COMPENSATION MANAGEMENT

 
Human Resource is the most vital resource for any
organization. It is responsible for each and every
decision taken, each and every work done and each
and every result. Employees should be managed
properly and motivated by providing best
remuneration and compensation as per the industry
standards. The lucrative compensation will also
serve the need for attracting and retaining the best
employees. 

Compensation is the remuneration received by an

employee in return for his/her contribution to the
organization. It is an organized practice that
involves balancing the work-employee relation by
providing monetary and non-monetary benefits to
employees.

Compensation is an integral part of human resource management which helps in motivating the
employees and improving organizational effectiveness. 

Components of Compensation System

Compensation systems are designed keeping in minds the strategic goals and business
objectives. Compensation system is designed on the basis of certain factors after analyzing the
job work and responsibilities. Components of a compensation system are as follows:

                      

Types of Compensation

Compensation provided to employees can direct in the form of monetary benefits and/or indirect
in the form of non-monetary benefits known as perks, time off, etc. Compensation does not
include only salary but it is the sum total of all rewards and allowances provided to the
employees in return for their services. If the compensation offered is effectively managed, it
contributes to high organizational productivity.

Direct Compensation           

Direct compensation refers to monetary benefits offered and provided to employees in

return of the services they provide to the organization. The monetary benefits include
basic salary, house rent allowance, conveyance, leave travel allowance, medical
reimbursements, special allowances, bonus, Pf/Gratuity, etc. They are given at a regular
 interval at a definite time.
Basic Salary
 

Salary is the amount received by the employee in lieu of the work done by him/her for a
certain period say a day, a week, a month, etc. It is the money an employee receives
from his/her employer by rendering his/her services.

House Rent Allowance

 

Organizations either provide accommodations to its employees who are from different
state or country or they provide house rent allowances to its employees. This is done to
provide them social security and motivate them to work. 

Conveyance

Organizations provide for cab facilities to their employees. Few organizations also provide
vehicles and petrol allowances to their employees to motivate them.
 

Leave Travel Allowance 

These allowances are provided to retain the best talent in the organization. The
employees are given allowances to visit any place they wish with their families. The
allowances are scaled as per the position of employee in the organization. 

Medical Reimbursement 

Organizations also look after the health conditions of their employees. The employees are
provided with medi-claims for them and their family members. These medi-claims include
health-insurances and treatment bills reimbursements.
 

Bonus

Bonus is paid to the employees during festive seasons to motivate them and provide
them the social security. The bonus amount usually amounts to one month’s salary of the
employee.
 Special Allowance 

Special allowance such as overtime, mobile allowances, meals, commissions, travel

expenses, reduced interest loans; insurance, club memberships, etc are provided to
employees to provide them social security and motivate them which improve the
organizational productivity.
 

Indirect Compensation

Indirect compensation refers to non-monetary benefits offered and provided to

employees in lieu of the services provided by them to the organization. They include
Leave Policy, Overtime Policy, Car policy, Hospitalization, Insurance, Leave travel
Assistance Limits, Retirement Benefits, Holiday Homes.

Leave Policy

It is the right of employee to get adequate number of leave while working with the
organization. The organizations provide for paid leaves such as, casual leaves, medical
leaves (sick leave), and maternity leaves, statutory pay, etc.

Overtime Policy

Employees should be provided with the adequate allowances and facilities during their
overtime, if they happened to do so, such as transport facilities, overtime pay, etc.

Hospitalization

The employees should be provided allowances to get their regular check-ups, say at an
interval of one year. Even their dependents should be eligible for the medi-claims that
provide them emotional and social security.
 Insurance

Organizations also provide for accidental insurance and life insurance for employees. This
gives them the emotional security and they feel themselves valued in the organization. 

Leave Travel
 

The employees are provided with leaves and travel allowances to go for holiday with their
families. Some organizations arrange for a tour for the employees of the organization.
This is usually done to make the employees stress free.
 

Retirement Benefits

Organizations provide for pension plans and other benefits for their employees which
benefits them after they retire from the organization at the prescribed age.

Holiday Homes

Organizations provide for holiday homes and guest house for their employees at different
locations. These holiday homes are usually located in hill station and other most wanted
holiday spots. The organizations make sure that the employees do not face any kind of
difficulties during their stay in the guest house.

Flexible Timings

Organizations provide for flexible timings to the employees who cannot come to work
during normal shifts due to their personal problems and valid reasons.

         
Need of Compensation Management

 A good compensation package is important to motivate the employees to increase the

organizational productivity.

 Unless compensation is provided no one will come and work for the organization. Thus,
compensation helps in running an organization effectively and accomplishing its goals.

 Salary is just a part of the compensation system, the employees have other
psychological and self-actualization needs to fulfill. Thus, compensation serves the
purpose.

 The most competitive compensation will help the organization to attract and sustain the
best talent. The compensation package should be as per industry standards.
           

Strategic Compensation

Strategic compensation is determining and providing the compensation packages to the

employees that are aligned with the business goals and objectives. In today’s competitive
scenario organizations have to take special measures regarding compensation of the employees
so that the organizations retain the valuable employees. The compensation systems have
changed from traditional ones to strategic compensation systems. 

Performance Appraisal

Performance Appraisal is the process of obtaining, analyzing and recording information about the
relative worth of an employee. The focus of the performance appraisal is measuring and
improving the actual performance of the employee and also the future potential of the employee. Its
aim is to measure what an employee does.

According to Flippo, a prominent personality in the field of Human resources, "performance appraisal
is the systematic, periodic and an impartial rating of an employee’s excellence in the matters
pertaining to his present job and his potential for a better job." Performance appraisal is a
systematic way of reviewing and assessing the performance of an employee during a given period of
time and planning for his future.

It is a powerful tool to calibrate, refine and reward the performance of the employee. It helps to
analyze his achievements and evaluate his contribution towards the achievements of the overall
organizational goals.

By focusing the attention on performance, performance appraisal goes to the heart of personnel
management and reflects the management's interest in the progress of the employees.

Objectives of Performance appraisal:

 To review the performance of the employees over a given period of time.

 To judge the gap between the actual and the desired performance.
 To help the management in exercising organizational control.
 Helps to strengthen the relationship and communication between superior –
subordinates and management – employees.
 To diagnose the strengths and weaknesses of the individuals so as to identify the
training and development needs of the future.
 To provide feedback to the employees regarding their past performance.
 Provide information to assist in the other personal decisions in the organization.
 Provide clarity of the expectations and responsibilities of the functions to be performed
by the employees.
 To judge the effectiveness of the other human resource functions of the organization
such as recruitment, selection, training and development.
  To reduce the grievances of the employees.

Purpose Of Performance Appraisal

Performance Appraisal is being practiced in 90% of the organisations worldwide. Self-

appraisal and potential appraisal also form a part of the performance appraisal processes. 

Typically, Performance Appraisal is aimed at:

 To review the performance of the employees over a given period of time.

 To judge the gap between the actual and the desired performance.

 To help the management in exercising organizational control.

 To diagnose the training and development needs of the future.

 Provide information to assist in the HR decisions like promotions, transfers etc.

 Provide clarity of the expectations and responsibilities of the functions to be
performed by the employees.
 To judge the effectiveness of the other human resource functions of the
organization such as recruitment, selection, training and development.
 To reduce the grievances of the employees.
 Helps to strengthen the relationship and communication between superior –
subordinates and management – employees.

According to a recent survey, the percentage of organisations (out of the total

organisations surveyed i.e. 50) using performance appraisal for the various purposes are
as shown in the diagram below:

The most significant reasons of using Performance appraisal are:

 Making payroll and compensation decisions – 80%

 Training and development needs – 71%
 Identifying the gaps in desired and actual performance and its cause – 76%
  Deciding future goals and course of action – 42%
 Promotions, demotions and transfers – 49%
 Other purposes – 6% (including job analysis and providing superior support,
assistance and counselling)

Challenges Of Performance Appraisal

Appraisals Home » Challenges Of Performance Appraisal

 
An organization comes across various
problems and challenges Of
Performance Appraisal in order to
make a performance appraisal system
effective and successful. The
main Performance Appraisal
challenges  involved in theperformance
appraisal process are:

 Determining the evaluation

criteria
Identification of the appraisal criteria is
one of the biggest problems faced by the
top management. The performance data
to be considered for evaluation should be
carefully selected. For the purpose of
evaluation, the criteria selected should
be in quantifiable or measurable
terms

 Create a rating instrument 

The purpose of the Performance
appraisalprocess is to judge the
performance of the employees rather
than the employee. The focus
of the system should be on the development of the employees of the organization.

 Lack of competence

 
Top management should choose the raters or the evaluators carefully. They
should have the required expertise and the knowledge to decide the criteria
accurately. They should have the experience and the necessary training to carry
out the appraisal process objectively.

 Errors in rating and evaluation

 
Many errors based on the personal bias like stereotyping, halo effect (i.e. one trait
influencing the evaluator’s rating for all other traits) etc. may creep in the
appraisal process. Therefore the rater should exercise objectivity and fairness in
evaluating and rating the performance of the employees.

 Resistance

The appraisal process may face resistance from the employees and the trade
unions for the fear of negative ratings. Therefore, the employees should be
communicated and clearly explained the purpose as well the process of
appraisal. The standards should be clearly communicated and every employee
should be made aware that what exactly is expected from him/her.
 Traditional Methods of Performance Appraisal

Appraisals Home » Traditional Methods of Performance Appraisal

 
1. ESSAY APPRAISAL METHOD 
This traditional form of appraisal,
also known as"Free Form
method" involves a description
of the performance of an
employee by his superior. The
description is an evaluation of the
performance of any individual
based on the facts and often
includes examples and evidences
to support the information. A
major drawback of the method is
the inseparability of the bias of
the evaluator.

2. STRAIGHT RANKING
METHOD 
This is one of the oldest and
simplest techniques of
performance appraisal. In this
method, the appraiser ranks the
employees from the best to the
poorest on the basis of their
overall performance. It is quite
useful for a comparative
evaluation. 

3. PAIRED COMPARISON
 
A better technique of comparison than the straight ranking method, this
method compares each employee with all others in the group, one at a
time. After all the comparisons on the basis of the overall comparisons, the
employees are given the final rankings. 

4. CRITICAL INCIDENTS METHODS

In this method of Performance appraisal, the evaluator rates the employee

on the basis of critical events and how the employee behaved during those
incidents. It includes both negative and positive points. The drawback of
this method is that the supervisor has to note down the critical incidents
and the employee behaviour as and when they occur.

5. FIELD REVIEW

In this method, a senior member of the HR department or a training officer

discusses and interviews the supervisors to evaluate and rate their
respective subordinates. A major drawback of this method is that it is a
very time consuming method. But this method helps to reduce the
superiors’ personal bias.

6. CHECKLIST METHOD

The rater is given a checklist of the descriptions of the behaviour of the

employees on job. The checklist contains a list of statements on the basis
of which the rater describes the on the job performance of the employees.
 7. GRAPHIC RATING SCALE

In this method, an employee’s quality and quantity of work is assessed in

a graphic scaleindicating different degrees of a particular trait. The factors
taken into consideration include both the personal characteristics and
characteristics related to the on the job performance of the employees. For
example a trait like Job Knowledge may be judged on the range of average,
above average, outstanding or unsatisfactory.

8. FORCED DISTRIBUTION

To eliminate the element of bias from the rater’s ratings, the evaluator is
asked to distribute the employees in some fixed categories of ratings like
on a normal distribution curve. The rater chooses the appropriate fit for
the categories on his own discretion. 

360 Degree Performance Appraisals

Appraisals Home » 360-Degree-Performance-Appraisals
 
360 degree feedback, also known as 'multi-rater
feedback', is the most comprehensive appraisal
where the feedback about the employees’
performance comes from all the sources that come
in contact with the employee on his job.

360 degree respondents for an employee can be

his/her peers, managers (i.e. superior),
subordinates, team members, customers, suppliers/
vendors - anyone who comes into contact with the
employee and can provide valuable insights and
information or feedbackregarding the "on-the-
job" performance of the employee.

360 degree appraisal has four integral components:

1. Self appraisal

2. Superior’s appraisal

3. Subordinate’s appraisal

4. Peer appraisal.

Self appraisal gives a chance to the employee to look at his/her strengths and

weaknesses, his achievements, and judge his own performance. Superior’s appraisal
forms the traditional part of the 360 degree performance appraisal where the
employees’ responsibilities and actual performance is rated by the superior.

Subordinates appraisal gives a chance to judge the employee on the parameters like
communication and motivating abilities, superior’s ability to delegate the work, leadership
qualities etc. Also known as internal customers, the correct feedback given by peers can
help to find employees’ abilities to work in a team, co-operation and sensitivity towards
others.
 Self assessment is an indispensable part of 360 degree appraisals and therefore 360
degreePerformance appraisal have high employee involvement and also have the
strongest impact on behavior and performance. It provides a "360-degree review" of the
employees’ performance and is considered to be one of the most credible performance
appraisal methods.

360 degree performance appraisal is also a powerful developmental tool because

when conducted at regular intervals (say yearly) it helps to keep a track of the changes
others’ perceptions about the employees. A 360 degree appraisal is generally found more
suitable for the managers as it helps to assess their leadership and managing styles. This
technique is being effectively used across the globe for performance appraisals. Some of
the organizations following it are Wipro, Infosys, and Reliance Industries etc.

MANAGEMENT BY OBJECTIVES

Appraisals Home » Management By Objectives

 
The concept of ‘Management by Objectives’
(MBO) was first given by Peter Drucker in
1954. It can be defined as a process whereby
the employees and the superiors come together
to identify common goals, the employees set
their goals to be achieved, the standards to be
taken as the criteria for measurement of their
performance and contribution and deciding the
course of action to be followed. 

The essence of MBO is participative goal setting,

choosing course of actions and decision making.
An important part of the MBO is the
measurement and the comparison of the
employee’s actual performance with the
standards set. Ideally, when employees
themselves have been involved with the goal
setting and the choosing the course of action to

be followed by them, they are more likely to fulfill their responsibilities. 

THE MBO PROCESS

UNIQUE FEATURES AND ADVANTAGES OF MBO

The principle behind Management by Objectives (MBO) is to create empowered
employees who have clarity of the roles and responsibilities expected from them,
understand their objectives to be achieved and thus help in the achievement of
organizational as well as personal goals.

Some of the important features and advantages of MBO are:

 Clarity of goals – With MBO, came the concept of SMART goals i.e. goals that
are:

Specific
Measurable
Achievable
Realistic, and
 Time bound.
The goals thus set are clear, motivating and there is a linkage between organizational
goals and performance targets of the employees.

 The focus is on future rather than on past. Goals and standards are set for the
performance for the future with periodic reviews and feedback.
 Motivation – Involving employees in the whole process of goal setting and
increasing employee empowerment increases employee job satisfaction and
commitment.
 Better communication and Coordination – Frequent reviews and interactions
between superiors and subordinates helps to maintain harmonious relationships
within the enterprise and also solve many problems faced during the period.