Unit – 4

Performance Appraisal and Compensation

Peformance Appraisal
It is a method of acquiring and processing the info needed to improve an
individual employee performance and accomplishments
Importance/ Needs of performance appraisal
• It reviews the performance of the employees over a given period of time
• It judges the actual and desired performance
• It helps to find org control
• It diagnoses training and devp in future
• It helps in HR for promotions and transfer
• It provides the clarity in responsibilities performed by the employees
Objectives of Performance appraisal
• Provide feedback
• Improve communication
• Clarify expectations
• Allocate rewards
Methods of Performance appraisal
1.Traditional methods
i.Forced choice method - the choice has been given according to that
they need to be rated
ii.Graphic rating method – given the rating based on that they need to
be given rating eg. -2 to +2
iii.Comparative evaluation approach – Comparing with co worker done
by superiors
a.Straight ranking method – By seeing the performance saying as
“Good” or “Bad”
b.Paired comparison method – Comparing with A,B,C,D,E
iv.Grading method- Given list of categories as Excellent, very good,
satisfactory, poor, very poor
v.Forced distribution method – Given as percent and following that ie
40% average,10% above average . . etc
vi.Checklist method and weighted checklists – given yes/no type
questions
vii.Critical incident method – Manager prepares the list of
effective and ineffective behaviour of the employee and it
will affects the performance appraisal
viii.Free essay method – Briefly express abt their views
ix.Group appraisal – appraisal by group of superiors
x.Field review – line superiors to evaluate their respective sub
ordinates and get important info
xi.Nominations – need to identify the poor performers
xii.Confidential reports - Appraisal done in once in a year and
done based on 14 criteria attendance, self expression, ablity
to work with others, leadership,initiative,technical ability,
ability of new material, ability of reason, originality,area of
work, integrity, responsibility, any defects and these will be
done based on scale of Excellent, good,average,fair,poor
xiii.Work sample test – Given work related test then evaluated
2.Modern Reports
i. Assessment centre – This is to evaluate the managers and asked to participate
in work groups,computer simulations and observed their response and given
appraisal
ii. Human Resource Accounting – When well trained employees leave the
organization the human assets of org will be decreased and vice versa.
iii. Behaviourally Anchored Rating Scale (BARS) – Combination of rating scale and
critical incident techniques
iv. Management by Objectives (MBO) –
a.Setting org goals
b.Setting dept goals
c.Set individual goals
d,.performance reviews
e.Provide feedback
v.360 Degree Appraisals –
a.Self appraisal
b.Superior appraisal
c.Sub ordinate appraisal
d.Peer appraisal
Process of performance appraisal
S1.Estb performance stds – compare actual
performance of employees
S2.commu the stds – the roles need to be
communicated to the employees
S3.measuring the actual performance – Testing
employees performance based on given period of
time
S4.comparing the actual with desired performance –
this tells the deviations of the employees
S5.Discussing results
S6.Decision making - Promotion,transfer,demotion
rewards etc
Essentials for effective performance appraisal
• Documentation
• standards
• practical and simple format
• Evaluation technique
• communication
• feedback
• personal bias
• mutual trust and confidence
• validity
• Reliability
• Training to appraisers
Limitations of PA
1. Halo error
- Judging a person based on the special trait
- If rater is friendly then outstanding ,if unfriendly then average
2.Central tendency
- Rating the evaluating persons in a safe
- Rater not familiar with the persons
3.Strictness
- Positive leniency error giving high rating
- Negative leniency error giving low rating
- Evaluator may strict and give low rating to all the employees
4.Spill over effect
- Giving the rate of the past performance
5.Primacy and recency efforts
- Rating given by influenced person
6.Rater effect
- Attitude employees given less rating not consider the actual performance of
employee
7.Status effect
Compensation Management
Compensation Management is the total amount of the
monetary and non monetary pay provided to an employee
by an employer in return for work performed as required

Objectives of compensation
• To attract and retain competent and productive staff from
the appropriate national,regional and local labour mkt
• To identify different levels of responsibility to establish
salaries accordingly
• Base salary adjustment on individual contributions
• To feel remuneration is fair
• It makes employer to motivate and increases performer
Benefits of compensation
• paid time off such as sick days and vacation days
• Health insurance
• life insurance
Components of compensation system
1.Job description
• Helps hire the right person
• lays out employee expectations
• Discourages innovation and expansion
• Becomes outdated quickly
2.Job analysis
• Helps scope of training required in field
• Helps to evaluated the job
• Helps to prepare job description and job specification
3.Job Evaluation
• Reduction in inequalities in salary structure
• helps in selection of employees
• relevanceof the job
4.Pay structure
• positioning district competitively
• Impact on current pay practices
• pay differentials for higher levels
• variance within each pay range
5.Salary Survey
• market data
• Average salaries, COLI, salary budget averages,
Types of Compensation Plans
1.Binary plans
2.Matrix plans
3.Unilevel Pay plan
4.Stair step Breakaway pay plans
Classical theorems on compensation
i.Economic theory
• Define earnings of bitz with rewards not only for layouts
but also business men,raw materials,plant ,machinery
• Compensation more than the efficiency of workers
ii.Administrative theory
• some company pays straight salary method, straight
commission method, salary ,bonus
• Following their own HR roles
iii.Social science theory
• Based on sociology and psychology
• Related to facilities of individual
Wage
Wage is systematic approach to providing monetary value to
employees in exchange for work performed. Wage are paid
on hourly or daily basis
Principles of wage and salary administration
• Preserving real income – It will happen becoz of inflation
• labour productivity – Technology and capital investment
increases labour also increases
• prevailing market rate – based on going wage rate and
COLI
• living wage – wage should be managed by employee for
maintain him and his family
• managerial attitudes – according to company prestige
• Psychological and social factors- based on position and
place of workers compensation should increased
Differences bt Salary and Wage
Salary Wages

1.Paid to managerial personnel employed 1.Paid to employed persons on hourly or

on monthly basis weekly or daily bases

2.Salary earners are paid by year 2.Wage earners are paid by hour

3.Payment given even though work is not 3.No work no payment

their

4.It is calculated as packages 4. It is not calculated as packages

5.Consists of all kinds of benefits and perks 5.No perks and benefits
Techniques of Wage Fixation
1.Time rate system
• payment paid on the basis of time spent in the factory
• wages earned = Time spent * wage rate per
hour/day/week/month
• It is benefit to average and below workers
• It will not increase the outputs
2.Piece rate system
• Workers paid on the basis of units of output produced
• Time will not be considered
• Total wages earned = output * piece rate
3.Balance or Debit method
• Combination of time and piece rate
• If Piece rate earning is less than time rate then cash need to be pay
based on time rate
Incentive
It is the supplemental reward that serves as a motivational device for a
desired action or behaviour

Types of Incentives
1.Individual Incentives
Cash rewards to recognize achievement of predetermined performance
objectives
2.Team or Group Incentives
Awards are based on the team or group achievement performance objectives
3.Profit Sharing
Sharing of cash when they achieved the specific operational goals, sales
revenue, employee productivity
4.Stock incentives
Which can offer shares in the company as incentives
5.Vacation incentives and prizes
Helps to reduce the sick days and personal days and giving the voucher
Wage Policy in India
1.Basic wage
All emoluments which earned by employee while on duty or leave or holidays with
wages
i.Living wage
ii.Fair wage
iii. Minimum wage
2.Dearness allowance
It is paid based on cost of living adjustments(impact of inflation)
It was linked with
i.House Rent Allowance
ii.Leaves travel allowances – employee travelling to other place / foreign
iii.Washing allowances
iv.Conveyance allowances
v.Food allowances - coupons
vi.Education allowance – Rs. 100 for each children (upto two children)
vii.Children hostel allowance - Rs. 300 for each children (upto two children)
viii.Outstation allowance – employess moving to other place behalf of company
ix.Overtime allowance – when stretch over the normal time
3.Bonus
Payment of minimum bonus - min 8.33 % after
the accounting year
Payment of maximum bonus- Allocable surplus
exceed minimum bonus then employer should
give 20 % to each and every employee
4. Fringe Benefits and Perquisites
Fringe Benefits
The extra benefits provided to the employees in addition
to the compensation paid in the form of wage or salary
Eg. Pension, medical, canteen,co operative credit,
consumer stores, educational facilities, recreational
facilities
Objectives of Fringe Benefits
• To improve sound industrial relations
• To boost up employee morale
• To provide qualitative work environment
• To protect health of the employees and safety
• To retain the employees
Need and purpose of fringe Benefits
1.Employee demand – pay hike
2.Trade union demands – get more fringe benefits
3.Employers preference – better contribution to the org
4.Human relations – economically,social
5.Employment security – travel pay,maternity
leave,COLI,jobs to their sons
6.Health protection – accident insurance,disability
insurance,health insurance
7.Old age and retirement – pension
8.Personal identification,participation and stimulation
Canteen,beauty parlour services,housing,stress counselling
attendance bonus
Classification of fringe benefits
1.Payment for time not worked
Sick leave with pay,vacation pay,paid lunch,travel time
2.Extra time for time worked
Premium pay,incentive bonus,shift premium,profit
sharing
3.Employee secruity
Minimum and continuous wage gives sense of
secruity
4.Safety and Health
According to factories act .1948
Perquisites
It refers to the payment received in addition to a regular wage or
salary.
It includes
• Rent free accommodation
• funds paid by the employer
Differences bt Fringe Benefits and Perquisites
Fringe Benefits Perquisites
1.Providing benefits or service 1.Providing benefits in
provided to the employee advance
2.These benefits are not 2.These are clubbed with
clubbed with salary salary
3.These are taxed in the hands 3.These are in the hands of
of employer employee itself
4.Calculated by IT dept 4.Facilities like
purpose of income tax housing,schooling conveyance
Classification of compensation
1.Base compensation
2. Variable compensation
3.Supplementary compensation

1.Base compensation
• Demand and supply of labor
• labor union pressure is also another factor influencing
• Based on nature of job ,job description compensation package differs
• Size of org and ability to pay its employees
• salaries of similar firm
• Govt policies on wage determination
2. Variable compensation
• It is employee compensation that changes as compared to salary which is
paid in equal proportions thought the year
• It is recognize and reward employee contribution toward company
productivity, profitability, team work, safety.
• It given in diff formats profit sharing, bonus,holiday bonus, company paid trip
thanksgiving turkey
 3.Supplementary compensation
• In this employer was given to employee when he/she
wishes to
• It is also called as fringe benefits
• It can be cancelled by the employer when ever they feel
to deduct
Components of Executive Compensation
1.Basic salary – pay according to the market rates
2.Short term incentives - Awarding the employees once in
a year / annually
3.Long term incentives - Awarding the employees based
on performance for a period beyond one year.
4.Benefits / Perquisites – benefits include company cars,
club membership ,housing accommodations.
Employee Incentive Schemes
1.Individual Incentive (PBR) schemes
2.Group Incentive schemes

Methods of plans under Individual Incentive scheme

1.Taylors differential piece rate system
• Introduced by Taylor, father of scientific mgnt
• Slow worker low payment for low production ,efficient worker higher rate
for higher production
• worker completes work less than standard time then he should given less
payment and worker completes work within standard time give higher rate
2.Merricks multiple piece rate
• Three different piece rates are applied for workers with different levels of
performance
• pay ordinary piece rate whose performance is less than 83 % of standard
output
• 110% piece rate bt 83 % and 100 % of std rate
• 120 % piece rate more than 100 % of std rate
3.Gants task and Bonus plan
• This is based on time and work done in standard time
• Actual performance is compared with standard time and his efficiency is
determined
• If a worker takes more time than the std time then wage should be paid based
on time taken
• Done work based on std time then given according to std wage
• Done work less than the std time then give std wage and also 20 % of the bonus

4.Halsey premium plan

• Std time is fixed and worker given wages if he completes the job in less than the
std time
• Formula is Total wages = T * R + % (S - T) R
Where T = actual time , R = rate per hour , S = std time, % = 50% otherwise
mentioned in the question

5.Rowan premium plan

• Hour is the fixed percentage of wages of time saved and worker is given a
guaranteed wage rate for the time taken to finish the job
2. Group Incentives schemes
a.Profit Sharing
Sharing of cash when they achieved the specific operational
goals,revenues.
b.Co-patnership
Having the sharing of the shares
c. Scanlon plan
Sharing the gains of increased productivity

Recent Trends in Compensations Management

1.Flexible Benefits – fringe benefits approximately 40% of the
employee salary
2.Paying for positions
3.Paying for Performance