Chapter 4: PERFORMANCE APPRAISAL

Concept of Performance Appraisal

Performance appraisal is a method of evaluating the output of employees at the workplace

normally including both the qualitative and quantitative aspects of t performance. It is a
systematic and objective way of evaluating work related and behaviour aspects of employees.
It is a process of establishing standards regarding employee performance at every level and
matching individual performance to those Standards.

Performance appraisal is the periodic and systematic assessment of the employees in terms of
the performance, aptitude, capabilities and other qualities which are necessary for
successfully carrying out their jobs. It is a systematic effort on the part of management and
has a direct linkage with induction, selection, training etc. of the employees. It identifies area
where the employees need training and provides data to determine promotions, transfers etc.

Definitions of Performance Appraisal

According to Scott, Clothier and Spreigel: "A performance appraisal is the process of
evaluation of an employee's performance of a job in terms of its requirements”.

According to Alford and Beatty: "A performance appraisal is the evaluation or appraisal of
the relative worth to the company of a man's service on his job”.

According to Edwin B Flippo: "Performance appraisal is a systematic, periodic and so far as

humanly possible, an impartial rating of an employee's excellence in motten pertaining to his
present job and to his potentials for a better job”.

According to Cummings: The overall objective of performance appraisal ist improve the
efficiency of an enterprise by attempting to mobilise the best possible efforts from individuals
employed in it. Such appraisals achieve four objectives viz.:

● Salary reviews

● Training and development of individuals

● Planning job rotation

● Assistance in promotions

Wayne Cascio: "Performance appraisal is the systematic description of an employee's job

relevant strengths and weaknesses”.
Michael Crino: "Performance appraisal is the process of assessing quantitative and
qualitative aspects of an employee's job performance”.

Sexton Adams: "Performance appraisal is a method for management to make ja and

impartial analysis of the value of employees to the organisation”.

Prof. Dale Yoder: "Performance appraisal includes all formal procedures used to evaluate
personalities and contributions and potentials of group members in a working organisation. It
is a continuous process to secure information necessary for making correct and objective
decisions on employees”.

Prof. Mirza. S. Saiyadain: According to Prof. Mirza S. Saiyadain, "Performance appraisal

could be seen as an objective method of judging the relative worth or ability of an individual
employee in performing his tasks. If objectively done, the appraisal can help to identify a
better worker from poor one"

In this view of Prof. M. S. Saiyadain, the following are the two important aspects relating to
performance appraisal.

(a) It is an objective method of judging the relative worth or ability of an employee in

performing his tasks.

(b) A performance appraisal, as can make clear the relative strengths and weaknesses of an
employee, if done objectively, helps to identify a better worker from poor one. This is
important from the viewpoint of management to identify better workers/ employees for
placing more responsibilities on the trusted workers/employees.

Prof. Arun Monappa and Prof. Mirza Saiyadain: Prof. Arun Monappa and Prof. Saiyadain
have expressed their views on a performance appraisal more comprehensively by giving
suitable examples. Accordingly, appraisals and judgements regarding the characteristics,
traits and performance of others are done. On the basis of these judgements, value of others
can be assessed and what is good and what is bad also can be identified. In day-to-day life, a
tailor, a doctor, an architect, a hair dresser, etc. is selected through the evaluation of his worth
based on personal judgement. Do we not do this?

In the industrial field, according to them, performance appraisal is a systematic evaluation of

employees/personnel by their superiors or supervisors of their performance. Such appraisals
can be used for making various administrative decisions relating to selection, training,
promotion, transfer, wage and salary administration, etc.

Objectives of Performance Appraisal

1.Maintaining an Inventory: To enable an organisation to maintain inventory of the number

and quality of all managers and to identify and meet their training needs and aspirations.
2. Initiating Personnel Development: To initiate personnel development by having
discussions with individual employees and line managers and identifying the reasons for
faulty performance.

3. Improving the Employee Performance: To suggest ways of improving the employee's

performance when he is not found to be up to the mark.

4. Determine Rewards: To determine increment rewards and provide a reliable index for
promotions and transfers to positions of greater responsibility.

5. Suitable Training and Development: To serve as a guide for formulating a suitable

training and development programme. Performance appraisal can inform employees about
their progress and tell them what skills they need to develop, to become eligible for pay raises
or promotions or both.

6. Decision Making: To help in taking decisions in respect of premature retirements or of

giving extension in service to the employees.

Features of Performance Appraisal

The important features of performance appraisal are as follows:

1. Performance appraisal is not only a technique or method but also is a systematic and
continuous process.
2. In performance appraisal, periodic and systematic assessment of employees'
performance is done. Appraisals are arranged periodically according to some definite
plan.
3. This technique is used by the management to make fair and impartial analysis of the
value of employees.
4. It is a systematic objective description of the employees' job relevant strengths and
weaknesses.
5. In the process of performance appraisal, efforts are made to bring an uniformity while
appraising the job performance of the employees working in an organisation.
6. Performance appraisal can be formal or informal. Informal performance appraisals are
unplanned and are often just statements made in passing about an employee's
performances. Most organisations use a formal appraisal system following certain
procedure to appraise the performances of their employees.
7. There are various objectives or purposes of doing appraisals of employees, but the
important one is to find out how well the employees are performing their jobs and on
that basis, to establish a plan of improvement.
8. Performance appraisal is different from job evaluation as well as merit rating.
9. There are different methods of appraising the performance of the employees.
According to the objectives, suitable methods can be adopted.
Process of Performance Appraisal

Performance appraisal is planned, developed and implemented through a series of steps:

1. Establish Performance Standards: Appraisal systems require performance standards,

which serve as benchmarks against which performance is to be measured. To be useful,
standards should relate to the desired results of each job.

2. Communicate the Standards: Performance appraisal involves at least two parties, the
appraiser who does the appraisal and the appraisee whose performance is to be evaluated, in
order to make the appraisal process a success. The appraiser should prepare the job
description clearly, help the appraise set his goals and targets, analyse the results objectively,
offer coaching and guidance to the appraisee whenever required and reward good results. The
appraisee should be very clear about what he is doing and why he is doing it. Hence the
performance standards must be communicated to the appraisees and their reactions should be
noted down and if necessary the standards must be revised or modified.

3. Measure Actual Performance: After the performance standards are set and accepted, the
next step is to measure the actual performance. This requires the use of dependable
performance measures. Four measures commonly used by managers to measure actual
performance are:

● Personal observation

● Statistical reports

● Oral reports

● Written reports

In order to be useful, the performance measures must be easy to use, reliable and able to
report on critical behaviours that determine performance.

4. Compare Actual Performance with the Standards: Actual performance may be better
than expected and sometimes it may go off the track. Whatever be the consequences, there
should be a way to discuss and communicate the final outcome

5. Taking Corrective Action if Necessary: Corrective action is of two types

● Immediate
● Permanent

A combination of both the types of corrective actions may be initiated as the situation
demands, to bring the individual's or group's or team's performance back on track. Corrective
action may involve remedial training, counselling, mentoring, explanation of team goals,
dispute and conflict resolution etc.

Performance Appraisal Methods

Performance appraisal methods can be divided into two categories:

● I. Past-oriented methods

● II. Future-oriented methods

I. Past-oriented Methods

1. Rating Scales: The rating scale method is relatively easy to use, adjustable and cost
effective. Employees' performance is rated on a rating scale based on performance criteria
and almost all types of jobs can be evaluated with the rating scale. The appraiser doesn't need
any training to use the scale. Thus it helps to evaluate large. number of employees within a
short period of time. However appraisal may get affected adversely due to appraiser's biases
which are particularly pronounced on subjective criteria such as cooperation, attitude and
initiative. Also numerical scoring gives an illusion of precision which can't be proved in
reality.

2. Checklist: Under this method a checklist of behavioural descriptions is prepared and each
employee is evaluated against such list. The appraiser just fills the checklist and different
staff member allocates weightages for each list and finally arrive at total points or marks
obtained.

Advantages:

● The chances of bias are less as evaluation and recording is done by different persons.
It makes comparison of two employees possible.

Limitations:

● This method is usually restricted only to staff of personnel department.

● It is difficult to apply for all types of jobs.

3. Forced Choice Method: This also involves filling a checklist however options are given to
choose between two or more statements, all of which may be favourable or unfavourable. The
appraiser is required to select the most appropriate statement that suits a particular employee.
Here the appraiser does not know the desirable answer for a particular job. It is kept
confidential in the 'key', stored in computer. The answers of rating are fed into the computer
and marks are obtained with the help of keys.
This method reduces subjectivity and establishes objective criteria of comparison between
employees, but it does not involve the intervention of a third party. However it may lead to
leniency ie, clustering a large number of employees around a high point on a rating scale.
This problem can be solved by compelling the appraiser to distribute the rates on all points on
the rating scale.

4. Critical Incidents Method: This method is becoming very popular recently It considers
certain critical behaviours of an employee as evaluation criteria that make all the difference
between effective and non-effective performance. The appraiser observes the employee's
behaviour and records such critical incidents for evaluation in future.

5. Behaviourally Anchored Rating Scales (BARS): This method involves use of a rating scale
whose scale points are determined by statements of effective and ineffective behaviours. It is
also called as behavioural expectation scale. The scales provide a series of descriptive
statements of behaviour, ranging between the least to the most effective. The distinguishing
features of BARS are listed below:

● Performance criteria are identified and defined by the people who are actually going
to use the scales.
● The scales are based on actual and observable job behaviour that, represent specific
levels of performance.
● BARS are specifically prepared for each job and are relevant to the job being
evaluated.
● As the appraisers are actively involved in the research and development process, they
are more likely to be committed to the final outcome.

6. Field Review Method: Under this method an appraisal is conducted by someone from other
than the appraiser's department, typically by a person from the corporate office or the HR
Department. The appraiser evaluates employee records and conducts appraisal discussion
with his or her supervisor. The method is primarily used to decide whether to promote an
employee at the managerial level. Field reviews are also useful when comparable information
is needed from employees in different units or locations. A member of the HR Department or
central administrative staff meets with small group of appraisers from each supervisory unit
and goes over each employee's rating with them to:
● Identify areas of inter-appraiser disagreement.
● Help the group arrive at a consensus and
● Determine that each appraiser interprets the standards similarly.

7. Performance Tests and Observations: This method can be followed where there are a
limited number of jobs. Appraisal is done by conducting a test of employee's knowledge or
skills. The test may be in the form of a written or an actual demonstration of skills. However
due to the nature of this method, it measures employee's potential performance rather than the
actual performance. The test needs to be reliable and validated to be useful. Also to make it
job related, observations should be made under circumstances likely to be encountered.
Another limitation of this method is that the cost of development and administration of tests
are high.

8. Ranking Methods: A ranking method involving collective judgement is particularly useful

for comparison purposes. Especially when employees reporting to different supervisors need
to be compared, individual statements, ratings or appraisal forms are not helpful. The method
needs to involve an overall subjective judgement to which a multitude of additional facts and
impressions can somehow be added. The two most effective methods in this respect are
discussed below. When these two techniques are combined with multiple rankings, they are
among the best available for generating valid order-of-merit rankings for salary
administration purposes (ie. when same employees are appraised independently by two or
more appraisers and their rankings are averaged using either of this methods.

● Alternation Ranking: This method involves ranking of employees from best to worst
on the basis of a particular quality or qualities. A list of all the employees to be
appraised is prepared and the names of under-performing employees are crossed on
that list. Then the employee who is highest and lowest on the quality being measured
are indicated on a form. This step goes on alternating between highest and lowest,
until all the employees to be appraised have been ranked. This method is most popular
as it's relatively easy to differentiate between the worst and the best employees as
compared to ranking them
● Paired-comparison Ranking: This method is similar to alternation ranking but
considered as more precise. However it is extremely time consuming and
unmanageable if there are large number of employees.

9. Essay Method: Under this method, the appraiser is required to write a short essay on
employee's strengths, weaknesses, potential and so on. The appraiser describes the employee
based on a number of broad categories, for example: (1) employee's strengths and
weaknesses, (ii) his effectiveness, (iii) the jobs ably performed by him, (iv) his training and
development needs and (v) overall impression about the employee. This method is most
commonly used in combination with others to fill the information gaps about the employees
that often occur in the checklist method. It can particularly be helpful for selection purpose to
take essay appraisals from former employers, teachers or colleagues.

10. Cost Accounting Method/Human Asset Accounting Method: This method evaluates an
employee based on the costs incurred on him and the monetary returns he derives to the
organisation. Thus employees' performance is appraised on the basis of the cost and benefit
relationship.

II. Future Oriented Appraisal

1.Management by Objective (MBO): This is a management system and philosophy where

the supervisor and subordinate mutually identify their common performance objectives and
define each employee's responsibilities. This agreement is used as a guideline for operating
the team and appraising the contribution of each of its members. This method encourages
employees' participation and helps is avoiding the feeling that they are being judged by
unfairly high standards.

Objectives:

● To emphasise on goals rather than method.

● To offer responsibility and accountability.
● To change behaviour and attitude towards getting the job done.
● To provide opportunities for participation in the goal-setting process.

Advantages:

● Concentrates on Actual Outcomes: Employees are judged on real outcomes and not
on their potential for success or on someone's subjective opinion of their abilities.

● Direct Results can be Observed Easily: This technique recognises the fact that it is
difficult to divide and analyse all the complex and varied elements that go to make up
employee performance efficiently. If all the elements are put together, the
performance can be directly observed and measured.

Limitations:

● (i) Idealistic Expectations: This technique may result in impractical expectations

about goals. Supervisors and subordinates need to do self-auditing and self-
monitoring.

● (ii) Assessment Centre Method: This technique was first adopted by the German
Army to evaluate the soldiers' performance. It appraises employees in job-related
stimulations using a number of assessors and a variety of procedures. This stimulation
includes the qualities that managers feel are important for the job.

2. Psychological Appraisals: Here appraisals are conducted by psychologists. This method is

typically used by large companies who can employ full-time industrial psychologists. They
measure employee's future potential and not past performance based on his intellectual,
emotional, motivational and other related characteristics. The process normally consists of in-
depth interviews, psychological tests, discussions with supervisors and a review of other
evaluations. This method is slow and costly and as the quality of the appraisal depends
largely on the skills of the psychologists. some employees may object to this type of
evaluation. However it is typically used to take placement and development decisions, to
shape the career of bright and young employees, having considerable potential.
360 Degree Feedback System

This technique not just considers ratings given by the supervisor up in the organisational
hierarchy, but also by peers and subordinates along with the element of self appraisal. This is
called 360-degree feedback as feedback comes from all the directions. The feedback is
generally used for training and development, rather than for pay increases. At times. feedback
from external sources such as customers and suppliers or other interested stakeholders may
also be taken.
Feedback thus gathered is clearly communicated to the employee to encourage
understanding, acceptance and ultimately change is behaviour.

Let us now consider the persons who are entrusted the task of performance appraisal.

(a) Immediate Superiors: Employees are generally evaluated by their immediate superior as
the superior has the most accurate and direct information on the work performance of his
subordinates.

(b) Supervisors: Supervisors include immediate superior, other superiors having knowledge
about the job/work of the employee, departmental head or manager. The general practice is
that the immediate superior makes the appraisal of his subordinate's performance which is
then reviewed by the departmental head or manager, as the case may be.

(c) Peers or Colleagues: Dictionary meaning of the word 'Peer' is "Equal - a person of equal
rank, quality". Peers or colleagues can rate each other's performance. This is useful especially
in work situations where team work matters most. Of course, for this purpose, the work group
should be stable over a reasonably long period of time and performs the tasks that require
interaction.

(d) Subordinates: Subordinates also can be asked to rate the performance of their superiors.
Such appraisals are useful in finding out the competent and efficient superiors.

(e) Self-Appraisals: There can be self-assessment. The employees may be asked to appraise
their own performances and for that purpose, neatly drafted forms can be made available to
them. This helps them to review and control their own performance and initiate efforts for
self-development.

(f) Panel of Appraisers: It is found that a member of the personnel department also conducts
the performance appraisal. Along with him, other members can be included in the panel of
appraisal. Such appraisal can best serve the needs of the appraisee and the organisation.

(g) Clients or Users of Services or Customers: Clients, users of services or customers

served by the appraisee or evaluatee are always in a better position to give valuable
information in respect of work performance of the appraisee or evaluatee. Banks, Insurance
Companies and other such organisations generally take the help of their clients in appraising
the performance of their employees. Especially behaviour, promptness, speed of doing the
job/work accuracy, politeness and such other things can better be judged by the clients,
customers or users of services.

(h) Consultants: Consultants are professionals and trained persons. The consultants are
engaged for appraising the performance of senior officers of an organisation. When
employees or employers do not trust the supervisor appraisals and the management does not
trust the self-appraisals or appraisals by peers, subordinates, etc.. consultants in the field are
engaged to do performance appraisals.

(i) Top Management: The top management, normally appraise the performance of the senior
or middle level executives who directly work with the top management and report to them.

Sometimes, the performance appraisal is done by one or more individuals involving a

combination of the immediate supervisor ar some other supervisors or managers acquainted
with the concerned employee's work/job. It is also found that in some organisations,
subordinates and their superiors jointly fix certain goals and with respect to those goals,
performance appraisal is done.

Factors Necessary for a Sound Performance Appraisal Policy

A number of crucial decisions about employees are made on the basis of performance
appraisal and hence it must be sound and effective. Given below are the essential
characteristics of a sound performance appraisal policy:

1. Reliability and Validity: Appraisal system should provide consistent, reliable and valid
outcomes which can protect the organisation even in legal matters. Consistency refers to
agreement in ratings given by two equally qualified appraisers using the same appraisal
technique. Validity refers to measuring what is supposed to be measured.

2. Job Relative: The appraisal technique should measure the performance and provide
information on job related activities and areas.

3. Standardised: All the elements of the appraisal procedure should be uniform across the
organisation, eg. appraisal forms, procedures, administration techniques, ratings etc.

4. Feasibility: The techniques should be practically viable to implement and administer and
constantly economical.

5. According to Laws: The appraisal procedure must be in accordance with the labour laws
framed by the constitution.

6. Trained Appraisers: Appraisers should be trained to conduct appraisals efficiently.

Problems with Performance Appraisal

Any errors in the appraisal process can severely impact evaluation results. Performance
appraisals suffer from a wide variety of biases and defects known as 'rating errors'. Some of
the most common rating errors are listed below:

1. Leniency or Severity:

If the appraiser is kind or harsh towards employee, it makes the assessment subjective and
defeats the purpose of performance appraisal. Ratings can be lenient for the following
reasons:

(a) The appraiser / supervisor may rate employees under his or her control favourably. as
adverse rating can reflect poorly on his or her own capabilities.
(b) If poor rating is revealed to the employee, it can spoil the relationship between the
appraiser and the employee.
(c) Favourable ratings can lead to promotions for the subordinates and indirectly increase
appraiser's hold over him.

2. Central Tendency:

This refers to the tendency of improper rating of employees, near the average or middle of the
scale. This happens when the appraiser has certain doubts and anxieties and wants to play
safe.

3. Halo Effect:

This error occurs when one aspect of an employee's performance overpowers the entire
performance evaluation. For example, rating the late-sitting employee high on productivity
and quality of output regardless of the fact. This can be avoided by rating employees
separately on each of the performance criteria and making appraisers aware of the halo effect.

4. Appraiser Effect:

This refers to the appraiser's attitude such as favouritism, stereotyping, aggression and
gender, age, race and friendship biases.

5. Primacy and Regency Effects:

This type of error occurs when employee's behaviour at the beginning of the review period or
at the end of the review period greatly influence the rating. For example, a salesman
achieving his monthly target just in the month preceding the appraisal, may get high rating
due to that, even though his performance throughout the year may not be up to the mark.
Hence the appraiser should consider performance throughout the review period and not just
one incident.

6. Performance Dimension Order:

This happens when one dimension of a performance is inaccurately rated high, if it is

followed by a similar dimension which is also rated high. This error can be avoided by
arranging the dimensions in a significantly different order.

7. Spill-over Effect:

This refers to influence of previous performance appraisal on the current ratings which
doesn't relate to current performance and could be unjustified.

Performance Management

Introduction
Performance Management is a system and process that link the organization's goals and
strategies to individual and team performance, to increase organizational effectiveness (and,
thus, profitability).

It is a joint process that involves both line managers and their direct reports ('subordinates")
who jointly identify common goals/objectives which correlate to the higher goals of the
organization. This process results in the establishment of written performance expectations (a
Performance Agreement) later used as measures for feedback and performance
appraisals/reviews.

Performance Management is the best route to learn what should be happening at all levels in
an organization, and then measuring whether it is happening as intended. Where there is a
gap between these two, a performance management system will help identify the causes and
help implement corrective actions.

Performance Management is a much wider concept than Performance Appraisals/ Reviews.

The latter is only one part of Performance Management.

Process of Performance Management

Performance Management consists of four stages:

1. Planning Performance: Performance Measures (Goals, Objectives, Targets, KPI's,
Competencies, etc.) for individual employees (at all levels) are jointly discussed and agreed
during one-on-one, face-to-face meetings with their direct line managers. These are put into a
formal, written Performance Agreement for each staff member. (Performance Agreements
can also be drawn up for entire work teams in organizations where teamwork is paramount.
2. Managing Performance: During this stage, employees implement/execute their agreed
Objectives/KPI's. They manage their own performance, assisted by line managers who should
aim at removing performance obstacles in the work environment and providing necessary
resources, training and coaching. Line managers are also responsible for integrating and
coordinating (horizontally and vertically) the Objectives/KPI's of all their
employees/units/teams, monitoring their performance, taking corrective action, and
participating joint problem solving, when necessary. The leadership, motivation, feedback,
reinforcement and support they provide throughout the process are of utmost importance.
Managing Performance is an ongoing activity that actually runs through all phases of the
Performance Management Cycle. It is the "Golden Thread" of Performance Management.

3. Reviewing Performance: During formal Performance Appraisal/Review Interviews,

employees and their line managers discuss (and assess) how well the agreed Objectives/
KPI's have been achieved, and whether the specified competencies are being demonstrated.
Problem areas are identified and corrective measures put in place, including possible
coaching and training that the jobholder needs. Depending on the type of organization and its
management philosophy, the frequency of Performance Appraisals may be any of 1, 2, 3, 4,
6, or 12-monthly (Appraisal Smart allows for all these options).

4. Rewarding Performance: The actual RATING of performance (how well each

Objective/KPI had been achieved and Competencies demonstrated) forms part of the
Performance Appraisal/Review Interview. Rewarding people for good performance takes the
form of monetary incentives or rewards (performance-based pay such as bonuses and/or
salary adjustments). However, the power of non-monetary rewards, such as praise and
recognition, should not be ignored and should be used to maximize returns.

Importance of Performance Management

The key benefits of a good performance management system are:

1. Working towards Common Goals: We often get so caught up in our daily work routine that
we forget about our purpose in an organization. Individual performance drives organizational
performance. It is important to ensure everyone understands this agency's vision and goals,
how their work fits in to the organization, and how they contribute to our mission
accomplishment. Doing this increases engagement and improves our program delivery.

2. A Clear Understanding of Job Expectations: When employees and supervisors have a

clear understanding of their specific job duties, any ambiguities in the workplace are
eliminated. Each individual is held accountable for their own duties and responsibilities.
Performance Management empowers you to think about and clarify your role in the
organization. Setting clear goals and expectations help with this. Employee performance
plans must provide for balanced, credible measures. Balance, so that in addition to
measuring expected results, the performance plans include appropriate measures, such as
quality, quantity, timeliness, and/or cost effectiveness. To be credible, performance
expectations must be: based on job analysis; clear, specific, and understandable;
reasonable and attainable; measurable, observable or verifiable, and results oriented;
communicated in a timely fashion; and foster continual improvement in productivity.

3. Regular Feedback about Performance: Regular feedback facilitates better communication

in the workplace. Performance Management helps you to identify your strengths and
weaknesses. It also allows for opportunities to hear and exchange views and opinions away
from the normal pressures of work. Most importantly it gives you a better understanding of
how your performance is being assessed and monitored. This builds employee confidence
and adds to your contribution in the workplace. Performance management can be a
motivational tool, fostering you to not only feel more satisfied, but to go beyond the
expected. If supervisors and employees aren't talking throughout the year, the system won't
work, so we must ensure we have a performance feedback process that facilitates a
dialogue between supervisors, managers, and employees throughout the year. Performance
management is not something that's looked at only at the beginning and end of the rating
cycle, with just one mid-cycle review it's a continuous, ever changing process, reflecting and
measuring the work employees are performing for the agency.

4. Advice and Steps for Improving Performance: Performance Management can help you to
identify ways in which to improve your performance and provides the opportunity to discuss
career direction and prospects. It presents the opportunity to plan for and set objectives to
further develop your career. Performance Management will help you to gain any additional
training or mentoring which can act as a basis for developing future succession plans.

5. Rewards for Good Performance: Outstanding efforts do not go unnoticed. Performance

Management offers a variety of awards that show gratitude for a job well done, such as time
off and bonuses. The prospect of a better than Fully Successful Performance Appraisal
gives you the incentive to perform well and may open the door to career advancements in
the future. Performance management is about increasing performance. As you know, we have
been steadily improving our performance management system for several years now,
but there is more to be done. Successful use of our performance management system will
enable us to improve our program delivery, increase our employee engagement and
productivity, and make us better stewards of the taxpayer's dollars - things that should be
important to all of us.

Challenges in Performance Management

The performance management challenge in organisations has many dimensions in today's

business environment and creating focused initiatives to overcome these challenges
is not a silver bullet approach. In many cases remuneration schemes are driving the
performance system, which creates a number on long term consequences in organisational
behaviour and culture. In other cases senior management are so focused on scorecard
management to hold people accountable that the creation of the scorecard is not aligned
with business focus areas, but rather a number of deliverable projects and tasks.
1. Lack of Alignment: The first challenge is the lack of alignment due to various
organisational processes being created in isolation. The link between Strategy development,
budgeting and operational planning is developed by different groups of people with different
frameworks being used. The performance management system lacks alignment between
individual performance, departmental performance and organisational delivery and so all
systems default back to financial measurements.

2. Lack of Measurements: The second challenge happens at various levels of the

organisation in that poor measures are developed, in many cases targets are set but no
relevant measure is put in place. In other cases no data can be collected or is kept as
evidence to track performance.

3. Leadership and Management Commitment: The Leadership and Management challenge

has a huge impact on integrating and aligning a management system to deliver a
comprehensive performance management system. The commitment and understanding of
leadership and management of the requirements for achieving a workable performance
system is critical to performance success.

4. Managing of the Performance System: Managing a performance system in an

organisation requires a disciplined framework; it requires the organisation to work off one
master plan broken down into relevant parts and areas of responsibility. The management
responsibility at various levels needs to understand the contracting, measurement
development and appraisal process very well and apply it consistently. Secondly
management needs to appreciate that performance management is not an event but
something that is managed daily but recorded and reported at certain times through reviews
and appraisals.

5. Managing Poor Performances: The management of poor performance is normally a

reactive action, but in many cases it is delayed and therefore turns into a discussion that is
difficult to make relevant. Another reason poor performance is not managed on time is the
lack of valid measurements and the collection of required evidence and measurement data.

PART B: WAGE AND SALARY ADMINISTRATION

Employee morale highly depends on proper salary and wage administration and hence it is
considered as a vital element of any organisation's working. Also it is critical for
organisations because employees represent a substantial investment and labour costs have a
significant impact on its annual budget and profitability. This process is often an integral
function of the organisation's human resources department, but the larger organisations often
have a separate department to handle it.

Salary and wage administration is the process of compensating an organisation's employees,

in accordance with accepted policy and procedures. Its success depends on monitoring and
evaluating all employees' compensation to ensure that they are being paid appropriately, both
with respect to others in the same organisation and to the marketplace as a whole. The overall
goal of a wage and salary administration programme is, to attract, retain and motivate
employees to achieve organisation's objectives.

Elements of Salary and Wage Administration

1. Periodic Payroll: The first and foremost element of salary and wage administration, the
periodic payroll, is a critical component of any organisation's functioning. If salary
processing is inaccurate, late, or missing even a single time, it severely affects employee's
morale and his confidence in the employer's stability. Irrespective of whether an organisation
handles all payroll functions internally or outsources it, it will usually devote significant
resources to make sure that employees are paid the right amount on time.

2. Monitoring and Evaluating Employees' Compensation: This is an ongoing function and

involves evaluating the elements of each job in the organisation and classifying them
according to a number of different criteria such as the nature of the work, the level of
supervision required, the degree of physical exertion and the amount of training necessary to
do the job competently.

The purpose of this exercise is to determine the approximate value of each job and
compensating employees accordingly. Adjustments can be made to wages and salaries from
time to time if required. In a collective bargaining environment, these evaluations will be
important in determining any such adjustments.

Methods of Wage Payments

Methods of wage payment can be classified into direct compensation, indirect compensation
and incentive plans.

Direct Compensation

Direct compensation refers to monetary benefits offered and provided to employees is return
of the services they provide to the organisation. Its components are listed below:

(a) Basic Salary: Salary is the amount received by the employee for the work done or services
rendered by him/her for a certain period, e.g. a day, a week, a month.

(b) House Rent Allowance: Employees who are from a different city or state or country are
either provided with accommodation or house rent allowances by the employers This is done
to provide them with social security and motivation.

(c) Conveyance: Organisations provide pick and drop facilities to their employees. Some also
provide conveyance or vehicle and petrol allowances to their employees to motivate them.
(d) Leave Travel Allowance: These are allowances given to employees to visit any place of
their preference with their families and are scaled as per the position of employes in the
organisation. These are normally provided to retain the best talent in the organisation.

(e) Medical Reimbursement: The employees are provided with medi-claims for themselves
and their family members which include health-insurances and reimbursement of medicines
and medical treatment bills.

(f) Bonus: The bonus amount is usually one month's salary of the employee. It is paid during
festive seasons to motivate them and provide them the social security.

(g) Special Allowance: These include overtime, mobile allowances, meal vouchers,
commissions, travel expenses, reduced interest loans and insurance.

Indirect Compensation

Indirect compensation refers to, non-monetary benefits offered and provided to employees for
the work done or the services provided by them to the organisation.

(a) Overtime Policy: Employees are provided with adequate allowances and facilities during
their overtime, e.g. transport facilities, snacks/meals, overtime pay etc.

(b) Hospitalisation: Employees are given allowances for their regular check-ups often at an
interval of one year.

(c) Insurance: Organisations also provide for accidental insurance and life insurance for
employees.

(d) Leave Travel: Employees are provided with leave and travel allowances to go on a
holiday with their families. Some organisations even arrange tours for the employees. This is
usually done to relieve them from daily routine and stress.

(e) Retirement Benefits: These include pension plans and other benefits to make employees
secure after their retirement from the organisation

(f) Holiday Homes: Organisations arrange for holiday homes and guest houses for their
employees at different locations such as hill stations and beaches. The organisations look
after employees' stay without any kind of difficulties.

Incentive Plans

Organisations usually opt for that incentive plans which best suits its requirement and aligns
with its goals and objectives Various forms of incentive plans are listed below:
1. Bonuses: Bonuses are given to employees on achieving a pre established target or criteria
and are administered by set policies regarding the bonuses. Usually bonuses are provided
during the festive season.

2. Merit Raises: Merit raises are given to employees on meeting a pre-set performance
standard and are administered by predetermined policies.

3. Standard Hour Pay: Standard hour plan provides incentives to employees based on the time
saved by them during the course of work. Employees' productivity and quality is evaluated as
against the set standards.

4. Maturity Curves: Maturity curve incentives are provided on achieving a certain level of
experience and performance by an employee. Experience is always given a weightage as
experienced people can produce better quality results.

5. Gain Sharing: Gain sharing incentive plans involve sharing of profits with employees who
give outstanding performances and provide cost saving measures.

6. Loyalty Pay: Under this plan, incentive (usually one month's additional salary) is provided
to the employees completing certain years in the organisation. This helps to retain loyal
employees of the organisation.

Factors Determining the Level of Remuneration/ Employee Remuneration Factors

The factors to be considered while determining remuneration for employees are discussed
below. An effective compensation plan takes care of legal stipulations, industry practices,
ever rising employee expectations and competitive pressures.

1. Employer Industry / Market Focus: Industries with vigorous, active and profitable markets
end up paying much better than industries with slow, inactive or unprofitable markets.

2. Job Classification / Rating/Pay Grade: This refers to the flexibility shown by organisations
to set salary ranges for the positions they seek to fill.

3. Job Experience: Employees with relevant documented experience, that fits employer's
requirements, get higher pay. Extraordinary experience might lead to extraordinary pay, but it
might also lead to not making an offer because of over qualification.

4. Salary History: Employee's last drawn salary is often considered as the base to make an
offer for new job. It might happen that those seeking a career change may find themselves
"over-compensated" and ineligible for positions they seek because of prior high salaries
earned.
5. Educational Qualifications: Most jobs have basic education requirements. Those who
exceed them can expect to be compensated more than those who don't. The institution from
where a degree is earned also makes a difference.

6. Certifications Held: A certification relevant to the position offered attracts higher pay.
Certifications can help hiring managers differentiate between the good ones and the great
ones among those competing for new positions or promotions.

7. Demonstrable Soft Skills: Employees with a documented track record of good soft skills
such as ability to write and speak well and interpersonal skills get compensated higher.

8. Publications, Honours, Awards: Those who have published in their fields or who have
earned honours or awards from professional societies or associations can help differentiate
between good, great or job promotion candidates. This value is mostly in terms of prestige
and may not make big differences in salary.

Profit-sharing Plans

A profit-sharing plan is designed to share an organisation's profits with its employees as an

incentive for better performance that supplements the other benefits. This brings in a sense of
belongingness and participation in the organisation's success among employees.

The compensation can be in form of stocks, bonds or cash and can be immediate or deferred
until retirement Profit-sharing allows for changing contributions each year. Contributions are
determined by a formula to allocate the overall contribution and distribution of accumulated
funds after the retirement age.

Features of Profit-sharing Plans

All the profit-sharing plans have some common features which are listed below:

● The contribution formula can be flexible.

● The maximum employer contribution up to 25% of the compensation of covered

employees can be deducted.

● It is normally determined annually by the board of directors of the company.

● Investment of contributions can be directed by the trustee or participant.

● Contributions may be based on profits, but profits are not mandatory for contribution.

Types of Profit-sharing Plans

There different types of profit-sharing plans offered by companies are discussed below:

1. Cash Plan: Under this plan, cash, cheques or stocks are given as bonus to employees at the
end of the year. The percentage of profit sharing is usually set when the employee signs a
contract with the company, however it can be changed from year to year depending on
company policy. This form is taxable and hence disadvantageous for employees.

2. Deferred Plan: This plan unlike the cash plan, helps companies and employees to avoid
immediate taxation. The monthly or yearly profit percentage as set from time to time is
placed into individual accounts of employees and can only be withdrawn under certain
specific conditions such as death, disability, retirement and occasionally in the case of
separation from the company. Thus it allows employees to earn tax- deferred interest.

3. Combination Plan: This plan as the name suggests, gives employees a choice between the
cash plan and the deferred plan. Employees can decide the amount of profits to be put into
personal account and rest of the amount that is taken in cash is taxed that year. This may
involve stocks as opposed to simply cash.

4. Sub-divisions: These refer to subdivisions or different methods of calculating profit

sharing that lead to a weighted percentage for certain employees over others. A traditional
profit-sharing plan involves receiving a percentage of profit that proportionate to the total
payroll amount paid to the employee. For example, if a particular employee is paid 5% of the
total payroll amount of the company, he would receive 5% of the total profit-sharing
allocation. Under age weight profit sharing plan, both compensation amount and employee's
age are considered for arriving at the percentage of profit-sharing. Thus older employees,
who are close to retirement, receive the highest benefit from the age-weighted plan. An
integrated plan gives higher paid employees a higher amount of profit sharing thereby
providing them with social security. The cross-tested plan divides employees into different
categories based on job description, title and wage and assigns different contribution rates for
each category.

Advantages of Profit-sharing Plans

● It places a sense of togetherness among employees to work together towards a

common goal of making the organisation successful.

● Employees focus on profitability as they get a direct share in profits

● The costs involved in implementing the plan are linked with the company's revenues.

● Employees are committed to organisational goals more than their personal goals.

Disadvantages of Profit-sharing Plans:

 ● As it is directly linked to organisation's profits, there are no individual differences for
merit or performance and the pay fluctuates for all depending on overall profitability.

● As employees are focussed only on the goal of profitability, quality of work may
suffer

● If there are drastic swings in a company's profits, especially in case of smaller

companies, there will be drastic changes in earnings for employees and they may find
difficult it to manage their personal finances.

Fringe Benefits

A fringe benefit is generally defined as, a benefit apart from salary, wage or other cash
remuneration, derived from employment, for example superannuation, low interest loans,
provision of cars or car allowances, subsidised meals etc. Such benefits are usually provided
to salaried employees not covered directly by awards or certified agreements.

Fringe benefits are exempt from taxation upon meeting certain conditions. The fair market
value of the benefit needs to be included in employee's taxable income for the year, which
will be subject to tax withholdings, and social security benefits payments

Types of Fringe Benefits

1. Employee Security: It is a job security provided to the employee with a view to promoting
security to the employee and his family members. Examples of this benefit include:
confirmation of the employee, a minimum and continuous wage or salary etc.

2. Retrenchment Compensation: It is mandatory to pay compensation, in case of lay- off and

retrenchment, under the Industrial Disputes Act, 1947. The non-seasonal industrial
establishments, employing 50 or more workers, have to give one month's notice or one
month's wages to all the workers who are retrenched after one year's continuous service. The
compensation is paid at the rate of 15 days wage for every completed year of service, with a
maximum of 45 days wage in a year.

3. Lay-off Compensation: Employees are entitled to lay-off compensation at the rate to 50%
of the total of the basic wage and dearness allowance for the period of their lay-off, except for
weekly holidays. Lay-off compensation can normally be paid up to 45 days in a year.

4. Safety and Health: It includes providing physical security to employees to protect them
against accidents, unhealthy working conditions and to protect worker's capacity. The
Factories Act, 1948, stipulates certain requirements regarding working conditions in order to
ensure a safe working environment, including specifications related to: cleanliness, disposal
of waste and effluents, ventilation and temperature. dust and fume, artificial humidification,
over-crowding, lighting, drinking water. latrine urinals and spittoons. Provisions relating to
safety measures include: fencing of machinery, work on or near machinery in motion,
employment of young persons on dangerous machines, striking gear and devices for cutting
off power, self-acting machines, easing of new machinery, probation of employment of
women and children near cotton openers, hoists and lifts, lifting machines, chains ropes and
lifting tackles, revolving machinery, pressure plant, floors, excessive weights, protection of
eyes, precautions against dangerous fumes, explosive or inflammable dust, gas etc.,
precautions in case of fire, power to require specifications of defective parts of test of
stability, safety of buildings and machinery etc.

Objectives of Fringe Benefits

Fringe benefits are an important part of employee incentives and help in retaining them and
keeping them loyal to the company. The objectives of fringe benefits are:

1. To provide employees with quality work environment and higher standard of living.

2. To establish and improve sound industrial relations.

3. To increase employee morale.

4. To meet requirements of various legislations relating to fringe benefits.

5. To motivate employees, by identifying and satisfying their unsatisfied needs. 6. To secure

employees against social risks like old age and maternity break.

7. To retain talented employees and bring in a sense of ownership among employees. Hence,
fringe benefits are called as golden hand-cuffs.

8. To protect the employee health and safeguard them against accidents.

9. To promote employee's welfare by providing welfare measures like recreation facilities.

Advantages of Fringe Benefits:

1. Support to Employee Remuneration: Fringe benefits enhance employee earnings and

provide benefit in kind which is as important as cash benefit.

2. Increased Employee Efficiency and Productivity: They motivate employees to work

efficiently and make them satisfied and co-operative. 3. Added Employee Attraction: These
help in attracting best talent and retaining them over a long period.

4. Reduced Employee Fatigue: These reduce monotony and fatigue of employees.

5. Higher Employee Morale: Fringe benefits boost employee spirit and develop their
following for the organisation. This leads to cordial industrial relations and avoids industrial
disputes, strikes and lock-outs

6. Good Corporate Image: Companies providing good fringe benefits have a higher market
standing/goodwill/prestige as compared to others.

7. Motivating Force: Fringe benefits motivate employees and induce them to work for the
progress and prosperity of the organisation.

Limitations of Fringe Benefits

1. These may create unhealthy competition among employees.

2. They may not be helpful if the monetary benefits are not adequately attractive to
employees.

3. Employee motivation may get affected if the implementation of the benefits scheme is not
transparent.

Employee Services

Organisations, at the discretion of the management, provide an assortment of services to their

employees, at no or significantly low cost, in addition to the fringe benefits. These services
are generally a cause of concern to trade unions when they engage in collective bargaining
with the employers. Various employee services are listed below.

1. Services related to the Type of Work Performed: These include subsidies for the purchase
and upkeep of work, clothing and uniforms and of the various types of tools used by a worker
in the course of his work.

2. Food Facilities: These include offering food at company restaurants, cafeterias, canteens,
lunch rooms, vending machines which are fully or partially subsidised.

3. Transportation Facilities: These include free parking lots pick & drop and bus service

4. Child-care Facilities: These include nurseries and day care centres for children.

5. Housing Services: These include providing company-owned housing projects and

subsidised housing.

6. Financial and Legal Services: These include sponsoring of loan funds, credit unions,
income-tax service, legal aid, savings plans and group insurance plans.
7. Purchasing Services: These include providing company-operated stores and

discounts on company's products and services.

8. Recreational, Social and Cultural Programmes: These include provision for athletics,
beauty parlours, social clubs, recreational areas, orchestras, entertainment programmes,
parties, picnics, libraries and reading rooms.

9. Educational Services: These-include sponsorship for off-duty courses, educational leaves,

tuition fee refunds and scholarships for employees and their children.

10. Medical Services: These include plant sanatorium, clinics and hospitals, medical
counselling services and referrals to community social services.

11. Outplacement Services: Outplacement services are services which include the assistance
an employer can provide to those employees affected by a layoff. These services can range
from employee counselling and career guidance to resume writing, job placement help etc

12. Flexitime: Employees are free to determine their own work time. They are permitted to
build up their flexible work day' around core working hours (such as 11 am to 4 pm). For
example, they may opt to work from 7 am to 4 pm or 11 am to 8 am.

According to Denis Hedges, following are special features of flexitime:

(i) The ratio of man-hours worked to man-hours paid increases.

(ii) Absenteeism is reduced and sick-leave cut down.

(iii) The hours actually worked seem to be more productive.

(iv) There is less slowing down towards the end of the work day.

(v) It reduces the tedium associated with the timing of the employees' work and
democratise the work.

(vi) The distinction between the management and professional workers is reduced and
more authority is delegated by supervisors.

However, flexitime is also subject to drawbacks:

(i) Flexitime is complicated to administer and may be impossible to implement where large
group of workers must work independently.

(ii) It requires the use of tithe-clocks or other time records, which might irritate the workers.
Compensation Management
Compensation management is the process of designing, implementing, and managing a
company's compensation and benefits programs to attract, motivate, and retain employees.
Here are the components of compensation management:
1. Job Analysis: Identifying and documenting job responsibilities, requirements, and skills
needed.
2. Job Evaluation: Assessing the value of each job within the organization based on factors
like responsibilities, skills, and market rates.
3. Pay Structure: Designing a pay system with pay grades, ranges, and levels to ensure
internal equity and market competitiveness.
4. Performance Management: Tying pay to individual and company performance through
regular reviews, assessments, and feedback.
5. Base Pay: Determining the fixed salary or wages for each job.
6. Variable Pay: Designing bonus, commission, or incentive plans to reward performance.
7. Benefits: Offering non-monetary perks like health insurance, retirement plans, or flexible
work arrangements.
8. Market Research: Conducting research to ensure compensation is competitive with
industry standards.
9. Budgeting: Managing compensation expenses and ensuring alignment with business
objectives.
10. Compliance: Ensuring compensation practices comply with legal requirements and
regulations.
11. Communication: Clearly explaining compensation programs to employees.
12. Monitoring and Adjustments: Regularly reviewing and adjusting compensation programs
to ensure effectiveness and fairness.
These components work together to create a comprehensive compensation management
system that attracts, motivates, and retains employees while supporting business objectives.

Incentives and Benefits Administration with a focus on the Virginia Retirement System
(VRS) as part of section 4.6:
Incentives and Benefits Administration
Overview
1. Purpose and Goals:
- Attraction and Retention: Competitive incentives and benefits are crucial for attracting
and retaining talent. Well-designed packages help differentiate an organization in a
competitive job market.
- Motivation and Performance: Properly structured incentives align employees' efforts with
organizational goals, driving higher performance and productivity.
- Employee Satisfaction: Comprehensive benefits support employees' overall well-being,
leading to higher job satisfaction and loyalty.
2. Types of Incentives:
- Monetary Incentives:
 - Bonuses: One-time or periodic payments based on performance, company profitability,
or other criteria.
- Commissions: Payments based on sales or other measurable performance metrics.
- Profit-Sharing: Distribution of a portion of company profits to employees, often based on
their contribution to the company’s success.
- Merit Increases: Salary increases based on individual performance evaluations and
achievements.

- Non-Monetary Incentives:
- Recognition Programs: Awards, certificates, or public acknowledgment for outstanding
performance or achievements.
- Career Development: Opportunities for training, mentoring, and professional growth.
- Flexible Work Arrangements: Options such as remote work, flexible hours, or
compressed workweeks to improve work-life balance.

3. Types of Benefits:
- Health and Wellness:
- Medical Insurance: Coverage for health care services, including hospital visits, doctor
visits, and prescription drugs.
- Dental and Vision Insurance: Coverage for dental care and eye exams, glasses, and
contact lenses.
- Wellness Programs: Initiatives to promote physical and mental health, such as gym
memberships or wellness challenges.
- Retirement Plans:
- Pension Plans: Defined benefit plans offering guaranteed retirement income based on a
formula considering salary and years of service.
- 401(k) or 403(b) Plans: Defined contribution plans where employees contribute a portion
of their salary, often with employer matching contributions.

- Work-Life Balance:
- Paid Time Off (PTO): Includes vacation days, sick leave, and personal days.
- Parental Leave: Time off for new parents to bond with and care for their newborn or
newly adopted child.
- Employee Assistance Programs (EAPs): Support services for personal or work-related
issues, including counselling and financial advice.

Virginia Retirement System (VRS) – Section 4.6

Overview of VRS:
- Purpose: The VRS provides retirement benefits to state and local government employees in
Virginia, aiming to ensure financial security in retirement.
- Components: The system includes several plans, including defined benefit, defined
contribution, and hybrid plans, tailored to different employee needs and roles.

Key Aspects of VRS (4.6):

1. Plan Types:
- Defined Benefit Plans:
- Features: Guarantees a specific retirement benefit amount based on a formula involving
years of service and average salary. The risk of investment performance falls on the
employer.
- Benefits Calculation: Typically uses a formula such as years of service multiplied by a
percentage of the average salary (often the highest three or five years).

- Defined Contribution Plans:

- Features: Employees and/or employers contribute to individual accounts. The retirement
benefit depends on the amount accumulated in the account, which is influenced by
investment performance.
- Investment Choices: Employees often have options to select from a range of investment
funds.

- Hybrid Plans:
- Features: Combine aspects of defined benefit and defined contribution plans. Provides a
guaranteed minimum benefit (defined benefit) and an additional defined contribution
account.
- Benefits Calculation: Typically includes a base pension amount calculated like a defined
benefit plan and additional savings based on contributions and investment returns.
2. Eligibility:
- Participation: Generally available to full-time state and local government employees.
Eligibility may vary based on job role, employment status, and plan specifics.
3. Contribution Rates:
- Employee Contributions: A fixed percentage of the employee’s salary, deducted from pay
checks. The percentage varies by plan type and employment status.
- Employer Contributions: The state or local government contributes to the VRS to fund the
retirement system. Contribution rates are determined by actuarial assessments to ensure
system sustainability.
4. Benefits:
- Retirement Benefits: Monthly pension payments based on the formula used in the specific
VRS plan. Payments are typically adjusted for inflation and may include options for survivor
benefits or cost-of-living adjustments.
- Disability Benefits: Provides income for employees who become unable to work due to
disability before reaching retirement age.
- Survivor Benefits: Provides financial support to beneficiaries of deceased employees,
often based on the employee's years of service and salary.
- Refunds and Withdrawals: Employees who leave employment before retirement eligibility
can often withdraw their contributions. Options vary based on the type of plan and length of
service.

5. Administration and Management:

 - Governance: Overseen by the Virginia Retirement System Board of Trustees, responsible
for investment decisions, actuarial assumptions, and overall system management.
- Employee Communication: VRS provides educational resources, counseling, and detailed
plan information to help employees understand their benefits and make informed retirement
decisions.

6. Recent Updates and Changes:

- Legislative Changes: Periodic changes in laws and regulations can impact contribution
rates, benefit calculations, and eligibility. It’s essential for administrators and employees to
stay updated on these changes.

Best Practices for Administration:

- Regular Review: Continually assess the competitiveness and effectiveness of incentive and
benefits programs to ensure they meet organizational goals and employee needs.
- Employee Education: Offer clear, accessible communication and resources to help
employees understand their benefits and make informed decisions.
- Compliance: Ensure all practices align with legal requirements and best practices to
maintain fairness and compliance.

This detailed outline should provide a comprehensive understanding of the key components
of incentives and benefits administration with a focus on the Virginia Retirement System.

Legal Issues in Performance Management and Compensation

1. Employment Law Compliance:
- Anti-Discrimination Laws: Ensure compliance with federal and state anti-discrimination
laws such as Title VII of the Civil Rights Act, the Equal Pay Act, and the Americans with
Disabilities Act (ADA). These laws prohibit discrimination based on race, color, religion,
sex, national origin, disability, and age.
- Equal Pay: Ensure that compensation is equitable and free from gender-based pay
disparities. The Equal Pay Act requires that men and women be paid equally for equal work.
- Accommodation: The ADA requires reasonable accommodations for employees with
disabilities, which may affect performance evaluations and job requirements.

2. Wage and Hour Laws:

- Fair Labor Standards Act (FLSA): Regulates minimum wage, overtime pay, and
recordkeeping. Employers must classify employees correctly as exempt or non-exempt and
ensure compliance with overtime pay requirements.
- Minimum Wage: Adhere to federal and state minimum wage laws. Some states have
higher minimum wage rates than the federal standard.

3. Privacy Concerns:
- Employee Privacy: Ensure that performance evaluations and compensation data are
handled confidentially. Avoid unauthorized disclosure of sensitive information.
 - Surveillance: If using surveillance for performance monitoring, ensure compliance with
privacy laws and provide transparency to employees.

4. Contractual Obligations:
- Employment Contracts: Adhere to the terms outlined in employment contracts or
collective bargaining agreements, including compensation structures and performance
evaluation criteria.
- Non-Compete and Non-Disclosure Agreements: Ensure these agreements are enforceable
and do not unlawfully restrict employees’ future employment opportunities.

5. Dispute Resolution:
- Grievance Procedures: Establish clear procedures for addressing performance
management disputes and compensation-related grievances to avoid litigation.
- Arbitration and Mediation: Utilize alternative dispute resolution methods to resolve
conflicts efficiently and fairly.

Ethical Issues in Performance Management and Compensation

1. Fairness and Equity:

- Objective Criteria: Ensure performance evaluations are based on objective, measurable
criteria to avoid bias and favouritism.
- Consistency: Apply performance management and compensation policies consistently
across all employees to maintain fairness and integrity.
2. Transparency:
- Communication: Clearly communicate performance expectations, evaluation criteria, and
compensation structures to employees. Transparency helps build trust and prevents
misunderstandings.
- Feedback: Provide regular, constructive feedback to employees to support their
development and address issues promptly.
3. Bias and Discrimination:
- Unconscious Bias: Be aware of unconscious biases that may affect performance
evaluations and compensate on decisions. Implement training programs to mitigate bias.
- Diverse Considerations: Ensure that performance management and compensation
practices support diversity and inclusion goals.

4. Conflict of Interest:
- Avoiding Favouritism: Prevent conflicts of interest by ensuring that decisions about
promotions, raises, and bonuses are based on merit rather than personal relationships.
- Disclosure: Require employees and managers to disclose any potential conflicts of interest
that could affect performance management or compensation decisions.

5. Performance Metrics:
- Relevance: Use performance metrics that are relevant to employees' roles and
responsibilities. Avoid setting unrealistic or irrelevant performance targets.
 - Accountability: Hold managers accountable for the fairness and accuracy of performance
evaluations. Ensure they have the necessary training and resources.

6. Ethical Leadership:
- Modeling Behaviour: Leaders should model ethical behaviour in performance
management and compensation practices. Their actions set the tone for the entire
organization.
- Integrity: Uphold high standards of integrity in all compensation and performance-related
decisions. Ensure that ethical considerations are integrated into organizational policies and
practices.

Implementing Best Practices

1. Develop Clear Policies:

- Establish and document performance management and compensation policies. Ensure
these policies align with legal requirements and ethical standards.

2. Training and Development:

- Provide regular training for managers and HR professionals on legal and ethical issues in
performance management and compensation.

3. Regular Audits:
- Conduct regular audits of performance management and compensation practices to ensure
compliance with legal requirements and adherence to ethical standards.

4. Employee Involvement:
- Involve employees in the development of performance management and compensation
policies to enhance buy-in and address potential concerns.

5. Seek Legal Counsel:

- Consult with legal experts to ensure that performance management and compensation
practices comply with applicable laws and regulations.

By addressing these legal and ethical issues, organizations can create fair, transparent, and
legally compliant performance management and compensation systems that support both
employee satisfaction and organizational success.