based Ma Foi began with recruitment, but is now
pushing the envelope with a gamut of HR services. These
include compensation management, psychometric evaluations,
training, exit interviews and wholesale outsourcing of person-
nel, including sales teams and manual labour.
The Rs 25 crore company employed the workers that laid cables
for Bharti Telecom, has on its roles the secondary sales team for
Monsanto, and has a long-term contract for recruiting graduates
for HSBC’s upcoming call centre in Hyderabad.
Ma Foi managing director Pandia Rajan points out that in the
USA, the number of HR professionals working in the corpo-
rate HR departments has shrunk by 16 per cent, which directly
correlates to the growth of HR outsourcing.
“In India too, the perceptions of what can and cannot be
outsourced have been changing rapidly. With new technologies
© Copy Right: Rai University
230
offering increased data security, companies are seriously looking
at integrated HRO.”
Though individual companies can also install the latest in HR
packages created by Oracle and SAP, it’s HRO that’s been at the
forefront - with good reason. These web-based systems allow
employees to log in to get online answers to queries on most
subjects, with the option of sending e-mail or calling the firm if
there are any doubts.
Says Shailesh Shah, managing director of HR consulting firm
Watson Wyatt: “The self-service model, where employees deal
with HR issues online, on their own, is becoming the favoured
option worldwide. Indian companies would do well to leapfrog
into the self-service mode as well.”
Online HR packages can be seamlessly integrated with recruiting,
appraisals and training. They can also empower individuals in
fantastic ways. For example, if corporates spell out the require-
ments of a particular job in terms of minimum qualifications
and experience, and place the information on the system, it
would be possible for an employee to plan his career.
Conversely, when the time comes to fill a certain position, the
system would throw up the names of every individual within
the company who fits the bill. This is an important advantage
in large organisations, where the best candidate may be posted
out of immediate sight in a distant location.
Says Ganesh Shermon, Partner, Arthur Anderson, which
recently launched its international e-HR package in India: “The
system brings objectivity and removes the whimsical element in
HR decisions. Instead of raw power, companies will use data
and knowledge in taking decisions about their employees’
lives.”
As the former HR chief at Arvind Mills, Shermon was respon-
sible for one of the country’s pioneering experiments in the
area, when the Ahmedabad-based company hived off its entire
HR department into a subsidiary.
The 20-member team was to handle the HR function of
Arvind Mills as well as offer its services to other corporates. But
the project ultimately failed, with the cash-strapped denim
company unable to provide the financial backup required to
install the latest in HR technology.
Today, Shermon is convinced that corporate HR is a dinosaur.
“In the company of the future, the head of HR in the best
organisations will be line managers from core functional areas.
The HR professionals will all operate from without, as consult-
ants,” he says.
A case in point in Hindustan Lever, where HR Chief Prem
Kamath has spent most of his career in marketing.
Says consultant TV Rao, formerly with the OB faculty at IIM
Ahmedabad: “You’ve to distinguish between HRD as in
human resource development and HRD as in human resource
department, which has unfortunately become the principal
meaning of the term.
Line managers play a key role in HR development, since it’s
business-driven and strategy-based. Consultants can be brought
in on a part-time basis here, but it cannot be wholly
outsourced.”
11.622.1
What does all this mean, if you’re posted in a new town
without a roof over your head? For one, if you’re connected to
the online e-HR system, you could log on and find company-
empanelled brokers. If that doesn’t work - and your HR
department has long since perished - you could call that HRO
number.
If you can’t understand what they’re saying, it’s probably
because they’ve moved their call centre to Ethiopia to save costs.
As a last resort, you could try the line manager at headquarters,
namely, your boss. If the insensitive chap bites your head off,
there’s always Mom.
Executive Compensation Review
Graduate recruitment update. ... was slightly lower at £18,343,
although the latest average rise ... a Research File and access to
the online Salary Surveys Directory. ...
Graduate Recruitment Update
With thousands of newly qualified graduates about to enter the
labour market in search of their first job, the IDS Management
Pay Review takes a look at recent surveys on graduate employ-
ment and pay prospects. The surveys are from the Association
of Graduate Recruiters (AGR), the Institute for Employment
Studies (IES) and the Higher Education Careers Service Unit
(CSU).
Salary increases for new graduates continue to outstrip inflation,
but the number of available jobs is shrinking, according to a
new survey from the AGR. The AGR recorded a 4.1 per cent
year-on-year increase in median salary to £20,300, but graduate
vacancies fell by 3.4 per cent in 2003 compared with the previous
12 months. The median starting salary reported in the CSU
survey was slightly lower at £18,343, although the latest average
rise was 4.5 per cent higher than last year.
As well as graduate salaries and vacancies, the article also looks at
graduate retention rates. A survey from the IES found that the
highest retention rates were in the public and not-for-profit
sectors, while graduates regarded prospects for long-term
development in their company as essential.
The MPR also publishes an annual research report Pay and
progression for graduates 2003. This provides an accessible
guide to the state of the market and gives details of planned
starting salaries for this year’s recruits.
Tutorial Activity 1.1
A Case Study of an Internation
In India dealing with 20 International Clients for ... from
recruitment and training fee to initial salary ... Conclusion The
results of our case study research show ...
Worker and Work
A Case Study of an International Call Centre in India
By Ramesh C Datta
Introduction
The Indian Call Centre Industry has been growing at a mind-
boggling growth rate of around 60 percent annually over the
last 3 years. The revenues from this sector have grown from
around $565 million in 1999-2000 to more than $3 billion by
March 2004 and are projected to increase beyond $ 10 billion by
© Copy Right: Rai University
11.622.1
2006. Employment in this sector has increased from 1,40000 in
COMPENSATITION MANAGEMENT
March 2003 to 2,00000 plus by 2004. In fact it has been reported
that the industry hired 200 persons every working day over the
last one year. This emergence of India as a major off-shoring
destination for information technology enabled services for
many of the fortune 500 companies is not surprising given its
lowest cost per transaction in a call centre in the world. Person-
nel cost per full time employee in a call centre in India is $6179
and total operating cost inclusive of additional other then salary
components like administration, telecom, property rental, and
depreciation is $ 11857 par employee per year.
A significant contribution to the low cost transaction could be
attributed to the supply of 2 million gra duates who pass out
every year from approximately 270 Indian Universities many of
whom could converse in English language with fluency as they
have had their schooling in English medium.
So it is really hardly surprising that General Electric which was
one of the pioneers that realized the potential in this area
reported to have saved us$340 annually by shifting its back
office work to India and by employing many of these graduates
for their call centre. American Express, Standard Chartered
Bank, Citi Bank, British Airways, Microsoft, AOL Time Warner,
Dell Computers, Morgan Stanley, J P Morgan Chase, Hewlett
Packard, Prudential Insurance, Marks and Spencer, to name a
few, all followed ‘lured’ by huge labour cost savings.
In recent years many independent companies including Indian
Information Technology firms such as Wipro, Satyam and
Infosys have entered the market to reach $ one billion overall
annual revenue mark. According to a recent study by an
International Consultancy firm McKinsey, for every one dollar
of job outsourced ‘Offshore’ by U.S.A., creates over $ 1.49 of
value and 78 percent of this value is retained in America only 22
percent goes to outsourcing destination like India. So far as the
Call Centre workers in India are concerned, they have been
hailed as the harbinger of a Brave New World holding ‘quality’
jobs with munificent salaries and are linked to the global
economy.
However, some scholars have equated call centre workers with
‘Cyber Coolies’ who are brain washed into thinking that they are
not salves but masters of the new world of work. They sell
everything from travel packages, settling credit card bills, warn
customers about overdraft, answer statement queries, catalogue
shopping, etc. Somebody said they live in India but work in
America.
Unlike in developed Countries like U.K., Germany and
Australia, unfortunately there is very little published research
work to-date by academics in this field so far in India. There are
consultancy reports quoted in the news papers and magazines
on the issues related to workers turnover, no-poaching
agreements, and retention methods but the nature of work in a
call centre as such is not been given much attention.
Broad objective of this study is to examine and understand the
profile of workers, work norms and work organization in a
third party international call centre in Mumbai.
231
 Methodology room with bunker beds and a reading lounge with free
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The research findings reported in this paper are based on the Internet surfing facility.
fieldwork conducted by the author in three large call centers.
Profile of the Respondents
Two of these are third party call centres and the third one is a
captive one of a multinational firm. Only one of these call Age 78 All Full time
centers permitted us to interview a sample of their workers 18 – 20 21.80 %
designated as customer service associates (CSA) and who are at 21 – 24 50.00 %
the lowest rung in the hierarchy of organizational structure and
25 – 30 24.40 %
form majority of the workforce employed by the firm. Within
the time and resources we could get to interview 78 such 31 + 3.80 %
associates-workers with the help of a questionnaire. All the Sex
interviews were conducted either during the work breaks or Males 41.00 %
before/after their work, but at the workplace itself.
Females 59.00 %
In addition three operations managers, three human resource
Marital Status
managers, and three team leaders were also interviewed in an
informal manner. Each of the 78 interviews took around 40 Married 12.80 %
minutes. The operation manager also organized a few visits to Unmarried 87.20 %
the floor-area for us to get experience of listening to a few live Education
customer calls and response by the associates.
Undergraduates 32.10 %
The call centre in which we have conducted our fieldwork is a
Graduates 60.30 %
third party outsourcing centre that started functioning about
three years back. It has been doing business with 3 international Post – graduates 7.70 %
clients for their voice-based work and has employed more then Extra – educational Courses 29.50 %
900 customer service associates working full time at its Mumbai Recruitment Mode
site mostly for inbound calls. However, it has more then 4000
Placement Agency 48.70 %
workforce working at its five sites in India dealing with 20
International Clients for 26 processes and has total revenue of Walk-in (Direct) 46.20 %
more than $40 million. Employee Referral 5.10 %
Some Observations Salary per Month
On the basis of our first few visits to the call centre we could $ 220 - 265 61.50 %
observe the following characteristics of the workplace and its $ 270 – 340 38.50 %
workers.
Our field survey of 78 associates reveals that over 50 percent of
a. The workplace, located in a huge modern multistoried these are under 22 years of age and 59 percent of total are
building, occupying two full floors space area, is centrally air females. About 13 percent of the totals are married only 15
-conditioned and it portray atypical metropolitan college percent are above the age of 26 years. Around 32 percent of all
type attractive bustling fun environment. are undergraduates, 60 percent have completed graduate studies
b. A typical worker-customer service associate – male or and about 8 percent have done post-graduation.
female, is an energetic youngster with a college student- Approximately 30 percent of our sample have had done
looks in trendy dress getting his/her backpack checked by additionaldiploma or a certificate course related to computer
‘security guard’ or swiping the identity card to open work. Most of the respondents in our survey have been living
electronically locked big glass doors to enter the work area. in the suburbs of Mumbai and come from mixed family
c. In the reception area 8 to 10 anxious looking youngsters background varying from a lower middle class family of a peon
could be seen every day walking-in to get interviewed / mother, or daughter of a security guard or first woman working
screened for employment. in the family to a private sector firm’s general manager’s
d. The space inside in the work-area is divided in bays where daughter working mainly to earn a decent pocket money for
individual associates are seen sitting in front of computers herself.
with their head-set on, punching keys while interacting in An associate earns approximately $220 per months as a starting
formally tutored clear English or scripts, with customers. gross salary. In addition some social security benefits like house
e. The bays and individual workspace consoles are well rent allowance, conveyance allowance, medical/accident cover,
decorated with bright coloured posters, captions and provident fund contribution by the employer, etc. are included
partying groups or presentations ceremony camera photos. in the salary package of an associate.
The parties, picnics, movies, festival nights like Hawaiian Recruitment and Training
night, Halloween night, ethnic night, rain dances etc. are the Recruitment in the call centre is carried out by various methods
regular monthly features in most call centres. but the prominent ones are through 1) walk-in-interviews, 2)
f. All the call centers visited have a modern 24 hour serving employee referral scheme and 3) placement agencies. The first
indoor cafeteria with a large television. There is a medical

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232 11.622.1
one of these is the preferred mode as this is also cost-wise
cheapest.
However, this method alone is not sufficient to fulfill the
demand for manpower and therefore six placement agencies
shortlisted by the firm to which orders of manpower require-
ments are placed by the firm. These agencies are also involved in
final recruitment and sometime in preliminary training of the
candidates. Typically these agencies charge a recruitment fee from
the call centre which is equal one-month salary of the prospec-
tive employee.
However, due to the increased competition among the place-
ment agencies in the market this outsourcing firm is paying
around $150 per hire which is about a $70 less then the starting
salary of an associate. And this recruitment fee is paid only if
the recruited candidate stays with the firm minimally for three
months. On an average a associate stay with the firm for 8
months. Interestingly during this period all the investment
made in the employee from recruitment and training fee to
initial salary during the training period, the operation manager
claims, is recouped by the firm. One of the major reasons for
this could be that the training skills required to facilitate
transforming a reasonably trainable English speaking graduate
to become an effectively efficient associate, are too easy to acquire
especially in a work where the range of tasks is very narrow with
tasks itself being routine-repetitious. In fact during the field
work interviews a significant number of associates mentioned
that it takes them around one month after training to acquire
proficiency.
Typically the training is given for eight weeks. This includes two
weeks training on ‘voice and accent’. And another two weeks is
on ‘customer service’. The former is aimed at in developing
‘neutral’ accent and the latter underline, through the teaching of
so called behavioural soft skills, the great importance of
emotional labour in the work of a typical call centre.
This training of four weeks is conducted by the manpower
placement-cum-training agencies or further outsourced by them
for the firm. While the four weeks of process training is
conducted in-house by the client with the help of associates
who have acquired sufficient proficiency to be designated as
‘process trainer’ and who by now have began to perceive
themselves as ‘cyber sahib’. Sometime ‘fast forward batches are
also run with ‘crash course’ of three weeks training. This is done
purely at the behest of client.
Work and Work Organisation
A typical associate, in the call center firm that we have studied,
works in shifts and five days a week. However, an associate
could ‘sacrifice’ his/her off day on the request of team leader
for which an extra payment of around $20 is made to the
associate. One could as well be requested to extend 9 hours shift
work by another 3 to 4 hours for a ‘reward’ of $6.
The associates are put in different shifts by rotation, and shifts
are typically of 9 hours of work including 7 ½ hours of log-in-
hours, two update briefing periods of fifteen minutes each, and
one hour of break from work which is further divided into
three short periods of 15-30-15 minutes. Rescheduling of
shifts and delayed breaks are not very uncommon especially
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11.622.1
during festive seasons like ‘X-mas when the call flow is very
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high.
According to one of the associate, “When the call flow is high
one has to raise a BLUE flag to attract attention of team leader
for break and sometimes one can not go to loo even”.
Another one told that, “If one is too tired because of lack of
sleep for example, permission is granted to sleep in the medical
room but ‘work break hour’ has to be given up” There are
various work-shifts timings which are largely as per the client’s
requirement.
Some examples of these shift timings are:
12.00 noon - 9.00 pm
2.00 pm. - 11.00 pm
10.30 pm - 7.30 am
12.00 mid night - 9.00 am
2.00 am - 11.00 am
The last one is referred to as ‘graveyard’ shift. Typically a shift
allowance of around $25 is paid “ My work typically involves
answering customer calls related to card activation and statement
queries on interest etc. which requires opening call punching
credit card member, getting all data on the screen, control-V,
copy the number activated doing verification as per procedures,
closing.
“My ‘day’ starts as per my shift timing and it could be between
12 noon to 9 p.m. any time. It typically takes me about an hour
to reach here by my motorbike. Sometime I make use of
company pick-up. After a smoke I go to my work area and look
for my TL (team leader) for any update (scripts) and then I log-
in My work typically involve answering to customer calls from
UK related to Card Activation and statement queries on interest
etc.
All this require opening call saying ‘good’ words, punching
credit card number, getting data on the screen, control-V, Copy
and Card get activated. I need to do verification as per proce-
dures and closing I must use the name of the customer certain
number of times. That is a requirement in quality. I have been
doing this for quite sometime. It is boring but alright. Other-
wise tell me, sir, who will pay me 11000 ($240)”
On the basis of such responses which were quite normal in our
survey, as far as we have been able to ascertain in our fieldwork
interviews with the customer service associates, the call centre
work is very repetitive requiring very little depth of knowledge
or experience and also require dealing with difficult customers
by suppressing one’s feelings or emotions. During customer
service training the associates is ‘trained’ on how to react to irate
customers by remaining focused on service mindedness.
Customer’s reactions like, “I want to talk to some who can
speak English”, or “My call has gone to an Indian block”, or
“You bloody Indian”, are not very uncommon. The associates
informed us during the interviews that they have been ‘trained’
not to take these reactions at personal level. However, another
associate told us that sometime the customers’ comments are
very nice which keeps her motivated. She was referring to an old
British lady customer who said, “Very nice of you to remember
any birthday. I am really touched…. You know my last wish is
233
 to come to India and die there. Will you please call me up at
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home and do not worry I’ll pay for the call”. But this particular
associate also mentioned that in such cases she ends up
spending more time then expected average call handling time
given to her and that has a negative impact on her performance
appraisal.
Nature of Work
Approximately 86 percent of the associates interviewed in our
fieldwork do deal with difficult customer who sometimes abuse
and also mimic to increase the average call handling time.
Almost all the associates in the sample indicate that they do not
show their feelings to such customers’ reactions and do remain
focused on service. Such regular suppression of feelings lead to
high use of emotional labour which could inturn becomes a
cause of stress.
Although about 90 percent of the associates feel that their work
does not require any in-depth knowledge or experience, still the
continuous call flow through the automatic call distribution
system creates enough pressure on the job to work fast. “If
customer has to repeat, it leads to my losing on my quality
scores.
But this may not be because of not having answered to
customer’s query. It could be purely because of a faulty headset
or sheer noise.”
More than 90 percent of the associates do face noisy work
environment. A significant number of associates in our field
interviews perceive that their work is organize d in such a way
that they have very little discretion to set their own pace of work
while doing largely routinized repetitive tasks and have very little
say in determining the work breaks.72
Nature of Work
Due to these very features of work and work organization
some researchers in the field have compared call centres to
‘factory assembly lines’ where in incoming calls are ‘force -fed’,
to associates on an unstoppable telephonic conveyor -belt
(Arkin 1997; Taylor and Bain 1999). A very high degree of
surveillance is used through technology and management
techniques to appraise the performance of associates. All
incoming calls and associates’ responses are recorded electroni-
cally. Twelve of the calls - 6 by the client and 6 by the internal
quality analyst, per month are randomly picked up to assess the
quality of response and performance of the associate. Addition-
ally assessment of quality by client through ‘mystery calls’ or
through live barge -in is also done. Internal quality analyst and
sometime client’s personnel also sit next to associate to assess
associate’s performance to give ‘feedback’.
Every associate got to adhere to the average call handling time
given to them by the client in the service level agreement.
Quality of the call is monitored on various – 30 in one case,
parameters many of which are subjective related to associate’s
behaviour and manners.“I must score 90 percent on quality.
Once I, by mistake pressed a letter key instead of ‘enter’. That
changed the name of customer. My score on quality became less
then 90 percent.
I got into ‘bucket’. To come out of the ‘bucket’ I had to score
more than 90 percent for the next two consecutive months.
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234
Unfortunately it took me 4 months to pull myself out of the
‘bucket’. I already had been given by that time verbal and
written warning”.
In the following table performance criteria and score attached to
each are given.
Team Working
All the associates are working in teams. A typical team is
comprised of 15 associate and a team leader. Each team is given
a fixed name for associates to develop identity. It took us quite
sometime to understand the purpose of working in a team in
call centre wherein the nature of work involves a narrow range
of routine repetitive largely script and technology controlled
fragmented tasks which are hardly interdependent to require
shared decision-making.
It seems to us that basic function of a team here is that of a
social support group where-in the members depend on each
other to share and get relieved of tensions, frustration, stress,
anxieties and boredom of work. In fact quite a few of them get
themselves relieved of anger by socializing within teams
especially after interacting with difficult customers.
Team leader also play a very important role of almost a
counselor in resolving emotional issues involving youngsters
working as associates, apart from giving regularly script updates,
motivating individuals through competition among teams
based on criteria like highest number of calls attended, lowest
average call handling time achieved, highest login hours, best call
of the week etc. etc. However, there are some elements of
interdependence of work within a team. For example, team
leader’s performance appraisal is partly dependent on team’s
average performance criteria like average quality score.
We believe this kind of team working in call centre is expected
to help in developing a ‘work culture’ of ‘fun’ aided by ‘social
support’ to encourage social group bonding that might reduce
attrition.
Nature of Work and Health
As most of the Call centre work performed by the CSA is
repetitive in nature providing little opportunity for task
variation with long duration of same working posture, and
over and above significantly at atypical hours because of the
time difference between India and the client’s country, a very
high risk is faced by the associate’s towards their health getting
affected.
Nature of Work and Health
In fact work organization that provide little task variation and
autonomy, and performance management techniques involving
least consultation of workers in setting targets, and subject
measurement, have been found as most significant causes of
stress. Our study shows that about 22 percent of our respon-
dents suffer from back-ache problem and about 37 percent get
head-ache.
Around 32 percent of these have been finding difficulty in
concentrating at work and 33 percent find difficult to get normal
sleep. Regular changes in shift work have also affected the
appetite of the associates and could have been caused by acidity
resulting from irregular-interrupted eating time. Around 14
percent of these have begun smoking cigarettes.
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Answer the Questions Below Based on the Above

COMPENSATITION MANAGEMENT
Case Study
1. What does the results of the case study research show?
2. Discuss the role of IT Industry in the call center Industry.
3. Discuss the impact of call center work on the employees
health.

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11.622.1 235
COMPENSATITION MANAGEMENT
LESSON 38:
INTRODUCTION TO DOWNSIZING
Latest Trends in Compensation Management
Learning Objective
• Introduction to the Concept of Downsizing
• To know The Paradox of Downsizing
• To understand Downsizing And Organizational Culture
• To know Downsizing with relation to Executive
compensation
• To study Latest Updates on Downsizing
Introduction to the Concept of
Downsizing
Like culture, “downsizing” is problematic in its usefulness.
Because it is popularly associated with giving people the “axe”
in organization. It is not a term that many management
consultants go out of their way to use. On the other side of the
spectrum, there are researchers who are concerned that
downsizing has become too closely associated with the process
of organisational decline and its naturally negative effects.
Cameron, for example, defines downsizing as a positive and
purposive strategy: “a set of organizational activities undertaken
on the part of management of an organization and designed to
improve organizational efficiency, productivity, and/or competi-
tiveness” (Cameron, 1994:194). Downsizing thus defined falls
into the category of management tools for achieving desired
change, much like “ rightsizing” and “reengineering”.
Clearly, the Cameron definition is overly expansive. Downsizing
may and very likely will impact or impinge on systemic change
efforts such as the introduction of “total quality management,
“reengineering,” or “reinventing” initiative. They are not one
and the same, however, as the Cameron definition would
imply. This is significant, because Cameron’s connection of
downsizing with a larger, purposive strategy allows him to
conclude unabashedly that downsizing is a good and positive
thing and that organizations should seek to do it on a regular
and continuing basis (Cameron, 1994).
This cheery conclusion flies in the face of Cameron’s own four
year study of thirty firms in the automotive industry, data from
which revealed that “very few of the organizations in the study
implemented downsizing in a way that improved their
effectiveness. Most deteriorated in terms of pre-downsizing
levels of quality, productivity, effectiveness, and the ‘dirty
dozen’, e.g., conflict, low morale, loss of trust, rigidity,
scapegoating)” (Cameron, Freeman, and Mishra, 1993).
Downsizing is defined in this effort simply as a reduction in the
size of the work force. This definition provides some analytical
clarity, because it does not imply a value, either positive or
negative, and encompasses a wide range of possible approaches.
Thus defined, downsizing does not necessarily imply a
reduction in the assets of the organization; for example, an
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236
organization may contract out a function that was previously
done by permanent employees. The elimination of the jobs of
the employees constitutes downsizing.
The Paradox of Downsizing
Information will be examined as a prime determinant in the
value of a stock. 5 specifically, the choice of how many workers a
firm JPil1 hire or fire may be interpreted as news that signals the
health 0/ that firm. Downsizing will be defined in the context
of a special case 0/ the labor input strategy of a firm. Questions
relating to how downsizing functions as a signal of firm health
will be raised, and the methods for answering those questions
will be presented
The economy was strong, inflation was falling, and real GNP
was growing at a steady, confident pace. Corporate profits had
reached historically high levels, and investors were on a buying
spree in the stock market, pushing it from one record close to
the next.
Unemployment had fallen to a level that many economists felt
was consistent with non-accelerating inflation. Expectations of
inflation were abated, and the boom seemed to be poised to
last for a long time, with no economic downturn in sight. At
the same time, the major corporations in the US appeared to be
firing workers by the hundreds of thousands, and job insecu-
rity had risen to a surprisingly high level. Regardless of seniority,
the company’s profitability, or the surging demand for the
firm’s outputs, the threat to an employee of finding a pink slip
in the next pay envelope was real and widespread. No job
seemed safe.
The above statements, describing the US economy in the mid
1990s, seem inconsistent not only with a standard textbook
characterization of an economic boom, but also with any
historically observable relationship between the labor market
and other economic arenas, such as the financial market or the
goods market. Politicians and unions pointed to the greed of
corporate America, and the insensitivity of management to the
contributions and value of workers.
Standard micro economies was at a complete loss to explain the
phenomenon. If strong firms were anticipating a greater
demand for their products during the economic boom, and
labor costs were not rising excessively relative to productivity,
why were firms firing workers? The term “downsizing” was
coined to describe the action of dismissing a large portion of a
firm’s workforce in a short period of time, particularly when the
firm was highly profitable.
In a standard downsizing story, a profitable firm well-poised
for growth would announce that it was firing a large percentage
of its workforce. The equity market would get excited, and
initiate a buying frenzy of the firm’s stock. This goes counter to
a standard micro-economic analysis, in which a weak firm
anticipates a slump in the demand for its products, and lays off
11.622.1
workers, while a strong firm foresees a jump in the demand for
its products, and hires more workers to increase production.
Investors care about downsizing, since it contains severe
implications for the short-term profitability and even the long-
term growth of a company. A dowrisizing is quite unlike a
traditional layoff: in a layoff, a worker is asked to temporarily
leave during periods of weak demand, but will be asked back
when business picks up. In a downsizing, the separation
between a worker and a firm is permanent. A downsizing is
also not a dismissal for individual incompetence, but rather a
decision on the part of management to reduce the overall work
force.
Through a downsizing, the management inadvertently (or
perhaps deliberately) signals to investors what the future
economic health of the firm is. In the 1980s, the largest layoffs
were executed by weak companies, who were looking market
share to foreign firms, or had large drops in demand for their
products.
Downsizing were clearly regrettable, but understandable, as they
helped the firms to survive. Such a large amount of workers
was certainly unnecessary for a firm doing a smaller volume of
sales, so the workers were released in large numbers over short
intervals of time. Investors noticed that major layoffs were
taking place, and downgraded their expectations of the firm’s
future profitability, so they dumped the stock.
Yet, this perfectly logical explanation seems inconsistent with
what was actually taking place in corporate boardrooms and on
the trading floors of the New York Stock Exchange of the
1990s: companies ridding themselves of workers by the
thousands were strong, and had bright economic futures ahead
of them. Upon learning of downsizing, the alleged signals of
firm weakness, investors went on a buying spree, and sent the
company’s stock price soaring.
This paradox leads to the first two questions addressed in this
thesis:
1. Why does the value of a firm increase when it announces a
downswing, especially since downswing is supposedly a
signal the rough economic times ahead?
2. Why do strong firms Lay off workers in a boom, but not in
a recession?
Another simultaneous-and possibly related-phenomenon
in the 1990s is the popularity of a new form of
compensation for executive management. Instead of being
paid in cash, many are now compensated in stock options.
If downsizing as a strategy increases equity value (investors
buy the stock of downsizers), then it increases
management’s compensation, and appears all the more
attractive.
This leads to the next issue, which seriously questions an
ideology which both academics and businessmen hold dear:
that stock options improve firm value by aligning the
interests of owners and managers. This thesis will show
that stock options are not the cure-all that many claim them
to be:
3. Did the proliferation of stock options in executive
compensation contribute to the wave of downsizing,
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11.622.1
especially downswing that engendered short-term gains, but
COMPENSATITION MANAGEMENT
reduced long-term firm value?
By re-aligning management’s interests with stockholders,
the managers care more about the perceived value of the
firm, not the actual value of the firm. The stock price is
based only on the perceived value-a function of the limited
information which shareholders can obtain.
Managers will undertake strategies that will improve the
perceived value of the firm, and to the extent that the two
are correlated, as a by-product, management mayor may not
improve the actual value of the firm. This raises an
ambiguity about the relationship between downsizing and
the actual strength of a firm:
4. Is downswing a signal of the strength of a firm? If so, why
do firms in similar situations in a given market follow
markedly different employment policies?
Lastly, downsizings mayor may not be surprising to the
extent that they are anticipated or accompanied by other
news pertaining to earnings or mergers. There may be a
systematic under or over-reaction to a given news variable.
The downsizing announcement is relevant if it changes the
expectation of the future cash flows that a stock will
generate:
5. Does the stock market under or over-react to a downsizing?
if so, what should an investor do following the
announcement of a downsizing?
Downsizing and Organizational Culture
A noted scholar recently assessed downsizing as “probably the
most pervasive yet understudied phenomenon in the business
world” (Cameron, 1994). While we have become numbed by
the near daily accounts of new layoffs, a New York Times
national survey finding is perhaps more telling: since 1980, a
family member in one-third of all U.S. households has been
laid off (New York Times, 1996). By some measures,
downsizing has failed abjectly as a tool to achieve the main
raison d’etre, reduced costs.
According to a Wyatt Company survey covering the period
between 1985 and 1990, 89 percent of organizations which
engaged in downsizing reported expense reduction as their
primary goal, while only 42 percent actually reduced expenses.
Downsizing for the sake of cost reduction alone has been
castigated intellectually as short-sighted and neglectful of what
resources will needed to increase the revenue stream of the
future (Hamel and Prahalad, 1994).
A truer and fuller understanding of the forces shaping and
thrusting downsizing forward today comes from an apprecia-
tion of increased global competition; changing technologies,
which in turn are profoundly impacting the nature of work;
increasing availability of a contingent work force (Fireman,
1994); and shifting balance of power among organizational
constituents away from rank and file employees and in the
direction of shareholders and the chief executives who serve as
their proxy, W4en we conceptualize downsizing within these
broader frameworks, it becomes clear that we are speaking of
downsizing both as a response to and as a catalyst of organiza-
tional culture change.
237
 This article will later provided a formal definition of “organiza-
COMPENSATITION MANAGEMENT
tional culture”. For the moment, it is suggested that culture is
to an organisation what personality is to an individual. As with
personality, change takes time and may be hard to discern,
especially for persons inside the organisation.
This article will argue that, ultimately, the most prominent
effects of downsizing will be in relation to culture change not in
relation to saved costs or short-term productivity gains. Key
drivers of organizational culture will tend to shape an
organization’s approach to downsizing. For whose benefit does
the organization exist? What are the basic assumptions among
people who work in the organization?
What are the basic assumptions the organization and the
employee make in relation to each other?
Establishing a direct link between downsizing and organiza-
tional culture is not an easy matter, however, as the following
example will demonstrate. The Chief Executive Officer of
Apple Computer recently bought himself more time with
disgruntled shareholders by promising to take forceful action
on a number of fronts, including downsizing.
The executive cited “five crises: lack of cash; declining quality; a
failed operating system development project; Apple’s chaotic
culture; and a fragmented strategy” (Mark off, 1997).
How do you connect downsizing, which is one of a number of
actions being taken, with corporate culture, which is only one of
a number of “crises” being solved in a manner and to a level
that establishes a positive relationship? .
Another reason that it is difficult to draw a specific link between
downsizing and organizational culture is that there are many
different variations and approaches to downsizing. A distinc-
tion has been made between proactive downsizing, which is
planned in advance and usually integrated with a larger set of
objectives, and reactive downsizing, which would be typified by
cost-cutting as a last resort after a prolonged period of inatten-
tion to looming problems by management (Kozlowski et. al.,
1991).
Work force reductions can range from forceful in nature, i.e.,
involuntary reductions, to the milder approaches, such as
resignation incentives and job sharing (Sutton and D’ Aunno,
1989). There are different ways of deciding “who stays, who
goes” from the outwardly arbitrary to criterion-based (Brockner,
1992).
There are different modes of planning, ranging from secretive
sessions to open discussions and solicitation of ideas from
employees. There are different standards of notice of termina-
tions, including relatively harsh same day terminations as well as
more generous 90 day or longer notices. There are even
differences in internationality, Le, reductions can be planned to
present employees with as little a break as possible from what
they have known in the past or they can be designed to be
deliberately disruptive to the status quo (Noer, 1993).
Downsizing Impact on Culture
For organizations, particularly the IBM’s and Digital
Equipment’s of the world which long resisted layoffs, it is hard
to image that the organizations or their cultures have remained
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238
anything close to intact. Getting back to the questions posed
earlier:
1. For Whose Benefit does the Organization Exist?
It seems clear that organizations exist less today for the well-
being of rank-and file employees than they once did. With the
Dow shattering all records, it seems clear that the shareholders
have the upper hand in making critical corporate decisions. They
are partnered with CEO’s who received an average pay raise in
1995 of23% (Washington Post, 3/5/96). Just look at who is
prospering and who is not.
2. What are the Basic Assumptions Among People
About Working Relationships in the Organization?
The basic assumptions about working relationships have
changed, in ways that can not yet be well assessed. It appears, at
least, that relationships tend to be less “familial” and more
competitive than in the past.
What is the worth of what have traditionally been termed
commitment and loyalty? We just do not know? What is the
impact of the feeling that the organization is a community
even a family - with relatively stable long-term working relation-
ships? And how will that play out in terms of cooperation
given to others as opposed to “backstabbing” in the intense
competition for scarce. resources? We can only be sure that
things have changed, not how.
3. What are the Basic Assumptions the Organization
and the Employee Make in Relation to Each Other?
The basic assumptions by employees and organizations about
their employment relationship have changed from long-term
and stable, with organizations expected to make accommoda-
tions to avoid laying people off to more short-term and
contingent. Researchers such as Bridges and Noer forecast a
more happy future for those who adapt to the changing times
in the new scenario, but that is a difficult forecast to test.
Organizations usually have some degree of flexibility about
how they reduce personnel expenses. Decisions to inflict pain
upon employees as part of the process may very well reflect an
effort to “bust” the existing culture. Decisions to minimize
pain may reflect an effort to reinforce the existing culture.
Downsizing
Executive compensation
It Starts with the CEO
Chief executive officers (CEOs) get paid lots of money for
being the top employees in the company. Why do they get paid
so much? Like athletes and actors, CEOs provide a level of
talent that is required to produce the desired product - in this
case, a strongly performing company. The skills and responsi-
bilities that come with the job of CEO are extreme and the
number of people who can fill these roles is limited. That is
why the market has determined that people with these skills are
worth a lot of money to their companies.
Only about 20 percent of a CEO’s pay is base salary; the rest is
made up of incentives based on the company’s performance.
The rationale is that if the company is performing well and the
shareholders are making money, then the CEO should share in
that success.
11.622.1
A CEO’s compensation package affects everyone within a
company. Often it can be considered the yardstick by which all
other employee benefits and bonuses are measured and
negotiated. Moreover, the CEO’s compensation may be an
indicator of how well the company is performing.
This performance, in turn, could translate into a more generous
compensation package for individual employees who are savvy
negotiators.
When companies establish pay structures, they define the
compensation for the highest- and lowest-paying jobs before
filling in the compensation for the jobs that fall in between in
the traditional
Chief Executive Officer
Plans and directs all aspects of an organization’s policies,
objectives, and initiatives. May require a bachelor’s degree with at
least 15 years of experience in the field. Relies on experience and
judgment to plan and accomplish goals.
May preside over board of directors. Source: Salary. Com the
compensation for the jobs that fall in between. In the tradi-
tional internal equity method of establishing a pay structure, the
CEO’s compensation sets a ceiling for the company, and each
level below is compensated at a comparably lower level. If you
know how well the CEO is compensated, you can get a sense
for how generous the company is likely to be toward other
employees as well.
CEOs make most of their money through incentives
As a general rule, base salary accounts for just 20 percent of a
CEO’s pay. The other 80 percent comes from performance-
based pay.
Base pay for the core role and responsibilities of the day-to-day
running of the organization. This amount is very often less
than $1 million because the IRS has imposed tax restrictions on
“excessive” compensation.
Annual bonuses for meeting annual performance objectives.
Long-term incentive payments for meeting performance
objectives to be achieved for a two- to five-year period. These
awards are sometimes described as performance shares,
performance units, or long-term cash incentives.
Restricted stock awards as an incentive to assure the executives
are strongly aligned with the interests of shareholders. Because
restricted stock awards have an actual cash value when they are
granted, the proxy table shows these in dollars, not in shares.
Stock options and stock appreciation rights (SARs) for increas-
ing share price and increasing the shareholders’ returns. Options
have very favorable accounting treatment for the company,
which is why they are so common. Option grants are always
shown as a number of shares underlying the option.
In a subsequent table in the proxy is an estimation of the
present value of each option grant assuming a 5 percent and a
10 percent increase per year in the stock price, or using a
mathematical model (e.g., Black Scholes) to predict the value of
the option.
Total compensation for CEOs goes beyond cash and stock
Although typically excluded from pay calculations, executive
benefits and perquisites are disclosed in the summary compen-
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11.622.1
sation table and the retirement plan section of the proxy. They
COMPENSATITION MANAGEMENT
include the following.
Supplemental executive retirement plans (SERPs), which may
keep the executive whole (that is, make up the difference) or
better from a tax regulation that prevents the executive from
receiving a pension benefit that exceeds ERISA limits ($135,000
per year or less based on the pension plan). For a CEO making
$2 million a year, a $135,000 benefit may be inadequate for
maintaining a comparable lifestyle.
Executive insurance plans that provide a source of retirement
income and a richer death benefit to the executive’s family. These
plans are used to guarantee retirement benefits from bank-
ruptcy. Unlike standard retirement plans that receive protection
from bankruptcy by the federal government, SERP benefits can
be lost in the event of bankruptcy.
Miscellaneous executive perquisites and other compensation for
various programs or negotiated deals that don’t properly fit
into the above categories, including perks such as country club
dues and financial planning. These are often small numbers that
disclose imputed income amounts for those additional special
benefits, but can also include some very large amounts for items
such as loan forgiveness, special insurance programs, relocation
expenses, etc.
At most companies, most of a CEO’s pay comes from stock or
stock option gains. At investment banks, most of it comes
from annual bonuses. Companies that pay the lion’s share of
compensation in the form of stock options may pay little or no
retirement. You can tell by looking for a retirement table in the
proxy statement.
If the words “SERP,” “ERISA-excess plan” or “Top Hat plan”
appear in the proxy, then retirement is an important part of the
executive’s remuneration. If not, then the executives are
expected to retire on their ability to make and save money on
their cash and equity earnings.
Pay philosophies often tie pay to company performance
The company’s Compensation Committee Report on Executive
Compensation contains specifics about your company’s
compensation philosophy, which affects all employees. It covers
the following.
How well your company pays relative to its peers?
Who the company sees as its peers?
How the company’s stock has performed relative to its peers
and to the stock market as a whole?
How the company prefers to reward its executives through its
total pay practices, i.e., what proportion of an executive’s total
pay comes from salary, bonus, stock options, and long-term
cash plans?
How the company measures its performance net income (NI),
earnings per share (EPS), return on equity (ROE), return on
assets (ROA), revenue growth, etc?
What criteria are used for determining the size of bonus
payments: corporate results, divisional results, individual goals;
or whether payments are discretionary?
239
 The degree to which your company is a success may be answered
COMPENSATITION MANAGEMENT
in the annual and long-term incentive payout columns in the
summary compensation table. If you see large bonus pay-
ments, then it is likely that your company is successful. Stock
option grants and gains are also important to look at.
This information can be gleaned from three tables in the proxy
statement: the stock option grants table; the aggregate option
exercises in the last fiscal year and fiscal year-end option value
table; and the total return to shareholders table. If there are
large gains from stock option exercises and substantial amounts
in both vested and unvested stock options, it may be an
indicator that the company is well managed in the opinion of
shareholders. Good five-year shareholder returns in the total
return to shareholders table would certainly validate this
opinion.
Nonprofit organizations typically offer compensation weighted
heavily toward base salary. In response to competitive concerns,
bonuses are becoming more prevalent as are special tax deferral
programs that help executives save for retirement. Unlike
comparable programs in for-profits, very few of these programs
are broad-based. Participation is limited to a select few.
Some watchdog organizations have been critical of the amounts
paid to chief executives of nonprofit organizations. But these
employers counter that they are competing for senior talent with
for-profit organizations that can offer incentives such as stock
options that are not available to them.
Cash Compensation is the Norm in Nonprofits
Nonprofit organizations typically offer compensation weighted
heavily toward base salary. In response to competitive concerns,
bonuses are becoming more prevalent as are special tax deferral
programs that help executives save for retirement. Unlike
comparable programs in for-profits, very few of these programs
are broad-based. Participation is limited to a select few.
Some watchdog organizations have been critical of the amounts
paid to chief executives of nonprofit organizations. But these
employers counter that they are competing for senior talent with
for-profit organizations that can offer incentives such as stock
options that are not available to them.
Workers can Force Change
Fortunately, CEO pay is an area in which workers can act directly
through their union pension funds. Arguably, CEO pay is a
direct deduction from corporate profits. This means that,
insofar as CEOs receive excessively generous pay packages, the
excess comes directly out of money that should be going to
shareholders.
In such a situation, the fiduciary responsibility that pension
fund managers have to the fund not only allows them to try to
rein in CEO pay, but also legally obligates them to make such
an effort. Unless it can be shown that high CEO pay has
somehow led to better corporate performance (the existing
research indicates the opposite), pension fund managers are
obligated to bring this pay under control to increase the returns
to the fund.
It is often argued that CEO pay cannot be controlled, because it
comes mostly in the form of stock options. In some cases,
stock prices go up enormously, and the CEO benefits along
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240
with all the other shareholders. In fact, it is a simple matter to
cap the gains that a CEO can earn from rising stock prices.
Contracts can be structured to Dean Baker and Archon Fung
ensure that CEOs have plenty of incentive to work hard to raise
stock prices but prevent them from gaining unlimited wealth if
they happen to get lucky and the stock price escalates. For
example, the total gains from stock options could be capped
within the contract at $3 million per year, with any additional
gains being returned to the firm.
Proponents of the current system, in which CEOs can earn tens
or hundreds of millions of dollars through stock options,
often argue that these packages are necessary to tie the CEO’s
interests to those of the shareholders. They raise the concern
that CEOs may otherwise attempt to further their own security
as top managers rather than maximize the price of the
company’s stock. Although there is a legitimate concern here, no
one has produced evidence that these sorts of packages are
necessary for that purpose.
Even if the potential gains were measured in the millions,
instead of in the tens of millions, CEOs would still have
enormous incentives to increase stock values. Furthermore, even
if a CEO reached a cap on the value of options in an existing
contract, he or she would still have incentive to perform well,
because in most cases he or she would be in search of another
contract, either from the CEO’s current firm or from a new one.
That firms have felt the need to evade standard accounting
procedures (as determined by Financial Accounting Standards
Board in their treatment of options) points to the fact that
CEOs did not get their fat packages through the natural
operation of the market.
Union pension funds are large enough actors in the market that
if they began to demand such caps, it would have a substantial
impact. In principle, other investors could also gain from
imposing such caps. Only the elite few who see the CEO as a
friend rather than a cost will be bothered by this approach. If
nothing else, union pension funds should be able to ensure
that CEOs and other top executives are treated just like all other
workers.
Latest Updates on Downsizing
99th report of Committee on HOME AFFAIRS
The Institute of Training and Management provides induction
as well as ... ii) Administration of. ... & extending the scope of
new facilities for fringe benefits to the……
Good Governance
34.0 Accountability has become the worst casualty because the
officers who are to enforce accountability are being increasingly
marginalized in the choice of appointing their subordinates to
various posts, specially in the field which is the cutting edge vis-
a-vis the people. Responsibility and rights are inseparable. There
is need to restore the rights of the executive to enable it to
discharge its responsibility regarding making itself accountable.
34.1 To a query posed by the Committee with regard to the
specific areas/issues identified, the Government gave the reply
that in order to bring about good governance, the areas/issues
identified includes – (i) review of administrative laws; (ii)
11.622.1
formulation of Citizen’s charters by the Central Ministries/

COMPENSATITION MANAGEMENT
Departments as also by State Governments; (iii) setting up of Reduction in staff
Information and Facilitation Counters in the Ministries/ (a) The transfer of staff from 1 & B to Prasar 0.40 lakh
Departments for easy and hassle free access of information by Bharti
(b) The transfer of staff from Telecom to 3.56 lakh
the citizen; (iv) strengthening the public Grievance Redress BSNL
Mechanism which is in place in various Ministries/Departments (c) Reduction in staff in Railways 0.78 lakh
of the Central Government; (v) implementation of a mini- (d) Exclusion of non-Departmental agents of 2.90 lakh
mum agenda for promotion of e-governance for re-engineering Department of Posts
(e) Reduction in staff in Department of Posts 0.81 lakh
of various processess with a view to ensure quicker delivery of Total 8.45 lakh
public services; and (vi) documentation and dissemination of Increase in staff
best practices in the area of administrative reforms. (a) Ministry of Home Affairs 1.05 lakh
(b) Department of Revenue 0.25 lakh
35. The Committee is of the view that with the help of e- Total 1.30 lakh
governance, computers, improvement of information Net reduction : ( 8.45 lakh – 1.30 lakh) 7.15 lakh
technology, Freedom of Information and Citizen’s Charters,
collection of basic data and information available with the
Ministry will show a marked improvement if they are constantly 36.2 With regard to the number of Secretary and equivalent
updated. The Committee hopes that not only statistical Officers at the time when the policy of downsizing was initiated
information but the parameters of decision making also should and after five years as against the present position the Ministry
in due course be made available to the people. furnished the following information as under:

Rightsizing of the Government Year (as on) Secretary & equivalent

36.0 One of the main themes identified for good governance is
rightsizing of Government. The size of Government machin-
ery is critical for the success of any for efficiency and economy in
Government. On being asked to elaborate on the policy
paradigm of the Government in this regard, the Ministry in its
written replies furnished the following replies:
a. Imposition of 10% cut in the Ministries/Departments
w.r.t. the sanctioned strength as on 1 January 1992.
b. Restriction on creation of posts both in Plan and Non-
Plan.
c. Restriction on filling up of posts lying vacant for more than
one year.
d. Setting up of Expenditure Reforms Commission to
suggest a road map for reducing the functions, activities and
administrative structure of the Central Government,
rationalize the staff and cardres of different services, review
the framework of the subsidies and also review the
procedure for setting up of Government funded
institutions. ERC has given in all ten reports covering 36
Ministries/Departments. The ERC’s recommendations are
at different stages of implementation.
e. That direct recruitment would be limited to 1/3 direct
recruitment vacancies arising in the year subject to further
ceiling that this does not exceed 1% of the total strength of
the Department.
36.1 In view of the above, the Committee wanted to know the
total reduction of staff as on date to which the Government
have informed that there has been total deduction of staff of
7.2 lakh from 1993 to 2001 as per explanation as given below:
1.1.1992 - 125
1.1.1997 - 119
28.2.2003 - 129
36.3 A perusal of the above figures provided to the Committee
mentioned in para 36.1 shows that the reduction is mainly
because of the transfer from one area to another area except in
the case of Railways and Department of Posts amounting to
reduction of 4.49 lakh officials out of the total 8.45 lakh of
staff.
36.4 To a question with regard to anticipated and actual impact
on the exchequer on account of rightsizing, the Government
informed the Committee that around 1,73,000 sanctioned
strength as on 1.1.1992. Besides, about 13,000 posts have been
abolished so far on the basis of the recommendations of ERC.
The abolition of these 13,000 posts is likely to result in annual
reduction of expenditure to the tune of Rs. 120 crores approxi-
mately. Further around 30,000 posts have been identified for
abolition with reference to restriction on filling up of posts of
direct recruitment upto 1/3 DR vacancies arising in the year
subject to further ceiling that this does not exceed 1% of the
total strength.
37 While appreciating the Government’s policy of rightsizing
and rationalizing of the Government machinery, it is of the
opinion that the functions, activities and administrative
structure of each Ministry/Department should be clearly
chalked out so that overlapping between them do not take
place.
A review of the Ministries/Departments not covered by the
Expenditure Reforms Commission may be made with a view
to rightsizing and rationalising them. It will be highly desirable
to carry out a manpower audit of each Department. Blanket
abolition of certain percentage of posts can on the one hand
cripple the functioning of one Department and another
Department warranting even greater reduction will escape. A
meaningful manpower audit of each Department alone can
make this exercise truly rational.

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11.622.1 241
 38. In this context, the Committee pointed out that in reply to
COMPENSATITION MANAGEMENT

information sought with regard to total strength of officials in

Groups A, B, C and D for 1992, 1997 and 2003, the Ministry
informed that information about group-wise strength in 1992
is not available. The Committee, therefore, recommends that
downsizing should be followed up vigorously in its pursuit to
improve administrative efficiency and effectiveness.
39. The Committee also wanted to know the details of staff
rendered surplus consequent to the right sizing exercise of the
Government. The Ministry informed that as on 1.3.2003, 272
staffs have been rendered surplus – 5 from Group ‘A’, 24 from
Group ‘B’, 241 from Group ‘C’ and 2 from Group ‘D’. The
detailed Department/Ministry-wise break-up is as given below:
Table – XIII

Name of Ministry No. of Staff

1. Ministry of Agriculture 7
2. Ministry of Civil Aviation 4
3. Ministry of Small Scale Industries 15
4. Ministry of Labour 17
5. Ministry of Home Affairs 2
6. Ministry of Shipping 1
7. Ministry of Information and 119
Broadcasting
8. Ministry of Steel 4
9. Ministry of Textiles 101
10. Ministry of Tourism 1
11. Ministry of Urban Development 1
and Poverty Alleviation

40. The Committee is of the view that the Government cannot

downsize its personnel meaningfully without enlisting the
support of major political parties.
Therefore, the Government should hold all party meeting to
arrive at a consensus to execute the recommendations of the
Fifth Pay Commission which recommended the downsizing of
Government while recommending greatly enhanced pay scales.
This is a matter of national interest and we cannot afford to
delay it indefinitely. The result of manpower audits will be really
helpful in getting the required consensus.

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242 11.622.1

LESSON 39:
VOLUNTARY RETIREMENT SCHEME
Latest Trends in Compensation Management
Learning Objective
To know and understand the below mentioned points:
• Voluntary Retirement Schemes (VRS)- Exit Policy- Its
Effects
• Effects of Excess Manpower
• Reducing Excess Manpower - Problems, Legal Aspects and
Solutions
• The Reasons for Proposing VRS
• Procedure for Voluntary Retirement Scheme
• The challenges in implementing employees exit
• Merits of voluntary retirement scheme
• Demerits of voluntary retirement scheme
Voluntary Retirement Schemes
Exit Policy- Its Effects
The Government of India adopted a new economic policy
whereby it relaxed and in certain cases removed restrictions on
import and export. This resulted in significant changes in
industrial and business sectors. One of the important aspects
of the liberalised economic policy is the Exit Policy.
Under this policy the government has allowed business and
industrial establishment, to reduce their excess staff and
employees. The reduction of excess staff is a result of restruc-
turing of organisations due to modernising, applying new
technology and new methods of operation, so that the
industrial organisations could operate economically and
withstand the competition with companies and organisations
which have accepted foreign collaborations, innovative methods
and technology upgradation, rendering some employees
surplus.
Since the procedure under Industrial Disputes Act 1947, for
retrenching involves a lot of legal hurdles and complex
procedures, the Government authorised schemes of voluntary
retirement of employees after offering them suitable voluntary
retirement benefits, and giving some tax relief on such pay-
ments to employees who are eligible to retire voluntarily under
the guidelines issued by the Government and Income Tax
authorities.
In the Five Year Plans which were adopted and implemented by
the Government it had established and developed public sector
undertakings to create employment and also to augment the
increased demands of industrial goods, fertilisers and other core
industries. The encouragement given to public sector was so
significant that .it created employment opportunities on a mass
scale.
Most of the public sector undertakings were not cost effective.
The trade unions have been opposing retrenchment under the
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11.622.1
COMPENSATITION MANAGEMENT
existing labour laws. The government, therefore, found a
solution to the problem of surplus staff by allowing voluntary
retirement both in public and private sectors.
The human resources in the industrial sector have become
surplus on account of (a) existing level of technology (b) will
become surplus with adoption of newer technologies and
technological up-gradation. If the textile industry adopts latest
technology in manufacturing units, 15 million workers in the
industry would be out of their jobs, around 2-4 million
workers are found surplus in the various sick industrial units all
over India. Similarly, millions have been found surplus in
government undertakings.
Effects of Excess Manpower
1. Excess manpower results in high labour costs which
increases the production cost and thus ending in high
product or service costs.
2. It reduces the competitive ability of the enterprise.
3. Excess manpower in any business activity or industrial
establishments reduces employee efficiency and labour
productivity.
4. Surplus human resources pose threat for technology up-
gradation which is essential in the competitive market.
5. Surplus labour may result in poor industrial relations and
unrest amongst labour.
Reducing Excess Manpower - Problems,
Legal Aspects and Solutions
As already pointed out earlier the Industrial Disputes Act, 1947
as it is existing puts restrictions on employers in the matter of
reducing excess staff by retrenchment, by closures of establish-
ment. The unions strongly oppose any plans of retrenchment
and reduction of staff and workforce. The Government had
taken a decision to amend the Labour Laws, whereby the
employers could trim its workforce legally after complying with
the conditions of the labour laws.
However, the unions in our country have been opposing such
amendment of labour laws. For reasons, which include political
reason, the Government has not implemented its decision to
amend the Industrial Disputes Act, 1947.
However, a way was found by allowing employers including
those in the government undertakings, to offer voluntary
retirement schemes to off-load the surplus manpower. The
voluntary retirement schemes were not vehemently opposed by
the Unions, because the very nature of its being voluntary and
not using any compulsion.
Exit Policy
Voluntary Retirement Schemes - have been legally found to be
giving no problem to employers, employees and their unions.
The essence of the voluntary retirement scheme, which is
243
 approved by the Government - involves voluntary separation
COMPENSATITION MANAGEMENT
of employees who are above the age of 40 years or have served
the company or establishment for minimum 10 years.
The company, may offer different separation benefits to
employees in different age groups subject to overall benefits
which are tax exempted up to a limit of Rs. 51akh, Public sector
undertakings, however, have to obtain prior approval of the
government before offering and implementing the voluntary
retirement schemes.
The Reasons for Proposing VRS
1. Recession in business
2. Intense competition, which makes the establishment
unviable unless downsizing is resorted to
3. Changes in technology, production process, innovation,
new product line
4. Realignment of business - due to market conditions
5. Joint-ventures with foreign collaborations
6. Takeovers and mergers
7. Business re-engineering process
8. Product/Technology obsolencences.
Procedure for Voluntary Retirement
Scheme
The employer has to issue a circular communicating his decision
to offer voluntary retirement scheme - mentioning therein.
a. The reasons for downsizing
b. Eligibility i.e. who are eligible to apply for voluntary
retirement
c. The age limit and the minimum service period of
employees who can apply (Employees who is 40 and above
and those who have completed minimum 10 years of
service in the establishment.)
d. The benefits that are offered.
It should be noted that employees who offer to retire
voluntarily are entitled as per law and rules the benefits of
Provident Fund,’ Gratuity and salary for balance of privilege
leave up to the date of their retirement, besides the
voluntary retirement benefits.
e. The right of an employer to accept or reject any application
for voluntary retirement.
f. The date up to which the scheme is open and applications
are received for consideration by the employer.
g. The circular may indicate income tax incidence on any
voluntary retirement benefits which are in excess of Rs. 5
lakhs, which is maximum tax free benefit under such
schemes.
h. It should also indicate that those employees who opt for
voluntary retirement and accept the benefits under such
scheme shall not be eligible in future for employment in the
establishment.
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244
Steps to be Taken for Introducing and Implementing
Voluntary Retirement Scheme
1. If the company is public sector undertaking obtain approval
of the government.
2. Identify departments/employees to whom VRS is to be
offered (Target group of employees -age above 40 years and
employees with more than 10 years service in the company).
3. If there is a union of employees ‘in the establishment
involve the union by communicating to them the reasons,
the target group and the benefits to be offered to those
who opt for the scheme.
4. Formulate terms of V R S and benefits to be offered are to
be mentioned in the circular or communication to
employees and decide the period during which the scheme is
to be kept open.
5. Motivate the managers through counseling.
6. Counselling employees is an essential part of implementing
the scheme. The counselling should include what the
retiring employee can do in future i.e. rehabilitation, how to
manage the funds received under the scheme.
7. After receipt of applications for accepting \IRS, scrutinize,
decide whose applications are to be accepted and those
whose are not to be accepted.
8. For those whose application are to be accepted prepare a
worksheet showing the benefits each will receive including
other dues like Provident Fund, gratuity and earned leave
wages for the balance un-availed earned leave, and tax
incidence should the V R S’ amount exceed Rs. 5 lakhs.
The Challenges in Implementing
Employees Exit
1. The reasons and need to introduce V R S should be
discussed with all management staff including top
management.
2. The effect of downsizing including on the work or activities
of the establishment carried on is to be considered i.e. post
reduction operations to be carried on should also be
planned - post plan reduction employee deployment.
3. Ensure all concerned employees and managers participate in
the decision making to down size.
4. The downsizing plan should match with the Strategic plans
of the company.
5. Transparency should be seen and used in choice of persons
to be retired.
6. Be prepared to manage the after effects of the down sizing -
both social and psychological.
7. Motivate employees who will stay with the company,
remove their apprehensions and fears, if any.
8. Provide professional assistance to employees who agree to
accept V R to plan their post retirement, activities and
financial management including, out placement.
9. The VRS should be made attractive and no pressures
should be used to ease out people.
11.622.1
Merits of Voluntary Retirement Scheme
1. There is no legal obstacle in implementing VRS - as is
predominantly encountered in retrenchment under the
labour laws.
2. It offers to the employee an attractive financial
compensation than what is permitted under retrenchment
under the law.
3. Voluntary nature of the schemes precludes the need for
enforcement, which may give rise to conflicts and disputes.
4. It allows flexibility and can be applied only to certain
divisions, departments where there is excess manpower.
5. It allows overall savings in the employee costs thus
lowering the overall costs.
Demerits of VRS
• To certain extent it creates fear, a sense of uncertainty among
employees.
• Sometimes the severance costs are’ heavy and outweigh the
possible gains.
• Trade unions generally protests the operation of such
schemes and may cause disturbance in normal operations.
• Some of the good, capable and competent employees may
also apply for separation which may cause embarrassment to
the managements.
It is found in practice that organisations may have to repeat the
scheme if there is no response or poor response to the scheme
by the employees. However, there are instances when the
managements have really made the schemes very attractive by
making it “Golden Hand Shake.”
It is incumbent on the establishments that they do not recruit
similar staff immediately after the implementation of voluntary
retirement scheme. Such recruitment, in spirit and essence is
contrary to the principle of staff being excessive or surplus.
Tutorial Activity 1.1
Voluntary Retirement Scheme (VRS) for
the employees of Public Sector
Undertakings
Short Title
i. This scheme may be called the Punjab State Public Sector
Undertakings Voluntary Retirement Scheme (VRS) 2002.
ii. This scheme shall apply to all the Public Sector
Undertakings (PSUs) including all Cooperative Institutions
of the State of Punjab. This will apply to the Subsidiaries
of the PSUs defined as entities in which PSUs and/or Govt.
hold more than 50% equity.
iii. This scheme shall come into force from the date of its
notification.
Objective
i. To achieve optimum human resource utilization.
ii. To optimize return on investment in PSU.
iii. In implementing the VRS scheme, managements shall
ensure that it is extended primarily to such employees
whose services can be dispensed with without detriment to
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11.622.1
the company. Care shall be exercised to ensure that highly
COMPENSATITION MANAGEMENT
skilled and qualified workers and staff are not given the
option. As there shall be no recruitment against vacancies
arising due to VRS, it is important that the organisation is
not denuded of talent. The managements of the PSUs shall
introduce the VRS with the approval of their Boards and
the administrative departments. Under no circumstances
shall grant of VRS be construed as a right.
Definitions
In this scheme, unless the context otherwise requires,
a. “Public Sector Undertaking (PSU)” means an entity that is :
i. Created under a Statute of the State Legislature; or
ii. Created under a statute of Parliament, in which case the
management & control vests in Govt. of Punjab or
iii. Created under the Companies Act 1956 in which the
Govt. of Punjab, holds equity share more than 50% of
those issued or A Cooperative Society as defined under
the “Punjab Cooperative Societies Act, 1961, as
amended from time to time including Apex
Cooperative Institutions.
b. “Scheme” means Punjab State Public Sector Undertakings
Voluntary Retirement Scheme (VRS) 2002.
c. “Employee” means a person employed on permanent/
regular basis working against regular sanctioned graded
post.
VRS-scheme.doc-2-
d. “Service” means a period of permanent or regular
employment against graded post as defined in the Service
Bye Laws/ Regulations of the PSU.
e. “Year” means a financial year commencing on 1st April and
ending on the subsequent 31st March
f. “Salary” means Basic Pay plus appropriate %age of DA as
on the date of applying.
g. “Family” means as defined under rule 2.17 of the Punjab
Civil Services Rules, Vol. I
h. “Request for V.R.” means application submitted for VR, as
per specimen proforma annexed as Annexure-A.
i. “Competent Authority” means the Chief Executive
Officer/Managing Director of the Public Sector Undertaking
concerned.
Operation of the Scheme
The Scheme shall remain in operation for 6 (six) months from
the date of issuance of notification to this effect. The Govt may
extend it from time to time.
Within the Period of Operation
a. In the case of a PSU which does not require budgetary or
any other external support to implement the scheme, it
shall come into operation upon the approval by the
Administrative Department of a resolution of the Board
of Directors that the scheme be brought into effect with
specified eligibility criteria
b. In the case of a PSU, which requires budgetary or any other
external support to implement the scheme, it shall come
245
 into operation only after the Department of Finance
COMPENSATITION MANAGEMENT
approves a proposal of the Administrative Department
based on a resolution of the Board of Directors as in (a)
above to this effect.
VRS-scheme.doc-3-
Eligibility
All persons employed on permanent/regular basis working
against regular sanctioned graded post of Public Sector Under-
takings will be eligible to seek Voluntary Retirement provided
they have completed a minimum of 5 years of service and have
at least 5 years of service remaining before their superannuation.
However, the employees falling in the following categories as
determined by the concerned PSU are not eligible to seek
Voluntary Retirement under the scheme:
a. Specialist employees who have executed service bonds and
have not completed the period prescribed therein;
b. Employees serving abroad under special arrangement/
bonds;
d. Employees appointed on contract basis;
e. Any other category of employees as may be specifically
debarred by the Public Sector Undertaking from seeking
retirement under this scheme.
Note: In case disciplinary action is pending against an employee,
who has sought Voluntary Retirement, the Disciplinary
Authority shall, after considering all facts, convey to the
Competent Authority whether the request of the employee
should be accepted or not. In case the Disciplinary Authority
decides that the request of such an employee for Voluntary
Retirement be not accepted, the same shall be communicated to
the employee in writing and he shall have a right to make an
appeal as provided under section 9 (v).
Amount of Ex-gratia
An employee seeking Voluntary Retirement under the scheme
will be entitled to the compensation consisting of salary of 35
days for every completed year of service and 25 days for every
year of the balance of service left until superannuation. The
compensation will be subject to a minimum of
VRS-scheme.doc-4-
Rs.25,000/- or 250 days salary whichever is higher. However,
this compensation shall not exceed 80% of the sum of the
salary that the employee would draw at the prevailing level for
the balance of the period left before superannuation. In case an
employee is governed by a retiring/superannuation pension
scheme the disbursement of pension shall commence from the
month next to the date an employee would have retired in the
ordinary course.
Mode of Payment
100% of the amount of ex-gratia payable to an employee on
opting for Voluntary Retirement under this Scheme would be
paid in cash within 60 days from the date of his relieving.
Other Benefits
An employee whose offer for Voluntary Retirement under the
Scheme is accepted will be eligible, apart from the ex-gratia
defined above, to any benefit that would have been available to
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246
him upon superannuation as per the policy extant in the PSU
prior to the date of notification of this scheme. It is clarified,
however, that an employee shall not be eligible for both
retrenchment compensation and ex-gratia under this scheme
but shall have to opt for one of the two.
Procedure
i. An eligible employee may submit request opting for
Voluntary Retirement under the scheme to the Competent
Authority through proper channel in a prescribed proforma
(Annexure-A), which shall be available in the PSU.
VRS-scheme.doc-5-
ii. The Competent Authority may after considering the
application and after giving an opportunity to the applicant
of being heard, pass a speaking order within a period of 3
months, either accepting or rejecting the request.
iii. In case the Competent Authority fails to pass an order
rejecting the request by the due date as given at sub para (ii)
above, the request would be deemed to have been accepted
and the employee would be retired.
iv. A copy of every order made under paragraph (iii) above
shall be given to the employee.
v. An employee who is aggrieved by an order of rejection may
within thirty days from issuance of such orders file an
appeal before the Administrative Secretary of the
Department under which the concerned PSU falls, whose
decision shall be final and binding.
vi. The date of acceptance of VRS by the competent authority
will be treated as date of voluntary retirement.
General Conditions
i. Arrears of wages due to general revision of pay scales etc.
shall not be included in computing the eligible amount.
ii. Only completed years of service shall be reckoned for
arriving at the minimum eligible service.
iii. Fraction of service of 6 months and above shall be
reckoned as one year for the purpose of calculating the ex-
gratia. Fraction of service less than 6 months will be
ignored for the purpose of calculating the ex-gratia.
iv. The salary shall be calculated on the basis of last salary
drawn by an employee/officer.
v. No employee shall be allowed to withdraw the request
made for voluntary retirement under the scheme after it has
been accepted by the Competent Authority.
vi. The Competent Authority shall have absolute discretion
either to accept or reject the request of an employee seeking
Voluntary Retirement under the scheme. The reasons for
rejecting the request of any employee seeking Voluntary
Retirement shall be recorded in writing by the Competent
Authority.
VRS-scheme.doc –6-
vii. All payments under the scheme and any other benefit
payable to an employee shall be subject to the prior
settlement/re-payment in full of loans, advances, returning
11.622.1
 of Govt.’s property and any other outstanding due against ii. State Renewal Fund in its present form will cease to exist.

him and payable by him to the PSU concerned.
viii.All payments made under the scheme shall be subject to
deduction of tax at source as per Income Tax Act 1961
wherever applicable.
ix. An employee who seeks voluntary retirement under this
scheme shall not be eligible for re-employment in Govt.,
any PSU or any of its subsidiaries. A complete data/record,
on website of all those employees of the Public Sector
Undertakings/Corporations, who have availed the VRS
shall be retained. While making future recruitments no
person out of these shall be retaken in service.
x. In the event of the death of an employee, whose request
for voluntary retirement under the scheme has been
accepted, the compensation, which would have become due
and payable to the deceased employee, shall be paid to the
person nominated to receive such dues.
xi. The benefits payable under this scheme shall be in full and
final settlement of all claims of whatsoever nature, whether
arising under the scheme or otherwise to the employee (or
his nominee in case of death). An employee who
voluntarily retires under this scheme will not have any claim
against the PSU concerned of whatsoever nature and no
demand or dispute or difference will be raised by him or on
his behalf, whether for re-employment or compensation or
back wages including employment of any of his relative on
compassionate grounds in the service of the PSU or for any
other benefits whatsoever.
xii. The vacancy caused by Voluntary Retirement shall stand
abolished.
xiii.The Govt. reserves the right to withdraw this scheme at any
time it thinks fit and its decision in this respect will be final.
COMPENSATITION MANAGEMENT
VRS-scheme.doc-8-
Annexure –A
Application to Seek Voluntary Retirement
The Managing Director/Chief Executive Officer,
……..Name of the PSU……
(Through Proper Channel)
Subject: Voluntary Retirement.
Sir/Madam,
I hereby opt to seek Voluntary Retirement from the services of
the …………………………….. (Name of the PSU) in
accordance with the terms and conditions stipulated in the
Punjab State Public Sector Undertaking Voluntary Retirement
Scheme (VRS) 2002, circulated vide No.
…………………………………………… dated
……………….., which I have carefully read and have under-
stood the contents of the same.
2. I accept the terms and conditions stipulated in Punjab State
Public Sector Undertaking Voluntary Retirement Scheme (VRS)
2002, unconditionally and irrevocably.
3. I furnish the required particulars in the APPENDIX enclosed
for consideration of my offer to seek Voluntary Retirement
from the services of the ………………………………( PSU)
under the above scheme w.e.f. …………………….
Thanking you,
Yours faithfully,
Signature of the Employee
Place:……………….. Designation:………………….
Name:………………………….

Enabling Rules Dated: ………………

i. The Public Sector Undertakings must consider the VRS-scheme.doc-9-

Voluntary Retirement Scheme (VRS) and pass an order Appendix
adopting it.
To be Filled in by the Employee
ii. The scheme shall come into effect only after requisite
approval as laid down in Para 4 is received. However, the Part-I
PSU may circulate this scheme & obtain response of the S. No. Particulars
employees, in order to determine the financial and other
implications.
1. Name of the Employee/ Officer:
VRS-scheme.doc-7-
2. Employee PF No.:
iii. No PSU/Administrative Department may make any change
3. Designation:
to the scheme without seeking comments of the Finance
Department and obtaining prior approval of the Council of 4. Date of Birth:
Ministers to the proposed changes. 5. Age as on (Last date of the Scheme):
Budgetary Support 6. Date of Joining the PSU (Excluding the temporary
period, if any):
i. Budgetary support will be provided to the loss making
enterprises or those making marginal profit and to the sick 7. No. of completed years of service as on (last date of
enterprises for implementing VRS only in case bank credit is the scheme):
not available. However, before seeking budgetary support in 8. Date of attaining the age of Superannuation:
cases of unviable/sick PSUs other sources of funding 9. Salary as on (last date of the scheme)
should be fully explored such as asset securitisation and
- Basic Pay
bank loan against government guarantee for funding VRS.
- D.A.

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11.622.1 247
 Total:
COMPENSATITION MANAGEMENT

10. Has the employee executed any bond? Give details

thereof.:
11. Has the employee undergone any specialised
intensive training within the organisation or
outside? If so, give details thereof :
12. Has the employee taken loans from the
organisation? If yes, give details thereof head-wise,
such as HBA/Vehicle Loan or any other. Give
details of amount of loan sanctioned and the
outstanding balance as on (last date of the scheme):
VRS-scheme.doc-10-
13. Whether the employee has been imposed any Major
or Minor Punishment during the preceding years. If
yes, give details:
14. Whether any disciplinary action is pending?:
Part-II
15. I hereby certify:
a. That the information given above is complete and true.
b. That I hereby opt to seek Voluntary Retirement from the
services of the………………………………. (Name of the
PSU) in accordance with the terms and conditions stipulated
in the Punjab State Public Sector Undertakings Voluntary
Retirement Scheme (VRS) 2002, which I accept
unconditionally and irrevocably as circulated
vide No. …………………………,
dated …………….
c. That I hereby authorise the …………………….(Name of
the PSU) to recover and adjust all loans/dues etc. payable by
me whatever kind or nature.
d. That I agree that in case any of the aforesaid statements is
found to be untrue, the payment made to me by the
…………………….. (Name of the PSU), under this
Scheme, will be recoverable from me without prejudice to
any other action that may be taken against me by the
…………………….. (Name of the PSU).
Dated:
Place: Signature of the Officer/Official

Note -

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248 11.622.1

LESSON 40:
PAY RESTRUCTURING IN MERGERS AND ACQUISITIONS
Latest Trends in Compensation Management
Learning Objective
To know and understand the below mentioned points:
• Mergers and Acquisitions
• Merger and acquisition check-list
• Profit-sharing schemes
• Communication strategy
• Job Evaluations & Market Considerations
• Reconciling market & job evaluations
Interaction
Restructuring - a means of implementing strategic change
aimed at improving performance by reducing the level of
differentiation and integration and downsizing the number of
employees to decrease operating costs.
Mergers and Acquisitions
The implications of a merger or acquisition on pay and
conditions of employment do not seem to be considered
seriously enough in most most take-over battles. Executives
and employees are too often pawns in a game of chess played
by remote grandmasters. However, acquisitions or mergers do
not always live up to expectations and one of the principal
reasons for failure is the demotivation of managers and staff.
This is inevitable if insufficient attention is paid to their needs
and fears as well as any existing imbalances between the reward
strategies and remuneration levels of the organizations set to
merge. This issue has assumed increasing significance as
globalization leads to mega-mergers between organizations
starting from very different places in the reward philosophy
spectrum.
The degree to which staff are affected by a merger or acquisition
does. of course, vary, At one extreme the holding company
adopts a completely ‘hands-off approach, leaving the acquired
company to run its own business, in its own way, and with its
own terms and conditions of employment as long as it delivers
the goods, At the other extreme, the acquisition is merged
entirely into the parent company and all terms and conditions
of employment are ‘harmonized’, The employees affected,
however, might ha\’c different views about the extent to which
the process is harmonious.
Between these two extremes there is a measure of choice, In
some cases it is only the pension scheme that is merged. In
others, it is the pension scheme and all the other benefits that
are harmonized, leaving separate pay structures. In making
decisions about what should be done and how, the points on
the following check-list should be considered jointly and in
advance by the parties concerned.
© Copy Right: Rai University
11.622.1
COMPENSATITION MANAGEMENT
Merger and acquisition check-list
Executive Rewards
1. What is the composition of the executive remuneration
package? Information on package structure and service
contracts will be needed to assess:
a. whether the gaps between practice in the two
organizations is likely to prove problematic;
b. whether the values underpinning executive rewards are
significantly different;
c. what the priorities are for the executives involved.
Salary Structure
2. To what extent, if at all, should a common salary be
introduced?
To answer this question information will be needed, first, on
the economics and strategy of each business unit to see how far
they conform. Then, if the business case emerges, details will be
needed on:
a. existing salary structures; .
b. organization structures, with salaries and grades for each
job;
c. the distribution of salaries within each grade;
d. the method of job evaluation used;
e. policies and procedures for grading or regarding jobs and
for fixing salaries on appointment or promotion;
f. any terms and conditions negotiated with trade unions or
staff associations;
g. the similarities and differences between the work carried out
in each company and, therefore, the type of people
employed.
3. What are the advantages and disadvantages of merging
salary structures?
The advantages seem obvious. A common basis is established
throughout the group which facilitates movement and a
consistent approach to salary administration.
The disadvantage is the disturbance and potential cost of
merging, bearing in mind the regarding and salary increases that
might be necessary as well as the expense of job evaluation.
Why go to all this trouble if the operations in the respective
companies are dissimilar and they are located in entirely different
parts of the country? It could even be damaging.
4. If salary structures have to be merged, how should this be
done? The choice is between:
a. a full job evaluation exercise involving rebenchmarking
which may be disturbing, time consuming and expensive
but may now have to be looked at in the light of recent
equal values cases; or
249
 b. the arbitrary slotting of jobs into the new structure using
COMPENSATITION MANAGEMENT
existing job descriptions (if any):- This could result in gross
inequities unless full job descriptions are available or there is
already a good fit between the two salary structures; or
c. a compromise between (a) and (b), slotting in jobs without
a full evaluation if the fit is obvious, but evaluating
doubtful or marginal cases. Note that if pay is negotiated
with a trade union or staff association they would have to
be involved and they will obviously fight against any
detrimental changes.
d. using this as an opportunity to adopt a new structure based
on job family models/generics and broader pay bands.
5. When the merger takes place, should action be limited to
the creation of a common grade structure, defining benefit
levels but allowing different salary scales to reflect regional or
separately negotiated variations in rates?
It is possible to have common grade structures with different
salary levels as long as the differences can be justified by reference
to market rates.
6. What should be done about staff whose grade or salary
range is changed as a result of merging pay structures?
To regrade people and adjust their salaries to higher levels could
be prohibitively expensive. To reduce salaries could be impos-
sible, especially if there are trade unions in existence who carry
any weight at all. It might then be necessary to ‘red circle’ staff
affected by grade changes, that is, give them ‘personal to job
holder’ gradings and salary brackets which they retain as long as
they are in the same job.
General salary reviews
7. Should general salary reviews be centralized and take place
simultaneously in all locations?
The answer is clearly yes if a common salary structure exists or
pay is negotiated centrally. If structures or pay levels vary or if
site negotiations continue, then it may be best to maintain local
arrangements.
Performance Management and Performance Related
Pay
8. Should performance management processes and linked
salary rev-i€1.o procedures be standardized?
It is tempting to say that they should, in the interests of
consistency and control and to facilitate career and salary
planning for the new group as a whole. But there are strong
arguments for maintaining the local scheme if it is operating
effectively.
Managers who are familiar with one system might resent
change. They could be forced to accept: it but reluctant reviewers
are bad at performance management, especially in a year of great
uncertainty.
Salary Administration Procedures
9. Should standardized procedures operate throughout the
new group?
A bureaucratic centralized approach is inevitable in some
organizations, but if local arrangements work well, why change
them for change’s sake?
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250
Bonus- schemes
10. Should different arrangements for bonuses be allowed to
continue?
The answer to this question again depends on how close the
links between establishments are. There is much to he said for
retaining effective local bonus schemes which have an immedi-
ate link to performance as long as they do not conflict too much
with group policies.
Profit-sharing Schemes
11. What should be done about profit sharing, assuming a
scheme exists in one or other or both of the companies?
Clearly, if there has been a complete take-over and the merged
company loses its status as a separate profit center or can no
longer issue shares under arrangements such as profit sharing
share schemes, then the scheme in the company which has been
taken over must be discontinued and employees moved into
the take-over company’s scheme. if one exists. If there is no
scheme in that company, consideration would have to be given
to some form of compensation which could be as high as three
times the average of the last three years’ payments.
Pension Schemes
12. Should the employees of the acquired firm be transferred
into the acquirer’s pension fund?
This is quite common and, obviously, there is no problem for
staff if benefits are better. However, the back-funding of
previous pension arrangements in order to pay for improve-
ments can be very expensive, and it may be necessary to
maintain separate schemes.
When the pension scheme in the acquiring company is inferior,
it may be possible for members to choose under which scheme
they will retire in the unlikely event that both schemes can
continue.
This could be divisive when staff in the take-over company see
that employees in the taken-over company are better off than
themselves. However, many employees may leave the taken-
over company before retirement and there will only be a handful
of genuine anomalies reaching retiring age.
The government regulations on personal pensions and the
development of portable pensions would also have to be taken
into account. Employees in the acquired firm should be told
about their rights and given advice on what is best for them to
do in their own-interests.
Other Benefits
13. To what extent should employee benefits be harmonized,
for example:
a. company cars;
b. free petrol for company cars;
c. life insurance;
d. sick pay;
e. private medical insurance;
f. mortgage subsidy;
g. season ticket and other staff loans;
11.622.1
h. lunch arrangements, including luncheon vouchers;
i. leave entitlements;
j. discount facilities?
The degree to which benefits should be harmonized is, like
other areas of reward management. a policy question, the
answer to which depends first on the philosophy of the
controlling company (the extent to which it believes in central-
ization and absolute consistency in the treatment of employees)
and second, on the circumstances in each company (the degree
to which their operations and their geographical locations are
linked or adjacent).
Considerable variations in benefit between employees in
different parts of a group are undesirable, especially if there is
any interaction or interchange between establishments. But a
brutal approach to harmonization which significantly reduces
the total remuneration of the affected employees will damage
morale - will the take over company wants its acquisition to be
operated by de motivated people?
Trade Unions or Staff-associations
14. If a trade union or staff association has negotiating rights.
how should they be involved?
It is desirable in these circumstances to enter into discussions as
soon as possible. The two companies should already have
considered the approach they want to adopt and this will
provide a basis for consultation and, were negotiated terms and
conditions are affected, negotiation.
Communication Strategy
Apart from any discussions with bodies representing staff, it is
essential to have a communication strategy which ensures that
staff in both companies know what is going to happen and
how it is going to affect them.
This strategy must be prepared in advance and this implies that
the questions in the check-list will have been considered before
the merger is announced.
Restructuring
Restructuring covers events as a result of which the terms, as
agreed by the reference entity or governmental authority and the
holders of the relevant obligation, governing the relevant
obligation have become less favourable to the holders that they
would otherwise have been.
These events include a reduction in the principal amount or
interest payable under the obligation, a postponement of
payment, a change in ranking in priority of payment or any
other composition of payment. A default threshold amount
can be specified.
This approach purports to adopt an objective approach by
identifying specific events that are typical elements of a restruc-
turing of indebtedness. As restructuring events could be those
undertaken by a reference entity that would result in the credit
quality being improved or remaining the same, the Credit Event
under the 1999 Definitions is specified not to occur in circum-
stances where the relevant event does not result from a
deterioration in the creditworthiness or financial condition of
the reference entity.
© Copy Right: Rai University
11.622.1
The, implications of a merger or acquisition on pay and
COMPENSATITION MANAGEMENT
conditions of employment do not seem to be considered
seriously enough in most take-over battles. Executives and
employees are too often pawns in a game of chess played by
remote grandmasters. However, acquisitions or mergers do not
always live up to expectations and one of the principal reasons
for failure is the demotivation of managers and staff.
This is inevitable if insufficient attention is paid to their needs
and fears as well as any existing imbalances between the reward
strategies and remuneration levels of the organizations set to
merge. This issue has assumed increasing significance as
globalization leads to mega-mergers between organizations
starting from very different places in the reward philosophy
spectrum.
The degree to which staff are affected by a merger or acquisition
does, of course, vary. At one extreme the holding company
adopts a completely ‘hands-off approach, leaving the acquired
company to run its own business, in its own way, and with its
own terms and conditions of employment, as long as it
delivers the goods. At the other extreme, the acquisition is
merged entirely into the parent company and all terms and
conditions of employment are ‘harmonized’. The employees
affected, however, might have different views about the extent
to which the process is harmonious.
Between these two extremes there is a measure of choice. In
some cases it is only the pension scheme that is merged. In
others, it is the pension scheme and all the other benefits that
are harmonized, leaving separate pay structures. In making
decisions about what should be done and how, the points on
the following check-list should be considered jointly and in
advance by the parties concerned.
Job Evaluations and Market
Considerations
You can arrive at appropriate wages for positions on your farm
on the basis of two main management tools:
1. job evaluations (based on compensable factors such as
education, skill, experience, and responsibility), and
2. the going rate (or market value) of a job.
Illegal Pay Differences
It is illegal to base pay differences on such protected personal
characteristics as sex, race, color and marital status. The term
“protected” is used because employees are safeguarded by law
against discriminatory practices based on these personal
characteristics. Federal law, established in the Equal Pay Act of
1963, explicitly requires men and women performing the same
work to be paid the same—with four key exceptions:
[when] payment is made pursuant to (i) a seniority system; (ii) a
merit system; (iii) a system which measures earnings by quantity
or quality of production; or (iv) a differential based on any
other factor other than sex.
Blatant cases of sex-based discrimination include instances
where men and women hold the same jobs yet are paid
differently with none of the defensible reasons applying.
Somewhat veiled, but no less illegal, are cases where sex-
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COMPENSATITION MANAGEMENT
differently.
Job Evaluation
A farmer such as Cecilia who pays different rates for different
jobs usually first classifies the jobs on her ranch. Through a job
evaluation she rates the jobs on the farm according to their
relative “importance.” Each job might be given its own rate, or
jobs of comparable importance may be grouped or banded into
a single wage classification, or pay grade.
Job evaluations compare positions in an organization with
respect to such factors as education, responsibility, experience
and physical effort. Figure 7-2 shows a sample job evaluation.
In it, for instance, much more value is given to responsibility
and education than to physical requirements. The supervisor in
this example would earn about twice what an equipment
operator would.
Figure 7-2
Figure 7-2 uses education as a compensable factor. You may
prefer to think in terms of what combination of experience and
education would qualify a person for the job. This is an
important step for determining the value of the position to be
filled. However, when it comes time to hire someone, you may
not care what combination of education or experience an
applicant has as long as he can do the job.
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If education is used as a compensable factor, a bachelor’s degree
might be worth 200 points, a junior college degree 150, a high
school diploma 100, and an elementary diploma 50 points.
Some of the jobs in the ranch might require a high school
diploma, thus earning 100 points in this category, while others
might have no education requirement (0 points allotted)—
regardless of the educational qualifications of the person who
may actually apply. Similar ratings of jobs would be made for
responsibility and other factors worth compensating.
You decide how much weight to allot various compensable
factors and how to distribute points within each job. For the
job evaluation to be useful, a detailed list of compensable
factors needs to be articulated. (The job analysis created during
the selection process can help.) You can test the job evaluation
by comparing a few jobs
you value differently. Does the tentative evaluation match your
expectations? If not, are there any job factors missing or given
too much or too little value?
Workers may also participate in the process of evaluating jobs
and can add valuable insight into the essential job attributes for
various positions.
Personnel involved in evaluating their own jobs, nevertheless,
are likely to experience conflict of interest.
Although supervisors will normally make more than those they
supervise, this is not always the case. A very skillful welder or
veterinarian will probably make more than her farm supervisor.
Some workers harvesting at a piece rate often make more than
the crew leaders supervising them. Supervisors may be offered
additional pay during labor-intensive periods.
Job evaluations, then, reflect the relative value or contribution
of different jobs to an organization. Once a job evaluation has
been completed, market comparisons for a few key jobs need to
be used as anchors for market reality. In theory, other jobs in the
job evaluation can be adjusted correspondingly.
Market Considerations
In practice, results of job evaluations are often compromised or
even overshadowed by market considerations. Labor market
supply and demand forces are strong influences in the setting
of wages. No matter what your job evaluation results may
indicate, it is unlikely you will be able to pay wages drastically
lower or higher than the going rate.
Supply and demand factors often control wages. When there are
many more pickers than available jobs, for instance, the going
wage decreases. If few good livestock nutrition specialists are
available for hire, they become more expensive in a free market.
The market may also influence the migratory patterns of farm
workers, for example, whether a worker stays in Mexico or
travels to Texas, Florida or Oregon.
Of course, the market is not totally free. Legal constraints affect
wages (e.g., equal pay, minimum wage). Labor groups, in the
form of unions, can combine forces to protect their earnings.
They may prevent employers from taking advantage of a large
supply of workers. At times wages are driven so high they
disable corporations who cannot compete in a broader interna-
tional market. Some professional groups can also impact the
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market. By limiting acceptance to universities, a limited supply
of available professionals is set.
To establish external equity, employers need information about
what other employers pay in the same labor market. While
some employers are content to lean over the fence and simply
ask their neighbors what they pay, others conduct systematic
wage and salary surveys.
Wage surveys need to describe jobs accurately as positions may
vary widely even for jobs with the same title. Surveys should
seek information about benefits given employees (e.g., farm
products, housing). Of course, there are other “intangible
benefits such as stability, the prestige of the position or the
institution [and] the possibility of professional development”.
Surveys need to consider the number of workers per farm in a
given classification. Wages on a farm employing many employ-
ees affect the going rate more than one with few. In some cases,
farmers may compete for labor within a broader labor market.
When compensating mechanics or welders, for instance, you
may have to check what those in industry are paid.
An important pay decision is whether one will pay the going
market rate. Those who pay at or below the market may have
difficulty attracting workers. Further, they may find themselves
training people who leave for higher paid positions. Merely
paying more than another farm enterprise, however, does not
automatically result in higher performance and lower labor
costs. Even when well paid, workers may not see the connection
between wages and their performance. Farmers who pay too
much may find it difficult to remain competitive. Furthermore,
there are other factors valued by employees besides pay, such as
working for an organization that values their ideas and allows
them to grow on the job.
Reconciling Market and Job Evaluations
In wage setting, it is usually more beneficial to reconcile market
information and job evaluation results than to singly rely on
either. Unique jobs are more appropriately priced on the basis
of job evaluations. You may depend more heavily on the job
market for common jobs.
In most cases, farmers have freedom to satisfy both job
evaluation and the market. Where the market pays a job
substantially less than a job evaluation does, however, you can
either pay the higher wage, reconsider job evaluation factors, or
pay the reduced wage. The farmer has fewer viable options
when the market would pay a higher wage than the job
evaluation.
Compensation Restructing –Acquisitions Concept –
Case of Kellog Acquisits Keebler Co.
The compensation department at Kellogg, the Battle Creek,
Mich-based packaged food company, faced a tough challenge in
2001.
That year, Kellogg acquired the Keebler Co. of Elmhurst, Ill.,
and with the acquisition came different technology and HR
management systems (HRMS). Standardizing onto one became
a priority for the company’s information technology (IT)
department, which ultimately decided on the system Keebler
used-from SAP AG of Walldorf, Germany, for financial
© Copy Right: Rai University
11.622.1
products and HRMS. (Kellogg used Oracle products for
COMPENSATITION MANAGEMENT
financials and Cyborg Systems Inc. for HRMS.)
Kellogg’s compensation department wasn’t thrilled with the
prospect of changing systems. It had been successfully manag-
ing salaries and bonuses using homegrown enterprise
compensation management (ECM) software for two years. Its
compensation planning system (CPS) achieved all its goals-
automating compensation planning in a decentralized,
consistent procedure with a market-based approach with little
burden on HR.
Since the CPS implementation in 1999, “we have tried to put
more information in the hands of managers and empower
them to make more of the compensation decisions,” says Miles
Meyer, Kellogg’s vice president of global compensation.
The compensation staff was happy with the CPS, so they
resisted the change, Meyer recalls. “We had a lot of positive
comments on its ease of use.” Managers liked it, too, although
they were less attached.
However, the IT staff pushed forward, informing the compen-
sation department that it had one year to move off the CPS
because IT would no longer support the system. Other
departments also had to move off legacy systems and onto the
SAP system. The compensation department could adopt either
the SAP compensation features or a commercial product that
had interfaces to SAP.
SAP’s features didn’t come close to the CPS, says Meyer, so the
compensation department decided to look elsewhere. Key to its
decision would be a product that could achieve the same
capabilities-or as close as possible-as the CPS with the ease of
use managers and HR had grown accustomed to.
Homegrown ECM
Kellogg developed its CPS to support new compensation
practices, according to Meyer and Catherine Hager, director of
compensation. Hager was at Kellogg when this transition
began, and Meyer, who reports to the executive vice president
of HR, joined later that year.
Before the CPS, the compensation department would send out
spreadsheets with budgeted merit increases for each division.
Three staffers in the compensation department would recom-
mend a merit increase and a merit range for each of the nearly
3,000 salaried employees. In most cases, Hager says, managers
accepted the recommended increase. The value of each job was
based on a comparison to similar jobs at Kellogg.
“As competition in the job market increased, that way of
evaluating jobs and connecting to pay didn’t serve the business
model very well,” says Meyer.
Kellogg decided to move to market pricing of jobs. The
company benchmarks each job relative to comparable jobs in
the marketplace, and this data is a key factor in determining
merit raises. Kellogg also decided to push decision-making to
managers, who could better determine the right pay increases
for their direct reports.
But managers had little understanding of market pricing and
little experience in making pay decisions. They needed training
and tools. Before the compensation department undertook
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 training or development of tools, its staff interviewed manag-
COMPENSATITION MANAGEMENT
ers and executives across the company to make sure that market
pricing and involving managers would meet their needs. “We
spent quite a bit of time making sure we had buy-in to move
forward,” says Hager.
Market pricing sounded good in theory, but it raised a mental
hurdle for managers, she says. Before the inaugural use of the
homegrown CPS in 1999, Kellogg gave all managers a day and a
half of training, including a session to validate the market
pricing of jobs within their departments. They later received a
half-day of training on the CPS itself.
The following year, everyone got another day of training on
compensation practices and upgrades to the CPS. Managers also
received about two hours of training before each compensation
planning cycle; initial compensation training was included in a
broader training program for new managers, Hager says.
The second hurdle was to provide managers with the necessary
tools. The compensation department, with help from an
outside consultant, developed the CPS in Lotus Notes to help
managers make decisions and to provide information on
compensation planning and decision-making.
Kellogg went merrily through three compensation-planning
cycles with its CPS and had no intention of buying a commer-
cial product, says Meyer.
The Decision
Of course, those intentions had to change with the Keebler
acquisition, forcing the compensation department to look into
commercial products that were supported by SAP. Meyer knew
of a compensation product called TotalComp by Kadiri Inc. of
Burlingame, Calif., because the company had made a presenta-
tion to Kellogg a couple of years earlier.
At that time, however, TotalComp did not have all the features
that Kellogg’s CPS had, Meyer says. “We were very biased. We
felt our CPS was the better system of the two,” he admits.
With the one-year deadline looming, the company re-examined
TotalComp in 2002 and found that the newer versions came
closer to meeting Kellogg’s needs. “Kadiri offered about 70
percent of what [the] CPS had,” Meyer says, and his staff could
customize it to provide features that Kadiri didn’t offer.
TotalComp did offer a distinct advantage over the CPS: timely
disparate impact analysis. With CPS, Kellogg executives had to
wait until all annual merit increases were awarded before they
could analyze companywide data to determine whether any
minority groups-based on race, age, gender or job level-were
treated unequally in performance ratings or merit raises.
But TotalComp had the capability to perform disparate impact
analysis before employees were informed of their performance
ratings and merit increases, allowing for necessary adjustments.
With those key features identified, Kellogg selected Kadiri in
June 2002 with installation to be completed by Dec. 1. Pro-
gramming began in August. The biggest challenge was to
migrate the CPS features that were not offered by TotalComp.
Fortunately, TotalComp had knowledge management technol-
ogy that allowed the adopters to migrate information from the
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254
CPS and to configure the new software to include some of the
custom features that were developed for the CPS.
“Kadiri didn’t have all the functionality of [the CPS], but we
figured out how to do it with the knowledge manager,” says
Lori Stafford, the project team leader. “We took three years of
learning on our old system and loaded it [into TotalComp] in
four months.”
One example of a feature that was migrated from the old
system to the new: a decision-making tool from the CPS that
walks managers through the process of making a merit
decision-what an employee is paid, the worker’s performance,
market pricing, and how hard he or she would be to replace.
“The tool sums up with a recommendation based on inputs
from the manager,” Stafford says.
Kellogg had four people, including Stafford, working nearly full
time along with a project manager from Kadiri who could tap
any resources needed from the vendor. Because Stafford had
quite a bit of self-taught IT knowledge, Kellogg did not rely
heavily on its IT staff for this implementation, says Meyer.
When the project was done, the customized TotalComp
software had 85 percent of the CPS functionality. No managers
complained; TotalComp looked a bit different on screen, but
basically it did everything the CPS had done. “We didn’t
experience any disruptions with the transition, and we got a lot
of compliments,” says Meyer.
The Process in Action
After the merger, Kellogg workers totaled 25,000 worldwide,
including 11,000 salaried employees. The company uses
TotalComp to plan for merit increases, performance bonuses
and stock options for 6,000 of the salaried workers. Kellogg
does not expect to use TotalComp for the other 19,000
employees because they work on commission, are international
workers or have their wages governed by union contracts.
Starting on Dec. 1 each year, managers access TotalComp from
the corporate intranet and input performance ratings for each
employee. In mid-December, Kellogg closes the system to
managers so employee relations and legal staff can run a
disparate impact analysis. Each manager can do a disparate
impact analysis of his own group after inputting performance
rankings, so problems can be dealt with before the company
analysis.
In January, the compensation department uses the software to
create a bottoms-up budget for merit increases and bonuses as
well as to determine the dollar pool for each manager.
Here’s a hypothetical example of the bottoms-up approach. If
overall merit increases are budgeted at 4 percent, Aranked
employees might be budgeted for an average increase of 5
percent, Bs at 4 percent and Cs at 3 percent.
The manager’s total pool is based on those calculations-
conducted by the software-but the manager can determine the
actual amount that each direct report gets from the pool. With
help from the software, including budget information feeds
from the SAP system, the compensation department then
figures the pools for merits, bonuses and stock options.
11.622.1
Starting Feb. 1, managers access the software again and decide
what merit increases, bonuses and stock option grants to give
to each employee. Pay decisions are based on three factors,
which the software helps automate-performance rating, pay
relative to the market pricing, and how difficult it would be to
replace the worker. The manager’s boss also can access the same
information, and workflow applications allow them to interact
and deliberate. The work in progress from across the company
can be rolled into a single report to be viewed by the CFO or the
CEO while the work is under way.
Managers complete their work by mid-February. The system is
closed to managers again while a disparate impact analysis is
performed on merit raises, bonuses and stock options.
Adjustments are made with each manager as needed. Then the
proposed compensation is reviewed to make sure it meets
budget.
Around the first of March, the system is opened to managers,
who begin to give employees the news about their merit raises,
bonuses and stock options for the year. The system can print a
compensation report and stock option certificates for each
individual.
In December, Kellogg will begin its second compensation
planning cycle on TotalComp-its fifth automated compensation
planning cycle since installing its own CPS. Kellogg has
dramatically reduced the total time it spends on this process
even while involving managers more than ever, Hager says.
Another dividend is that managers are more knowledgeable
about pay factors, Meyer says.
Kellogg budgeted the Kadiri project at $300,000 but spent
$400,000, Meyer says. Just under half the total was for
customization.
Meyer has not calculated return on investment, but he states
emphatically: “The direction we have gone is more supportive
of our business model and the competitive environment we
have to keep up with.”
An Article
The ECM Experience
Enterprise compensation management (ECM) software helps
companies get the most out of their compensation dollars,
which for many is their biggest budget item. Good compensa-
tion management helps single out the better workers and
reward them accordingly. “Companies that practice good
compensation hygiene will have better retention,” says Craig
Symons, an analyst at Forrester Research Inc. of Cambridge,
Mass.
Most companies understand their markets and customers better
than they understand their compensation practices, analysts
contend. These practices tend to be inefficient and don’t always
produce the biggest bang for the buck.
“Compensation is an enormous [budget] line item, but we
don’t have a good understanding of it,” says Jay Weir, a senior
researcher at HR.com, a web-based HR consulting and research
company in Aurora, Ontario, Canada. Technology lets compen-
sation managers, HR professionals and CFOs comprehend the
process, he says.
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11.622.1
ECM is different from incentive management software, which
COMPENSATITION MANAGEMENT
calculates and tracks sales commissions; such payments are
highly specific to individual business unit goals. Rather, ECM
covers payments such as merit increases, performance bonuses
and stock options, which tend to be consistent across a
company.
While compiling a buyer’s guide that includes ECM software,
Weir encountered a company-using spreadsheets and e-mail for
compensation planning-that routinely had a $ percent to 10
percent error rate, forcing the compensation department to act
as fact checker. One year the errors were so numerous that the
company ran millions of dollars over budget. Weir says. “They
had to e-mail everyone that they were reducing pay after already
issuing a few of the higher checks.” That company now uses
software by Kadiri Inc. of Burlingame, Calif., he says.
Other ECM software developers include Workscape Inc. of
Framingham, Mass., and Advanced Information Management
Inc. of Santa Barbara, Calif. All of them allow the adopter to
integrate ECM software with the company’s HR management
system (HRMS) and provide web access for managers.
“Kadiri has a bit of an edge,” says Symons. “They’ve been at it
longer and have a bit larger installed base. But all three are
credible solutions.”
Kadiri has 40 TotalComp customers, says Kevin Dobbs,
Kadiri’s vice president of marketing, including Dow Jones, The
Gap and Wells Fargo Bank. Motorola Inc. of Schaumburg, III.,
is its biggest client, with 13,000 managers planning compensa-
tion for 100,000 employees in 60 countries.
ECM software starts at around $250,000, but the value can be
significant, says Weir.
Motorola didn’t calculate a financial return on investment (ROI)
because the benefits were so obvious, says Craig Morgenroth,
Motorola’s director of global reward programs and services.
Companies have not widely adopted ECM. In the economic
downturn, corporations have reduced overall information
technology (IT) spending and have spent even less on HR
information systems (HRIS), Symons says. However, analysts
expect adoption to pick up, especially among companies with
1,000 or more employees.
HRMS vendors, including SAP AG of Walldorf, Germany, and
PeopleSoft Inc. of Pleasanton, Calif., include some compensa-
tion planning features, but they tend to lag those from ECM
developers. “If you’re looking for 60 percent of the functional-
ity at 20 percent of the price, then PeopleSoft has it,” and that
may be enough for some users, says Weir.
By Bill Roberts
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