THE FUNCTIONS AND IMPORTANCE OF COMPENSATION, WAGES AND PERFORMANCE EVALUATION,

APPRAISAL, REWARD SYSTEM, EMPLOYEE RELATIONS AND MOVEMENT

COMPENSATION/WAGES and PERFORMANCE EVALUATION

Compensation/wages and performance evaluation are related to each other because the
employees’ excellent or poor performance also determines the compensation given to them, after
considering other internal and external factors like the actual worth of the job, compensation
strategy of the organization, conditions of the labor market, cost of living, and area wage rates,
among others. Compensation may come in different forms. It may be direct, indirect, or
nonfinancial.

The daily minimum wage rate differs in relation to factors

such as geographical area and industry or sector. The
National Wage and Productivity Commission is the
government agency concerned with minimum wage
determination in the country

Types of Compensation

Direct compensation – includes workers’ salaries, incentive pays, bonuses, and commission

Indirect compensation – includes benefits given by employers other than financial remunerations;
for example travel, educational and health benefits, and others

Nonfinancial compensation – includes recognition programs, being assigned to do rewarding jobs,

or enjoying management support, ideal work environment, and convenient work hours.

Connecting Compensation to Organizational Objective

Worker compensation/wages had tremendously changed in the 21st century due to increased
market competition (both local and global), required skills from workers, and changes in technology,
among others. Along with these, organizations’ pay philosophies have also changed. Instead of
paying employees based mainly on their job position or titles, they are now given pay according to
their competencies or according to how much they could contribute or have contributed to their
company’s success. Wage experts now prepare compensation packages to create values for both the
organization and its employees.

Source: (Latte, 2018)

Figure 1
Figure 1. Pay equity is among the important considerations in preparing compensation packages. As
illustrated in this diagram, pay equity is based on the idea that an employee’s pay must be
commensurate to his or her effort.

Compensation: A Motivational Factor for Employees

Compensation pay represents a reward that an employee receives for good performance that
contributes to the company’s success. With this, the following must be considered:

Pay Equity – related to fairness; the Equity Theory is a motivation theory focusing on employees’
response to the pay that they receive and the feeling that they receive less or more than they
deserve. Employees generally feel that their pay must be commensurate to the effort exerted in the
performance of their job. In other words, pay equity is achieved when the pay given to them by their
employers is equal to the value of the job performed; thus, this motivates them to perform well and
to do their jobs to the best of their abilities.

Expectancy Theory – another theory of motivation which predicts that employees are motivated to
work well because of the attractiveness of the rewards or benefits that they may receive from a job
assignment. The employee’s perception of the compensation or pay attached to a job position is an
important factor in ascertaining the motivational value of compensation.

Bases for Compensation

Employees may be compensated based on the following:

Piecework basis – when pay is computed according to the number of units produced

Hourly basis – when pay is computed according to the number of work hours rendered Daily basis –
when pay is computed according to the number of workdays rendered

Weekly basis – when pay is computed according to the number of workweeks rendered

Monthly basis – when pay is computed according to the number of work months rendered

Compensation rates are influenced by internal and external factors. Among the internal factors are
the organization’s compensation policies, the importance of the job, the employees’ qualifications in
meeting the job requirements, and the employer’s financial stability. External factors, on the other
hand, include local and global market conditions, labor supply, area/regional wage rates, cost of
living, collective bargaining agreements, and national and international laws, among others.

Purposes of Performance Evaluation: Administrative and Developmental

Improving individual job performance through performance evaluation is just one of the reasons
why employees are subjected to assessments on a continuous basis. There are other purposes
behind employee assessment that are beneficial to the company and employee.

Administrative Purposes – These are fulfilled through appraisal/ evaluation programs that provide
information that may be used as a basis for compensation decisions, promotions, transfers, and
terminations. Human resource planning may also make use of it for the recruitment and selection of
potential employees.

Developmental Purposes – These are fulfilled through appraisal/ evaluation programs that provide
information about employee’s performance and their strengths and weaknesses that may be used as
a basis for identifying their training and developmental needs. Through this approach, the workers
become more receptive to explanations given by the organization’s management regarding the
importance of having evaluations at regular intervals – that these are conducted to improve their
competencies to prepare them for future job assignments.

Different performance appraisal methods are used depending on the information an evaluator aim
to find out.

Performance Appraisal Methods

Methods of evaluating workers have undergone development to adapt to new legal employment
requirements and technical changes. Some appraisal methods used today are the following:

1. Trait Methods – performance evaluation method designed to find out if the employee possesses
important work characteristics such as consciousness, creativity, emotional stability, and others

2. Graphic rating scales – performance appraisal method where each characteristic to be evaluated
is represented by a scale on which the evaluator or rater indicates the degree to which an employee
possesses that characteristic

3. Forced-choice method – performance evaluation that requires the rater to choose from two
statements purposely designed to distinguish between positive or negative performance; for
example: works seriously – works fast; shows leadership – has initiative

4. Behaviorally anchored rating scale (BARS) – a behavioral approach to performance appraisal that
includes five to ten vertical scales, one for each important strategy for doing the job and numbered
according to its importance

5. Behavior observation scale (BOS) – a behavioral approach to performance appraisal that measures
the frequency of observed behavior

Advantages of Performance Appraisal

It is said that performance appraisal is an investment for the company which can be justified by the
following advantages: (Enriquez, 2016)

➢ Promotion: Performance Appraisal helps the supervisors to chalk out the promotion programs for
efficient employees. In this regard, inefficient workers can be dismissed or demoted in case.

➢ Compensation: Performance Appraisal helps in chalking out compensation packages for

employees. Merit rating is possible through performance appraisal. Performance appraisal tries to
give worth to performance. Compensation packages which include bonuses, high salary rates, extra
benefits, allowances, and prerequisites are dependent on performance appraisal. The criteria should
be merit rather than seniority.

➢ Employees Development: The systematic procedure of performance appraisal helps the

supervisors to frame training policies and programs. It contributes to analyzing the strengths and
weaknesses of employees so that new jobs can be designed for efficient employees. It also helps in
framing future development programs.

➢ Selection Validation: Performance Appraisal helps the supervisors to understand the validity and
importance of the selection procedure. The supervisors come to know the validity and thereby the
strengths and weaknesses of the selection procedure. Future changes in selection methods can be
made in this regard.
➢ Motivation: Performance Appraisal serves as a motivation tool. Through evaluating the
performance of employees, a person’s efficiency can be determined if the targets are achieved. This
very well motivates a person for a better job and helps him to improve his performance in the
future.

Why Some Evaluation Programs Fail

Performance appraisals (such as manager/supervisor appraisal, self-appraisal, subordinate appraisal,

customer appraisal, peer appraisal, team appraisal, or 360-degree appraisal) may sometimes fail due
to various reasons including the following:

• the inadequate orientation of the evaluatees regarding the objectives of the program;
• incomplete information of the evaluatees (e.g. proper answering of the evaluation questionnaire);
• bias exhibited by evaluators;
• inadequate time for answering the evaluation forms;
• ambiguous terms used in the evaluation questionnaire;
• employee’s job description is not properly evaluated by the evaluation questionnaire used; nflated
ratings resulting from the evaluator’s avoidance of giving low scores;
• evaluator’s appraisal is focused on the personality of the evaluatee and not his or her
performance;
• the unhealthy personality of the evaluator; and
• the evaluator may be influenced by organizational politics.
REWARD SYSTEM
Organizations offer competitive rewards systems to attract knowledgeable and skilled people and to
keep them motivated and satisfied once they are employed in their firm. Further, rewards promote
personal growth and development and present fast employee turnover.
Management offers different types of rewards:
Monetary rewards – rewards that pertain to money, finance, or currency.
a. Pay/Salary – financial remuneration given in exchange for work performance that will help
the organization attain its goals; examples: weekly, monthly, or hourly pay, piecework
compensation, etc.
b. Benefits – indirect forms of compensation given to employees/ workers to improve the
quality of their work and personal lives; health care benefits, retirement benefits, educational
benefits, and others are examples of these
c. Incentives – rewards that are based upon pay-for-performance philosophy; it establishes a
baseline performance level that employees or groups of employees must reach to be given such
reward or payment; examples; bonuses, merit pay, sales incentives, etc.
d. Executive Pay – a compensation package for executives of organizations which consists of
five components: basic salary, bonuses, stock plans, benefits, and perquisites
e. Stock Options – are plans that grant employees the right to buy a specific number of
shares of the organization’s stocks at a guaranteed price during a selected period
Nonmonetary Rewards – rewards that do not pertain to money, finance, or currency; refer to
intrinsic rewards that are self-granted and which have a positive psychological effect on the
employee who receives them.
a. Award – a nonmonetary reward that may be given to individual employees or
groups/teams for meritorious service or outstanding performance; trophies, medals, or certificates
of recognition may be given instead of cash or extrinsic rewards
b. Praise – a form of nonmonetary, intrinsic reward given by superiors to their subordinates
when they express oral or verbal appreciation for excellent job performance.