MODULE -3

PERFORMANCE MANAGEMENT AND APPRAISAL

Module-3 (9 Hours)
Performance Management and Appraisal: Objectives of Performance Management, Performance
Management and Performance Appraisal, Common Problems with Performance Appraisals,
Performance Management Process, Types of Performance Rating Systems, Future of Performance
Management.
Compensation and Benefits: Introduction, Definitions, Total Compensation, Total
Rewards System,
Forms of Pay, External and Internal Factors, Establishing Pay Rates, Employee
Benefits.
Industrial Relations: Decent Workplace, International Labour Organisation,
Industrial Relations,
The Objectives of Industrial Relations, Approaches of Industrial Relations Systems,
The Actors in
Industrial Relations, Indian Context, Industrial Relations and Human
Resource Management.

o Performance management is defined as a continuous process of identifying,

measuring, managing, and developing the performance of individuals and groups in an
organization.

o At the basic level, it is about finding out the current level of employee performance so
that appropriate steps can be taken to eventually upgrade the performance level.

o It is a systematic assessment of employee performance aiming at performance

improvement over time.

o Performance appraisal is the ongoing process of reviews of employee

performance over time, and is one component of the entire performance management
process. It is a formal system, which requires a manager to carry out this activity in a
continuous manner.

OBJECTIVES OF PERFORMANCE MANAGEMENT

A. Objective for the Employee

B. Objective for the organization

A. Objective for the Employee

1. Personal development: Performance appraisal can provide an indication of
employees with leadership potential or leadership development needs. In both
cases, the manager and HR department then can develop programs and interventions
to either offer employees an opportunity to exercise their leadership competencies or
build skills.
2. Work satisfaction: High job satisfaction is also linked to performance, which in turn
is linked to higher profits. Those employees who feel happy and content in their
roles are much more likely to approach the tasks that they need to carry out with
enthusiasm and dedication.
 3. Engagement in the organization: When companies help people to develop their
skills and recognise them for great performance, engagement increases. Knowing this
should create a sense of urgency for organisations of all sizes to better integrate
engagement into performance management processes.

B. Objective for the organization

1. Provide information about employees and their development
2. Measure the efficiency with which human resources are being used and improved
3. Provide linkages to compensation and rewards to employees
4. Maintain organizational control Identifying the strength and weakness of an employee
5. Opening communications between employees and managers
6. Strengthening the relationship of an employee with his superior
7. Offering clarity in terms of expectations and organizational goals
8. Encouraging superior performance
9. To assess the potential for growth and development in an employee
10. Identify whether the employees need further training
11. Encouraging employees to take part in coaching
12. To offer constructive feedback to the employees
13. Counselling average and poor performers

PERFORMANCE APPRAISAL

 Performance appraisal is a process that needs to be undertaken meticulously if obtaining

desirable results is anything to go by.

 Many managers conduct this kind of evaluation on their employees from time to time
majorly because it is an organizational tradition or requirement but not necessarily
because of its impact on the future.

Performance Management and Performance Appraisal

Performance Appraisal Performance Management

Focus is on performance appraisal and Focus is on performance management.

generation of ratings.

Emphasis is on relative evaluation of Emphasis is on performance improvements of

individuals. individual officer and his departmental or team
performance.

Annual exercisethough normally periodic Continuous process with quarterly or periodic

evaluations are continuous process with performance made review discussions.
quarterly or periodic performance made.
Emphasis is on ratings and evaluation. Emphasis is on performance planning,
analysis, review, development and
improvements.

Rewards and recognition of good performance  Performance rewarding may or may

is an important component. not be an integral part

 Defining and setting performance

standards is an integral part.

Designed and monitored by the Designed by the personnel/HR department but

personnel/administration department. could be monitored by the respective
departments themselves

Ownership is mostly with the Ownership is with line managers;

administration/personnel. personnel/administration facilitates its
implementation.

KPAs and KRAs are used for bringing in KPAs or KRAs are used as planning
objectivity. mechanisms

Developmental needs are identified at the end Developmental needs are identified in the
of the year on the basis of the appraisal of beginning of the year on the basis of the
competency gaps. competency requirements for the coming year.

There are review mechanisms to ensure There are review mechanisms essentially to
objectivity in ratings. bring performance

Improvements.

It is a system with deadlines, meetings, input, It is a system with deadlines, meetings, input,
and a format and output. output, and a format.

Format-driven with emphasis on those Linked Process driven with emphasis on the format as
to promotions, rewards, training and an aid Linked to performance improvements
development interventions, placements, etc. and through them to other career decisions as
and when necessary.

SOME OF THE PROBLEMS WITH PERFORMANCE APPRAISAL

1) Compare/contrast error

When appraising employees, it is important never to compare their abilities and using it to
make a judgment.

Each employee is gifted in their unique way and thus has different strengths and weaknesses.
When you try to compare or contrast their abilities, it means that you will not get a fair
review because high performers will certainly make relatively low performers for particular
tasks to look below average, which on some occasions is never the case.

Of essence is to ensure that you appraise every worker by their performance against
established standards and criteria, individually.

2) Similarity error

In every organization, some employees have a resemblance of different aspects with the
manager. Now some managers usually find it easy to reward such employees highly
compared to those who portray contrasting behavior or opinion.
As a manager, it would be significant to ensure that you perform your employee appraisal
objectively and considering that diversity should be respected, try to carry out the appraisal
process based on performance and results that they provide and not primarily by
similarity/dissimilarity that you have.

3) Bias

Bias is also one of the problems with performance appraisal managers often encounter. As a
matter of fact, everyone has some biases towards someone or something irrespective of how
we portray them. However, as a manager, it is imperative not to let the biases hinder the
manner in which you approach performance evaluation process.

Your biases can manipulate the objectivity of appraisal hence it is important to ensure that
you keep it off as much as possible to make sure that you do not compromise the results of
your findings. Biases may also lead to inconsistencies among different employees bearing in
mind that the key element for attaining best results from appraisal is consistency.

If you do not like someone it will not be right to use that feeling in making review judgment,
it is unprofessional.

4) Stereotyping

Stereotyping is closely related to biases only that in this case, you tend to make your
judgment by your predetermined mindset towards a particular employee’s race, gender,
political affiliation, religious background, culture and other characteristics.

Stereotyping is problematic when assessing employees’ performance because it implies that

you will only be able to provide judgment based on what you label the group similar to one
that the particular employee belongs to.

What you need to know is that stereotyping can also be positive or negative and thus can
significantly influence your judgment respectively. It is only ideal to look beyond the labels
and evaluate the employee by set standards and performance.

5) The Halo effect

This is also known as the horns effect. It is a situation where you let your positive or negative
feelings towards an employee to influence your evaluation easily. It is necessary to judge
each criterion independently without compromising what you feel for the employee.
You should also be careful when doing appraisal evaluations so that in the event you realize
that most criterions are coming out with similar appraisals, you should halt and check
yourself for the halo effect. It is a fact that each employee will always portray certain areas as
their weakness and others as their strengths. What you need to do is to ensure that you do not
color the entire evaluation with a particular impression

6) Recency effect
This is majorly about carrying out an appraisal for a short period before it takes place. As
stated earlier, an appraisal is an activity that takes place continuously, which means that the
focus should not only be for the short period before it happens but rather the entire time of
the year.

In many organizations, problems with performance appraisal usually arise when a manager
decides to determine results by basing their evaluation on what an employee has achieved just
before the assessment. In this case, it sounds unfair to employees who have been outstanding
throughout but later faulted few days to assessment and vice versa because the appraisal will
not be able to reveal the actual reality.

7) Attribution error

This is one of the trickiest problems with performance appraisal. It involves making your
independent belief on possible causes of some behaviors or outcome and letting that
influence your judgment.

It is never a good idea to develop an assumption of what transpired or made the employee
behave in the manner that he or she did and later use it as a basis for reviewing the appraisal
process. It is only essential if you stick by the stipulated standards and criterion and how the
performance of each employee compares to such standards. It only becomes a fair when the
employee is judged on their performance in line with the set standards rather than
preconceived notion.

8) Leniency and Severity tendencies

These mistakes usually arise as a result of distribution errors, which imply that the overall
dissemination of appraisal does not stand firm to the classic bell. This means that some
managers are too lenient and will end up appraising all employees above average, others will
give average whereas others would provide below average.

In the typical occasion, the results need to reflect the classic bell curve where some
employees are graded as high performers; others average while other poor performers.
However, in the unlikely event that all appraisal results come out as similar, you need to
ensure that entire performance measures are given sufficient consideration. It helps in a great
way of making sure that fair appraisal has been carried out.

PERFORMANCE MANAGEMENT PROCESS

The circular process consists of six interconnected stages:

1. Contextual preparation
 2. Planning

3. Execution

4. Assessment
5. Review

6. Renewal of performance.

Step 1: Contextual information (also described as Pre-requisites)

The performance management process, in order to take off successfully in an organization,

requires two key prerequisites.

1. It presupposes that the organization would have clarified its organizational vision,
mission and strategy planning.

2. A mastery over the requirements of the jobs , and more specifically, clear definition
of the roles for performing a given job within the organizational framework is the
second prerequisite.

The pre-requisite stage also covers one more important element: the commitment and support
of the senior leadership and top management. The support is manifested through various
steps, which include:

 Challenging work for star performers

 Healthy investment in learning and development projects

 Appropriate structure for dealing with poor performance

 Reward and recognition aligned to PMS

Step 2: Planning

 The goals of the performance planning are:

1. To build agreement on the employee’s job responsibilities.

2. To clear doubts about targets and objectives that needs to be achieved.

3. To bring into focus the competencies relevant for the job.

4. To develop a career development plan for the employee.

 Performance plan has the following elements:

 Key Accountabilitiesthey are broad areas of a job for which the employee is
responsible for producing results.

 Specific Objectivesthey are statements of outcomes a model way to develop

outcomes is by using the acronym SMART. SMART stands for specific, measurable,
attainable, realistic, and timely.
  Performance Standardsthe performance standards/criteria used in organizations
are as diverse as traits, behaviors, competencies, goal achievement, and potential to
improve.

Step 3: Performance Execution

 Performance execution is the joint responsibility for both the employee and the
manager.

 Employee responsibility:

1. Committing to goal achievement

2. Seek performance feedback

3. Effective and periodical communication with manager

4. Collection and sharing of information on performance

5. Active participation in performance reviews

 Manager responsibility:

1. Creating suitable work environment to motivate the employee

2. Timely documentation of performance

3. Updation of initial goals

4. Feedback and coaching

Step 4: Performance Assessment

 Using multiple sources (peers, customers, and subordinates) improves the ownership
of the employee and also opens up wider area of information.

 Rater problems

 Problems with standards of evaluation: perceptual divergence in the use of words (e.g.
good, adequate, satisfactory) among multiple evaluators.

 Halo effect: assigning values on the basis of an overall impression of the rate, created
by a positive first impression.

 Leniency or harshness: seeing everything good, or everything bad in a rate.

 Central tendency error: avoiding use of high or low ratings, rather rate all employees
on an average basis.

 ‘Recency of events’ error: rating an employee more on the basis of recent past
behaviour (e.g., last five weeks) rather than overall performance
  Contracts effects: raters let another employee’s performance influence the ratings.

 Personal bias (stereotyping, similar to me): rating an employee on the basis of sex,
race, and favoritism.

Step 5: Performance Review

 At the review meeting the employee and manager discuss the ‘what’ and the
‘how’ of results achieved against performance plans.

 The manager and employee should discuss:

1. Commitments, if any, from the last review meeting.

2. Specific achievements since the last conversation.

3. Difficulties hampering performance, the reasons and the ways and means of
overcoming them, including use of skills in past achievements.

4. The implications of changing behaviors.

5. Action plan for

future. Step 6: Renewal

 In the last phase, the manager uses insights and learning from the last cycle to more
effectively plan performance in the next cycle.

 The manager and employee review and make appropriate adjustment of goals in tune
with the organization’s mission, vision, values, and strategy.
 This could lead to setting new objectives and standards, new accountabilities,
development of new competencies for the upcoming performance period; and
creating the ongoing and continuous nature of the performance management
cycle.
THE CRITICAL SUCCESS FACTORS FOR PERFORMANCE MANAGEMENT
SYSTEM
Here are seven critical elements of performance management that will help your organization
succeed in achieving goals, cultivating career paths and tailoring talent that maximizes
organizational efficiency and performance:

1. Empower through the self-appraisal process.

Self-appraisal is an empowering process, enabling team members to look inward. Self-
appraisal also provides insight for management to understand how its team members
areCommunicating, completing tasks, and balancing work-life objectives. A team member may
have been struggling with meeting a specific goal, perhaps time management. Self- appraisal is a
place where the challenge can be positively analyzed, new procedures implemented, and
future success realized.

2. Use constructive guidance to drive optimal performance.

Focus on ways to develop hidden talent and enhance current strengths to achieve success
on both individual and organizational levels. The guidance that allows your team to
perform at its best creates a more positive work environment. A growth mindset allows
for optimal performance to be achieved. Your team needs to be allowed to develop and be
challenged. In the early days of the space race, the challenge was to launch a rocket into
space.

3. Embrace challenging conversations to develop a mature and thoughtful process.

When it comes to weaknesses or shortcomings, conversations can be difficult. However,
directing attention to these issues facilitates mature, thoughtful discussions. The ability to
discuss them helps management and the employee focus on multiple goals for growth as
it relates to the team, organization and individual. Specific conversations can elaborate on
criteria that can be implemented to make the individual a better team player and the
overall team and organization stronger. It is not about pointing out the failures, but rather
using the guidance to help the employee develop into a more successful contributor.

4. Compliment progress to make a stronger impact.

Look at the review cycle as a continuous process, not just a once-a-year event. A yearly
performance review is not the place to discover errors and challenges not met. To have
true success, the individual must meet his or her challenges daily. Understanding the
challenges and successes that occur throughout the year makes for significant impact on
the performance of the individual and organization. By making the progress part of the
review, management allows all parties to have a stake in the overall success.

5. Use employee surveys to create quality outcomes.

Properly worded, you can obtain more accurate responses from insightful employee
survey questions. Workplace surveys can be a tool used throughout the performance
management review process. Historically, employment surveys were conducted annually
or when a team member departed. However, one can obtain a clearer picture of the
 workplace environment if the review process includes quality studies throughout the year.
Responses should provide a window into the functionality of the team and the team’s
cohesiveness.

6. Redesign and digitize systems to create efficient, holistic processes.

A quality performance management platform allows organizations to gather insight into
creating the best team possible. The quantitative analysis gives the ability to compare an
employee’s past skill set with new achievements. Streamlining the performance
Management process creates the opportunity to deepen the impact. By letting go of the
traditional stacks of paper and instead record information online, data can be viewed and
analyzed for more positive outcomes.

Shift from feedback to feed-forward.

Feedback is looking at the past and seeing what could be adapted or changed for a better
outcome. During the performance management review process, one wants to look to the
future and build momentum. Create an outline and process to move forward through goal
setting. This helps your organization actively advance goals, cultivate creativity and
careers, and tailor talent to a growth mindset.

Other success factors:

 Strong commitment from the top management
 Alignment with strategy
 Alignment with other HR systems

 Acceptance by all levels of employees

 Adequate organizational training
 Automation

PERFORMANCE RATING SYSTEMS

 Performance evaluation system is a systematic way to examine how well an employee
is performing in his or her job. If you notice, the word systematic implies the
performance evaluation process should be a planned system that allows feedback to
be given in a formal—as opposed to informal—sense. Performance evaluations can
also be called performance appraisals, performance assessments, or employee
appraisals. The performance rating systems can be classified into two broad groups:

There are different methods for evaluating an employee’s performance, and these methods are broadly
classified as traditional and modern methods of performance appraisal.
TRADITIONAL METHOD:

Ranking Method
In this technique, the evaluator assigns relative ranks to all the employees in the same work unit doing the
same job. The evaluator provides a rank to the employees from good to poor on the basis of their
performance. For Example, if five persons A, B, C, D, and E get a rank on the basis of their performance, it
will be like:

Paired Comparison Method

This traditional method of appraisal is a modification to the straight ranking method. Under this method,
unlike the straight ranking method, all the employees are put to relative comparisons. After the comparison,
the employee gets a rank on the basis of his status of being better than other employees.

Paired comparison is a good method for evaluating employee performance. However, it becomes
very difficult for companies with large number of employees to form pairs as the pairs are formed
by applying the formula:

N (N-1) ÷ 2, where N = No. of employees

For an example, if there are four employees, the number of pairs formed will be six.
Forced Distribution System
In this technique, the rater distributes his rating in the form of a normal frequency distribution. Its basic
purpose is to eliminate the rater’s bias of central tendency. This method is extremely easy to apply and
understand. One of the disadvantages of this method is that the rater cannot explain why an employee is
there in a particular category.

Graphic Rating Scales

It is a numerical scale which states different degrees of a particular trait. under this method, the company or
organization provides a form to each evaluator. Each form contains many characteristics relating to the
personality and performance of the employee. Hence, the rater records his judgment on the employee’s trait
on the scale.
Checklist Method
This is one of the traditional methods of appraisal. A checklist is nothing but a list of statements that
describe the characteristics and performance of employees on the job. the rater ticks/checks to indicate if
the employee possesses any specific trait/quality or not. Hence, the number of ticks describe the rating or
result of the employee.

Modern Methods
.
Management by objectives (MBO)
The management by objectives method is an approach that focuses on improving an organization’s
performance across the board by articulating clear objectives for the business. The entire team, both
management and employees, sets those objectives.

In this approach, an employee and manager work together to identify and plan goals for the employee to
reach, usually within a specific time frame. The manager and employee then meet regularly to discuss the
employee’s progress and make any adjustments necessary toward the goals and objectives.

360-Degree Feedback Method

This method of performance appraisal is very useful for startups as it involves collecting
feedback from each and every individual who interacts with the employee during the course of work. These
individuals could be customer or friends, or supervisors of the employee. Collecting feedback and gathering
data gives a clear insight into the employee’s personality traits and attitude towards work assigned. This
method is time-consuming, although it gives the overall performance card of the employee, and the
management can plan the career development accordingly with the help of the data collected. This method
benefits both the employee and the organization as the constant feedback would help understand the
employee and his work approach better, helping them grow. The advantage of this method is that it is cost-
effective and gives a clear picture of employee’s performance.
Behaviorally anchored rating scale (BARS)

According to HR software company TalentLyft, BARS is “a measuring system which rates

employees or trainees according to their performance and specific behavioral patterns.”This is considered
one of the most effective modern methods of performance appraisal because it relies on both
quantitative and qualitative forms of measurement. In this approach, the employer compares each
employee’s performance with specific behavioral examples that are anchored to numerical ratings.

A BARS can be developed in following steps.

1. Collecting samples of effective and ineffective job behavior from the experts by analyzing the
critical incident method
2. Converting these samples into performance dimension
3. Relocating the performance dimension (from unacceptable to outstanding)
4. Rating the performance dimension accordingly, starting from 1
5. Finally, using the scale anchor to evaluate employee’s performance
Assessment center
In the assessment center method, an organization tests its employees on both job capabilities
and social interaction skills. Written tests help evaluate ability, while situational exercises and role-playing
scenarios assist with determining an employee’s likelihood of success in carrying out responsibilities that
are part of their day-to-day role.
Performance appraisals are critical to the success of any organization. The performance
appraisal method you choose will depend on your goals and the structure of your business; the right one can
help you improve performance and provide growth opportunities across your organization.
FUTURE OF PERFORMANCE MANAGEMENT

 Performance Management system, like all HR processes have witnessed disruptions.

 The most debated component of PMS seems to be the used of forced ranking or
Bell curve.

 The annual 'performance management' process has yielded place to a

new 'performance achievement' system.

 The focus is on real-time, forward-looking conversations about setting priorities,

growing strengths and creating rewarding career opportunities for employees.
 With a holistic view of performance management, the future process will foster
achievements and talents of each employee with the help of leaders, who will spend
more time coaching and talking with employees.
 COMPENSATION AND BENEFITS
 “Compensation is what employees receive in exchange for their contribution to the
organization.” – Keith Davis.

 In the words of Edwin B. Flippo, “The function compensation is defining as adequate

and equitable remuneration of personnel for their contributions to the organizational
objectives.”

REWARD

1. Reward implies all the tangible benefits and provisions an employee obtain as part of
‘employment relationship’

2. Buch (Employee perceptions of the rewards associated with six sigma. 2006) found in
his study, the concept of six sigma that indicates the four categories of rewards:
⚫ Intrinsic – Internal feelings of satisfaction, involvement, growth, autonomy
and self-competence

⚫ Extrinsic – based upon organizational participation and performance and

further categorized into direct and indirect form

⚫ Social – Alderfer’s social relatedness and affiliation are associated with team
based projects that reinforce the employees to interact with peers in order to
obtain the shared goal outcomes (Larson 2003)
⚫ Organisational – refer to the probability of increased profits and productivity:
extensive training that streamlined the main business processes and good
communications between the employees and management

TOTAL COMPENSATION AND REWARDS SYSTEM

A. TOTAL COMPENSATION

1. John Tropman of University of Michigan Business School (The Compensation

Solution. Jossey-Bass.2001) classifies pay in three ways: Old Pay, New Pay and New
New Pay

2. Old Pay is the frozen system based on ‘tenure, entitlement and internal equity’. The
New Pay is linked ‘to the success of the employee and the firm’. The New New Pay
suggests a new system of 10 variables that form the Total Compensation system’ or
the Cafeteria Compensation.

⚫ TC = (BP + AP + IP) + (WP + PP) + (OA + OG) + (PI + QL) + X

⚫ TC = total compensation

⚫ BP = base pay, or salary

 ⚫ AP = augmented pay, that is, any one-time payment, even if received at
regular intervals (such as overtime)
⚫ IP = indirect pay (benefits)

⚫ WP = works-pay, that is, employer-subsidized equipment, uniforms, and so on

⚫ PP = perks-pay, that is, special benefits-anything from accessories to

employee discounts on company products

⚫ OA = opportunity for advancement and increased responsibility

⚫ OG = opportunity for growth, both through on-the-job training and through

off-site training and degree attainment

⚫ PI = psychic income, the emotional enhancements provided by the job itself

and the setting (the people) QL = quality of life, that is, opportunity to express
other important aspects of life (location close to home, flextime, on-site child
care, ski to work, or whatever)

⚫ X = any unique element that an employee wants that the workplace can
facilitate ("Can I bring my dog to work?")

3. TOTAL REWARDS
⚫ It integrates the financial and non financial elements of rewards into a unified
whole
⚫ The WorldatWork Total Rewards Model, depicts the strategic elements of the
employer-employee exchange, and indicates how external influences and an
increasingly global business environment affect ‘attraction, motivation,
retention and engagement’ of employees

1. Compensation: Pay provided by an employer to its employees for services rendered

(i.e., time, effort, skill). This includes both fixed and variable pay tied to performance
levels.

2. Benefits: Programs an employer uses to supplement the cash compensation

employees receive. These health, income protection, savings and retirement programs
provide security for employees and their families.

3. Work-Life Effectiveness: A specific set of organizational practices, policies and

programs, plus a philosophy that actively supports efforts to help employees achieve
success at both work and home.
4. Recognition: Either formal or informal programs that acknowledge or give special
attention to employee actions, efforts, behavior or performance and support business
strategy by reinforcing behaviors (e.g., extraordinary accomplishments) that
contribute to organizational success.

5. Performance management: The alignment of organizational, team and individual

efforts toward the achievement of business goals and organizational success.
Performance management includes establishing expectations, skill demonstration,
 assessment, feedback and continuous improvement.

6. Talent development and career opportunities : Provides the opportunity and tools
for employees to advance their skills and competencies in both their short- and long-
term careers

FORMS OF PAY OR COMPONENTS OF COMPENSATION

 BASIC PAY

 VARIABLE PAY

I. Company Performance Linked Pay

II. Group/Team Performance Linked Pay

III. Individual Performance Linked Pay

 FRINGE BENEFITS

 PERQUISITES

 ALLOWANCES

 BASIC PAY: Basic salary is the base income of an individual. Basic salary is the
amount paid to employees before any reductions or increases due to overtime or
bonus, allowances (internet usage for those who work from home or communication
allowance).

 VARIABLE PAY: Variable pay is the portion of compensation determined by

employee performance (commonly a commission). ... In sales, variable pay is the
portion of sales compensation determined by employee performance. When
employees hit their goals (aka quota), variable pay is provided as a type of bonus,
 incentive pay, or commission.

I. Company Performance Linked Pay: A performance-linked incentive

(PLI) is a form of payment from an employer to an employee, which is
directly related to the performance output of an employee and which may be
specified in an employment contract.

II. Group/Team Performance Linked Pay: Team based pay is a type of

performance based pay used in some organizations. In a team based pay
compensation structure, a portion of an employee's wages or bonus is tied to
the success of team goals, with all team members typically receiving the same
or similar incentive pay.

III. Individual Performance Linked Pay: They are tied to individual levels of
performance measurement (typically performance appraisal ratings), and the
payouts allocated under merit plans are commonly added into an individual
employee's base salary.

 FRINGE BENEFITS: Fringe benefit, any nonwage payment or benefit (e.g., pension
plans, profit-sharing programs, vacation pay, and company-paid life, health, and
unemployment insurance programs) granted to employees by employers. It may be
required by law, granted unilaterally by employers, or obtained through collective
bargaining.

 PERQUISITES: Perquisite” may be defined as any casual emolument or benefit

attached to an office or position in addition to salary or wages. In essence, these
are usually non-cash benefits given by an employer to employees in addition to cash
salary or wages.Examples rent-free accommodation, supply of gas, water and
electricity, professional tax of employee, reimbursement of medical expense, and
salary of servant employed by employee

 ALLOWANCES Allowances are the financial benefits that are provided to the
employees by the employers over their regular salary. While some allowances are
taxable under the head salaries, some are partly taxable or fully non-taxable.

 Entertainment allowance.
 Overtime allowance.

 City compensatory allowance.

 Interim allowance.

 Project allowance.

 Tiffin/meals allowance.

 Uniform allowance.
 THEORIES OF COMPENSATION

REINFORCEMENT THEORY

 Reinforcement theory uses behavior modification (apply reinforcement theory to get

employees to do what you want them to do) and operant conditioning (types and
schedules of reinforcement).
 Reinforcement theory is a psychological principle maintaining that behaviors are shaped
by their consequences and that, accordingly, individual behaviors can be changed through
rewards and punishments.
 Positive reinforcements involves the use of rewards to reinforce behaviors. Negative
reinforcement involves the removal of aversive stimuli to reinforce the target
behavior.
 Behavior is environmentally caused
o Thought (internal cognitive event) is not important
o Feelings, attitudes, and expectations are ignored
 Behavior is controlled by its consequences – reinforcers
 Is not a motivational theory but a means of analysis of behavior
 Reinforcement strongly influences behavior but is not likely to be the sole cause

Expectancy theory is based on Victor Vroom’s formula:

motivation = expectancy × instrumentality × valence.

Expectancy theory proposes that people are motivated when they believe they can
accomplish the task, they will get the reward, and the rewards for doing the task are worth
the effort.

The theory is based on the following assumptions:

 Both internal (needs) and external (environment) factors affect behavior; behavior is the
individual’s decision; people have different needs, desires, and goals; and people make behavior
decisions based on their perception of the outcome. Expectancy theory continues to be popular in
the motivation literature today.

Three Variables

All three variable conditions must be met in Vroom’s formula for motivation to take place:

 Expectancy refers to the person’s perception of his or her ability (probability) to accomplish an
objective. Generally, the higher one’s expectancy, the better the chance for motivation. When
employees do not believe that they can accomplish objectives, they will not be motivated to try.
 Instrumentality refers to belief that the performance will result in getting the reward.
Generally, the higher one’s instrumentality, the greater the chance for motivation. If employees
are certain to get the reward, they probably will be motivated. When not sure, employees may not
be motivated.
For example, Dan believes he would be a good manager and wants to get promoted. However,
Dan has an external locus of control and believes that working hard will not result in a promotion
anyway. Therefore, he will not be motivated to work for the promotion.
 Valence refers to the value a person places on the outcome or reward. Generally, the higher the
value (importance) of the outcome or reward, the better the chance of motivation.
For example, the supervisor, Jean, wants an employee, Sim, to work harder. Jean talks to Sim and
tells him that working hard will result in a promotion. If Sim wants a promotion, he will probably
be motivated. However, if a promotion is not of importance to Sim, it will not motivate him.

Motivating with Expectancy Theory

One study found that expectancy theory can accurately predict a person’s work effort,
satisfaction level, and performance—but only if the correct values are plugged into the
formula.

ADAMS’ EQUITY THEORY

• Employees compare their ratios of outcomes-to-inputs of relevant others.

– When ratios are equal: state of equity exists – there is no tension as the
situation is considered fair

– When ratios are unequal: tension exists due to unfairness

• Under-rewarded states cause anger

• Over-rewarded states cause guilt

– Tension motivates people to act to bring their situation into equity

The Adam’s Equity Theory was proposed by John Stacey Adams, and is based on the
following assumptions:
  Individuals make contributions (inputs) for which they expect certain rewards
(outcomes).

 To validate the exchange, an individual compares his input and outcomes with
those of others and try to rectify the inequality.

There are three types of exchange relationships that arise when an individual input/outcomes
are compared with that of the other persons.

1. Overpaid Inequity: When an individual perceives that his outcomes are more
as compared to his inputs, in relation to others.
2. Underpaid Inequity: When an individual perceives that his outcomes are less
as compared to his inputs, in relation to others.
3. Equity: An individual perceives that his outcomes in relation to his inputs are equal
to those of others.

Thus, Adam’s equity theory shows the level of motivation among the individuals in the
working environment. An individual is said to be highly motivated if he perceives to be
treated fairly. While the feelings of de-motivation arise, if an individual perceives to be
treated unfairly in the organization.

Thus, an individual’s level of motivation depends on the extent he feels being treated fairly,
in terms of rewards, in comparison to others.

TYPES OF EQUITY

– EXTERNAL EQUITY – External equity denotes employee perception of fairness

while comparing with the wages prevailing in external labour markets

– INTERNAL EQUITY – Internal equity exists when the employees perceive that
the wages are commensurate with the relative internal value of each job
– INDIVIDUAL EQUITY – When individuals who on similar jobs are compensated on
the basis of variations in individual performance, in so-called pay for performance,
individual equity occurs

– PERSONAL EQUITY – Personal equity involves no direct comparison between

employees. It exists when the compensation that an employee receives, matches
an employee's own image of his or her worth

– PROCEDURAL EQUITY – It refers to the perceived fairness of the processes

and procedures used to make decisions regarding the allocation of pay

Reactions to Inequity

• Employee behaviors to create equity:

– Change inputs (slack off)

– Change outcomes (increase output)

 – Distort/change perceptions of self

– Distort/change perceptions of others

– Choose a different referent person

– Leave the field (quit the job)

• Propositions relating to inequitable pay:

– Paid by time:

• Overrewarded employees produce more

• Underrewarded employees produce less with low quality

– Paid by quality:

• Overrewarded employees give higher quality

• Underrewarded employees make more of low quality

FACTORS INFLUENCING COMPENSATION

The factors affecting employee compensation can be categorized into:-
1. Internal Factors
2. External Factors.

Internal Determinants of Compensation:

1. Compensation Policy of the Organization:

Firm’s policy regarding pay i.e., attitude to be an industry leader in pay or desire to
pay the market rate determines its pay structure. The former can attract better
talent and achieve lower cost per unit of labour than the ones that pay competitive
pay.
2. Employer’s Affordability:
Those organizations which earn high profit and have a larger market share, a large
business conglomerate and multinational companies can afford to pay higher pay than
others. Besides, company’s ability to pay higher pay is impaired by sector- specific
economic recession and acute competition.
3. Worth of a Job:
Organizations base their pay level on the worth of a job. The wages and salaries
tend to be higher for jobs involving exercise of brain power, responsibility laden
jobs, creativity-oriented jobs, technical jobs.
4. Employee’s Worth:
In some organizations, time rates are granted to all employees irrespective of
performance. In such cases, employees are rewarded for their mere physical presence
on the job rather than for their performance. However many private sector
organizations follow performance-linked pay system. They conduct performance
 appraisal more often than not which provides input for determining pay levels. It
distinguishes the high-performer from the low-performer and the non-performer.

External Determinants of Compensation:

1. Labour Market Conditions:

The forces of demand and supply of human resources, no doubt, play a role in compensation
decision. Employees with rare skill sets and expertise gained through experience command
higher wage and salary than the ones with ordinary skills abundantly available in the job
market. But the higher supply of human resources for certain jobs may not lead to reduction
of wages beyond a floor level due to Government’s prescription of minimum wage levels and
employee union’s bargaining strength.
Similarly, this factor by itself does not result in lower pay if the vast majority of available
resources are unemployable due to poor skill and low talent. Thus, it is clear that law of
demand and supply applies to labour market only to a limited extent.

2. Economic Conditions:
Organizations having state-of-the-art technology in place, excellent productivity records,
higher operational efficiency, a pool of skilled man power, etc., can be better pay masters.
Thus, compensation is the consequence of the level of competitiveness .prevailing in a
given industry.
3. Prevailing Wage Level:
Most of the organizations fix their pay in keeping with the level for similar jobs in the
industry. They frequently conduct wage survey and accordingly seek to keep their wage
level for different jobs. If a particular firm keeps its pay level higher than those of others
in the industry, its employee cost becomes heavier which may escalate the end cost of the
products. This will affect the competitiveness of the firm. On the other hand, if a firm
keeps its pay level lower than the prevailing rates, it may not recruit the skilled and
competent man power.
4. Government Control:
Government through various legislative enactments such as Minimum Wages Act, 1948,
Payment of Wage Act, 1936, Equal Remuneration Act, 1976, Payment of Bonus Act,
1965, dealing with Provident Funds, Gratuity, Companies Act, etc., have a bearing on
compensation decisions. Therefore, firms have to decide on salaries and wages in the
light of the relevant Acts.
5. Cost of Living:
Increase in the cost of living, raise the cost of goods and services. It varies from area to
area within a country and from country to country. The changes in compensation are
based on consumer price index which measures the average change in the price of basic
necessities like food, clothing, fuel, medical service, etc., over a period of time.
Allowances like Dearness Allowance. City compensatory allowances are paid to meet
the increasing cost of living and parity among employees posted at different geographies.
6. Union’s Influence:
 The collective bargaining strength of the trade unions also influence the wage levels.
Trade unions enjoy an upper hand in certain industries like banking, insurance, transport
and other public utilities. Therefore, wage structure in such industries and in such Union-
active regions, salary and wage need to be fixed and revised in consultation with the
unions for ensuring smooth industrial relation.
7. Globalization:
The collective bargaining strength of the trade unions also influence the wage levels.
Trade unions enjoy an upper hand in certain industries like banking, insurance, transport
and other public utilities. Therefore, wage structure in such industries and in such Union-
active regions, salary and wage need to be fixed and revised in consultation with the
unions for ensuring smooth industrial relation.
8. Cross Sector Mobility:
Contemporary companies find it difficult to benchmark the salaries of their staff with
others in the industry thanks to mobility of talent across the sectors. For example,
hospitality sector employees are hired by airlines, BPOs, healthcare companies and
telecom companies.

ESTABLISHING PAY RATES

• There are several steps to designing a pay structure
1. Collect and summarize work content information for each job through Job Analysis.
2. Establish relative worth of different jobs through Job Evaluation.
3. Gather Compensation data from other employers for comparable jobs through
Salary survey.
4. Formulate the Compensation policy in respect of external competitiveness.
5. Integrate the internal structure (Step 2) with the external market pay rates and create a
Compensation structure.

EMPLOYEE BENEFITS

 Employee Benefits (also covering fringe benefits, perquisites, or perks) constitute

the indirect financial and non financial remuneration, which an employee is eligible
to receive in addition to their normal wages or salaries, by virtue of being employed
 The objective of employee benefits is to address the economic security concerns of
the employees, and while doing so, to improve employee retention in the organization.
 Benefits include:
o Housing accommodation
o Accident insurance
o Retirement benefits
o Crèche
o Scholarships
o Educational assistance
o Various kinds of leave
o Leave Fare assistance
 o Social security
o Profit sharing, and such specialized

benefits COMPONENTS OF EMPLOYEE BENEFITS

Employee benefits have two major components:

a. Allowances
b. Perquisites.

Allowances include Dearness Allowance, Compensatory allowances (City Compensatory,

Hill allowance, duty allowances, Hardship allowance, Shift allowance, and Hazard
allowance), Conveyance allowance, House Rent allowance, Deputation allowance, Education
allowance etc.

Perquisites include Leave Travel concession, Advances, Soft Furnishing reimbursements,

Club membership, and Expense account etc.

COMPONENTS OF EMPLOYEE BENEFITS – INDIA

 INDUSTRIAL RELATIONS

 According to Encyclopedia Britannica, industrial relations denote “the relations of the

state with employers, workers, and other organizations. The subject, therefore,
includes individual relations and joint consultation between employers and workers at
their places of work, collective relations between employers and trade unions; and the
part played by the State in regulating these relations”.

 Dale Yoder (Personnel Management and Industrial Relations. Prentice Hall. 1942)
considers IR to be “a designation of a whole field of relationship that exists
because of the necessary collaboration of men and women in the employment
processes of Industry”.

 According to Armstrong Ir is “concerned with the systems and procedures used

by unions and employers to determine the reward for effort and other conditions of
employment, to protect the interests of the employed and their employers and to
regulate the ways in which employers treat their employees”(Human Resource
Management. Kogan Page)

Objectives of industrial relations

1. No. of Strikes & lockouts and their intensity - man days / man-hours lost &
production loss during last five years.
2. Productivity improvement initiatives and result achieved.
3. Welfare measures and CSR activities launched by the company.
4. Training/re-training and skill development initiatives taken by the company
for employee's development.
5. Number of Industrial Disputes pending.
6. Information about grievance machinery set up by the management at various
levels for redressal of genuine grievances of workers.

Approaches to industrial relations

Systems approach

 JOHN DUNLOP gave the systems theory of industrial relations in the year 1958. He
believed that every human being belongs to a continuous but independent social
system culture which is responsible for framing his or her actions, behaviour and
The industrial relations system was based on three sets of different variables:

 Actors: By actors here we mean that the individuals or parties involved in the
process of developing sound industrial relations. This variable is denoted by ‘A’.

 Contexts: The contexts refer to the setup in which the actors perform the given
tasks. It includes the industry markets (M), technologies (T) and the power
distribution in the organization and labour unions(P).

 Ideology: The similar ideas, mentality or beliefs shared by the actors helps to blend
the system. It can be expressed by the initial (I) role.

UNITARIST APPROACH

 Under unitary approach, industrial relations are grounded in mutual co- operation,
individual treatment, team-work, and shared goals. Work place conflict is seen as a
temporary aberration, resulting from poor management, from employees who do
not mix well with the organizational culture.
  This theory believes that the conflicts are non-permanent malformations, which are
a result of improper management in the organization.

 Moreover, if everyone works towards the achievement of the common goals by

maintaining peace and cooperation in the workplace, it will tend to benefit
everyone associated with the organization. It also considered the organizational
conflicts resulting in strikes to be useless and destructive.

PLURALIST APPROACH

 The pluralist theory also called the ‘Oxford Approach’, was proposed by Flanders in
the year 1970. This approach explained that the management and the trade unions are
the different and robust sub-groups which unanimously form an organization.
 Following are some of the highlights of this approach:
 The organization should appoint personnel experts and industrial relations specialists
to act as mediators between the management and trade unions. They need to look into
the matters of staffing, provide consultation to the managers and the unions, and
negotiate with both the parties in case of conflicts.
 The organization should ensure that the trade unions get recognized and the union
leaders or representatives can perform their duties freely.
 In the case of industrial disputes, the organization can avail the services of
the external agent for settlement of such issues.
 The managers should resolve to a collective bargaining agreement when there is a
need for negotiation and settlement with the trade unions.

Marxist Approach

 This theory perceived that the industrial relations depend upon the relationship
between the workers (i.e., employees or labour) and the owners (i.e., employer or
capital). There exists a class conflict between both the groups to exercise a higher
control or influence over each other.

SOCIOLOGICAL APPROACH

 The industries comprise of different human beings who need to communicate with the
individuals of other organizations.
 Due to the difference in their attitude, skills, perception, personality, interests, likes
and dislikes, needs, they are usually involved in one or the other conflict. Even
the social mobility and other aspects including transfer, default, group dynamics,
stress, norms, regulations and status of the workers influence their output and the
industrial relations.

GANDHIAN APPROACH
  The Gandhian approach to industrial relations was proposed by the father of our
nation, Mahatma Gandhi or Mohandas Karamchand Gandhi, who was also a well-
known labour leader.

 The Gandhian approach illustrated that nature had provided us with human
capabilities and different kinds of property. Thus, such nature’s gift belongs to the
whole society and cannot be considered as of personal possession by anyone.

 The objective of this theory is to adopt non-violent ways to bring in economic parity
and material enhancement in a capitalist society.

 Gandhi Ji perceived that every organization is a joint venture, and the labour should
be treated as associates or co-partners with the shareholders. Moreover, the workers
should have proper knowledge of all the business transactions as it is their right.

 He focussed on increasing the production and believed that the gains should be shared
with the employees because of whom it has been possible.

 He also emphasized that the industrial disputes and conflicts between the parties
should be resolved healthily through interactions, arbitration and bilateral
negotiations.

 This theory gained massive popularity and is applied to address disputes and
misunderstandings in the organizational setup even today.

PSYCHOLOGICAL APPROACH

 The psychologists perceived the problem of the industrial relations as a result of the
varying perception and mindset of the key participants, i.e., the employees and the
management.

 The ‘thematic application test’ was conducted by Mason Harie to understand the
behaviour, mindset and perception of the two significant workgroups, i.e., executive
and the union leaders, in a particular situation.

 In this test, both the groups were asked to rate and interpret the photograph of an
ordinary middle-aged person, and the results were drastically contrasting. The union
leaders perceived the person to be a ‘manager‘ whereas, the executives thought that
the person was a ‘union leader‘.

 The major interpretations of this test were as follows:

 The general belief of a management representative is entirely different from that of a

labour representative.

 Both the management and labour do not consider each other to be trustworthy.

 Even each of these groups considers that the other one lacks emotional and
interpersonal attributes.
HUMAN RELATIONS APPROACH

 The concept of human relations approach underlines the need for making the
individuals familiar with the work situations of the organization and uniting the
efforts of the workers. The purpose is to meet the social, psychological and economic
objectives, by enhancing the overall productivity.

THE ACTORS IN INDUSTRIAL RELATIONS

The main participants in industrial relations are:

(i) Employers.
(ii) Employees/workers.
(iii) Government. Employers have their associations to deal with labour problems and
their unions in a collective way.

Examples of these actors include: NGOs, employment agencies, HR consultancy firms,

counsellors, chaplains, health advisors/trainers, citizens' advice bureaus, global union
federations, employment arbitrators, grassroots activists and social movements, and so
forth.

IR AND HRM

 Industrial Relations and Human Resource Management (IR&HRM) is a branch of

study that is designed to prepare students for careers in the fields of employment
relations, human resource management, workplace change, and adult education and
training.

 Industrial Relations vs Human Resource Management

Difference between industrial relations and human resource management is
that industrial relations is about establishing relationships among the
stakeholders while human resource management is about managing the human
resource in an organisation.

EMPLOYMENT RELATIONS

Employment Relations is defined by Cambridge dictionary as –

“ behaviours and interaction between an employee and their employer,

especially relating to employees' rights and their happiness in their jobs”.

According to ILO, The employment relationship is the legal link between employers and
employees. It exists when a person performs work or services under certain conditions in
return for remuneration.

The elements of employee relations consist of:

The formal and informal employment policies and practices of the organization.
 ● The development, negotiation and application of formal systems, rules and procedures
for collective bargaining, handling disputes and regulating employment. These serve to
determine the reward for effort and other conditions of employment, to protect the
interests of both employees and their employers, and to regulate the ways in which
employers treat their employees and how the latter are expected to behave at work.

● Policies and practices for employee voice and communications.

● The informal as well as the formal processes that take place in the shape of continuous
interactions between managers and team leaders or supervisors on the one hand and
employee representatives and individuals on the other. These may happen within the
framework of formal agreements but are often governed by custom and practice and the
climate of relationships that has been built up over the years.

● The philosophies and policies of the major players in the industrial relations scene: the
government of the day, management and the trade unions.

● A number of parties each with different roles. These consist of the state, management,
employers’ organizations, the trade unions, individual managers and supervisors, HR
managers, employee representatives or shop stewards and employees

TRADITIONAL EMPLOYEE RELATIONS

 A critical feature of the traditional employment relationship is the hierarchical power

of employers over employees.

 A power structure is a hierarchy of competence predicated on influence between an

individual and other entities in a group. A power structure focuses on the way power
and authority is related between people within groups such as a government, nation,
institution, organization, or a society.

Hierarchical power has three subsets –

(i) Directional power : A power structure is a hierarchy of competence predicated on

influence between an individual and other entities in a group. A power structure focuses
on the way power and authority is related between people within groups such as a
government, nation, institution, organization, or a society.

(ii) Control power : Controlling Power means the power actually used to direct the
corporate activities and guide the operation of the Company's bodies, whether directly or
indirectly, on a factual or legal basis.
 (iii) The disciplinary power : Disciplinary power is a particular type of power which
subjects exercise over their own person, such as the application of rules of conduct and
appropriate behaviour.

TRADITIONAL EMPLOYMENT RELATIONSHIP

Shared value Employee mindset Employer mindset

Specialized employment Work in a clearly defined Offer clearly defined and

employment area specialized employment
opportunities.

Internal Focus Follow organizational policies Reinforce the need to follow

and practices organizational policies and
practices

Job Focus Fulfill job requirement Link rewards and benefits to

fulfilling job requirements

Functional based work Focus on job functions Structure work around

functions

Human dispirit and work Value a stable and secure job Offer secure jobs

Loyalty Display loyalty to the Reward employees who are

employer. loyal to the company.

Training Commit to gain technical Provide opportunities for

qualification employees to develop
technical skills

Closed information Comply with managerial Provide sufficient information

instructions for employees to do their job

ACTORS IN THE FRAY: ROLE TAKING

1. The management: Pre- independence, the managerial style, mostly of private

owners, was authoritarian The managerial style mirrors manifold influences of
authoritarian practices within the family, the educational system, society's hierarchical
structure, and religious institutions to create a strong sense of dependence Other
factors which are believed to have influenced the managerial style are the traditional
values of renunciation, giving away, self‐sacrifice, and self‐denial
2. The Trade unions :Trade unionism in India can be traced back to the nineteenth
century The trade unions need to shun adversarial and shed political agendas from
 Their trade union activities. They could develop commercial orientation (a la
Singapore) and experiment with running businesses to get into the shoes of the
employer. They need to undertake reskilling and literacy programs for their members.
There should also be partnership with the employer to build the quality of their
leadership by getting trained in advanced negotiation techniques and teamwork &
collaboration.
3. The state: Main functions of the state are : Encourage trade unions Maintain
industrial peace Involve unions in the formulation of five‐year plans Exercise political
control over the union movement without jeopardizing the legal rights of unions.

EMPLOYMENT RELATIONS IN SMES

Some key findings:

 Researches on the status of employment relations practices in SMEs have indicated a

general lack of formal processes and informal engagement in routine day to day tasks

 Formal people practices are conspicuous by their absence, and the internal
environment is relaxed and friendly with strong focus on relationships

 Employee relations were characterized by informality and close personal ties

FUTURE OF EMPLOYEE RELATIONS

If employment relations has to remain relevant:

 Needs to define a coherent set of values and priorities: greater equity, trust and
reciprocity

 Improved employment standards required by a decent workplace which will

incorporate fair wages

 Greater employment security and Flexibility in work to create a work life balance
demanded by the new employees

 Slew of legislations to foster industrial democracy and Individual and collective

employment rights, Strategy for vocation-oriented curricula, learning and skill
enrichment
IMPORTANT QUESTIONS:

1. Explain the Components of Compensation?

2. Discuss methods of Performance and appraisal?
3. List out the problems involved in performance appraisal?
4. Explain various objectives of compensation management?
5. Discuss the factors influencing the compensation level?
6. Explain the theories of Compensation?
7. Explain the Performance management Process?
8. Define:
a) Performance Appraisal
b) Industrial Relations
c) Employee Relations

9. What is 360 degree Performance Appraisal?

10. Explain the actors in IR and ER
11. What is BARS?
12. Define Balance scrorecard?