NATIONAL OPEN UNIVERSITY OF NIGERIA

FACULTY OF MANAGEMENT SCIENCES

COURSE CODE: BUS 818

COURSE TITLE:

REWARD AND COMPENSATION MANAGEMENT

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COURSE
GUIDE

BUS 818
REWARD AND COMPENSATION MANAGEMENT

NATIONAL OPEN UNIVERSITY OF NIGERIA

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Course Developers/Writers: DR.KUSA DANJUMA NANFA
Department of Administration
University of Jos

Course Editor : DR (MRS) CAROLINE ATURU-AGHEDO

Programme Coordinator: DR (MRS) CAROLINE ATURU-

AGHEDO
Department of Administration,
National Open University of Nigeria,
Victoria Island, Lagos.

Head of Department : DR (MRS) YEMISI I. OGUNLELA

Department of Administration,
National Open University of Nigeria,
Victoria Island, Lagos.

Dean of Faculty: DR. SAMSON B. OSOBA

Faculty of Management Sciences,
National Open University of Nigeria,
Victoria Island, Lagos.

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 CONTENTS PAGE

Introduction ……………………………………………………… 1
What You Will Learn in This Course ………………….………… 1
Course Aims ………………………………………..…………….. 1
Course Objectives ………………………………… ….………. 1
Working through This Course………………..………..………. 2
Course Materials…………………………………………………… 2
Study Units ……………………………………………………… 2
Assignment File ……………………………………………………. 3
Presentation Schedule ……………………………………………… 3
Assessments ………………………………………………………… 3
Tutor-Marked Assignment (TMAs) …………………………….. 4
Final Examination and Grading ………………………………….. 4
Course Marking Scheme ………………………………………… 4
Course Overview ………………………………………………… 5
Facilitators/Tutors and Tutorials……………………………………. 5
Summary………………………………………………………….…. 6

INTRODUCTION

The course BUS 818 Reward and Compensation Management, is a semester course
work of two credit units and it is available to students of Master of Science (M.Sc) in
Business Administration in the Faculty of Management Sciences.
This course guide is intended for the learner enrolled on the M.Sc Business
Administration programme of National Open University of Nigeria (NOUN). This
course guide gives a brief summary of what the course is all about, it stipulates
guidelines on how long learners are to spend on each unit so that learners will
complete it at the stipulated time and not lag behind. It also explains how learners can
work through the course material.
It is therefore recommended that learners should go through this course guide so as to
know what they are to expect in the main course material.
COURSE AIM
This course aims at equipping learners with the basic knowledge on what reward and
compensation management is all about. This chapter starts with an introductory
discussion of the concept of reward management and its aims. This is followed by an
assessment of how these aims can be achieved, a description of the elements of a

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reward system and an analysis of the factors that affect reward management. The
chapter concludes with a survey of developments in reward management.
COURSE OBJECTIVES
The objective of this course is to develop students‘ understanding of the concepts of
Rewards and compensation management in an organization. In particular, the subject
is designed to develop the underpinning knowledge and skills required to understand
one of the complex management functions i.e. rewarding and compensating
employees and its importance. This subject introduces the student to the basics
Rewards and compensation structure and differentials.
Working through This Course
To complete this course, you are required to read the study units, read set books and
read other materials provided by the National Open University of Nigeria
(NOUN). You will also need to undertake practical exercises for which you
need access to a personal computer running Windows 95. Each unit contains self-
assessment exercises, and at certain points during the course, you will be expected to
submit assignments. At the end of the course is a final examination. The course
should take you about a total 17 weeks to complete. Below are the components of
the course, what you have to do, and how you should allocate your time to each unit
in order to complete the course successfully on time.

COURSE OUTLINED PROGRAMME PROPOSAL (OPP) FOR BUS 818

The course is in six modules and 25 units as follows:

Module 1

Unit 1 The concept, aims and objectives of Reward management

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Unit 2 Value, system and components of reward management
Unit 3 The elements of reward system
Unit 4 Strategies and levels of reward strategy

Module 2
Unit 1 The nature and context of Total reward
Unit 2 Reasons and principles of total reward
Unit 3 Learning, Development and components of total reward
Unit 4 Work Environment

Module 3
Unit 1 Concepts and types of motivation
Unit 2 Theories of motivation
Unit 3 Motivation and financial incentives as they affect reward
Unit 4 Motivation, Job satisfaction and Performance

Module 4
Unit 1 Evaluation, Characteristics and Objectives
Unit 2 Types of Job Evaluation
Unit 3 Performance Management
Unit 4 Market Pricing

Module 5
Unit 1 Introduction, Grade and Pay structure and types
Unit 2 Developing and Implementing Gray and Pay Structure
Unit 3 Equal Pay for Equal work
Unit 4 Bonus Scheme
Unit 5 module

Module 6
Unit 1 Concepts, Objectives, significance, Components and Policies
Unit 2 Compensation Design and Philosophy
Unit 3 Tying Compensation to retention and Human Resource
Unit 4 Wages theories
Unit 5 Downsizing and Voluntary Retirement Scheme

Assignment File
In this course, you will find all the details of the work you must submit to your
tutor for marking. The marks you obtain for these assignments will count
towards the final mark you obtain for this course. Further information on
assignments will be found in the assignment file itself and later in the section on

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 assessment in this course guide. There are 6 tutor-marked assignments in this
course; the student should attempt all the 6.

Presentation Schedule

The presentation schedule included in your course materials gives you the
important dates for this year for the completion of tutor-marked assignments
(TMAs) and attending tutorials. Remember, you are required to submit all your
assignments by the due date. You should guard against falling behind in your
work.

ASSESMENT

There are two aspects to the assessment of the course: first are the tutor- marked
assignments; and second is a written examination.

In tackling the assignments, you are expected to apply information, knowledge and
techniques gathered during the course. The assignments must be submitted to your
tutor for formal assessment in accordance with the deadlines stated in the
Presentation Schedule and the Assignment File. The work to be submitted to your
tutor will count for 30% of your total course mark.

At the end of the course, you will need to sit for a final written examination of
‗three hours‘ duration. This examination will also count for 70% of your total
course mark.

Tutor-Marked Assignment (TMAs)

There are six tutor-marked assignments in this course and you are advised to attempt
all. Aside from the course material provided, you are advised to read and research
widely using other references which will give you a broader viewpoint and may
provide a deeper understanding of the subject. Ensure all completed assignments
are submitted on schedule before set deadlines. If for any reasons, you cannot
complete your work on time, contact your tutor before the assignment is due to
discuss the possibility of an extension. Unless in exceptional circumstances,
extensions may not be granted after the due date.

Final Examination and Grading

The final examination for this course will be of three hours‘ duration and have a
value of 70% of the total course grade. All areas of the course will be assessed and
the examination will consist of questions, which reflect the type of self-testing,
practice exercises and tutor- marked problems you have previously encountered.
All areas of the course will be assessed.

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 Utilise the time between the conclusion of the last study unit and sitting for the
examination to revise the entire course. You may find it useful to review your self-
assessment tests, tutor-marked assignments and comments on them before the
examination.

Course Marking Scheme

The work you submit will count for 30% of your total course mark. At the end
of the course, you will be required to sit for a final examination, which will also
count for 70% of your total mark. The table below shows how the actual course
marking is broken down.

Table 1: Course Marking Scheme

ASSESSMENT MARKS
Assignment 6 (TMAs) 4 assignments, best 3 will be used
for C.A = 10 x 3 = 30%
Final Examination 70% of overall course marks
Total 100% of course marks

Course Overview

This table brings together the units and the number of weeks you should take to
complete them and the assignment that follow them.

Unit Title of course Weeks Assessment (end of

activity unit)
Course Guide
Module 1
1 The concept, aims and objectives 1
of Reward management
2 Value, system and components 1
of reward management
3 The elements of reward 1
system
4 Strategies and levels of 1
reward strategy
Module 2
1 The nature and context of 1
Total reward

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2 Reasons and principles of 1
total reward
3 Learning, Development and 1
components of total reward
4 Work Environment 1

Module 3
1 Concepts and types of motivation 1
2 Theories of motivation 1
3 Motivation and financial 1
incentives as they affect reward
4 Motivation, Job satisfaction and 1
Performance

Module 4
1 Evaluation, Characteristics and 1
Objectives
2 Types of Job Evaluation 1
3 Performance Management 1
4 Market Pricing 1
Module 5
1 Introduction, Grade and Pay 1
structure and types
2 Developing and Implementing 1
Gray and Pay Structure
3 Equal Pay for Equal work 1
4 Bonus Scheme 1
5 Module 1
Module 6
1 Concepts, Objectives, significance, 1
Components and Policies
2 Compensation Design and 1
Philosophy
3 Tying Compensation to retention 1
and Human Resource
4 Wages theories 1
5 Downsizing and Voluntary 1
Retirement Scheme
Total 27

Facilitators/Tutors and Tutorials

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 There are 27 hours of tutorials provided in support of this course. You will be
notified of the dates, times and location of these tutorials, together with the
names and phone number of your tutor, as soon as you are allocated a tutorial
group.

Your tutor will mark and comment on your assignments, keep a close watch on
your progress and on any difficulties you might encounter as they would provide
assistance to you during the course. You must mail your tutor-marked assignments
to your tutor well before the due date (at least two working days are required).
They will be marked by your tutor and returned to you as soon as possible. Do not
hesitate to contact your tutor by telephone, e-mail, or discussion board if you need
help. The following might be circumstances in which you would find help
necessary: when

a. you do not understand any part of the study units or the assigned readings.
b. you have difficulty with the self-tests or exercises.
c. you have a question or problem with an assignment with your tutor‘s
comment on an assignment or with the grading of an assignment.

You should try your possible best to attend the tutorials. This is the only chance to
have face-to-face contact with your tutor and to ask questions which are answered
instantly. You can raise any problem encountered in the course of your study. To
gain the maximum benefit from course tutorials, prepare a question list before
attending them. You will learn a lot from participations in discussions.

Summary

BUS818: Reward and Compensation Management intends to expose the graduate

students to the nitty-gritty of managing enterprises, be it private or public, corporate
or small business enterprises, government or non- governmental organisations. Upon
completing the course, you will be equipped with the knowledge required to produce
a good research work. You will be able to answer questions such as:

We hope you enjoy your acquaintances with the National Open University of
Nigeria (NOUN). We wish you every success in the future.

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CONTENTS PAGE
Module 1 … … … .. … … … … … 13

Unit 1 The concept, aims and objectives of Reward management… 13

Unit 2 Value, system and components of reward management… … 21
Unit 3 The elements of reward system… … … … … 24
Unit 4 Strategies and levels of reward strategy… … … … 29

Module 2 … … … … … … … … … 36

Unit 1 The nature and context of Total reward … … … … 36

Unit 2 Reasons and principles of total reward … … … … 48
Unit 3 Learning, Development and components of total reward… … 57
Unit 4 Work Environment … … … … … … 60

Module 3 … … … … … … … … … 64

Unit 1 Concepts and types of motivation … … … … … 64

Unit 2 Theories of motivation … … … … … … 70
Unit 3 Motivation and financial incentives as they affect reward … 93
Unit 4 Motivation, Job satisfaction and Performance … … … 98

Module 4 … … … … … … … … … 101
Unit 1 Evaluation, Characteristics and Objectives … … … 101
Unit 2 Types of Job Evaluation … … … … … … 104
Unit 3 Performance Management … … … … … … 106
Unit 4 Market Pricing … … … … … … … 107

Module 5 … … … … … … … … … 114
Unit 1 Introduction, Grade and Pay structure and types … … … 114
Unit 2 Developing and Implementing Gray and Pay Structure … … 121
Unit 3 Equal Pay for Equal work … … … …. … … 130
Unit 4 Bonus Scheme … … … … … … … 136

Module 6 … … … … … … … … … 142
Unit 1 Concepts, Objectives, significance, Components and Policies 142
Unit 2 Compensation Design and Philosophy … … … … 166
Unit 3 Tying Compensation to retention and Human Resource … … 176
Unit 4 Wages theories … … … … … … … 197
Unit 5 Downsizing and Voluntary Retirement Scheme … … … 222

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 Module 1

Unit 1 The concept, aims and objectives of Reward management

Unit 2 Value, system and components of reward management
Unit 3 The elements of reward system
Unit 4 Strategies and levels of reward strategy

UNIT 1 CONCEPTS, AIMS AND OBJECTIVES OF REWARD

MANAGEMENT

CONTENTS
1.0 Introduction
2.0 Main Content
2.1 Concept of Reward Management
2.2 Aims of Reward Management
2.3 Achieving the aims of reward management
2.3.1 Distributive Justice
2.3.2 Procedural Justice
2.3.3 Fairness
2.3.4 Equity
2.3.5 Consistency
2.3.6 Transparency
2.3.7 Strategic Alignment
2.3.8 Contextual and culture fits
2.3.9 Fit for purpose
2.3.10 Developing a high performance culture
2.4 Objectives of Reward Management
3.0 Conclusion
4.0 Summary

1.0 INTRODUCTION

Globalization encompasses change and competition. If Organizations want to survive

in an intense competitive business environment and to develop themselves, they are
required to produce different kinds of solutions when the need arises. There are lots of
external factors that triggered organizations to work harder. Especially in global
crises, businesses in terms of profitability and permanency must pay attention to

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change and development within their systems. Undoubtedly, the most important factor
is human in organizations. One of the main management strategies of the
organizations is to invest in employees. Organizations are seeking to develop,
motivate and increase the performance of their employees in a variety of human
resources applications. Therefore, the reward management system has been the most
considerable practice of the human resource management system. Reward
management system is a core function of human resource discipline and is a strategic
partner with Organisation managements. Besides, it has an important role on
employee performance.

2.0 MAIN CONTENT

2.1 Concept Of Reward Management

Reward management is a popular management topic. It was developed on the basis of
psychologist‘s research. Psychologists started studying behavior in the early 1900s;
one of the first psychologists to study behavior was Sigmund Freud and his work was
called the Psychoanalytic Theory. Many other behavioral psychologists improved and
added onto his work. With the improvements in the behavioral research and theories,
psychologists started looking at how people reacted to rewards and what motivated
them.

Reward management is concerned with the formulation and implementation of strate-

gies and policies that aim to reward people in the organization fairly, equitably and
consistently in accordance with their value to the organization.
According to Steers and Porter (1987), work motivation is a factor that sustain and
manage employee behavior. In another study, Porter and Miles (1974), put some theo-
ries about motivation and they gathered into three categories which are job (e.g., de-
gree of autonomy), individual (e.g., need for achievement) and work environment
characteristics (e.g., rewards). Barber and Bretz (2000) mentioned that reward man-
agement systems have major impact on organizations capability to catch, retain and
motivate high potential employees and as a result getting the high levels of perfor-
mance.

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Bishop (1987), on the other hand has studied about employee performance and found
that recognition and reward of employee performance leads to differentiation between
the productivity of the employees.

On the other hand, it is crucial to invest in employee development for enhancing the
skills and abilities of employees and organization. Furthermore, social exchange theo-
ry shows that employees behave in positive ways when the organizations invest on
them. Organizational inducements are the factors for the motivation of the employees
and pro socially motivated employees make a great effort to benefit the organization.

Reward management consists of analysing and controlling employee remuneration,

compensation and all of the other benefits for the employees. Reward management
aims to create and efficiently operate a reward structure for an organisation. Reward
structure usually consists of pay policy and practices, salary and payroll administra-
tion, total reward, minimum wage, executive pay and team reward.

Defining motivation as "the degree to which an individual wants and choose to

engage in certain specific behaviours", to which Vroom (quoted in Mitchell, 1982)
adds that performance = ability x motivation. To have an efficient Reward System
then, is mandatory that employees know exactly what their task is, have the skills to
do it, have the necessary motivation and work in an environment allowing the
transformation of intended actions into an actual behaviour. From the company point
of view instead, an effective performance appraisal has to be present, in order to let
motivation be a major contributor to the rewarded performance

2.2 Aims of Reward Management

The following are the aims of reward management;

 reward people according to the value they create;
 reward the right things to convey the right message about what is important in
terms of behaviours and outcomes;
 help to attract and retain the high-quality people the organization needs;
 align reward practices with business goals and with employee values and
needs;

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  develop a high-performance culture;
 motivate people and obtain their engagement and commitment.
 help to attract and retain the high-quality people the organization needs;
 reward people according to the value they create;
 align reward practices with business goals and with employee values and
needs;
 reward the right things to convey the right message about what is important

in

terms of behaviours and outcomes;

 motivate people and obtain their engagement and commitment.

2.3 Achieving the Aims of Reward Management

Reward management adopts a ‗total reward‘ approach, which emphasizes the

importance of considering all aspects of reward as a coherent whole that is linked to
other Human Resource (HR) initiatives designed to achieve the motivation,
commitment, engagement and development of employees. This requires the
integration of reward strategies with other HRM strategies, including talent
management and human resource development. Reward management is an integral
part of an HRM approach to managing people. The aims can be achieved in the
following ways:

2.3.1 Distributive justice

Distributive justice refers to how rewards are provided to people. They will feel that
they have been treated justly if they believe that the rewards have been distributed in
accordance with the value of their contribution, that they receive what was promised
to them and that they get what they need.

2.3.2 Procedural justice

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Procedural justice refers to the ways in which managerial decisions are made and
reward policies are put into practice. The five factors that affect perceptions of
procedural justice as identified by Tyler and Bies (1990) are:

 The viewpoint of employees is given proper consideration.

 Personal bias towards employees is suppressed.
 The criteria for decisions are applied consistently to all employees.
 Employees are provided with early feedback about the outcome of decisions.
 Employees are provided with adequate explanations of why decisions have
been
made.

2.3.3 Fairness

A fair reward system is one that operates in accordance with the principles of
distributive and procedural justice. It also conforms to the ‗felt-fair‘ principle
formulated by Eliot Jaques (1961). This states that pay systems will be fair if they are
felt to be fair. The assumptions underpinning the theory are that:

 there is an unrecognized standard of fair payment for any level of work;

 unconscious knowledge of the standard is shared among the population at
work;
 pay must match the level of work and the capacity of the individual to do it;
 people should not receive less pay than they deserve by comparison with their
fellow workers

2.3.4 Equity

Equity is achieved when people are rewarded appropriately in relation to others within
the organization. Equitable reward processes ensure that relativities between jobs are
measured as objectively as possible and that equal pay is provided for work of equal
value.

2.3.5 Consistency
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A consistent approach to reward management means that decisions on pay do not vary
arbitrarily – without due cause – between different people or at different times. They
do not deviate irrationally from what would generally be regarded as fair and
equitable.

2.3.6 Transparency

Transparency exists when people understand how reward processes function and how
they are affected by them. The reasons for pay decisions are explained at the time they
are made. Employees have a voice in the development of reward policies and
practices.

2.3.7 Strategic alignment

The strategic alignment of reward practices ensures that reward initiatives are planned
by reference to the requirements of the business strategy and are designed to support
the achievement of business goals.

2.3.8 Contextual and culture fit

The design of reward processes should be governed by the context (the characteristics
of the organization, its business strategy and the type of employees) and the
organization‘s culture (its values and behavioural norms). Account should be taken of
good practice elsewhere, but this should not be regarded as best practice, ie
universally
applicable. Best fit is more important than best practice.

2.3.9 Fit for purpose

The formulation of reward strategy and the design of the reward system should be
based on an understanding of the objectives of reward management and should be
developed to achieve that purpose.

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2.3.10 Developing a high-performance culture

A high-performance culture is one in which people are aware of the need to perform
well and behave accordingly in order to meet or exceed expectations. Employees are
engaged in their work and committed to the organization. Such a culture embraces a
number of interrelated processes that together make an impact on the performance of
the organization through its people in such areas as productivity, quality, levels of
customer service, growth, profits and, ultimately in profit-making firms, the delivery
of increased shareholder value. In a more heavily service- and knowledge-based
economy, employees have become the most important determinant of organizational
success.
A high-performance culture can be developed by taking into account characteristics
such as those listed above and applying an integrated set of processes, of which
reward
is an important part. Besides reward, the processes include those concerned with
resourcing and talent management (ensuring that the organization has the high
performing people it needs), learning and development, performance management, the
enhancement of the working environment (for example, work design and work/ life
balance) and communication

2.4 Objectives of Reward Management

Reward management deals with processes, policies and strategies which are required
to guarantee that the contribution of employees to the business is recognized by all
means. The objective of reward management is to reward employees fairly, equitably
and consistently in correlation to the value of these individuals to the organization.
Reward system exists in order to motivate employees to work towards achieving stra-
tegic goals which are set by entities. Reward management is not only concerned with
pay and employee benefits. It is equally concerned with non-financial rewards such as
recognition, training, development and increased job responsibility.

Kerr (1995) brings to attention how Reward Management is an easily understandable

concept in theory, but how its practical application results often difficult. The author,
in fact, points up how frequently the company creates a Reward System hoping to re-

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ward a specific behavior, but ending up rewarding another one. The example made is
the one of a company giving an annual merit increase to all its employees, differenti-
ating just between an "outstanding" (+5%), "above average" (+4%) and "negligent"
(+3%) workers. Because the difference between the percentage increasing was so
slight, what the company obtained from the employees was indifference to the extra
percentage point for a superlative job or the loss of one point for an irresponsible be-
havior.

3.0 CONCLUSION

The discussion in this unit have taking us through the evolutionary and philosophical
concept of reward management. We also attempted to discuss the aims of reward
management, ways to achieve a sound reward management system in our 21st century
organizations. Finally, the objectives of establishing a reward management system in
any organizational setting.

4.0 SUMMARY
In this unit, we treated the concept of reward management, its aims and objectives and

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UNIT 2 VALUE OF REWARDS, REWARD SYSTEM, ELEMENTS
AND POLICIES OF REWARDS.

CONTENTS
1.0 Introduction
2.0 Main Content
2.1 Value of Reward
2.2 Reward System
3.0 Conclusion
4.0 Summary

1.0 INTRODUCTION
The notion that the motivational impact of any reward is largely dependent on the
value of that reward to the individual is central both in the management control and in
the organizational psychology literature. Cognitive-oriented, process theories of work
motivation, such as the Expectancy-Valence theory, explicitly emphasise the link
between one‘s perceived value of the reward and motivation.

2.0 MAIN CONTENT

2.1 Value of Reward

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The notion that the motivational impact of any reward is largely dependent on the
value of that reward to the individual is central both in the management control and in
the organisational psychology literature. Cognitive-oriented, process theories of work
motivation, such as the Expectancy-Valence theory, explicitly emphasise the link
between one‘s perceived value of the reward and motivation. Porter et al., (1975), for
instance, argue that generally ―...the more attractive a reward, the more it can motivate
people to behave in certain ways in order to obtain it‖. Considering the design of
motivational contracts for middle-level managers, Merchant (1989) posits that the
rewards subsumed in incentive schemes should be sufficiently valuable to the
managers they intend to motivate, so as to offset other incentives managers may have
to act contrary to the company‘s best interest. Thus, the recommendation to
organisations regarding the design of their reward schemes is to include those rewards
that are highly valued by their managers, so as to maximize the motivational effect of
these reward packages.

The extant empirical research on the relationship between the perceived value of
reward and motivation, however, has produced mixed results. Porter and Lawler‘s
(1968) seminal study on managerial attitudes and work motivation shows that
differences in preferences for rewards are positively correlated with motivation and
performance variations. Similarly, Vroom (1964) maintains that when the value of a
reward to the individual is increased, individual motivation and performance
increases. Subsequent empirical studies by Pritchard and Sanders (1973), Pecotich
and Churchill (1981), and Nakanishi (1989) all collectively concluded that the greater
the importance (value) attributed by the manager to the rewards that he receives, the
higher tends to be his level of work motivation and performance. On the other hand,
other studies report either very weak positive (Hackman & Porter, 1968) or even
negative correlations (Jorgenson et al.,1973) between the perceived value of rewards
and managerial motivation and performance. Several studies indicate that rewards
have high varying effects on effort and cannot guarantee improved performance
(Bonner et al.,2000; Libby & Lipe, 1992; Sprinkle, 2000)

2.2 The Reward System

The approaches to achieving the aims of reward management as discussed above are
Incorporated in the reward system of an organization. This consists of the following:

21
  Reward strategies, which set out what the organization intends to do in the
long- term to develop and implement reward policies, practices, processes and
procedures that will further the achievement of its business goals. For example,
an organization may have a strategy to maintain competitive rates of pay.
 Reward policies, which set guidelines for decision making and action. For
example, an organization may have a policy that sets the levels of pay in the
organization compared with median market rates.
 Reward practices, which consist of the grade and pay structures, techniques
such as job evaluation, and schemes such as contingent pay used to implement
reward strategy and policy. For example, the policy on pay levels will lead to
the practice of collecting and analyzing market rate data, and making pay
adjustments that reflect market rates of increase.
 Reward processes, which consist of the ways in which policies are
implemented and practices carried out, for example the way in which the
outcomes of surveys are applied and how managers manage the pay adjustment
and review process.
 Reward procedures, which are operated in order to maintain the system and to
ensure that it operates efficiently and flexibly and provides value for money.
For example, a procedure will be used for conducting the annual pay review.

3.0 Conclusion
The discussion in this unit took us through the evolutionary and empirical reviews on
author‘s perceived value of reward. Finally, attempts was made in discussing the
various components of an effective reward system.
4.0 Summary
In this unit, we examined scholar‘s perceptions on what constitutes value of reward,
we also looked at the various components of a sound reward system in our 21st century
organizations

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UNIT 3 ELEMENTS OF A REWARD SYSTEM

CONTENTS
1.0 Introduction
2.0 Main Content
2.1 Business Strategy
2.2 Reward strategy and Policy
2.2.1 Base or basic pay
2.2.2 Contingency Pay
2.2.3 Employee benefits
2.2.4 Allowance
2.3 performance Management
2.3.1 Financial Reward
2.3.2 Total reward
2.3.3 Total earnings
2.3.4 Total remuneration
2.4 Job Evaluation
2.5 Market rate analysis
2.6 Grade and Pay Structures
3.0 Conclusion
4.0 Summary

1.0 Introduction

The elements of a reward system and the interrelationships between them are
discussed below under specific sub-headings.
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2.0 MAIN CONTENT

2.1 Business strategy

The starting point of the reward system is the business strategy of the organization.
This identifies the business drivers and sets out the business goals. The drivers are
unique to any organization but will often include items such as high performance,
profitability, productivity, innovation, customer service, quality, price/cost leadership
and the need to satisfy stakeholders – investors, shareholders, employees and, in local
authorities, elected representatives.

2.2 Reward strategy and policy

The reward strategy flows from an analysis of the business drivers. The question is:
‗How can these be supported by reward in order to achieve the goals of the business?‘
The reward strategy will define longer-term intentions in such areas as pay structures,
contingent pay, employee benefits, steps to increase engagement, commitment and
adopting a total reward approach.
Reward policy will cover such matters as levels of pay, achieving equal pay,
approaches to contingent pay, the use of job evaluation and market surveys and
flexing benefits.

2.2.1 Base or basic pay

The base rate is the amount of pay (the fixed salary or wage) that constitutes the rate
for the job. It may be varied according to the grade of the job or, for shop floor
workers, the level of skill required.
Base pay will be influenced by internal and external relativities. The internal
relativities may be measured by some form of job evaluation. External relativities
(going rates) are assessed by tracking market rates. Alternatively, levels of pay may
be agreed through collective bargaining with trade unions or by reaching individual
agreements.
Base pay may be expressed as an annual, weekly or hourly rate. This is sometimes
referred to as a time rate system of payment. Contingent pay or allowances as
24
described later may be added to base pay. The rate may be adjusted to reflect
increases in the cost of living or market rates by the organization unilaterally or by
agreement with a trade union.

2.2.2 Contingent pay

Additional financial rewards may be provided that are related to performance,
competence, contribution, skill or experience. These are referred to as ‗contingent
pay‘.
Contingent payments may be added to base pay, i.e. ‗consolidated‘. If such payments
are not consolidated (i.e. paid as cash bonuses) they are described as ‗variable pay‘.

2.2.3 Employee benefits

Employee benefits include pensions, sick pay, insurance cover, company cars and a
number of other ‗perks‘. They consist of elements of remuneration additional to the
various forms of cash pay and also include provisions for employees that are not
strictly remuneration, such as annual holidays.

2.2.4 Allowances

Allowances are paid in addition to basic pay for special circumstances (e.g. living in
London) or features of employment (e.g. working unsocial hours). They may be
determined unilaterally by the organization but they are often the subject of
negotiation. The main types of allowances are location allowances, overtime
payments, shift payments, working conditions allowances and stand-by or call-out
allowances made to those who have to be available to come in to work when required.

2.3 Performance management

Performance management processes define individual performance and contribution

expectations, assess performance against those expectations, and provide for regular
constructive feedback, and result in agreed plans for performance improvement,
25
learning and personal development. They are a means of providing non-financial
motivation and may also inform contingent pay decisions.

2.3.1 Non-financial rewards

Non-financial rewards do not involve any direct payments and often arise from the
work itself, for example achievement, autonomy, recognition, scope to use and
develop
Skills, training, career development opportunities and high-quality leadership.

2.3.2 Total reward

Total reward is the combination of financial and non-financial rewards available to

Employees.

2.3.3 Total earnings

Total earnings (financial rewards) consist of the value of all cash payments (base pay,
contingent pay and allowances, ie total earnings).

2.3.4 Total remuneration

Total remuneration consists of the financial rewards represented by total earnings plus
the value of the benefits received by employees.

2.4 Job evaluation

Job evaluation is a systematic process for defining the relative worth or size of jobs
within an organization in order to establish internal relativities and provide the
basis for designing an equitable grade structure, grading jobs in the structure and
managing relativities. It does not determine the level of pay directly. Job evaluation
can be analytical or non-analytical. It is based on the analysis of jobs or roles, which
leads to the production of job descriptions or role profiles.

26
2.5 Market rate analysis

Market rate analysis is the process of identifying the rates of pay in the labour market
for comparable jobs to inform decisions on levels of pay within the organization and
pay structures. A policy decision may be made on how internal rates of pay should
compare with external rates – an organization‘s market stance.

2.6 Grade and pay structures

Jobs may be placed in a graded structure according to their relative size. In such a
structure, pay is influenced by market rates, and the pay ranges attached to grades
provide scope for pay progression based on performance, competence, contribution or
service. Alternatively, a ‗spot rate‘ structure may be used for all or some jobs in
which
no provision is made for pay progression in a job.

3.0 Conclusion
The discussion in this unit took us through elements of a reward system and the
interrelationships between them. Finally, we also attempted to discuss the various
components of an effective reward strategies and policies.

4.0 Summary
In this unit, we examined scholar‘s perceptions on what constitutes value of reward,
we also looked at the various components of a sound reward strategies and policies in
our 21st century organizations

27
UNIT 4 STRATEGIES AND POLICIES OF REWARD
SYSTEM

CONTENTS
1.0 Introduction
2.0 Main Content
2.1 Strategies of Reward Management
2.2 Reward strategy policies
2.2.1 Levels of Reward
2.2.2 External Competitiveness and internal equity
2.2.3 Use of Job evaluation
2.2.4 Achieving equal pay
2.2.5 Total reward policy
2.2.6 Contingency reward
2.2.7 The roles of line managers
2.2.8 Transparency
2.2.9 Assimilation policies
2.3 Protection policies
3.0 Conclusion
4.0 Summary
5.0 References

28
1.0 INTRODUCTION
Strategic reward management is an approach to the development and implementation
over the longer term of reward strategies and the guiding principles that underpin
them. Strategic reward can be described as an attitude of mind, a belief in the need to
plan ahead and make the plans happen. The aim of strategic reward is to create total
reward processes that are based on beliefs about what the organization values and
wants to achieve. It does this by aligning reward practices with both business goals
and employee values.

2.0 MAIN CONTENT

2.1 Strategies Of Reward Management

As emphasizes, the ‗alignment of your reward practices with employee values and
needs is every bit as important as alignment with business goals, and critical to the
realization of the latter‘. Strategic reward ‗is ultimately thinking that you can deploy
to any reward issue arising in your organization, to see how you can create value from
it‘.

2.2 Reward policies

Reward policies are sets of specific guidelines for decision making and course of
action. They show what the organization and its management are supposed to do
about managing reward, as well as, how they will behave in a given circumstance
when dealing with issues related to reward.
They are distinguishable from guiding principles that are usually expressed in a more
generalized philosophy. These policies can be grouped into the following headings:

2.2.1 Levels of rewards.

The policy on the level of rewards indicates whether the company pays high, is
content to pay median or average rates of pay or even, exceptionally, accepts that it
has to pay below the average. Pay policy, which is sometimes referred to as the ‗pay
stance‘ or ‗pay posture‘ of a company, will depend on a number of factors. These

29
include the degree to which there is competition for good-quality people, the
traditional stance of the company, the extent to which the company demands high
levels of performance from its employees, the organization culture, and whether or
not it can or should afford to be a high payer. Also, a firm may say that ‗We will pay
upper-quartile salaries because we want our staff to be upper-quartile performers.
Policies on pay levels will also refer to differentials and the number of steps or grades
that should exist in the pay hierarchy. This will be influenced by the structure of the
company. In today‘s typical organizations an extended or complex pay hierarchy may
not necessarily be required on the grounds that it does not reflect the way in which
work is organized and will constrain flexibility. Policies on the level of rewards also
cover employee benefits – pensions, sick pay, health care, holidays and perks such as
company cars. Pay level policies are linked to policies on external competitiveness
and internal equity.

2.2.2 External Competitiveness versus Internal Equity.

A policy needs to be formulated on the extent to which rewards are market-driven ra-
ther than equitable. This policy is usually influenced by the culture and reward phi-
losophies of the organization and the pressures on the business to obtain and keep
high-quality staff. Any organizations that have to attract and retain staff who are much
in demand and where market rates are therefore high may, to a certain degree, have to
sacrifice their ideals (if they have them) of internal equity to the realism of the mar-
ketplace. They will provide market pay‘ and be ‗market-driven‘.
The pay management process must cope with the irresistible force of market

pressures which is required to meet the immovable object of internal equity.

There will always be some degree of tension in these circumstances and,

while no solution will ever be simple or entirely satisfactory, there is one basic

principle that can enhance the likelihood of success. That principle is to make

explicit and fully identifiable the compromises with internal equity that are

made and have to be made in response to market pressures if the organization

must remain competitive.

30
2.2.3 Use of Job evaluation.
Policy on the use of formal job evaluation procedures to determine internal

relativities will depend on the policies on equal pay and internal equity re-

ferred to above. The policy could determine, to an extent, how a formal job

evaluation should be used. The choice is between evaluating every job with

the full scheme or allocating a support role to job evaluation, which, after the

grade structure has been designed, is only used when grading needs to be

validated or in special circumstances, which would need to be defined, e.g.

for new jobs, for appeals against grading or in equal pay reviews.

2.2.4 Achieving equal pay.

A policy is required on the degree to which equal pay considerations should

drive the management of the reward system. The policy should also cover the

use of equal pay reviews. This raises the important policy issue of the degree

to which pay levels should be market-oriented, which then mean that the pay

inequities that exist outside the organization would be reproduced inside it.

2.2.5 Total Reward Policy.

A policy is required on the extent to which the organization wants to adopt a

‘total reward’ approach is discussed in details. This will mean assessing the

importance of the non-financial relational rewards and how they complement

the financial transactional rewards.

2.2.6 Contingency Reward.

The policy will have to determine whether or not the organization wants to

pay for competence, contribution, performance, or skill and, if so, what’s and

the cost implication under what circumstances? There may be, for instance, a

policy that bonuses should be paid for exceptional performance but that, to be

significant, they should not be less than, say, 20 per cent of basic pay, while

31
their upper limit should be restricted to 40 per cent or so on the base pay. The

policy may also indicate the type of approach to be used relating pay to team,

individual, or organizational performance.

2.2.7 The Role of Line Managers.

Line managers play a critical role in administering rewards, and the policy

should be recognized. The extent to which the responsibility for rewards

should be devolved to line managers is a policy decision. The aim may be to

devolve it as far as possible, taking into cognizance the need to ensure that

other reward policy guidelines are followed and that consistent decisions are

made across the organization by line managers. The policy may cover the lev-

el of decisions managers can make, the guidance that should be made availa-

ble to them and how consistency will be attained. The training required by

line managers to increase their capacity to exercise judgements on reward and

to conduct performance management reviews could also be addressed by the

policy.

2.2.8 Transparency.
Historically, organizations in the private sector have hid information about

pay policies from public view. This does not stand anymore. Employees will

only feel that the reward management processes of an organization are fair if

they know what they are and how they are used to determine their level of

pay and methods of pay progression. Lack of understanding engenders sus-

picion and hostility. One of the aims of reward management therefore, is to

enhance engagement and commitment, but there is no possibility of this being

achieved if the organization is secretive about pay. Without transparency,

people will believe that the organization has something to hide, often with

reason. There is no chance of building a satisfactory psychological contract

32
unless the organization spells out its reward policies and practices. Transpar-

ency is achieved through involvement and communication.

2.2.9 Assimilation Policies.

The introduction of a new or comparatively revised pay structure ensures that

policies have to be developed on how existing employees should be assimilat-

ed into it. These policies cover where they should be placed in their new

grades and what happens to them if their new grade and pay range mean is

above or below the new scale for their job.

2.2.10 Policies on pay decisions.

Policies may be required to determine the extent to which the level of pay of-

fered on appointment can exceed the minimum pay for the grade into which

the individual will be allocated. It is also necessary to consider the policy on

what promotion increases to be awarded.

2.3 Protection policies.

A policy is needed on how employees whose pay are above the upper limit of

their new grade after assimilation are to be ‘protected’ or ‘safeguarded’. It is

usual to guarantee that employees in this position who have been ‘red-circled’

do not suffer an immediate reduction in pay. Thereafter, the policy lays down

how quickly pay can and should be brought in line.

It needs to be re-emphasized that all aspects of reward management are dy-

namic and evolutionary. They cannot stand still. They must be continually

reviewed and modified in line with changes in organization strategic priori-

ties, structures, core values, processes, technologies and the new demands

that the changes make on people.

33
The review should be carried out by HR specialists or, may be, outside con-

sultants, working with a project team of staff and importantly, their repre-

sentatives (extensive consultation is important). The review should be based

on an attitude survey supplemented by focus groups. The need to monitor

reward policies constantly to identify the need for changes extend to all re-

ward processes. It is a good idea to include a firm review date – one or two

years ahead – followed by the introduction of any new reward system or

structure. When reviewing reward policies, the following questions are neces-

sary:

 One of the recurring themes in this book is the importance of best fit rather
than best practice Are the policies still relevant?

 Are they providing the level of guidance necessary?

 Are there any new areas of reward policy that need to be covered?

 What problems, if any, are being met with in implementing them?

 Does anyone (top managers, line managers, HR specialists, employees, union
Representatives) want them changed and, if so, how?

3.0 CONCLUSION
The discussion in this unit took us through the evolutionary and empirical reviews on
strategies and policies of reward management system. Finally, we also attempted to
discuss the various levels of a sound reward policies.

4.0 SUMMARY
In this unit, we examined scholars‘ perceptions on what constitutes a sound reward
management system and the various levels of reward policies in our 21st century
organizations

5.0 TUTOR-MARKED ASSIGNMENT

1. In your own words, what is Reward Management?

34
 2. What are the basic aims of instituting a reward management in an
organizations?
3. There are various ways through which a sound reward management system
can be achieved in our 21st century organization. Elucidate
4. Various scholars aired their view on what constitutes a value reward system,
what was their disagreement on the subject matter?
5. Elaborately discuss on reward strategies and policies in our 21st century
organization.

6.0 REFERENCES/FURTHER READING

Armstrong, M and Baron, A (2004) Managing Performance: Performance anagement

in action, Chartered Institute of Personnel and Development, London e-
reward (2003–06) Reward Case Studies, e-reward.co.uk, Stockport

Armstrong, M and Brown, D (2006) Strategic Reward, Kogan Page, London

Office of the Deputy Prime Minister and the Local Government Employers‘
Association (2003) Pay and Workforce Strategy for Local Government, Office
of the Deputy Prime Minister/Local Government Employers‘ Association,
London
Flannery, TP, Hofrichter, DA and Platten, PE (1996) People, Performance, and Pay,
Free Press, New York
Lawler, EE (1995) The new pay: a strategic approach, Compensation and Benefits
Review, November

Lawler, EE (1990) Strategic Pay, Jossey-Bass, San Francisco

Leventhal, GS (1980) What should be done with equity theory?, in Social Exchange:
Advances in theory and research, ed GK Gergen, MS Greenberg and RH
Willis, Plenum, New York

Tyler, TR and Bies, RJ (1990) Beyond formal procedures: the interpersonal context
of procedural justice, in Applied Social Psychology and Organizational
Settings, ed JS Carrol, Lawrence Erlbaum, Hillsdale, NJ
Thompson, M (1998) Trust and reward, in Trust, Motivation and Commitment: A
reader, ed SJ Perkins and St J Sandringham, pp 66–71, Strategic
Remuneration Research Centre, Faringdon

Mintzberg, H (1987) Crafting strategy, Harvard Business Review, July/August, pp

66–74

35
Pearce, JA and Robinson, RB (1988) Strategic Management: Strategy formulation
and implementation, Irwin, Georgetown, Ontario

Schuster, JR and Zingheim, PK (1992) The New Pay, Lexington Books, New York

Ulrich, D (1997) Human Resource Champions, Harvard Business School Press,

Boston, MA

MODULE 2

Unit 1 The nature and context of Total reward

Unit 2 Reasons and principles of total reward
Unit 3 Learning, Development and components of total reward
Unit 4 Work Environment

UNIT 1 THE NATURE OF TOTAL REWARD AND CONTEXT OF

TOTAL REWARD

CONTENT
1.0 Introduction
2.0 Main Content

36
 2.1 Nature of Total Reward
2.1.1 transactional reward
2.1.2 Relational Reward
2.2 Relational Reward: learning and development, work environment
2.2.1 Learning and development
2.2.2 Workplace learning
2.2.3 Training
2.2.4 Performance Management
2.2.5 Career Development
2.3 Work environment
2.3.1 Core values of the organization
2.3.2 Leadership
2.3.3 Employee voice
2.3.4 Recognition
2.3.5 Achievement
2.3.6 Job design and role development
2.3.7 Quality of working life
2.3.8 Work/life balance
2.3.9 Talent management
3.0 Conclusion
4.0 Summary

1.0 INTRODUCTION

Total reward ‗includes all types of rewards – indirect as well as direct, and intrinsic as

well as extrinsic‘. All aspects of reward, namely base pay, contingent pay, employee

benefits and non-financial rewards, which include intrinsic rewards from the work

itself, are linked together and treated as an integrated and coherent whole. Total

reward combines the impact of the two major categories of reward as will be

discussed later in this unit.

2.0 MAIN CONTENT

2.1 The Nature of Total Reward

Total reward ‗includes all types of rewards – indirect as well as direct, and intrinsic as

well as extrinsic‘. All aspects of reward, namely base pay, contingent pay, employee

benefits and non-financial rewards, which include intrinsic rewards from the work

itself, are linked together and treated as an integrated and coherent whole. Total

37
reward combines the impact of the two major categories of reward (as illustrated in

Figure 2.1):

2.1.1 Transactional rewards – tangible rewards arising from transactions between

the employer and employees concerning pay and benefits.

2.1.2 Relational rewards – intangible rewards concerned with learning and

development and the work experience.

A total reward approach is holistic, reliance is not placed on one or two reward

mechanisms operating in isolation, and account is taken in every way in which people

can be rewarded and obtain satisfaction through their work. The aim is to maximize

the combined impact of a wide range of reward initiatives on motivation, commitment

and job satisfaction.

‗Total reward embraces everything that employee‘s value in the employment

relationship.‘ An equally wide definition of total reward is offered by World at Work,

who state that total rewards are ‗all of the employer‘s available tools that may be used

to attract, retain, motivate and satisfy employees‘. Paul Thompson suggests that:

Definitions of total reward typically encompass not only traditional, quantifiable

elements like salary, variable pay and benefits, but also more intangible non-cash

elements such as scope to achieve and exercise responsibility, career opportunities,

learning and development, the intrinsic motivation provided by the work itself and the

quality of working life provided by the organization.‘

The conceptual basis of total rewards is that of configuration or ‗bundling‘, so that

different reward processes are interrelated, complementary and mutually reinforcing.

Total reward strategies are vertically integrated with business strategies, but they are

also horizontally integrated with other HR strategies to achieve internal consistency.

38
Source: Perrin (2005)

Figure 2. 1 Total Rewards Model

39
An equally wide definition of total reward is offered by World at Work (2000), who

state that total rewards are ‗all of the employer‘s available tools that may be used to

attract, retain, motivate and satisfy employees‘. Paul Thompson (2002) suggests that:

‗Definitions of total reward typically encompasses not only traditional, quantifiable

elements like salary, variable pay and benefits, but also more intangible non-cash

elements such as scope to achieve and exercise responsibility, career opportunities,

learning and development, the intrinsic motivation provided by the work itself and the

quality of working life provided by the organization.‘

The conceptual basis of total rewards is that of configuration or ‗bundling‘, so that

different reward processes are interrelated, complementary and mutually reinforcing.

Total reward strategies are vertically integrated with business strategies, but they are

also horizontally integrated with other Human Resource (HR) strategies to achieve

internal consistency.

2.2 Relational Reward: Learning and Development, Work Environment.

A model of total reward developed by Perrin (2005) is shown in Figure 2.1 The upper

two quadrants – pay and benefits – represent transactional rewards. These are

financial in nature and are essential to recruit and retain staff but can be easily copied

by competitors. By contrast, the relational (non-financial) rewards produced by the

lower two quadrants are essential to enhancing the value of the upper two quadrants

and they are less easy to imitate by competitors. The real power, as Thompson (2002)

states, comes when organizations combine relational and transactional rewards. There

are different approaches to total reward, and the choice is dependent on the core

values of the organization. Consideration is given below to the main areas of

relational or non-financial rewards as set out in the lower quadrants.

40
2.2.1 Learning and Development

These are the constituents of learning and development as shown in figure 2.1

2.2.2 Workplace learning

The workplace itself as an environment for learning can reward people by offering

them

opportunities to develop their skills and therefore their employability. Learning can be

intentional and planned, aimed at training employees by supporting, structuring and

monitoring their learning on the job. But, significantly, learning is an everyday part of

the job. People develop skills, knowledge and understanding through dealing with the

challenges posed by their work. This can be described as continuous learning, and line

managers can be encouraged and trained to enhance this process.

2.2.3 Training

The provision of systematic and planned instruction and development activities to

promote learning can enable employees continually to upgrade their skills and

progressively develop their careers. Many people now regard access to training as a

key element in the overall reward package. The availability of learning opportunities,

the selection of individuals for high-prestige training courses and programmes and the

emphasis placed by the organization on the acquisition of new skills as well as the

enhancement of existing ones can all act as powerful motivators. This is particularly

important in delayered organizations where upward growth through promotion is

restricted but people can still develop laterally.

41
2.2.4 Performance management

Performance management processes are a powerful means of providing relational

rewards. They can be the basis for developing a positive psychological contract by

clarifying the mutual expectations of managers and their staff. Motivation can be

provided by feedback. Performance reviews can inform personal development

planning, thus encouraging self-managed learning with the support as required of the

manager and the organization.

2.2.5 Career development

Alderfer emphasized the importance of the chance to grow as a means of rewarding

people and therefore motivating them. He wrote: ‗Satisfaction of growth needs

depends

on a person ability in finding the opportunity to be what he is most fully and to

become what he can.‘ The organization can offer this opportunity by providing people

with a sequence of experience and training that will equip them for whatever level of

responsibility they have the ability to reach. Talented individuals can be given the

guidance and encouragement they need to fulfil their potential and achieve a

successful career in tune with their abilities and aspirations. Paths can be defined to

map out how people can be rewarded by progressing in their careers. Rewarding

people through career development is associated with the process of talent

management, which deals with the recruitment and retention of talented people and

their career progression but is also associated with providing rewards through the

working environment.

2.3 Work environment

42
2.3.1 Core values of the organization

The significance of the core values of an organization as a basis for creating a

rewarding

work environment was identified by the research conducted by John Purcell and his

colleagues at Bath University. The most successful companies had what the

researchers called ‗the big idea‘. They had a clear vision and a set of integrated

values, which were embedded, enduring, collective, measured and managed. They

were concerned with sustaining performance and flexibility. Clear evidence existed

between positive attitudes towards HR policies and practices, levels of satisfaction,

motivation and commitment, and operational performance.

2.3.2 Leadership

Leaders play a vital role in reward management. They exist to get things done through

people, ensuring that the task is achieved but also building and maintaining

constructive and supportive relationships between themselves and members of their

team and between the people within the group. They are there to motivate people and

to obtain engaged performance. Leaders are the source of many relational rewards

such as recognition through feedback, scope to carry out meaningful work and

exercise responsibility and the opportunity to grow through workplace learning and

training.

They are crucial to the success of performance management processes and may make

or strongly influence contingent pay decisions.

2.3.3 Employee voice

43
As defined by Peter Boxall and John Purcell, ‗Employee voice is the term

increasingly used to cover a whole variety of processes and structures which enable,

and sometimes empower employees, directly and indirectly, to contribute to decision

making in the firm.‘ Having a voice in the affairs of the firm is rewarding because it

recognizes the contribution people can make to the success of the organization or their

team.

Employees can have a voice as an aspect of the normal working relationships between

them and their managers and this is linked closely to the other relational reward

factors inherent in those relationships, concerning recognition, achievement and

responsibility. But the organization, through its policies for involvement, can provide

motivation and increase commitment by putting people into situations where their

views can be expressed, listened to and acted upon.

2.3.4 Recognition

Recognition is one of the most powerful methods of rewarding people. They need to

know not only how well they have achieved their objectives or carried out their work

but also that their achievements are appreciated. Recognition needs are linked to the

esteem needs in Maslow‘s hierarchy of needs. These are defined by Maslow as the

need to have a stable, firmly based, high evaluation of oneself (self-esteem) and to

have the respect of others (prestige). These needs are classified into two subsidiary

sets: first, ‗the desire for achievement, for adequacy, for confidence in the face of the

world, and for independence and freedom‘, and second, ‗the desire for reputation or

status defined as respect or esteem from other people, and manifested by recognition,

attention, importance or appreciation‘.

44
There are other forms of recognition such as public ‗applause‘, status symbols of one

kind or another, sabbaticals, treats, trips abroad and long-service awards, all of which

can function as rewards. But they must be used with care. One person‘s recognition

implies an element of non-recognition to others, and the consequences of having

winners and losers need to be carefully managed.

2.3.5 Achievement

The need to achieve applies in varying degrees to all people in all jobs, although the

level at which it operates will depend on the orientation of the individual and the

scope provided by the work to fulfil a need for achievement. People feel rewarded and

motivated if they have the scope to achieve as well as being recognized for the

achievement. University researchers, for example, want to enhance their reputation as

well as making a significant contribution to their institution‘s research rating.

If achievement motivation is high, it will result in discretionary behaviour. As defined

by Purcell et al, ‗Discretionary behaviour refers to the choices that people make about

how they carry out their work and the amount of effort, care, innovation and

productive behaviour they display. It is the difference between people just doing a job

and people doing a great job.‘ Self-discretionary or self-motivated behavior occurs

when people take control of situations or relationships, direct the course of events,

create and seize opportunities, enjoy challenge, react swiftly and positively to new

circumstances and relationships, and generally ‗make things happen‘. People who are

driven by the need to achieve are likely to be proactive, to seek opportunities and to

insist on recognition.

45
2.3.6 Job design and role development

Job design has two aims: first, to meet the needs of the organization for operational

efficiency, quality of product or service and productivity. Secondly, to reward

individuals by satisfying their needs for meaningful work that provides for interest,

challenge and accomplishment. However, job design is not a static process. The roles

people play at work develop as they respond to opportunities and changing demands,

acquiring new skills and developing competencies. Managers and members of their

teams have to work together to achieve mutual understanding of expectations as they

change and to ensure that the role continues to provide intrinsic motivation from the

work itself (the most powerful form of motivation).

2.3.7 Quality of working life

Rewards can be provided by the working environment if it improves the quality of

working life. This is a matter of how the work is organized and the type of facilities

provided as well as the design of the job or role. For example, research workers may

feel well rewarded when they have excellent laboratory or other facilities that they

can

use to deliver exciting results.

2.3.8 Work/life balance

Work/life balance policies can reward people by recognizing their needs outside work

environment, for example, providing more flexible working arrangements and making

it clear that people will not be rewarded simply because they stay on after normal

finishing time. It‘s what they deliver that counts, not how long they work.

46
2.3.9 Talent management

Talent management is about ensuring that the organization attracts, retains, motivates

and develops talented people it needs. It is associated with a number of other

relational reward processes such as designing jobs and developing roles that give

people opportunities to apply and grow their skills and provide them with autonomy,

interest and challenge. It is also concerned with creating a working environment in

which work processes and facilities enable rewarding (in the broadest sense) jobs and

roles to be designed and developed.

Talent management also means developing reward processes and a working

environment that ensure that the organization is one for which people want to work –

an ‗employer of choice‘. There is a desire to join the organization and, once there, to

want to stay. Employees are committed to the organization and engaged in the work

they do.

Becoming an employer of course starts with developing the image of the organization

so that it is recognized as one that achieves results, delivers quality products and

services, behaves ethically and provides good conditions of employment.

Organizations with a clear vision and a set of integrated and enacted values are likely

to project themselves as being rewarding to work for.

3.0 CONCLUSION

The discussion in this unit took us through the philosophical nature of total reward

system. We also attempted to discuss the constitueints of learning and development

in our 21st century organizations. Finally, effort was made in explaining the benefits

of having a good work balance policies and a sound talent management system in any

organizational setting.

47
4.0 SUMMARY

In this unit, we treated the nature of total reward system, its various components and

ways to achieve an effective and efficient training and development programs in our

modern organizations

UNIT 2 THE CONTEXT OF TOTAL REWARD

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Concept of Total Reward
2.1.1 Internal Environment
2.1.1.1 culture of the organization
2.1.1.2 the business of the organization
2.1.1.3 the business of the organization
2.1.1.4 technology
2.1.1.5 organization‘s business strategy
2.1.1.6 people employed in the organization
2.1.1.7 the view of workers in the organization
2.1.2 External Environment
2.1.2.1 Globalization
2.1.2.2 Employment record
2.1.2.3 Pay rate in market place
2.1.2.4 Demographic trends
2.2 The voluntary not for profit sectors
3.0 Conclusion
4.0 Summary

1.0 INTRODUCTION

Reward management takes place within the context of the internal (corporate) and

external environments. These can exert considerable influence on reward strategy and

policies as described in this chapter. Reward policies cannot be designed, considered,

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or operated independently of their operational environment. The approach to reward

between organizations differs considerably and there are no universally effective or

ineffective reward practices.

2.0 MAIN CONTENT

2.1 Concept of Total Reward

As earlier discussed in our introduction, Reward management takes place within the

context of the internal (corporate) and external environments. These can exert

considerable influence on reward strategy and policies as described in this chapter.

Reward policies cannot be designed, considered, or operated independently of their

operational environment. The approach to reward between organizations differs

considerably and there are no universally effective or ineffective reward practices.

The diversity of people working in highly varied organizations and settings explains

the reasons for it. Best fit is what organizations have to strive for when formulating

reward strategies, although, to a degree, ‗fit‘ can be forced upon them by the

circumstances in which they operate and the type of people they employ. The Context

of total reward can be analysed from Internal and External Environments.

2.1.1 Internal Environment

Reward policy and practice will be affected by the characteristics of the organization

with regard to its purpose, products and services, processes, sector (private, public,

voluntary or not-for-profit) and, importantly, culture, which is influenced by all the

other characteristics. The internal environment can be influenced by the following:

2.1.1.1 Culture of the Organisation

The culture of the organization can make a significant impact on reward management

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policy and practice. Corporate or organizational culture consists of shared values,

norms, attitudes and assumptions, which influence the way people act and the way

things get done. It is significant because it is rooted in deeply held beliefs and reflects

what has worked in the past. A positive culture can work for an organization by

creating an enabling environment to performance improvement, the management of

change and a sense of belonging and unity of purpose. It can help to shape behaviour

by giving direction on what is expected. The wrong culture can work against an

organization by erecting barriers that can inhibit the attainment of reward strategic

objectives. Some of these barriers include resistance to change and lack of

commitment.

In reward management, the most important aspect of culture that needs to be taken

into account is the core values of the organization. Values are expressed in beliefs as

to what is best for the organization and what sort of behaviours are desirable. The

‗value set‘ of an organization may be recognized only at top level, or it may be shared

throughout the firm, so that the enterprise can be described as ‗value-driven‘. The

stronger the values, the more they will affect behavior. Values are concerned with

such matters as care and consideration for people, the belief that employees should be

treated as stakeholders, employee involvement, equity in the treatment of employees,

equal opportunity, care for customers, innovation, quality, social responsibility and

teamwork.

These values may influence policies in such areas as performance management,

paying for contribution, resolving the often competing pressures for internal equity

and external competitiveness, the equity and ‗transparency‘ of reward arrangements

and the extent to which employees are involved in the development of reward

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processes and structures. They should be taken into account in determining the criteria

to be used in reviewing performance and rewarding people for their contribution.

2.1.1.2 The business of the organization

The business of the organization – manufacturing, profit-making service, not-for

profit services, public sector services, education – will govern its ethos and therefore

core values. It will influence the type of people it employs and the degree to which it

is subject to turbulence and change. All these factors will contribute to the reward

strategy. For instance, in the public and voluntary sector the of paying service-related

increments rather than progressing pay according to performance or contribution dies

hard, although successive governments have driven the adoption of performance pay

in the Civil Service.

2.1.1.3 Technology

The technology of a business exerts a major influence on the internal environment –

how work is organized, managed and carried out. The introduction of new technology

may result in considerable changes to systems and processes. Different skills are

required; new methods of working and therefore rewards are developed. The result

may be an extension of the skill base of the organization and its employees, including

the use of knowledge and expertise, and multiskilling (ensuring that people have a

range of skills that enable them to work flexibly on a variety of tasks, often within a

team working environment). Traditional piecework payment systems in

manufacturing industry have been replaced by higher fixed pay and rewards focused

on quality and employee teamwork.

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2.1.1.4 Organization’s Business Strategy

When the business is going (the business strategy) determines where reward should

go (the reward strategy). Merging reward and business strategies means combining

them as a whole so that they contribute effectively to achieving the mission or

purpose of the organization. The process of linking strategies is the best way of

achieving vertical integration, or ‗internal fit‘, in the sense that business and reward

strategies are in harmony. It is necessary to see that reward goals are aligned with

business goals and reward strategies are defined in a way that spells out how they will

contribute to the achievement of the business plan. Business strategies change and as

Nicki Demby, remarked: ‗This is a key issue. This changes reward strategy.‘ Put

simply, she said, ‗Your organization‘s fundamental purpose may be revised. Major

long-term goals in terms of outcomes and achievement of performance objectives

may change. As a result, what your organization has to be good at doing to fulfil its

mission and achieve its strategic goals will need refining.‘ The company‘s underlying

thinking here is that the people strategy is not for the human resource function to own

but is the responsibility of the whole organization, hence the title Organization and

People Strategy.

2.1.1.5 People Employed in the Organisation

The type of people employed and therefore the approach to reward will clearly be

dependent on the type of business and its technology, for example the growing

importance of ‗knowledge workers‘. But what has become increasingly recognized by

management is that ‗people make the difference‘ and that unique competitive

advantage is achieved by having better people who are capable of doing better things

than those in other businesses. The aim is to acquire, develop, motivate and retain

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people who possess distinctive capabilities (competencies) that arise from the nature

of the firm‘s activities and relationships. As Nicki Demby, formerly Performance and

Reward Director at Diageo, observed to e-reward: ‗It is our people who deliver our

performance, which is why ―release the potential of every employee‖ is at the heart of

our growth strategy. Alongside what we deliver, every bit as important is how we

deliver. Our people are judged against global leadership capabilities: edge, emotional

energy, ideas, people performance, and living the values.‘

2.1.1.6 The view of workers in the Organisation

Reward management policies should take into account the aspirations, expectations

and needs of employees as stakeholders in the organization. Consideration has also to

be given to the needs or views of other stakeholders, especially owners in the private

sector and governments, local authorities and trustees elsewhere. Employee

involvement is crucial to the development of reward policies and programmes. The

wishes of employees need to be ascertained. Their comments on existing practices

should be listened to and acted upon. They should be involved in the development of

new reward processes, for example job evaluation, performance management and

contingent pay. They should continue to be involved in the implementation and

evaluation of these processes.

2.1.2 The External Environment

The external environment in the shape of globalization, increased competition,

government interventions, the industrial relations scene and the characteristics of the

53
organization‘s sector can all influence reward policies and practices. The external

environment can be seen from the following:

2.1.2.1 Globalization

Globalization entails organizations moving people, ideas, products and information

around the world to meet local needs. Traditionally, discussions of international

reward strategies and practices have tended to focus on an elite of expatriate workers,

sourced from headquarter locations and rewarded in isolation from local country staff.

We are now seeing a more diverse and complex pattern emerging, requiring a much

more strategic approach.

2.1.2.2 Employment Records

An increasing demand for skills and qualifications is taking place, especially for

managerial and professional workers, knowledge workers, customer service staff,

technical and office staff and skilled manual workers. This, coupled with the skill

shortages associated with low levels of unemployment, influences reward strategies

designed to attract and retain people.

2.1.2.3 Pay rate in Market place

The external environment exerts a major influence on rates of pay and pay reviews

within organizations. Market or going-rate levels and movements have to be taken

into account by organizations if they want their pay to be competitive. Some

organizations are affected by national agreements with trade unions.

2.1.2.4 Demographic Trends

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One of the most important factors that reward and HR strategies have to address for

the future is demographic change. Birth rates throughout the developed world have

been falling in recent decades, and this has been paralleled by declining mortality

rates and increasing longevity. Just as traditional labour pools are shrinking,

traditional reward practices and mindsets have been further reducing on employment,

with early retirement through defined benefit pensions arrangements in the 1990s

helping to explain falls in the average age of retirement for both men and women. The

UK faces a long-term pension ‗crises as the ratio of the retired to the working

population increases. Individual companies such as British Airways and BAe Systems

has produced major deficits in traditional defined benefits pensions plan, which

represent a significant proportion of the market value of the firm. Industrial action in

public and private sectors has resulted from employers trying to change pension

arrangements to address these deficits. As Armstrong and Brown emphasize:

‗Resourcing and reward strategies which are heavily focused on either recruiting

young ―dynamic‖ staff and getting rid of ―old‖ employees at a fixed retirement date or

before; or the opportunistic poaching of staff with the requisite skills and experience

from competitors, are therefore becoming increasingly outdated and undesirable from

both an employer and national perspective.‘

2.3 The Voluntary not for profit sectors.

The voluntary and not-for-profit sectors are very diverse and it is difficult to detect

any general trends in the development of pay systems. Most of the big charities have

traditionally adopted public sector schemes with pay spines consisting of service

related incremental scales. In recent years, however, a number of the larger charities

and housing associations have introduced broad-banded structures and some form of

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contribution pay. In two examples (the Peabody Trust and the Shaw Trust) the

contribution pay scheme has involved an arrangement of four or five steps to a target

rate or reference point with progression based on competence. Above the target rate,

bonuses are given for special achievements, which can be consolidated if the high

level of achievement is sustained.

Other external environmental factors include; Local Government Scene, the national

government scene, and the national industrial scene.

3.0 CONCLUSION

The discussion in this unit took us through the philosophical context of total reward

system. We also attempted to discuss internal and external factors affecting reward

system in our modern organizations.

4.0 SUMMARY

In this unit, we treated the context of total reward system and those environmental

factors that may affect a sound reward system in our organizations.

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UNIT 3 REASONS AND PRINCIPLES FOR STRATEGIC REWARD

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Reasons for strategic reward
2.2 Principles of strategic reward
2.3
3.0 Conclusion
4.0 Summary

1.0 INTRODUCTION

In the words of Duncan Brown, strategic reward ‗is ultimately a way of thinking that

you can apply to any reward issue arising in your organization, to see how you can

create value from it‘.

2.0 MAIN CONTENT

2.1 Reasons for Strategic Reward

57
As highlighted in our introduction, Duncan Brown sees strategic reward ‗as ultimately

a way of thinking that you can apply to any reward issue arising in your organization,

to see how you can create value from it‘. More specifically, there are four arguments

for adopting a strategic approach to reward management:

1. You must have some idea where you are going, or how do you know how to

get there, and how do you know that you have arrived (if you ever do)?

2. As Cox and Purcell explain, ‗the real benefit in reward strategies lies in

complex linkages with other human resource management policies and

practices‘. Isn‘t this a good reason for developing a reward strategic

framework that indicates how reward processes will be aligned to HR

processes so that they are coherent and mutually supportive?

3. There can be a positive relationship between rewards, in the broadest sense,

and performance, so shouldn‘t we think about how we can strengthen that

link?

4. Pay costs in most organizations are by far the largest item of expense – they

can be 60 per cent and often much more in a labor-intensive organizations – so

doesn‘t it make sense to think about how they should be managed and invested

in the longer term?

2.2 Principles of Strategic Reward

The guiding principles should incorporate or be influenced by general beliefs about

fairness, equity, consistency and transparency. Reward strategies in the past have

sometimes focused exclusively on business needs and alignment. Yet unless

employees see and experience fairness and equity in their rewards, the strategy is

58
unlikely to be delivered in practice. The following are the principles of strategic

reward:

 Align reward strategies with the business and HR strategy.

 Value employees according to their competence and contribution.

 Align reward policies with the culture of the organization and use them to

underpin that culture and, as required, help to change it.

 Reward people according to what the organization values and is prepared to

pay for.

 Adopt an integrative approach that ensures that no innovations take place and

no practices are changed without considering how they relate to other aspects

of human resource management so that they can become mutually supportive.

 Provide managers with the authority and skills needed to use rewards to help

achieve their goals, but ensure that they are given the training, guidance and

continuing support required to develop and use these skills well.

 Ensure that reward processes are transparent and that staff are treated as

Stakeholders.

3.0 CONCLUSION

The discussion in this unit elaborately explained the reasons and principles needed

for a strategic and sound reward system.

4.0 SUMMARY

In this unit, we treated the reasons and principles behind a strategic reward system in

our 21st modern day organizations.

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UNIT 4 ADVANTAGES AND DISADVANTAGES OF TOTAL REWARD

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Advantages of Total Reward
2.2 Disadvantages of Total Reward
3.0 Conclusion
4.0 Summary
5.0 Tutored Marked Assignment
6.0 References/ Further Reading

1.0 INTRODUCTION

Every human activity is backed or opposed by advantages and disadvantages, so is the

case of reward system in our organizations. The various advantages among others

include improvement in employee commitment to an organization, promotion of

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flexibility in pay delivery, etc. while the negative sides are; time consumption, the

saying and not doing syndrome.

2.0 MAIN CONTENT

2.1 Advantages of Total Rewards

A typical organization believes that a total reward programme offers substantial

benefits. These are:

 improved recruitment, arising from a quantified total employment package;

 improving employees‘ perception of the value of their reward package;

 supporting the objective of becoming an ‗employer of choice‘;

 increased organizational performance through greater workforce commitment

and motivation;

 mixing extrinsic and intrinsic rewards to encourage employees‘ discretionary

effort;

 promoting flexibility in pay delivery;

 helping manage costs and maximize the return on the investment in HR;

 Reallocating reward to match individual employee needs.

2.2 Disadvantages of Total Reward

As important as Total reward, there are certain formidable stumbling blocks in

delivering this reward strategy, which include the following:

 It is easier to believe that total reward strategy is a good thing than to put it

into practice;

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  The cost of some intangible rewards is not quantifiable, and hence it is

difficult to make a business case;

 Developing total reward is time-consuming – it may take months to plan and

Implement;

Implementation and management require full support from the management team –

they are not something done by HR department of the business.

3.0 CONCLUSION

The discussion in this unit elaborately explained the advantages and disadvantages of

a total reward system. The various advantages among others include improvement in

employee commitment to an organization, promotion of flexibility in pay delivery,

etc. while the negative sides are; time consumption, the saying and not doing

syndrome

4.0 SUMMARY

In this unit, we highlighted various advantages and disadvantages of a total reward

system in our 21st modern day organizations

5.0 TUTOR-MARKED ASSIGNMENT

1. In your own words, what do you understand by Total Reward?

2. Total reward combines the impact of two major categories of reward. Discuss

3. List and explain the different approaches to total reward

4. Learning and development is made up of some components. List and discuss

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 5. There are two major environments that may affect reward system. Discuss the

components of those environment

6. What do you think are the basic reasons for incorporating a reward system in

our modern organizations?

6.0 REFERENCES

Bloom, M and Milkovich, GT (1998) Rethinking international compensation,

Compensation and Benefits Review, April, pp 17–27

Boxall, P and Purcell, J (2003) Strategic Human Resource Management, Palgrave

Macmillan, Basingstoke

Lawler, EE (1969) Job design and employee motivation, Personnel Psychology, 22,

pp 426–35

Pfeffer, J (1998) The Human Equation: Building profits by putting people first,

Harvard Business School Press, Boston, MA

Manus, TM and Graham, MD (2003) Creating a Total Rewards Strategy, American

Management Association, New York

Maslow, A (1954) Motivation and Personality, Harper & Row, New York

Thompson, P (2002) Total Reward, Chartered Institute of Personnel and

Development, London

Towers Perrin (2005) Reconnecting with Employees: Quantifying the value of

engaging your workforce, Towers Perrin, London

Robertson, IT and Smith, M (1985) Motivation and Job Design, IPM, London

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 Module 3

Unit 1 Concepts and types of motivation

Unit 2 Theories of motivation

Unit 3 Motivation and financial incentives as they affect reward

Unit 4 Motivation, Job satisfaction and Performance

Unit 1 Concepts and types of motivation

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Concept of Motivation
2.2 Types of Motivation

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 2.2.1 Extrinsic motivation
2.2.2 Intrinsic Motivation
3.0 Conclusion
4.0 Summary

1.0 INTRODUCTION

One of the most fundamental concerns of reward management is how high levels of

performance can be achieved by motivating people. The development of a

performance culture is a typical aim of reward strategy. It is therefore necessary to

understand the factors that motivate people and how, in the light of these factors,

reward processes and practices can be developed that will enhance motivation, job

engagement, commitment and positive discretionary behaviour. Motivation theories

provide essential guidance on the practical steps required to develop effective reward

systems (there is nothing so practical as a good theory). This unit examines the

process of motivation and those theories that influence reward. The relationship

between money and motivation is then considered, and the Unit ends with an analysis

of how motivation theory can be put to good use. Approaches to achieving

engagement and commitment are considered.

2.0 MAIN CONTENT

2.1 Concept of Motivation

A motive is a reason for doing something – for moving in a certain direction. People

are motivated when they expect that a course of action is could to lead to the

attainment of a goal – a valued reward that satisfies their particular needs. Well-

motivated people are those with well-defined goals who take action that they expect

will achieve those goals.

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Some of the common theorists such as Maslow (1954) and Herzberg et al., (1967),

have been established. But it cannot be assumed that these are present at any moment

to the same extent or even present at all in all the members of a population such as the

employees of an organization. It is a cliché to say that all people are different but it is

none the less true, and it is a truth that organizations sometimes fail to appreciate

when they assume, for example, that all their employees will be motivated to the same

degree by money.

2.2 Types of Motivation

Rewards serve many purposes in an organization. They serve to build a better

employment deal, hold on to good employees and to reduce employee turnover. The

principal goal is to increase people's willingness to work in one‘s company, to

enhance their productivity. Most people assimilate "rewards", with salary raise or

bonuses, but this is only one kind of reward, extrinsic reward. Studies proves that

salespeople prefer pay raises because they feel frustrated by their inability to obtain

other rewards, but this behavior can be modified by applying a complete reward

strategy.

There are two kinds of motivations:

2.2.1 Extrinsic Motivation.

These involves the things done to people in an organization in order to motivate them.

These are:

A. Salary raise. Is achieved after hard work and effort of employees, attaining

and acquiring new skills or academic certificates and as appreciation for

employee‘s duty (yearly increments) in an organization. This type of reward is

66
 beneficial for the reason that it motivates employees in developing their skills

and competence which is also an investment for the organization due to

increased productivity and performance. This type of reward offers long-term

satisfaction to employees. Nevertheless, managers must also be fair and equal

with employees serving the organization and eliminate the possibility of

adverse selection where some employees can be treated superior or inferior to

others.

B. Promotion: Quite similar to the former type of reward. Promotions tend to

effect the long-term satisfaction of employees. This can be done by elevating

the employee to a higher stage and offering a title with increased

accountability and responsibility due to employee efforts, behaviour and

period serving a specific organization. This type of reward is vital for the main

reason of redundancy and routine. The employee is motivated in this type of

reward to contribute all his efforts in order to gain managements trust and

acquire their delegation and responsibility. The issue revolved around

promotion is adverse selection and managers must be fair and reasonable in

promoting their employees.

C. Bonuses: Usually annually, Bonuses motivates the employee to put in all

endeavours and efforts during the year to achieve more than a satisfactory

appraisal that increases the chance of earning several salaries as lump sum.

The scheme of bonuses varies within organizations; some organizations ensure

fixed bonuses which eliminate the element of asymmetric information,

conversely, other organizations deal with bonuses in terms of performance

which is subjective and may develop some sort of bias which may discourage

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 employees and create setback. Therefore, managers must be extra cautious and

unbiased.

D. Gifts: Are considered short-term. Mainly presented as a token of appreciation

for an achievement or obtaining an organizations desired goal. Any employee

would appreciate a tangible matter that boosts their self-esteem for the reason

of recognition and appreciation from the management. This type of reward

basically provides a clear vision of the employee‘s correct path and motivates

employee into stabilizing or increasing their efforts to achieve higher returns

and attainments.

2.2.2 Intrinsic Motivation.

This was defined by Herzberg as motivation through the work itself. This happens

when people feel that the work they do is interesting, challenging, and important, and

involves exercising responsibility, autonomy or freedom to act, as well as abilities and

opportunity to develop and use skills for advancement and growth. Below are some of

the components of intrinsic motivation:

A. Information / feedback: Also a significant type of reward that successful and

effective managers never neglect. This type of rewards offers guidance to

employees whether positive (remain on track) or negative (guidance to the

correct path). This also creates a bond and adds value to the relationship of

managers and employees.

B. Recognition: Is recognizing an employee‘s performance by verbal

appreciation. This type of reward may take the presence of being formal for

example meeting or informal such as a "pat on the back" to boost employees‘

self-esteem and happiness which will result in additional contributing efforts.

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 C. Trust/empowerment: in any society or organization, trust is a vital aspect

between living individuals in order to add value to any relationship. This form

of reliance is essential in order to complete tasks successfully. Also, takes

place in empowerment when managers delegate tasks to employees. This adds

importance to an employee where his decisions and actions are reflected.

Therefore, this reward may benefit organizations for the idea of two minds

better than one.

Intrinsic rewards make the employee feel better in the organization, while Extrinsic

rewards focus on the performance and activities of the employee in order to attain a

certain outcome. The principal difficulty is to find a balance between employees'

performance (extrinsic) and happiness (intrinsic).

The reward also needs to be according to the employee‘s personality. For instance, a

sports fan will be really happy to get some tickets for the next big match. However, a

mother who passes all her time with her children, may not use them and therefore they

will be wasted.

When rewarding one, the manager needs to choose if he/she wants to rewards an

Individual, a Team or the whole Organization. One will choose the reward scope in

harmony with the work that has been achieved

3.0 CONCLUSION

The discussion in this unit elaborately explained those factors that can motivate an

employee to put in his/her best. This factors were grouped into intrinsic and extrinsic

factors.

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4.0 SUMMARY

In this unit, we highlighted various factors capable of motivating an employee to put

in his or her best into the organization.

Unit 2 Theories of Motivation

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Theories Of Motivation
2.1.1 instrumentality theories
2.1.2 the need/content theory
2.1.3 Maslow hierarchy of need theory
2.1.4 Herzberg‘s two factor model
2.1.4.1 Implication of the theory for management
2.1.5 Cognitive theory
2.1.5.1 Criticism of the theory
2.1.6 Expectancy theory
2.1.6.1 major elements of the theory
2.1.6.2 criticism of the theory

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 2.1.7 Goal theory
2.1.7.1 implication of the theory to organization
2.1.8 equity theory
3.0 Conclusion

1.0 INTRODUCTION

This unit will discuss the various theories of motivation such as Instrumentality

theory, the Need/content theory, Herzberg‘s two-factor model, Cognitive theory and

Expectancy theory among others.

2.0 MAIN CONTENT

2.1 Theories of Motivation

The process of motivation as described above is broadly based on a number of

motivation theories that attempt to explain in more detail what it means. The main

theories as described below are:

Value of Rewards Abilities

Effort Performance

Probability that
reward depends Role Expectations
upon effort

Source: Porter & Lawler (1968)

Figure 3.1 Motivation Model

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2.1.1 Instrumentality theory.

‗Instrumentality‘ is the belief that if we do one thing it will lead to another. In its

crudest form, instrumentality theory states that people work only for money. The

theory emerged in the second half of the 19th century, when the emphasis was on the

need to rationalize work and to concentrate on economic outcomes. It assumes that

people will be motivated to work if rewards and penalties are tied directly to their

performance. Instrumentality theory has its roots in the scientific management

methods of Taylor, who wrote: ‗It is impossible, through any long period of time, to

get workmen to work much harder than the average men around them unless they are

assured a large and permanent increase in their pay.‘ This belief is often described as

‗Taylorism‘.

Instrumentality theory is based on the principle of reinforcement, which states that,

with experience in taking action to satisfy needs, people perceive that certain actions

help to achieve their goals while others are less successful. Success in achieving goals

and rewards therefore acts as a positive incentive and reinforces the behaviour, which

is repeated the next time a similar need emerges. Conversely, failure or punishment

provides negative reinforcement, suggesting the need to seek alternative means of

achieving goals. This process has been called the law of effect.

Motivation using this approach has been and still is widely adopted and can be

successful in some circumstances. But it is based exclusively on a system of external

controls and fails to recognize a number of other human needs. Nor does it take

account of the fact that the formal control system can be seriously affected by the

informal relations between workers.

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2.1.2 The Need/content theory

This is also called the need theory. The basis of this theory is the belief that an

unsatisfied need creates tension and disequilibrium. To restore the balance a goal is

identified that will satisfy the need, and a behaviour pathway is selected that will lead

to the achievement of the goal. All behaviour is therefore motivated by unsatisfied

needs. Not all needs are equally important to a person at any one time. Some may

constitute a more powerful drive towards a goal than others, depending on the

individual‘s background and situation. Complexity is increased because there is no

simple relationship between needs and goals. The same need could be satisfied by a

number of different goals. The stronger the need and the longer its duration, the

broader the range of possible goals. At the same time, one goal may satisfy a number

of needs. A new car provides transport as well as an opportunity to impress the

neighbours.

Figure 3.2 Maslow Hierarchy of needs theory

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The best-known contributor to needs theory is Maslow. He is considered to be the

father of Humanistic Psychology, also known as the ―Third Force‖. Humanistic

Psychology incorporates aspects of both Behavioral Psychology and Psychoanalytic

Psychology. Behaviorists believe that human behavior is controlled by external

environmental factors. Psychoanalytic Psychology is based on the idea that human

behavior is controlled by internal unconscious forces. Though he studied both

Behavioral and Psychoanalytic Psychologies, Maslow rejected the idea that human

behavior is controlled by only internal or external forces. Instead, Maslow‘s

motivation theory states that man‘s behavior is controlled by both internal and

external factors. In addition, he emphasizes that humans have the unique ability to

make choices and exercise free-will. He formulated the concept of a hierarchy of

needs, which start from the fundamental physiological needs and lead through safety,

social and esteem needs to the need for self-fulfillment, the highest need of all. He

said that ‗man is a wanting animal‘; only an unsatisfied need can motivate behaviour,

and the dominant need is the prime motivator of behaviour. Maslow showed little

interest in animal or laboratory studies of human behavior. He chose instead to collect

data for his theories by studying outstanding individuals.

His studies led him to believe that people have certain needs which are unchanging

and

genetic in origin. These needs are the same in all cultures and are both physiological

and psychological. Maslow described these needs as being hierarchal in nature,

meaning that some needs are more basic or more powerful than others and as these

needs are satisfied, other higher needs emerge.

This is the best-known theory of needs, but it has never been verified by empirical

research.

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2.1.3 Understanding Maslow’s Needs Hierarchy

To understand Maslow‘s thinking it‘s worth noting some of his main assertions:

 Broadly, as one set of needs is met, the next level of needs become more of a

motivator to an individual.

 A satisfied need is not a motivator.

 Only unsatisfied needs motivate an individual. We have an innate desire to

work our way up the hierarchy, pursuing satisfaction in higher order needs.

 Self-actualization stimulates a desire for more due to what Maslow explained

as ―peak experiences‖.

2.1.4 Herzberg’s Two-Factor Model

To understand employees‘ attitudes and motivation, Herzberg undertook studies to

determine which factors in an employee‘s work environment caused satisfaction

and/or dissatisfaction. His findings were published in the 1959 book The Motivation

to Work. The studies included interviews in which employees where asked what

pleased and displeased them about their work.

Herzberg found that the factors causing job satisfaction (and presumably motivation)

were different from those causing job dissatisfaction. He developed the motivation-

hygiene theory to explain these results. He called the satisfiers motivators and the

dissatisfies hygiene factors, using the term ―hygiene‖ in the sense that they are

considered maintenance factors that are necessary to avoid dissatisfaction but that by

themselves do not provide satisfaction. The following table presents the top six

factors causing dissatisfaction and the top six factors causing satisfaction, listed in the

order of higher to lower importance. Herzberg‘s two-factor model theory states that

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the factors giving rise to job satisfaction (and motivation) are distinct from the factors

that lead to job dissatisfaction. It is sometimes called the motivation–hygiene theory.

There are two groups of factors. The first consists of the satisfiers or motivators,

which are intrinsic to the job. These include achievement, recognition, the work itself,

responsibility and growth. The second group comprises what Herzberg calls the

‗dissatisfaction avoidance‘ or ‗hygiene‘ factors, which are extrinsic to the job and

include pay, company policy and administration, personal relations, status and

security. These cannot create satisfaction but, unless preventive action is taken, they

can cause dissatisfaction. He also noted that any feeling of satisfaction resulting from

pay increases was likely to be short-lived compared with the long-lasting satisfaction

from the work itself. One of the key conclusions derived from the research is

therefore that pay is not a motivator, except in the short term, although unfair payment

systems can lead to demotivation.

Herzberg‘s two-factor model draws attention to the distinction between

intrinsic and extrinsic motivators, and his contention that the satisfaction resulting

from pay increases do not persist has some face validity. But his research and the

conclusions he reached have been attacked – first because, it is asserted, the original

research is flawed and fails to support the contention that pay is not a motivator, and

secondly because no attempt was made to measure the relationship between

satisfaction and performance. As Guest (1992) has written: ‗Many managers‘

knowledge of motivation has not

advanced beyond Herzberg and his generation. This is unfortunate. Their theories are

now over thirty years old. Extensive research has shown that as general theories of

motivation the theories of Herzberg and Maslow are wrong. They have been replaced

by more relevant approaches.‘

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2.1.4.1 Implications of the Theory for Management

If the motivation-hygiene theory holds, management not only must provide hygiene

factors to avoid employee dissatisfaction, but also must provide factors intrinsic to the

work itself in order for employees to be satisfied with their jobs. Herzberg argued that

job enrichment is required for intrinsic motivation, and that it is a continuous

management process. According to Herzberg:

 The job should have sufficient challenge to utilize the full ability of the

employee.

 Employees who demonstrate increasing levels of ability should be given

increasing levels of responsibility.

 If a job cannot be designed to use an employee‘s full abilities, then the firm

should consider automating the task or replacing the employee with one who

has a lower level of skill. If a person cannot be fully utilized, then there will be

a motivation problem. Critics of Herzberg‘s theory argue that the two-factor

result is observed because it is natural for people to take credit for satisfaction

and to blame dissatisfaction on external factors.

Furthermore, job satisfaction does not necessarily imply a high level of motivation or

productivity. Herzberg‘s theory has been broadly read and despite its weaknesses its

enduring value is that it recognizes that true motivation comes from within a person

and not from KITA factors

2.1.5 Cognitive Theory

This is also referred to as the Process theory. Cognitive theory suggested first that

external factors such as tangible rewards, deadlines (Amabile, DeJong, & Lepper,

1976), surveillance, and evaluations tend to diminish feelings of independence on the

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employee, prompt a change in perceived locus of causality from internal to external,

and undermine intrinsic motivation. However, some external factors like providing

choice about aspects of task engagement tend to enhance feelings of autonomy,

prompt a shift in PLOC from external to internal, and increase intrinsic motivation

(Zuckerman et al., 1978). Cognitive Theory further suggested that feelings of

competence as well as feelings of autonomy are important for intrinsic motivation.

Studies showed that optimally challenging activities were highly intrinsically

motivating (e.g., Danner & Lonky, 1981) and that positive feedback (Deci, 1971)

facilitated intrinsic motivation by promoting a sense of competence when people felt

responsible for their successful performance (Fisher, 1978; Ryan, 1982). Furthermore,

negative feedback which decreased perceived competence was found to undermine

both intrinsic and extrinsic motivation, leaving people not motivated (Deci & Ryan,

1985a). Underlying these CET propositions was the assumption that people need to

feel autonomous and competent, so social-contextual factors that promote feelings of

autonomy and competence enhance intrinsic motivation, whereas factors that diminish

these feelings undermine intrinsic motivation, leaving people either controlled by

contingencies or amotivated. Spirited debate ensued concerning both the undermining

effect and Cognitive theory, leading to numerous laboratory experiments and field

studies intended to support, refine, extend, or refute the undermining effect and

Cognitive Theory. Eventually, a meta-analysis of 128 laboratory experiments

confirmed that, whereas positive feedback enhances intrinsic motivation, tangible

rewards significantly undermine it (Deci, Koestner, & Ryan, 1999).

Cognitive theories are known as process theories because they describe the

psychological processes or forces that affect motivation, as well as basic needs. The

term ‗cognitive theory‘ is used because it refer to people‘s perception of their working

78
environment and the ways in which they interpret and understand it. Process theory

can be more useful to managers than needs theory because it provides more realistic

guidance on motivation techniques.

2.1.5.1 Criticism of the Theory

The undermining of intrinsic motivation by extrinsic rewards and the Cognitive

Theory account of that phenomenon received attention in the organizational literature

in the 1970s and early 1980s, leading to Cognitive Theory being referred to as one of

seven traditional theories of motivation in organizations. This acceptance soon waned.

Some of these reasons are:

 Most studies that tested Cognitive Theory were laboratory experiments rather

than organizational studies.

 It was difficult to incorporate CET propositions into the prevalent behavioral

and expectancy valence approaches.

 More practically, many activities in work organizations are not intrinsically

interesting and the use of strategies such as participation to enhance intrin-

sic motivation is not always feasible.

 most people who work have to earn money, so using monetary rewards as a

central motivational strategy seems practical and appealing.

 Cognitive Theory seemed to imply that managers and management theo-

rists would have to focus on one or the other i.e. either on promoting intrin-

sic motivation through participation and empowerment while minimizing

the use of extrinsic factors or, alternatively, on using rewards and other ex-

trinsic contingencies to maximize extrinsic motivation while ignoring the

importance of intrinsic motivation

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  The Concepts of internalization (Ryan, Connell & Deci 1985), which di-

rectly addresses the last of the above critiques of Cognitive Theory and also

has implications for some of the others. Internalization refers to ‗taking in‘

a behavioral regulation and the value that underlies it (Gagne & Deci,

2005).

2.1.6 Expectancy Theory

Expectancy theory proposes that a person will decide to behave or act in a certain way

because they are motivated to select a specific behavior over other behaviors due to

what they expect the result of that selected behavior will be. In essence, the

motivation of the behavior selection is determined by the desirability of the outcome.

However, at the core of the theory is the cognitive process of how an individual

processes the different motivational elements. This is done before making the ultimate

choice. The outcome is not the sole determining factor in making the decision of how

to behave. Expectancy theory is about the mental processes regarding choice, or

choosing. It explains the processes that an individual undergoes to make choices. In

the study of organizational behavior, expectancy theory is a motivation theory first

proposed by Victor Vroom of the Yale School of Management. This theory

emphasizes the needs for organizations to relate rewards directly to performance and

to ensure that the rewards provided are those rewards deserved and wanted by the

recipients. Victor H. Vroom (1964) defines motivation as a process governing choices

among alternative forms of voluntary activities, a process controlled by the individual.

The individual makes choices based on estimates of how well the expected results of a

given behavior are going to match up with or eventually lead to the desired results.

Motivation is a product of the individual‘s expectancy that a certain effort will lead to

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the intended performance, the instrumentality of this performance to achieving a

certain result, and the desirability of this result for the individual, known as valence.

The core process theory is expectancy theory. As Guest notes, most other

approaches adapt or build on it. The concept of expectancy was originally contained

in the valency– instrumentality–expectancy (VIE) theory formulated by Vroom

(1964). Valency stands for value, instrumentality is the belief that if we do one thing

it will lead to another, and expectancy is the probability that action or effort will lead

to an outcome.

The strength of expectations may be based on past experience (reinforcement),

but individuals are frequently presented with new situations – a change of job,

payment system or working conditions imposed by management – where past

experience is an inadequate guide to the implications of the change. In these

circumstances, motivation

may be reduced. Motivation is likely only when a clearly perceived and usable

relationship exists between performance and outcome, and the outcome is seen as a

means of satisfying needs. This explains why extrinsic financial motivation – for

example, an incentive or bonus scheme – works only if the link between effort and

reward is understood (there is a clear ‗line of sight‘) and the value of the reward is

worth the effort. It also explains why intrinsic motivation arising from the work itself

can be more powerful than extrinsic motivation. Intrinsic motivation outcomes are

more under the control of individuals, who can judge from past experience the extent

to which advantageous results are likely to be obtained by their behaviour.

This theory was developed by Porter and Lawler into a model that follows

Vroom‘s ideas by suggesting that there are two factors determining the effort people

put into their jobs:

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 1. the value of the reward to individuals in so far as they satisfy their need

for security, social esteem, autonomy and self-actualization; and

2. The probability that reward depends on effort, as perceived by

individuals – in other words, their expectations of the relationship

between effort and reward. Thus, the greater the value of a set of

rewards, and the higher the probability that receiving each of these

rewards depends upon effort, the greater the effort that will be made in

a given situation. But, as Porter and Lawler emphasize, mere effort is

not enough. It has to be effective effort if it is to produce the desired

performance.

The two variables additional to effort that affect task achievement are:

a. ability – individual characteristics such as intelligence, manual skills and

know-how; and

b. Role perceptions – what individuals want to do or think they are required to

do. Role perceptions are good from the viewpoint of the organization if they

correspond with what it thinks the individual ought to be doing. They are poor

if the views of the individual and the organization do not coincide.

2.1.6.1 Major Elements of the Theory

The Expectancy Theory of Motivation explains the behavioral process of why

individuals choose one behavioral option over another. It also explains how they

make

decisions to achieve the end they value. Vroom introduces three variables within the

expectancy theory which are valence (V), expectancy (E) and instrumentality (I). The

three elements are important behind choosing one element over another because they

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are clearly defined: effort-performance expectancy (E>P expectancy), performance-

outcome expectancy (P>O expectancy).

Three components of Expectancy theory: Expectancy, Instrumentality, and Valence

1. Expectancy: Effort → Performance (E→P)

2. Instrumentality: Performance → Outcome (P→O)

3. Valence- V(R)

Expectancy: Effort → Performance (E→P)

2.5.2 Criticisms of the Theory

 Some of the critics of the expectancy model were Graen (1969) Lawler

(1971), Lawler and Porter (1967), and Porter and Lawler (1968). Their

criticisms of the theory were based upon the expectancy model being too

simplistic in nature; these critics started making adjustments to Vroom‘s

model.

 Edward Lawler claims that the simplicity of expectancy theory is deceptive

because it assumes that if an employer makes a reward, such as a financial

bonus or promotion, enticing enough, employees will increase their

productivity to obtain the reward. However, this only works if the employees

believe the reward is beneficial to their immediate needs. For example, an

increase in salary may not be desirable to an employee if the increase pushes

her into a tax bracket in which she believes her net pay is actually reduced,

which is actually impossible in the United States with marginal tax brackets.

Similarly, a promotion that provides higher status but requires longer hours

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 may be a deterrent to an employee who values evening and weekend time with

his children.

 Lawler‘s new proposal for expectancy theory is against Vroom‘s theory.

Lawler argues that since there have been a variety of developments of

expectancy theory since its creation in 1964; the expectancy model needs to be

updated. Lawler‘s new model is based on four claims. First, whenever there

are a number of outcomes, individuals will usually have a preference among

those outcomes. Two, there is a belief on the part of that individual that their

action(s) will achieve the outcome they desire. Three, any desired outcome

was generated by the individual‘s behavior. Finally, the actions generated by

the individuals were generated by the preferred outcome and expectation of

the individual.

 In a published work titled ―On the Origins of Expectancy Theory‖ published

in Great Minds in Management by Ken G. Smith and Michael A. Hitt, Vroom

himself agreed with some of these criticisms and stated that he felt that the

theory should be expanded to include research conducted since the original

publication of his book.

 Instead of just looking at expectancy and instrumentality, W.F. Maloney and

J.M.McFillen found that expectancy theory could explain the motivation of

those individuals who were employed by the construction industry. For

instance, they used worker expectancy and worker instrumentality. Worker

expectancy is when supervisors create an equal match between the worker and

their job. Worker instrumentality is when an employee knows that any

increase in their performance leads to achieving their goal.

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2.1.7 Goal theory

Edwin Locke and Gary Latham (1990), leaders in goal setting theory and research,

have incorporated nearly 400 studies about goals into a theory of goal setting and task

performance. According to the theory, there appear to be two cognitive determinants

of behavior: values and intentions (goals). A goal is defined simply as what the

individual is consciously trying to do. Locke and Latham postulate that the form in

which one experiences one‘s value judgments is emotional. That is to say, one‘s

values create a desire to do things consistent with them. Goals also affect behavior

(job performance) through other mechanisms. For Locke and Latham, goals,

therefore, direct attention and action.

Furthermore, challenging goals mobilize energy, lead to higher effort, and

increase persistent effort. Goals motivate people to develop strategies that will enable

them to perform at the required goal levels. Finally, accomplishing the goal can lead

to satisfaction and further motivation, or frustration and lower motivation if the goal is

not

accomplished.

Goal theory states that motivation and performance are higher when

individuals set specific goals, when the goals are difficult but accepted, and when

there is feedback on performance. Participation in goal setting is important as a means

of securing agreement to the setting of higher goals. Difficult goals must be agreed,

and achieving them must be helped by guidance and advice. Finally, feedback is vital

in maintaining motivation, particularly towards the achievement of even higher goals.

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Source; Lunenburg (2011)
Figure 3.3 General model of goal theory.

Goal theory provided the theoretical underpinning to processes such as management

by objectives where the emphasis was on setting goals and measuring performance.

Management by objectives, or MbO as it was known, is no longer a fashionable term,

Partly because MbO systems tended to be bureaucratic and overemphasize

quantitative targets. But they still provide the basis for traditional performance-related

pay schemes where the focus is on objectives and the measurement of achievements

as a means of providing financial rewards in the shape of performance pay.

2.1.7.1 Implications of the Theory to the Organisation

Under the right conditions, goal setting can be a powerful technique for motivating

organizations‘ members. The following are practical suggestions for organisations to

consider when attempting to use goal setting to enhance motivation and performance:

a. Goals Need to Be Specific. Organization members perform at higher levels

when asked to meet a specific high performance goal. Asking organization

members to improve, to work harder, or to do your best is not helpful, because

86
 that kind of goal does not give them a focused target Specific goals (often

quantified) let organization members know what to reach for and allow them

to measure their own progress. Research indicates that specific goals help

bring about other desirable organizational goals, such as reducing

absenteeism, tardiness, and turnover (Locke & Latham, 2002)

b. Goals Must Be Difficult to Attainable: A goal that is too easily attained will

not bring about the desired increments in performance. The key point is that a

goal must be difficult as well as specific for it to raise performance. However,

there is a limit to this effect. Although organization members will work hard to

reach challenging goals, they will only do so when the goals are within their

capability. As goals become too difficult, performance suffers because

organization members reject the goals as unreasonable and unattainable. A

major factor in attainability of a goal is self-efficacy (Bandura, 1997). This is

an internal belief regarding one‘s job -related capabilities and competencies. If

employees have high self-efficacies, they will tend to set higher personal goals

under the belief that they are attainable. The first key to successful goal setting

is to build and reinforce employees‘ self-efficacy.

c. Goals Must Be Accepted. Goals need to be accepted. Simply assigning goals

to organization members may not result in their commitment to those goals,

especially if the goal will be difficult to accomplish. A powerful method of

obtaining acceptance is to allow organization members to participate in the

goal-setting process. In other words, participation in the goal-setting process

tends to enhance goal commitment. Participation helps organization members

better understand the goals, ensure that the goals are not unreasonable, and

helps them achieve the goal. The fact or of self-efficacy mentioned above also

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 may come into play regarding imposed goals. Some individuals may reject

imposed goals, but if they have self-efficacy, they may still maintain high

personal goals to accomplish the imposed goals.

d. Feedback Must Be Provided on Goal Attainment. Feedback helps

organization members attain their performance goals. Feedback helps in two

important ways. First, it helps people determine how well they are doing. For

example, sports teams need to know the score of the game; a sharpshooter

needs to see the target; a golfer needs to know his score. The same can be said

for a work team, department, or organization. Performance feedback tends to

encourage better performance. Second, feedback also helps people determine

the nature of the adjustments to their performance that are required to

improve. For example, sports teams watch video reproductions of a game and

adjust their play; a sharpshooter can adjust his shot; a golfer can adjust her

swing; and a CEO of an organization can gage the growth, profitability, and

quality of a product line.

e. Deadlines Improve the Effectiveness of Goals. For most employees, goals

are more effective when they include a deadline for completion. Deadlines

serve as a time-control mechanism and increase the motivational impact of

goals. Being aware that a deadline is approaching, the typical employee will

invest more effort into completing the task. In contrast, if plenty of time

remains for attaining the goal, the employee is likely to slow down his or her

pace to fill the available time. However, when deadlines are too tight,

particularly with complex tasks, the quality of work may suffer.

f. Goals Are More Effective When They Are Used to Evaluate Performance.

When employees know that their performance will be evaluated in terms of

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 how well they attained their goals, the impact of goals increases. Salespeople,

for example, have weekly and monthly sales goals they are expected to attain.

Telephone operators have goals for the number of customers they should assist

daily. Quarterbacks are judged on the completion percentages of passes

thrown and the number of yards the offense generates per game. Coaches are

assessed on their win-loss record. CEOs of organizations are evaluated on

meeting growth, profitability, and quality goals.

Locke and Latham provide a well-developed goal-setting theory of motivation. The

theory emphasizes the important relationship between goals and performance.

Research supports predictions that the most effective performance seems to result

when goals are specific and challenging, when they are use d to evaluate performance

and linked to feedback on results, and create commitment and acceptance. The

motivational impact of goals may be affected by moderators such as ability and self-

efficacy. Deadlines improve the effectiveness of goals. A learning goal orientation

leads to higher performance (Lunenburg, 2011), than a performance goal orientation,

and group goal-setting is as important as individual goal-setting.

2.1.8 Equity Theory

John Stacey Adams, a workplace and behavioral psychologist, put forward his Equity

Theory on job motivation in 1963. The theory similar with Charles Handy‘s extension

and interpretation of previous theories of Maslow, Herzberg and other pioneers of

workplace psychology, in that the theory acknowledges the subtle and variable factors

that affect each individual‘s assessment and perception of their relationship with their

work, and thereby their employer.

However, awareness and cognizance of the wider situation - and crucially comparison

89
- feature more strongly in Equity Theory than in many other earlier motivational

theories.

The Equity Theory model therefore extends beyond the individual self, and

incorporates influence and comparison of other people‘s situations - for example

colleagues and friends - in forming a comparative view and awareness of Equity,

which commonly manifests as a sense of what is fair. Equity theory as described by

Adams (1965) states that people will be better motivated if they are treated equitably

and demotivated if they are treated inequitably. It is concerned with people‘s

perceptions of how they are being treated in relation to others. To be dealt with

equitably is to be treated fairly in comparison with another group of people (a

reference group) or a relevant other person. Equity involves feelings and perceptions,

and it is always a comparative process. It is not synonymous with equality, which

means treating everyone alike. That would be inequitable if they deserved to be

treated differently.

Equity theory is linked with the ‗felt-fair‘ principle as defined by Jaques (1961),

which states in effect that pay systems will be fair if they are felt to be fair.

Adams called personal efforts and rewards and other similar ‗give and take‘

issues at work respectively ‗inputs‘ and ‗outputs‘.

➢Inputs are logically what we give or put into our work. Outputs are everything we

take out in return. These terms help emphasize that what people put into their work

includes many factors besides working hours, and that what people receive from their

work includes many things aside from money.

➢Adams used the term ‗referent‘ others to describe the reference points or people

with

whom we compare our own situation, which is the pivotal part of the theory.

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➢Adams Equity Theory goes beyond - and is quite different from merely assessing

effort and reward. Equity Theory adds a crucial additional perspective of comparison

with ‗referent‘ others (people we consider in a similar situation.

Understanding Equity Theory - and especially its pivotal comparative aspect –

helps managers and policy-makers to appreciate that while improving, one‘s terms

and conditions can resolve that individual‘s demands (for a while), if the change is

perceived by other people to upset the Equity of their own situations then the solution

can easily generate far more problems than it attempted to fix.

Equity Theory reminds us that people see themselves and crucially the way they are

treated in terms of their surrounding environment, team, system, etc - not in isolation

and so they must be managed and treated accordingly.

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Figure 3.4 Adams’ Equity Theory:

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Table 3.1
3.0 Summary of Motivation Theories
Theory Theorist Summary of Theory Implication
Instrumentality Taylor People will be motivated to work if Conceptual basis of
rewards and penalties are tied incentive and pay-for-
directly to their performance. performance
schemes.
Needs Maslow Unsatisfied needs create Identifies a number of
tension and disequilibrium. key needs for
To restore the balance a goal is consideration in
identified that will satisfy the need, developing total reward
and a behavior pathway is selected policies.
that will lead to the achievement of
the goal. Only unsatisfied needs
motivate.
Two Factor Herzberg The factors giving rise to job A useful distinction is
satisfaction (and motivation) are made between intrinsic
distinct from the factors that lead to and extrinsic
job dissatisfaction. Any feeling motivation that
of satisfaction resulting from pay influences total reward
increases is likely to be short-lived decisions. The
compared with the long-lasting limited motivational
satisfaction from the work itself. effects of pay increases
Makes a distinction between are worth
intrinsic motivation arising from remembering when
the work itself and extrinsic considering the part
motivation provided by the contingent pay can play
employer, eg pay. in motivating people.
Expectancy Vroom Motivation is likely only Provides the foundation
when: 1) a clearly perceived for good practice in the
and usable relationship design and management
exists between performance of contingent pay.
and outcome; and 2) the The basis for the concept
outcome is seen as a means is the ‗line of sight‘,
of satisfying needs which emphasizes
the importance of
establishing a clear link
between the reward and
what has to be done to
achieve it.
Goal Latham Motivation and performance are Provides a theoretical
and higher when individuals are set underpinning for
Locke specific goals, when the goals are performance
difficult but accepted, and when management processes
there is feedback on performance. to ensure that they
contribute to
motivation through goal
setting and feedback.
Equity Adams People will be better motivated if Emphasizes the need to
they are treated equitably and develop an equitable
demotivated if they are treated reward
inequitably system involving the use
of job evaluation.

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UNIT 3 MOTIVATION AND FINANCIAL INCENTIVES AND
REWARDS

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Financial incentives and reward
3.0 Conclusion
4.0 summary

1.0 INTRODUCTION

It is mostly believed that financial incentives and rewards can motivate. People need

money and therefore want money. It can motivate but it is not the only motivator

2.0 MAIN CONTENT

2.1 Financial Incentives and Rewards

It is mostly believed that financial incentives and rewards can motivate. People need

money and therefore want money. It can motivate but it is not the only motivator. It

has been suggested by Wallace and Szilagyi (1982) that money can serve the

following reward functions:

 It can act as an instrument that provides valued outcomes.

 It can be a symbol that indicates the recipient‘s value to the organization.

 It can act as a goal that people generally strive for although to different

degrees.

 It can act as a general reinforcer because it is associated with valued rewards

so often that it takes on reward value itself.

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  Money motivates because it is linked directly or indirectly with the

satisfaction of many individual needs. It satisfies the basic need for survival

and security, if income is regular.

 It can also satisfy the need for self-esteem (it is a visible mark of appreciation)

and status – money can set you in a grade apart from your fellows and can buy

you things they cannot afford. Money satisfies the less desirable but

nevertheless prevalent drives of acquisitiveness and cupidity. So money may

in itself have no intrinsic meaning, but it acquires significant motivating power

because it comes to symbolize so many intangible goals. It acts as a symbol in

different ways for different people, and for the same person at different times.

Pay is often a dominant factor in the choice of employer, and pay is an

important consideration when people are deciding whether or not to stay with

an organization.

But doubts have been cast on the effectiveness of money as a motivator by Herzberg

et al (1957). As noted above, he claimed that, while the lack of it may cause

dissatisfaction, money does not result in lasting satisfaction. There is something in

this, especially for people on fixed salaries or rates of pay who do not benefit directly

from an incentive scheme. They may feel good when they get an increase, apart from

the extra money, it is a highly effective way of making people believe they are valued.

But the feeling of euphoria can rapidly die away. However, it must be re-emphasized

that different people have different needs, and Herzberg‘s two-factor theory has not

been validated.

Some will be much more motivated by money than others. What cannot be

assumed is that money motivates everyone in the same way and to the same extent.

But do financial incentives motivate people? The answer, according to Kohn (1993),

95
is absolutely not. He challenges what he calls the behaviourist dogma about money

and motivation. And he claims that ‗no controlled scientific study has ever found a

long term enhancement of the quality of work as a result of any reward system‘.

When you look at how people are motivated, claims Kohn, ‗It becomes disturbingly

clear that the more you use rewards to ―motivate‖ people, the more they tend to lose

interest in whatever they had to do to get the rewards.‘ He quotes research that has

‗repeatedly shown that the more salient or reinforcing the reward is, the more it

erodes intrinsic interest‘ and points out that ‗various devices can be used to get people

to do something, but that is a far cry from making people want to do something‘.

Pfeffer (1998) also posits that: ‗People do work for money, but they work even more

for meaning in their lives. In fact, they work to have fun. Companies that ignore this

fact are essentially bribing their employees and will pay the price in lack of loyalty

and commitment.‘ He believes that pay cannot substitute for a working environment

‗high on trust, fun and meaningful work‘.

In contrast, Gupta and Shaw (1998) emphasize the instrumental and symbolic

meaning of money. The instrumental meaning of money concerns what we get for it –

better houses, clothes, cars, etc. The symbolic meaning of money concerns how it is

viewed by ourselves and others – money signals our status in and worth to society.

They take the basic behaviourist line on money: ‗When certain behaviours are

followed by money, then they are more likely to be repeated. This means that

employees will do the things for which they are rewarded; it also means that they

ignore the things for which they are not rewarded.‘

The views expressed by Kohn are overwhelmingly convincing except that he seems to

think that the only types of rewards to be considered in this debate are financial. He

did not recognize that non-financial rewards can motivate if properly handled. Pfeffer,

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however, makes this point when he emphasizes the importance of trust and

meaningful work. Gupta and Shaw weaken their argument by adopting a crude

behaviourist viewpoint.

To assume that financial incentives will always motivate people to perform better is

as simplistic as to assume, like Kohn, that they never motivate people to perform

better. Some people will be more motivated by money that others and, if handled

properly, an incentive scheme can encourage them to perform more effectively as

long as they can link their effort to the reward and the reward is worth having.

Sometimes cash sums (bonuses) can be more effective rewards because they can be

immediately converted into things that people want. But others may be less interested

in money and will respond more to intrinsic or non-financial rewards. It seems likely

that the majority will react positively to a judicious mix of both financial and non-

financial rewards, although how positively will depend on their own needs and

aspirations.

It should also be remembered that, while an increase in pay arising from a contingent

pay scheme may motivate the people who get it, for a limited period perhaps it will

almost certainly demotivate those who don‘t get it or feel that they are not getting

enough compared with other people. The likelihood is that the number of people

demotivated in this way will be larger than the number who have been motivated.

Paradoxically, therefore, contingent pay schemes are in danger of increasing the

amount of demotivation existing in the organization rather than enhancing motivation.

As Lawler (1990) points out, people‘s feelings about the adequacy of their pay

are based upon comparisons they make between their own and others‘. External

market comparisons are the most critical because they are the ones that strongly

influence whether individuals want to stay with the organization. Many people,

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however, are unlikely to leave for pay reasons alone unless the increase they expect

from a move is substantial.

He further suggests that, ‗Sometimes it seems that individuals are never

satisfied with the pay.‘ One of the reasons put forward by Lawler for low pay

satisfaction is that individuals tend to seek unfavourable comparisons. First they look

externally. If comparisons there are favourable, they then focus on internal

comparisons. Only if these are favourable as well are they likely to be satisfied. He

comments that: ‗A finding

that employees are dissatisfied with pay is, in effect, a non-finding. This should not be

expected.

3.0 CONCLUSION

The discussion in this unit elaborately and empirically explained both the positive

and negative aspects of financial incentives and how this incentives affects

employee‘s performance (output) and commitment in an organization.

4.0 SUMMARY

In this unit, we highlighted various benefits/argument for or otherwise of financial

incentives in our 21st century organizations..

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Unit 4 Motivation, Job Satisfaction and Performance

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Job satisfaction and performance
3.0 Conclusion
4.0 Summary
5.0 Tutor-Marked Assignment
6.0 Reference/Further reading

1.0 INTRODUCTION

There is no sufficient evidence that there is always a strong and positive relationship

between job satisfaction and performance. A worker that satisfied is not necessarily a

high performer and a high performer is not necessarily a satisfied worker.

2.0 MAIN CONTENT

2.1 Job Satisfaction and Performance

As highlighted in our introduction. There is no sufficient evidence that there is always

a strong and positive relationship between job satisfaction and performance. A worker

that satisfied is not necessarily a high performer and a high performer is not

necessarily a satisfied worker. Satisfaction may lead to good performance but good

performance may just as well be the cause of satisfaction.

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The relationship between motivation and performance is even more complex. Vroom

(1964) formulated it as P = M × A where P is performance, M is motivation and A is

ability.

Note that the relationship is multiplicative – if the value of either M or A is zero, then

there will be no performance. Performance depends on both motivation and ability.

A more recent formulation of the relationship has been produced by Boxall and

Purcell (2003). This states that P = M + A + S where P is performance, M is

motivation, A is ability and S is scope to use and develop abilities. Note that the

relationship is not multiplicative as in Vroom and there is an additional factor (scope).

By including ability and scope as factors, the latter formulation underlines the

importance of adopting an integrated approach to reward and other HR strategies.

Motivation by pay or any other means is not enough. Reward strategies must be

associated with human resource development and resourcing strategies to maximize

their impact on performance.

3.0 CONCLUSION

The discussion in this unit elaborately and empirically explained both relationship

between job satisfaction and performance. The unit concluded that Motivation by pay

or any other means is not enough. Reward strategies must be associated with human

resource development and resourcing strategies to maximize their impact on

performance

4.0 SUMMARY

In this unit, we highlighted the relationship between job satisfaction and performance.

Also a formula was developed by different scholars to expatiate on the topic

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5.0 TUTOR-MARKED ASSIGNMENT

1. Is it true that only financial incentives motivate people?. Discuss

2. What similarities can be found in the various schools of thought as regards to

motivation (Hint; Theories Of Motivation)

3. Do you think that there exist a relationship between job satisfaction and

performance?. discuss

6.0 REFERENCES

Adams, J (1965) Injustice in social exchange, in Advances in Experimental

Psychology, ed L Berkowitz, Academic Press, New York

Boxall, P and Purcell, J (2003) Strategic Human Resource Management, Palgrave

Macmillan, Basingstoke

Gupta, N and Shaw, JD (1998) Financial incentives are effective!, Compensation and
Benefits Review, March/April, pp 26, 28–32

Guest, D (1992) Motivation after Herzberg, Unpublished paper delivered at the

Compensation Forum, London

Herzberg, F, Mausner, B and Snyderman, B (1957) The Motivation to Work, Wiley,

New York

Kohn, A (1993) Why incentive plans cannot work, Harvard Business Review,
September/October, pp 54–63

Latham, G and Locke, EA (1979) Goal setting: a motivational technique that works,
Organizational Dynamics, Autumn, pp 68–80

Lawler EE (1990) Strategic Pay, Jossey-Bass, San Francisco Jaques, E (1961)

Equitable Payment, Heinemann, London

Maslow, A (1954) Motivation and Personality, Harper & Row, New York

Pfeffer, J (1998) Six dangerous myths about pay, Harvard Business Review, May/
June, pp 42–51

Porter, L and Lawler, EE (1968) Management Attitudes and Behaviour, Irwin-Dorsey,

Homewood, IL

Taylor, FW (1911) Principles of Scientific Management, Harper, New York

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Vroom, V (1964) Work and Motivation, Wiley, New York

Wallace, MJ and Szilagyi, L (1982) Managing Behaviour in Organizations, Scott,

Glenview, IL

MODULE 4 JOB EVALUATION

Unit 1 Evaluation, Characteristics and Objectives
Unit 2 Types of Job Evaluation
Unit 3 Performance Management
Unit 4 Market Pricing

UNIT 1 NATURE, CHARACTERISTICS AND OBJECTIVES OF JOB

EVALUATION

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Nature of Job Evaluation
2.2 Characteristics of Job Evaluation
2.3 Objectives of Job Evaluation
3.0 Conclusion
4.0 summary

1.0 INTRODUCTION
In this unit, we shall be discussing the nature of job evaluation, its basic features or
characteristics and the basic aim of job evaluation.

2.0 MAIN CONTENT

2.1. Nature of Job Evaluation

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Job evaluation is a systematic process of defining the relative worth or size of jobs
within an organization in order to establish internal relativities. It provides the basis
for designing an equitable grade and pay structure, grading jobs in the structure,
managing job and pay relativities and guiding the achievement of equal pay for work
of equal value.

2.2 Characteristics of Job Evaluation

The following are the characteristics of Job evaluation:
1. Based on factual evidence
The relative value or ‗size‘ of jobs is determined on the basis of information on the
characteristics of the jobs. In analytical schemes this information is assessed within a
structured framework of criteria or factors.
2. Judgmental
Human judgement has to be exercised at a number of points in the job evaluation
process. Although job evaluations are based on factual evidence, this has to be
interpreted. The information provided about jobs through job analysis can sometimes
fail to provide a clear indication of the levels at which demands are present in a job.

The definitions in a factor plan used in an analytical scheme or grade definitions in a

non-analytical scheme will not precisely indicate the level of demand that should be
recorded. Judgement is required in making decisions on the level and therefore, in a
point-factor or factor comparison scheme, the score.
The aim is to be objective, but it is difficult to eliminate a degree of subjectivity. As
the EOC states (2003), ‗it is recognized that to a certain extent any assessment of a
job‘s total demands relative to another will always be subjective‘.
A fundamental aim of any process of job evaluation is to ensure, as far as possible,
that consistent judgements are made based on objectively assessed information. To
refer to an evaluation as ‗judgmental‘ does not necessarily mean that it is inaccurate
or invalid. Correct judgements are achieved when they are made within a defined
framework and are based on clear evidence and sound reasoning. This is what job
evaluation can do if the scheme is properly designed and properly applied.
3. Concerned with internal relativities
When used within an organization, job evaluation in the true sense as defined above
(ie not market pricing as described later) can only assess the relative size of jobs in
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that organization. It is not concerned with external relativities, that is, the relationship
between the rates of pay of jobs in the organization and the rates of pay of comparable
jobs elsewhere (market rates).
4. Concerned with the job not the person
This is the iron law of job evaluation. It means that when evaluating a job, the only
concern is the content of that job in terms of the demands made on the job holder. The
performance of the individual in the job must not be taken into account. But it should
be noted that while performance is excluded, in today‘s more flexible organizations
the
tendency is for some people, especially knowledge workers, to have flexible roles.
Individuals may have the scope to enlarge or enrich their roles and this needs to be
taken into account when evaluating what they do. Roles cannot necessarily be
separated
from the people who carry them out. It is people who create value not jobs.

2.3 Objectives of Job Evaluation

 produce the information required to design and maintain equitable and
defensible grade and pay structures;
 provide as objective as possible a basis for grading jobs within a grade
structure, thus enabling consistent decisions to be made about job grading;
 establish the relative value or size of jobs, i.e. internal relativities based on
fair, sound and consistent judgements;
 enable sound market comparisons with jobs or roles of equivalent complexity
and size;
 be transparent – the basis upon which grades are defined and jobs graded
should be clear;
 ensure that the organization meets equal-pay-for-work-of-equal-value
obligations.

3.0 Conclusion
The discussion in this unit explained the nature, characteristics and the objectives of
job evaluation among which are; produce the information required to design and
maintain equitable and defensible grade and pay structures; provide as objective as
possible a basis for grading jobs within a grade structure, thus enabling consistent

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decisions to be made about job grading; establish the relative value or size of jobs, i.e.
internal relativities based on fair, sound and consistent judgements; among others.
.
4.0 Summary
In this unit, we discussed on the nature, characteristics and objectives of job evaluation
in our 21st century organizations

UNIT 2 TYPES OF JOB EVALUATION

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Types of Job evaluation
2.1.1 analytical evaluation
2.1.2 non-analytical job evaluation
2.1.3 market pricing
3.0 Conclusion
4.0 summary

1.0 INTRODUCTION
This unit will discuss on the various types of job evaluation which include; Analytical
Job Evaluation, Non Analytical Job Evaluation and Market Pricing among others.

2.0 MAIN CONTENT

2.1 Types of Job Evaluation
The three main categories of job evaluation are analytical schemes, non-analytical
schemes and market pricing. The first two rely on internal comparisons and do not
directly ‗price‘ the jobs, i.e attach rates of pay to them. Market pricing is not a job
evaluation scheme as usually defined because it relies totally on external comparisons,
but it‘s included in this chapter because it is a method of determining the relative
value of jobs, albeit in financial terms.

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2.1.1 Analytical Job Evaluation
Analytical job evaluation is the process of making decisions about the value or size of
jobs, which are based on an analysis of the level at which various defined factors or
elements are present in a job in order to establish relative job value. The set of factors
used in a scheme is called the ‗factor plan‘, which defines each of the factors used
(which should be present in all the jobs to be evaluated) and the levels within each
factor. Analytical job evaluation is the most common approach to job evaluation The
two main types of analytical job evaluation schemes are point-factor schemes and
analytical factor comparison schemes, as described later. Another variety of analytical
scheme is factor comparison but it is not used except by independent experts in equal
pay cases and as a basis for the Hay Guide Chart method of job evaluation.

2.1.2 Non Analytical Job Evaluation

Non-analytical job evaluation compares whole jobs to place them in a grade or a rank
order – they are not analyzed by reference to their elements or factors. Non-analytical
schemes do not meet the requirements of equal value law. They operate either on a
job-to-job basis in which a job is compared with another job to decide whether it
should be valued more, or less, or the same (ranking and ‗internal benchmarking‘ or
job-matching processes) or a job-to-scale basis in which judgements are made by
comparing a whole job with a defined hierarchy of job grades (job classification) –
this involves matching a job description to a grade description.

2.1.3 Market Pricing

Market pricing is the process of assessing rates of pay by reference to the market rates
for comparable jobs. It can be described as external benchmarking.
Generally, Organizations have to use some method of valuing jobs that ensures that
their pay system is externally competitive or internally equitable. Every time a
decision is made on what a job should be paid it requires the use of either job
evaluation or market pricing. Job evaluation proper is all about creating an internally
equitable grade structure to which pay levels or ranges are attached that take account
of market rates although they are not allowed to drive the structure. But it can be
resource-intensive. Market pricing is, in a sense, realistic and is not so bureaucratic or
time-consuming as the conventional forms of job evaluation, although it ignores the
claims of internal equity.
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3.0 Conclusion
The discussion in this unit explained the three aim types of Job evaluation. The three
main categories of job evaluation are analytical schemes, non-analytical schemes and
market pricing. The first two rely on internal comparisons and do not directly ‗price‘
the jobs, i.e. attach rates of pay to them.
.
4.0 Summary
In this unit, we discussed the three basic types of job evaluation, (analytical scheme,
non-analytical scheme and market pricing).
UNIT 3 PERFORMANCE MANAGEMENT AND REWARD

Performance management is a strategic and integrated process that delivers sustained

success to organizations by improving the performance of the people who work in
them and by developing the capabilities of individual contributors and teams. It is
strategic in the sense that it is concerned with the broader issues facing the business if
it is to function effectively in its environment, and with the general direction in which
it intends to go to achieve longer-term goals. It is integrated in two senses: 1) vertical
integration – linking or aligning business, team and individual objectives and core
competences; and 2) horizontal integration – linking different aspects of human
resource management, especially organizational development, human resource
development and reward, to achieve a coherent approach to the management,
development and motivation of people.

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UNIT 4 THE REASON FOR PERFORMANCE MANAGEMENT.

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Reasons for performance Management
2.2 Performance management circle
3.0 Conclusion
4.0 summary

1.0 INTRODUCTION
The fundamental purpose of performance management is to get better results from the
organization, teams and individuals by understanding and managing performance
within an agreed framework of planned goals, standards and competence
requirements.

2.0 MAIN CONTENT

2.1 Reasons for Performance Management
As highlighted in our introductory part, the fundamental purpose of performance
management is to get better results from the organization, teams and individuals by
understanding and managing performance within an agreed framework of planned
goals, standards and competence requirements. It is a process for establishing shared
understanding about what is to be achieved, and an approach to managing and
developing people in a way that increases the probability that it will be achieved in the
short and longer term. It is owned and driven by line management. Performance
management can also make a major contribution to the motivation of people by
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providing the foundation upon which many non-financial motivation approaches can
be built. Essentially, performance management is concerned with the encouragement
of productive discretionary behaviour. As defined by John Purcell and his team at
Bath University, ‗Discretionary behaviour refers to the choices that people make
about how they carry out their work and the amount of effort, care, innovation and
productive behaviour they display. It is the difference between people just doing a job
and people doing a great job.‘ On the basis of their research on examining the
relationship between HR practice and business performance, Purcell and his
colleagues noted that ‗the experience of success seen in performance outcomes helps
to reinforce positive attitudes‘. Performance management can help to define what
success is and how it can be attained.

2.2 Performance Management Cycle

Performance management is a natural process of management. It is not a HRM
technique or tool. As a natural process of management, the performance management
cycle as shown in Figure 4.1 corresponds with William Deming‘s (5) Plan–Do–
Check–Act model.
The performance management processes takes the following steps:
a. plan – agreeing objectives and competence requirements, identifying the
required behaviours, producing plans expressed in performance agreements
for meeting objectives and improving performance, and preparing personal
development plans to enhance knowledge, skills and competence and reinforce
the desired behaviours;
b. act – carrying out the work required to achieve objectives by reference to the
plans and in response to new demands;
c. monitor – checking on progress in achieving objectives and responding to
new demands, and treating performance management as a continuous
process – ‗managing performance all the year round‘ – rather than an annual
appraisal event;
d. review – a ‗stocktaking‘ discussion of progress and achievements held in a
review meeting and identifying where action is required to develop
performance as a basis for completing the cycle by moving into the planning
stage.

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Figure 4.1 Performance Management Cycle

3.0 Conclusion
The discussion in this unit explained the reasons behind performance management
and the performance management circle which are plan, act, monitor and review.

.
4.0 Summary
In this unit, we discussed the reasons and steps to achieve a sound performance
management system in our modern organizations.

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UNIT 5 PERFORMANCE MANAGEMENT AS A MOTIVATING
PROCESS.
CONTENT
1.0 Introduction
2.0 Main Content
2.1 Performance management as a motivating process
2.2 Performance management and non-financial motivation
2.2.1 performance management and recognition
2.2.2 performance management and the provision of opportunities to
achieve
2.2.3 performance management and skills development
2.2.4 performance management and career planning
2.2.5 performance management and job engagement
2.3 Performance Level
3.0 Conclusion
4.0 Summary
5.0 Tutor-marked assignment
6.0 references

1.0 INTRODUCTION
As discussed earlier in our previous unit (unit 4), Performance management, if carried
out properly, can motivate people by functioning as a key component of the total
reward process. It provides rewards in the form of recognition through feedback,
opportunities to achieve, the scope to develop skills, and guidance on career paths. It
can encourage job engagement and promote commitment. All these are non-financial
rewards that can make a longer-lasting and more powerful impact than financial
rewards such as performance-related pay.

2.0 MAIN CONTENT

2.1 Performance Management as a motivating Process
Performance management is, of course, also associated with pay by generating the
information required to decide on pay increases or bonuses related to performance,
competence or contribution. In some organizations this is its main purpose, but
performance management is, or should be, much more about developing people and
rewarding them in the broadest sense. Approaches to using performance management

111
to motivate by non-financial means are discussed below. The rest of this unit will deal
with performance management and pay.

2.2 Performance Management And Non-Financial Motivation

Non-financial motivation is provided by performance management through
recognition, the provision of opportunities to succeed, skills development and career
planning, and by enhancing job engagement and commitment.

2.2.1 Performance management and recognition

Performance management involves recognizing people‘s achievements and strengths.
They can be thanked, formally and informally, for what they have done.

2.2.2 Performance management and the provision of opportunities to achieve

Performance management processes are founded on joint agreements between
managers and their people on what the roles of the latter are and how their role can be
developed (enriched). It is therefore an essential part of job or role design and
development activities.

2.2.3 Performance management and skills development

Performance management can provide a basis for motivating people by enabling them
to develop their skills. It provides an agreed framework for coaching and support to
enhance and focus learning.

2.2.4 Performance management and career planning

Performance management reviews provide opportunities to discuss the direction in
which the careers of individuals are going and what they can do – with the help of the
organization – to ensure that they follow the best career path for themselves and the
organization.

2.2.5 Performance management and job engagement

People are engaged with their jobs when they have an interest in what they do and a
sense of excitement in their work. This can be created by performance management
when it concentrates on intrinsic motivating factors such as taking responsibility for

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job outcomes, job satisfaction and achievement and fulfilment of personal goals and
objectives.
One of the prime aims of performance management is to promote commitment to the
organization and its goals by integrating individual and organizational objectives.

2.3 PERFORMANCE LEVEL

The rating scale format can either be behavioural, with examples of good, average and
inadequate performance, or graphic, which simply presents a number of scale points
along a continuum. The scale points or anchors in the latter may be defined
alphabetically (a, b, c, etc), numerically (1, 2, 3, etc.) or by means of initials (ex for
excellent, etc), which purports to disguise the hierarchical nature of the scale. The
scale points may be further described adjectivally (eg exceptional, acceptable,
unsatisfactory).
The following is a typical example of a five-point rating scale, which progresses
downwards from highly positive to negative:

a. Outstanding performance in all respects.

b. Superior performance, significantly above normal job requirements.
c. Good all-round performance, which meets the normal requirements of the job.
d. Performance not fully up to requirements. Clear weaknesses requiring
improvement have been identified.
e. Unacceptable; constant guidance is required and performance of many aspects
of the job is well below a reasonable standard.
An alternative and increasingly popular approach is to have a rating scale such as the
following four-point one, which provides positive reinforcement or at least
emphasizes development needs at every level:

i. Very effective Consistently performs in a thoroughly proficient manner

beyond normal expectations.
ii. Effective Achieves required objectives and standards of performance and
meets the normal expectations of the job.

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 iii. Developing A contribution that is stronger in some aspects of the job than
others, where most objectives are met but where performance improvements
should still take place.
iv. Basic A contribution that indicates that there is considerable room for
improvement in several definable areas.

3.0 Conclusion
Performance management is, of course, also associated with pay by generating the
information required to decide on pay increases or bonuses related to performance,
competence or contribution. Non-financial motivation is provided by performance
management through recognition, the provision of opportunities to succeed, skills
development and career planning, and by enhancing job engagement and commitment

4.0 Summary
In this unit, we discussed both the financial and non-financial motivating factors of
performance management system in our modern organizations.

5.0 TUTOR-MARKED ASSIGNMENT

1. In your own words, what are the basic features, types and objectives of an

effective job evaluation system?

2. What do you think are the reasons for performance management in our

modern organizations?

3. Elaborately discuss the non-financial motivating factors of performance

management

6.0 REFERENCES
Acker, J. (1990). Hierarchies, jobs, bodies: A theory of gendered organizations.
Gender& society, 4(2), 139-158.

Robinson, D. D., Wahlstrom, O. W., & Mecham, R. C. (1974). Comparison of job

evaluation methods: A" policy-capturing" approach using the Position
Analysis Questionnaire. Journal of Applied Psychology, 59(5), 633.

Rodgers, S. H. (1988). Job evaluation in worker fitness determination. Occupational

medicine (Philadelphia, Pa.), 3(2), 219-239.
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Steinberg, R. J. (1992). Gendered instructions: cultural lag and gender bias in the Hay
system of job evaluation. Work and Occupations, 19(4), 387-423.
Module 5

Unit 1 Introduction, Grade and Pay structure and types

Unit 2 Developing and Implementing Gray and Pay Structure
Unit 3 Equal Pay for Equal work
Unit 4 Bonus Scheme
Unit 5 module

UNIT 1 GRADE, TYPES OF GRADE AND PAY STRUCTURE

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Grade Structure
2.1.1 Types of Grade Structure
2.2 Pay Structure
2.2.1 Reasons for having different types of pay system
3.0 Conclusion
4.0 Summary

1.0 INTRODUCTION
Pay is a key factor affecting relationships at work. The level and distribution of pay
and benefits can have a considerable effect on the efficiency of any organization, and
on the morale and productivity of the workforce. It is therefore vital that organizations
develop
pay systems that are appropriate for them, that provide value for money, and that
reward
workers fairly for the work they perform. Pay systems are methods of rewarding
people
for their contribution to the organization. Ideally, systems should be clear and simple
to follow so that workers can easily know how they are affected. In considering
rewards, it should be borne in mind that pay and financial benefits are not the only

115
motivator for worker performance. Other important motivators for individuals may
include job security, the intrinsic satisfaction in the job itself, recognition that they are
doing their job well, and suitable training to enable them to develop potential. Grade
and pay structures provide a logically designed framework within which an
organization‘s pay policies can be implemented. They enable the organization to
determine where jobs should be placed in a hierarchy, define pay levels and the scope
for pay progression and provide the basis upon which relativities can be managed,
equal pay achieved and the processes of monitoring and controlling the
implementation of pay practices take place. A grade and pay structure can also serve
as a medium through which the organization communicates the career and pay
opportunities available to employees.

2.0 MAIN CONTENT

2.1 Grade Structure

A grade structure consists of a sequence or hierarchy of grades, bands or levels into
which groups of jobs that are broadly comparable in size are placed. There may be a
single structure, which is defined by the number of grades or bands it contains.
Alternatively, the structure may be divided into a number of career or job families
consisting of groups of jobs where the essential nature and purpose of the work are
similar but the work is carried out at different levels.

2.1.1 Types of Grade Structure

The following are the types of Grade structure:
a. Narrow-graded structures, which consist of a sequence of narrow grades
(generally 10 or more). They are sometimes called multi-graded structures;
b. Career family structures, which consist of a number of families (groups of
jobs with similar characteristics) each divided typically into six to eight levels.
The levels are described in terms of key responsibilities and knowledge, skill
and competence requirements and therefore define career progression routes
within and between career families. There is a common grade and pay
structure across all the career families;
c. Broad-graded structures, which have fewer grades (generally six to nine);
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 d. Broad-banded structures, which consist of a limited number of grades or
bands (often four to five). Structures with six or seven grades are often
described as broad banded even when their characteristics are typical of broad
grades;
e. Job family structures, which are similar to career families except that pay
levels in each family may differ to reflect market rate considerations (this is
sometimes referred to as market grouping). The structure is therefore more
concerned with market rate relativities than mapping careers. The number of
levels in families may also vary;
f. Combined structures, in which broad bands are superimposed on career/job
families or broad bands are divided into families;
g. Pay spines, consisting of a series of incremental ‗pay points‘ extending from
the lowest- to the highest-paid jobs covered by the structure

Table 5.1 Description of different grade and pay structures

Types of Features Advantages Disadvantages

Structures
Narrow – A sequence of job – Clearly indicate – Create
graded grades:10 or more pay relativities hierarchical
– Narrow pay ranges, – Facilitate control rigidity
e.g.20%–40% – Easy to – Prone to grade
– Progression usually understand drift
linked to performance – Inappropriate in
a delayered
organization
Broad Graded – A sequence of As for narrow – Too much scope
between six and nine graded for pay progression
grades structures but in – Control
– Fairly broad pay addition: mechanisms
ranges, e.g. – the broader can be provided
40%–50% grades can be but
– Progression linked to defined more they can be
contribution and may clearly difficult to manage
be – better control can – May be costly
controlled by be exercised over
thresholds or zones grade drift

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Broad – A series of, often, – More flexible Create unrealistic
Branded five or six ‗broad‘ – Reward lateral expectations of
bands development scope for pay rises
– Wide pay bands: and growth in – Seem to restrict
typically, between competence scope for
50% and 80% – Fit new-style promotion
– Progression linked organizations – Difficult to
to contribution and understand
competence – Equal pay
problems
Career Family – Career families – Clarify career – Could be
identified paths within difficult to manage
and defined and between – May appear to be
– Career paths defined families divisive if ‗silos‘
for each family in – Facilitate the emerge
terms of key activities achievement
and competence of equity between
requirements families
– Same grade and pay and therefore equal
structure for each pay
family – Facilitate level
definitions
Job Family – Separate grade and – Can appear to be – Facilitate pay
pay divisive differentiation
structures for job – May inhibit between market
families containing lateral career groups
similar jobs development – Define career
– Progression linked to – May be difficult paths against clear
competence and/or to maintain internal criteria
contribution equity between job
families unless
underpinned by job
evaluation
Pay Spine – A series of – Easy to manage – No scope for
incremental pay – Pay progression differentiating
points covering all jobs not based on rewards according
– Grades may be managerial to
superimposed judgement performance
– Progression linked to – May be costly as
service staff
drift up the spine

Source: Armstrong (2007)

2.2 Pay Structure

Pay systems provide the foundation for financial reward systems. There are basic rate
systems, where the worker receives a fixed rate per hour/week/month with no
additional
payment. There are systems related in whole or part to individual or group
performance or profit. There are systems based in part on the worker gaining and

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using additional skills or competencies Pay systems provide the bases on which an
organization rewards workers for their individual contribution, skill and performance.
Pay structures are different - they are used to determine specific pay rates for
particular jobs, usually based on the nature of the job, its content and requirements. A
pay structure provides the framework within which the organization places the pay
rates for its various jobs or groups of jobs. Pay systems fall into two main categories:

 Those where pay does not vary in relation to achievements or performance,

(basic rate systems), and
 Those where pay, or part pay, does vary in relation to
results/profits/performance (including the acquisition of skills).

A grade structure becomes a pay structure when pay ranges, brackets or scales are
attached to each grade, band or level. In some broad-banded structures as described
later in this chapter, reference points and pay zones may be placed within the bands
and these define the range of pay for jobs allocated to each band. Pay structures are
defined by the number of grades they contain and, especially in narrow- or broad-
graded structures, the span or width of the pay ranges attached to each grade. Span is
the scope the grade provides for pay progression and is usually measured as the
difference between the lowest point in the range and the highest point in the range as a
percentage of the lowest point.
Pay structures define the different levels of pay for jobs or groups of jobs by reference
to their relative internal value as determined by job evaluation, to external relativities
as established by market rate surveys and, sometimes, to negotiated rates for jobs.
They provide scope for pay progression in accordance with performance, competence,
contribution or service.
There may be a single pay structure covering the whole organization or there may be
one structure for staff and another for manual workers, but this is becoming less
common. There has in recent years been a trend towards ‗harmonizing‘ terms and
conditions between different groups of staff as part of a move towards single status.
This has been particularly evident in many public sector organizations in the UK,
supported by national agreements on ‗single status‘. Executive directors are
sometimes treated separately.

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2.2.1 Reasons for having Different Types of Pay Systems
The following are the reasons for developing different pay systems:

1. Basic Rate Schemes

Basic rate schemes tend to be job-based (ie the rate for the job). A grading structure
may be developed through a job evaluation scheme which is used to put jobs into an
appropriate grade or band in the organization. Pay increases may then depend on
moving up a scale, skill development, promotion to another grade, or a general
updating of pay levels.

2. Incentive Schemes
Incentive schemes may be short- or long-term. Schemes based on individual
performance, such as weekly or monthly production bonuses or commission on sales,
generally offer a short-term incentive. Longer-term schemes such as profit sharing
and
share option schemes may not provide as much incentive to individual workers as
schemes based on personal performance. They can, however, help to generate in
workers a long-term interest in the success of the organization. Pay is not the only
factor that might produces enhanced performance. As well as the job-related factors
mentioned earlier, additional payments, non-contributory pension schemes, and non-
cash benefits such as cars, life insurance, and assistance towards child care (eg
workplace nurseries/creches) may all play a part. Nevertheless, the prospect of higher
pay for increased output/quality often provides an incentive and many schemes are
introduced in the clear expectation that performance will thereby be improved.
Increases in pay are often linked to productivity or ‗self-financing‘ pay schemes,
especially where organizations have no ‗new‘ money to put into the pay rates. In such
systems the results of increases in productivity and efficiency can be shared between
the employer and workers to their mutual benefit. There is an increasing trend for
organizations to build a quality factor into incentive scheme calculations, offering
additional payments for reductions in waste, good quality goods or services and
increased customer satisfaction. Productivity and efficiency schemes can be based on
individual, group or organization performance dependent upon the needs of the
organization and the availability of suitable performance measures. Organizations
often use a combination of systems to provide greater flexibility in the pay package to
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address particular needs. For instance, they may have a basic rate for the job, with a
top-up increase that is self-financing, and an element for individual performance. This
has been particularly common in the public sector and the privatized ex-public
sector/agencies.

3.0 Conclusion
Pay is a key factor affecting relationships at work. The level and distribution of pay
and benefits can have a considerable effect on the efficiency of any organization, and
on the morale and productivity of the workforce. It is therefore vital that organizations
develop pay systems that are appropriate for them, that provide value for money, and
that reward workers fairly for the work they perform. Pay systems are methods of
rewarding people for their contribution to the organization. There are 7 basic types of
grading structures which are; Narrow-graded structures, Career family structures, ,
Broad-graded structures, Broad-banded structures, Job family structures Combined
structures and Pay spines. While that of pay schemes are; basic rate and incentive
schemes.

4.0 Summary
In this unit, we discussed the various types of pay and grading structures (schemes) in
our modern organizations.

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UNIT 2 DEVELOPING GRADE AND PAY STRUCTURES IN AN
ORGANISATION
CONTENT
1.0 Introduction
2.0 Main Content
2.1 Guiding principles and steps for pay and grade structures
2.2 Implementing new grade and pay structure
2.3 Assimilation policy
2.4 Protection policies
3.0 Conclusion
4.0 Summary

1.0 INTRODUCTION
This unit is concerned with approaches, options and guidelines for the development of
grade and pay structures. It starts with a statement of guiding principles and, as an
introduction to the process, quotes the views of some practitioners on managing
design projects. The chapter continues with a description of the design process
covering the analysis of present arrangements and the selection of a structure,
including the criteria for choice, design options and the use of job evaluation. The
focus is then on the design of the most typical structures, ie graded, broad-banded and
career/job family structures. Because the approach to developing narrow and broad
graded structures is the same, even if the result in terms of the number of grades is
different, these two types of structure are considered together. The unit ends with a
discussion of the process of implementing new or radically changed structures with
particular reference to assimilation and protection issues.

2.0 MAIN CONTENT

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2.1 Guiding Principles and Steps for Grade and Pay Structures
The following are the principles for grade and pay structure in an Organization:

 be appropriate to the culture, characteristics and needs of the organization and

its employees;
 facilitate the management of relativities and the achievement of equity,
fairness, consistency and transparency in managing grading and pay;
 facilitate operational flexibility and continuous development;
 be capable of adapting to pressures arising from market rate changes and skill
shortages;
 provide scope as required for rewarding performance, contribution and
increases in skill and competence;
 be constructed logically and clearly so that the basis upon which they operate
can readily be communicated to employees;
 enable the organization to exercise control over the implementation of pay
policies and budgets;
 be constructed logically and clearly so that the basis upon which they operate
can readily be communicated to employees.

2.2 Implementing New Grade and Pay Structures

The implementation of new or revised grade and pay structures provides management
challenge of considerable proportions. The scale of this challenge will be reduced if
employees have a voice in its design. But it is essential to communicate the purpose
and features of the new structure and how everyone will be affected. If, as usual, the
new structure follows a job evaluation programme. It is necessary to manage the
expectations of staff. They should be informed that, while no one will necessarily get
extra pay, no one will lose pay when the structure is implemented. This means that
assimilation and protection policies should be discussed and agreed prior to
implementation. It is also necessary to ensure that training is provided for everyone
concerned in administering reward.
For the implementation, Armstrong and Brown (2001) suggested the following
planned approach for implementation:

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 Decide at the planning stage the overall change/transition strategy and timing;
 Model the transition into the new structure and develop policies to manage this
Transition;
 Develop detailed operating responsibilities and guidelines for the new
structure including the procedures for grading or regrading jobs and managing
pay progression. The authority to make pay and grading decisions and
methods of budgetary control should also be covered;
 Negotiate the introduction of the new arrangements with staff representatives
and trade unions. They should have been involved throughout the process, but
the detailed ‗nitty-gritty‘ of actual pay levels and assimilation policies and
procedures need to be thrashed out now;
 Produce and distribute communications about the new structure – how it
works, who will be involved in managing it and how people will be affected.
This is when the benefits of regularly involving and communicating with staff
throughout the design and development programme will become apparent.
Broad details of the proposed changes and the reasons for them should thereby
be known already. The focus at the implementation stage can then be on the
detailed designs and their individual impact. It is best to use line managers as
the main communicators, helping them with relevant support (booklets,
question-and-answer sheets, PowerPoint presentations, etc) to get the key
messages over to their staff. Information technology (the intranet) can be used
to identify and address specific staff concerns;
 Design and run training workshops for managers, and possibly all staff. In the
case of broad-banded structures and some career/job family structures,
managers are likely to have more freedom and discretion in positioning staff in
bands or family levels and adjusting their pay. But they may well need more
than an operating manual and entries on the intranet to help them manage this
in an appropriate and fair manner. HR should be prepared to provide coaching
to managers as well as more formal courses. They must make themselves
available to give guidance, especially to the less committed or experienced
managers. A cadre of line managers can be trained to coach their colleagues
on managing pay in the new structure;
 Run a pilot or simulation exercise, operating the new approach in parts of the
organization, to test its workability and robustness. In one organization
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 recently, for example, the new system was initially introduced in the IT
department, where the market pressures were greatest; this assisted in
estimating the HR support required for full roll-out, and also indicated the
emphasis required in the staff communication and ‗branding‘ of the changes
when full implementation occurred;
 Full implementation and roll-out. This will include giving every person
information on how the new structure affects them and on their right to ask for
a review of their grading if they are dissatisfied.

Figure 5.2 Grade and Pay Structure

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Source: Armstrong, 2007

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2.3 Assimilation policy

The hard part of implementing arrives when the assimilation of staff to the new
structure has to take place. It is necessary to have a policy on where staff will be
assimilated to the new structure. This is usually at their existing salary or, in the case
of a revised pay spine, on the nearest point in a new incremental scale above their
existing salary. The following categories of staff should be covered by the
assimilation policy:
i. Employees with current pay and pay potential both within the new pay
range. In some ways this group is the easiest to deal with and the majority of
staff will normally be included in it. The wider the grades the more likely that
is to be the case. One point at issue is whether or not any increase should be
awarded on transition and the answer should be ‗no‘ except when, as
mentioned above, the policy is to move each person‘s pay to the nearest higher
pay point. Good advance communications should have conveyed the fact that
job evaluation and a new pay structure do not necessarily mean any increase in
pay. But some people in this group may still feel disadvantaged at seeing
others getting increases. This negative reaction can be decreased by
introducing the new structure at the same time as any annual pay increase, so
that everyone gets at least something. It is necessary to be aware of the
possibility of creating equal pay problems when assimilating staff to their new
scale. For example, if two people with broadly equivalent experience and
skills are on different current salaries and are assimilated into the same new
grade but at those rates, it would appear that there is no equal pay problem –
they are both on the same grade with the same grade and salary potential. But
an equal value issue is only avoided if a lower-paid woman or man has the
opportunity to catch up with the higher-paid man or woman within a
reasonable period (say three or four years).

ii. Employees whose current pay is within the new pay range but pay potential
higher than the new maximum. No immediate increase is necessary in this
circumstance but employees should be told what will happen if progression to
the old maximum was based on service only, ie automatic annual increases to
the maximum. This guarantee will have to be retained and, contractually, it
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 may be necessary to go on awarding increments to the maximum of the
previous scale. However, once a person‘s pay passes the maximum for the
grade as a result of service-related increases, this will then become a red-circle
situation and should be treated. If progression to the old maximum was not
guaranteed, but was based on performance, competencies, etc, then the new
range maximum should normally be applied. Care will be needed to ensure
that this does not adversely affect any specific category of employees,
particularly female staff.
iii. Employees whose current pay is below the minimum for the new grade. Both
justice and equity demand that, if someone has now been identified as being
underpaid, that situation should be rectified as quickly as possible. Correcting
this situation, by raising the pay to the minimum of the new pay range, should
normally be the first call on any money allocated to the assimilation process.
Each case should, however, be taken on its merits. If someone has recently
been appointed to a post and given a pay increase at that time, it may be
appropriate to wait until that person has completed a probationary period
before awarding another pay increase. If the total cost of rectifying
underpayments is more than the organization can afford, it may be necessary,
however unpalatable to ‗green-circle‘ them and phase the necessary increases,
say one portion in the current year and the rest in the next year – it is
undesirable to phase increases over a longer period unless the circumstances
are exceptional. The simplest approach is to place a maximum on the increase
that any one person may receive. This can be in absolute terms (eg maximum
of £3,000) or in percentage increase terms (eg maximum of 25 per cent of
current pay). Another alternative is to use an annual ‗gap reduction‘ approach
(eg pay increase of 40 per cent of the difference between current pay and
range minimum or £600, whichever is the greater).. Again, if any delay in
rectifying underpayment situations is necessary and some staff are to be green-
circled, it must not disadvantage one staff group more than another. Most
organizations introducing job evaluation for the first time (or replacing an
outdated scheme) and using the outcome to devise a new pay structure will
find that more women than men have to be green-circled. Failure to correct
these underpayments would be a perpetuation of gender bias.

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 iv. Employees whose current pay is above the maximum for the new grade.
These situations, which lead to red-circling, are usually the most difficult to
deal with. They normally include a high proportion of people (often male)
who have been in their current job a long time and who have been able to
benefit from a lax approach to pay management in the past. People can take
different attitudes about what should be done about these situations and, as a
result, the most protracted of the implementation negotiations are often
centered on ‗how to handle the red circles‘ (protection policy). At one end of
the scale is the argument that these people are now known to be receiving
more pay than the job is worth and that this should be stopped as soon as
possible, especially if the organization needs that money to pay more to those
people who have been (or are still) receiving less than they should. The
opposite stance is that these people have become accustomed to a standard of
living based on the pay that the organization has been willing to provide up to
now and they should not suffer just because new standards are being applied.
This is the principle that is usually adopted but there are different ways of
applying it.

2.4 Protection policies

Indefinite protection that is, maintaining the difference between current pay and the
range maximum for as long as the employee remains in the job, is highly undesirable,
first because it will create permanent anomalies and, second, because, where there are
a lot of men in this situation (which is often the case), it will perpetuate unacceptable
gender gaps. The Equal Opportunities Commission in its Good Practice Guide: Job
evaluation schemes free of sex bias (4) states that red-circling ‗should not be used on
such a scale that it amounts to sex discrimination‘. And, as stated by the Equal Pay
Task
Force (5): ‗The use of red or green circling which maintains a difference in pay
between
men and women over more than a phase-in period of time will be difficult to justify.‘
Because of these considerations, the most common approach is now to provide for
red-circled employees to receive any across-the-board (cost of living) increase
awarded to staff generally for a protection period, which is usually limited to three or
four years. They will no longer be entitled to general increases after the time limit has
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been reached (ie they will ‗mark time‘) until their rate of pay falls within the new
scale for their job. They will then be entitled to the same increases as any other staff
in their grade up to the grade maximum. If a red-circled individual concerned leaves
the job, the scale of pay for the job reverts to the standard range as set up following
job evaluation. Where there is an incremental pay structure it is usual to allow staff to
continue to earn any increments to which they are entitled under existing
arrangements up to the maximum of their present scale.
If there is no limit to the protection period, red-circled staff continue to be eligible for
general increases for as long as they remain in their present job. They are then on
what is sometimes called a ‗personal to job holder‘ scale to be worth the current
salary, then they may well be underused in their existing job. Throughout the
protection period, and particularly at the start of it, every attempt should be made to
resolve the red-circle cases by other means. If job holders are thought Attempts
should be made to resolve this by either increasing the job responsibilities so that the
job will justify regrading to a higher grade or moving the person concerned to a
higher-graded job as soon as an appropriate vacancy arises.

3.0 Conclusion
This unit was concerned with approaches, options and guidelines for the development
of grade and pay structures. It starts with a statement of guiding principles and, as an
introduction to the process, quotes the views of some practitioners on managing
design projects. The chapter continues with a description of the design process
covering the analysis of present arrangements and the selection of a structure,
including the criteria for choice, design options and the use of job evaluation. The unit
ends with a discussion of the process of implementing new or radically changed
structures with particular reference to assimilation and protection issues.
4.0 Summary
In this unit, we discussed the guiding principles, steps for grades and pay structures.
Efforts was made in discussing assimilation and protection issues as it relates to
reward management.

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UNIT 3 EQUAL PAY FOR EQUAL WORK
CONTENT
1.0 Introduction
2.0 Main Content
2.1 Equal pay claim
2.2 How to avoid equal pay claim
2.3 Avoiding discrimination in job evaluation
3.0 Conclusion
4.0 Summary

1.0 INTRODUCTION
The equal-pay-for-work-of-equal-value legal framework is based on the provisions of
European legislation, the 1970 Equal Pay Act as amended by the Equal Pay
(Amendment) Regulations 1983, plus the case law. The legislation essentially
provides that pay differences are allowable only if the reason for them is not related to
the sex of the job holder. The Act and its amendment are implemented through
employment tribunals. The same principles of fairness and equity of course apply to
other potential areas of discrimination because of race, religion, disability or age that
results in pay inequities.
Discrimination arises when equal people are treated unequally. Pay discrimination can
take place because of race, sex, disability or age. For instance, historically, its
generally accepted in a man‘s world that women‘s place was in the home, unless the
need arises for them to carry out menial and underpaid jobs. Women‘s work has been
undervalued because of the low rates of pay. It has been a vicious circle. Prior to the
Equal Pay Act in 1970, collective agreements tended to have only one rate of pay for
women workers, with no differentiation between grades of work or levels of skill.

2.0 MAIN CONTENT

131
2.1 Equal Pay Claim
Equal pay claim, which may be supported by a completed equal pay questionnaire,
can be made to an employment tribunal on any of the following three grounds:
i. where the work is like work, meaning the same or very similar work;
ii. where the work is work rated as equivalent under a job evaluation ‗study‘;
iii. where the work is of equal value ‗in terms of the demands made on a worker
under various headings, for instance, effort, skill, decision‘.
If a tribunal finds that the work is the same, equivalent or of equal value it can invoke
the equality clause in the legislation and rule that the man and the woman should be
paid the same. The following are reasons for unequal pay claims

1. Proof that work is unequal

The onus is on the employer to prove that the complainant is not carrying out like
work, work rated as equivalent or work of equal value when compared with the
comparator. If the employer applies job evaluation to provide support to a claim that
the jobs are not equal, it must be analytical, unbiased and applied in a non-
discriminatory manner. Analytical means that the scheme must analyse and compare
jobs by reference to factors such as, in the words of the Equal Pay Regulations,
‗effort, skill, decision‘. Slotting jobs on a whole job comparison basis is not
acceptable as a defence. The legislation and case law do not specify that a point-factor
or a scored factor comparison scheme should be used, and even if an ‗analytical
matching‘ process is followed.

2. Genuine Material Factor.

The legislation provides for a case to be made by the employer that there is a ‗genuine
material factor‘ creating and justifying the difference between the pay of the applicant
and the comparator. A genuine material factor could be the level of performance or
length of service of the comparator, which means that he or she is paid at a higher
level than the applicant in the pay range for a job. But this only applies if the basis for
deciding on additions to pay and the process of doing so are not discriminatory. The
Crossley case referred to above is an example of where a tribunal found that length
of-service criteria could be discriminatory if they meant that women are paid less than
men and find it hard to catch up.

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Pay differences because of market supplements can be treated as genuine material
factors as long as they are ‗objectively justified‘. In the case of a claim that market
pressures justify unequal pay the tribunal will need to be convinced that this was not
simply a matter of opinion and that adequate evidence from a number of sources was
available. In such cases, the tribunal will also require proof that the recruitment and
retention of the people required by the organization were difficult because pay levels
were uncompetitive.
If there is any doubt as to whether or not work is of equal value, employment
tribunals
will require an independent expert to prepare a report. The expert must:

 evaluate the jobs concerned analytically;

 take account of all information supplied and representations that have a
bearing on the question;
 before reporting, send the parties a written summary of the information and
invite representations;
 include the representations in the report, together with the conclusion reached
on the case and the reason for that conclusion;
 take no account of the difference in sex, and at all times act fairly.

2.2 How to avoid equal pay claims.

To avoid successful equal pay claims, which can be very expensive and time-
consuming, there are five things an organization must do:
a. Use a non-discriminatory analytical job evaluation scheme designed and
operated to avoid discrimination as explained later in this unit.
b. Conduct regular equal pay reviews or audits as described in the next chapter
and take action if they reveal pay discrimination.
c. Ensure that there is objective and non-discriminatory justification for any
differences in pay between men and women.
d. Adopt a non-discriminatory grade and pay structure as will be described in the
next module.
e. Ensure that everyone is aware that one of the most important core values of
the organization is the provision of equal opportunities to enable women to
have the same chance as men to progress their careers and therefore be given
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 equal pay for work of equal value. Steps must be taken to ensure that this core
value is acted upon.

2.3 Avoiding Discrimination in Job Evaluation

The main points on avoiding discrimination made by the Equal Opportunities
Commission in its Good Practice Guide: Job evaluation schemes free of sex bias and
in case law are:
i. The scheme should be analytical.
ii. The scheme should be appropriate for the jobs it is intended to cover – it
should incorporate all the important and relevant differentiating characteristics
of those jobs.
iii. The scheme should be designed and operated to measure fairly all significant
features of jobs typically carried out by women as well as of those generally
carried out by men.
iv. The factors should operate fairly.
v. The factor and level definitions should be exact, and detailed descriptions
should be provided for each factor.
vi. The factors should cover all important job demands. A scheme will be
discriminatory if it fails to include or properly take into account a demand
such as caring that is an important element in the jobs carried out by women –
the exclusion of an important factor will result in it being undervalued
compared with other jobs.
vii. Knowledge and skills factors should measure what is actually required for the
job (not recruitment level or what the current job holder has), measure all
forms of knowledge and skills, not just occupational knowledge, measure
actual knowledge (qualifications as indicators, not determinants) and avoid
measuring years of experience.
viii. The factor levels should represent clear and recognizable steps in demand and
be defined in absolute, not relative, terms, ie they should define the differences
in terms of what is done at each level not in terms such as small, bigger or big.
ix. There should be no double-counting of factors.
x. Factors that are characteristic of jobs largely held by one sex should not
unjustifiably have a greater number of levels than the number of levels in
factors mainly held by the other sex.
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 xi. Factors that are characteristic of male-dominated jobs should not have a wider
dispersion of scores than factors that are characteristic of female-dominated
jobs.
xii. There should be a rationale for the scoring and weighting system, eg relative
value of factors to the organization, agreed relative values – it should not just
give the answer people want.
xiii. The method of scoring for each factor should be reasonably similar.
xiv. Variation between points should reflect real differences in demand.
xv. The weighting system should not favour men or women.
xvi. The selection of benchmark jobs should not favour men or women.
xvii. Job evaluation on the basis of a traditional organizational job description is
likely to be unsatisfactory because it leaves evaluators to use their own
experience or make assumptions when assessing jobs against factors for which
no information is provided.
xviii. Job analysts, facilitators and evaluators should be trained on how to avoid
bias.
xix. The selection of grade boundaries should be objectively based on the evidence
provided by job evaluation, irrespective of the sex of the job holders.
xx. The outcome of a new job evaluation scheme should be monitored to check
for sex bias; other things being equal, it is to be expected that a new job
evaluation scheme will result in some upward movement of female-dominated
jobs as historical pay discrimination is eliminated, particularly those that show
typical features of work carried out by women, relative to other jobs.
xxi. Existing schemes should be kept up to date and reviewed to ensure that sex
discrimination has not crept in.
xxii. Evaluation outcomes should be properly recorded with reasons, consistency
should be checked by factor and by whole job and the outcome should be
revised if there is good reason, e.g. faulty job information or a bad evaluation
day.

3.0 Conclusion
The equal-pay-for-work-of-equal-value legal framework is based on the provisions of
European legislation, the 1970 Equal Pay Act as amended by the Equal Pay
(Amendment) Regulations 1983, plus the case law. The legislation essentially
135
provides that pay differences are allowable only if the reason for them is not related to
the sex of the job holder. The Act and its amendment are implemented through
employment tribunals. Discrimination arises when equal people are treated unequally.
This units concludes that in order to avoid discrimination in job evaluation,
Knowledge and skills factors should measure what is actually required for the job (not
recruitment level or what the current job holder has), measure all forms of knowledge
and skills, not just occupational knowledge, measure actual knowledge (qualifications
as indicators, not determinants) and avoid measuring years of experience, there should
be no double-counting of factors and factors that are characteristic of male-dominated
jobs should not have a wider dispersion of scores than factors that are characteristic of
female-dominated jobs among other factors.

4.0 Summary
In this unit, we discussed ways to settle equal pay claim, ways to avoid equal pay
claims. Finally, ways to avoid discrimination in job evaluation

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UNIT 4 BONUS SCHEMES

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Bonus Scheme
2.2 Aims of Bonus Scheme
2.3 Category of people covered by bonus scheme
2.4 Criteria for designing bonus scheme
2.5 Introducing a bonus scheme
2.6 Types of bonus scheme
3.0 Conclusion
4.0 Summary
5.0 Tutor-marked assignment
6.0 References/further reading

1.0 INTRODUCTION
Bonus schemes provide cash payments to employees that are related to the
performance of their organization, their team or themselves, or a combination of two
or more of these. Bonuses are often referred to as ‗variable pay‘ or ‗pay at risk‘.

2.0 MAIN CONTENT

2.1 Bonus Scheme

A defining characteristic of a bonus is that it has to be re-earned, unlike increases
arising from individual contingent pay schemes such as performance- or contribution
related pay or pay related to service, which are consolidated into base pay. Such

137
payments can be described as ‗gifts that go on giving‘. Cash bonuses may be the sole
method of providing people with rewards in addition to their base pay or they may be
paid on top of individual contingent pay.

2.2 Aims of Bonus Schemes

The aims of bonus schemes may differ, but typically they include one or more of the
following:

 Enable people to share in the success of the organization and therefore

increase their commitment to it;
 Provide a reward that recognizes past performance or achievements and
encourages individuals and teams to perform well in the future;
 Provide rewards related to business performance to increase motivation,
commitment and engagement;
 Provide a direct incentive that increases motivation and engagement and
generates higher future levels of individual and team performance;
 Ensure that pay levels are competitive and will attract and retain good-quality
people.

2.3 Category of people covered by Bonus Scheme

Bonus schemes based on organizational or individual performance are often only
provided for directors and, possibly, senior managers on the grounds that they make
the greatest impact on results and should be incentivized and rewarded for their
contribution to those results. But this may frustrate other staff who, with justification,
could argue that they also make a contribution that deserves a cash reward. They are
based on organizational performance may be made available to all staff to provide a
general reward and encourage identification with the business. Such bonuses can be in
addition to contingent pay. They are sometimes provided in organizations that have
team pay for certain categories of staff, eg branch staff in a financial services
company, but are unable to extend team payments to other categories of staff who do
not work in such well-defined teams. Combination plans may also be applied to all
staff although they are sometimes restricted to senior managers. Bonuses based on

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individual performance may also be paid to all categories of staff or restricted to
certain categories, eg directors or sales staff.

2.4 Criteria for Designing Bonus Scheme

The following are the criteria for designing Bonus Scheme:
 It should provide a clear line of sight between effort or contribution and the
reward;
 It should be designed to meet defined objectives;
 It should result in meaningful rewards;
 It should be based on realistic, significant and measurable key performance
indicators (KPIs) for organizational and team bonus schemes or combination
plans;
 It should be based on a well-established and effective process of performance
management for individual bonuses;
 It should operate fairly, equitably, consistently and transparently;
 It should be appropriate for the type of people to which it applies;
 It should be reasonably easy to understand and manage, ie not over-complex;
 It should contain arrangements to restrict (cap) the maximum payment to an
acceptable sum;
 It should only provide for payment if a demanding threshold of performance is
achieved;
 It should be self-financing;
 It should provide for review at regular intervals to decide whether the scheme
needs to be amended, replaced or cancelled;
 It should provide scope to moderate corporate bonuses by reference to
personal performance.

2.5 Introducing a Bonus Scheme

For an Organization to introduce a bonus scheme, the following are required:
 Define responsibilities for introducing, maintaining and evaluating the
scheme.
 Consult with those concerned on the purpose and features of the scheme.
 Pilot-test it if at all possible in a department or division or on a representative
sample of employees to obtain information on how well the formula works,
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 the appropriateness of the measures, the cost of the scheme, its impact, the
effectiveness of the process of making decisions on bonuses (eg the
application of performance management) and the reactions of staff.
 Prepare a description for communication to staff of the purpose of the scheme,
how it works and how staff will be affected.
 Make amendments as necessary in the light of the test.
 Ensure that the scheme is bedded down in the organization‘s day-to-day
operating processes, including management reports and performance reviews.
 Define operating and control processes including responsibilities, the
achievement of fairness and consistency and cost control.
 Draw up a budget for the costs of the scheme.
 Prepare a plan for introducing the scheme covering the agreement of
performance indicators and targets, methods of reviewing performance, the
process of deciding on bonus payments and communications.

2.6 Types of Bonus Scheme

The table below summarised the features of the different types of bonus scheme and
advantages and disadvantages.
Table 5.3 summary of types of Bonus Schemes
Approach Advantages Disadvantages
Bonus only – Has to be re-earned. – May be perceived as
– Can be related to corporate arbitrary.
or team performance as well as – Many people may prefer
individual performance, thereby the
increasing commitment and opportunity to increase
enhancing teamwork. their base
– Cash sums, as long as they are pay rather than rely on
sizeable, can have a more potentially
immediate unpredictable bonus
impact on motivation payments.
and engagement. – If unconsolidated, the
payment will
not be pensionable.
Bonus and Get best of both worlds: – Potentially complex.
Contingent pay consolidated increases and cash – The impact made by
payments either
bonuses or consolidated
payments
might be dissipated,
especially when
the sums available are
divided into

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 two parts.

3.0 Conclusion
Bonus schemes provide cash payments to employees that are related to the
performance of their organization. Aims of bonus schemes include; Enable people to
share in the success of the organization and therefore increase their commitment to it;
Provide a reward that recognizes past performance or achievements and encourages
individuals and teams to perform well in the future;
Provide rewards related to business performance to increase motivation, commitment
and engagement among others. Certain criteria were highlighted for effective bonus
scheme which include; It should operate fairly, equitably, consistently and
transparently; It should be reasonably easy to understand and manage, ie not over-
complex and It should be self-financing among others.

4.0 Summary
In this unit, we discussed bonus schemes, aims of bonus scheme, criteria for a good a
bonus scheme. Finally, the various types of bonus schemes used in our organizations.

5.0 TUTOR-MARKED ASSIGNMENT

1. What are the different grading and payment schemes available to organizations

in Nigeria?

1. Why do you think we have different pay schemes in Nigeria?

2. What principles can guide Nigerian organizations in building and implementing a

good pay schemes?

3. How do you think Nigerian managers can avoid discrimination in Job evaluation?

4. What are the aims and criteria for designing an effective bonus schemes?

6.0 REFERENCES

Armstrong, T. J., Radwin, R. G., Hansen, D. J., & Kennedy, K. W. (1986). Repetitive
trauma disorders: job evaluation and design. Human factors, 28(3), 325-336.

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Armstrong, M and Brown, D (2001) New Dimensions in Pay Management, Chartered
Institute of Personnel and Development, London

Armstrong, M and Murlis, H (1988) Reward Management, 1st edn, Kogan Page,
London

Armstrong, M and Brown, D (2001) New Dimensions in Pay Management, Chartered

Institute of Personnel and Development, London

Crystal, G (1970) Financial Motivation for Executives, AMA, New York

Equal Opportunities Commission (2003) Good Practice Guide: Job evaluation

schemes free of sex bias, EOC, Manchester

Equal Pay Task Force (2001) Just Pay, Report of the Equal Pay Task Force to the
Equal Opportunities Commission, EOC, Manchester

e-reward (2002) Survey of Job Evaluation, e-reward.co.uk, Stockport

Equal Opportunities Commission (2003) Good Practice Guide: Job evaluation

schemes free of sex bias, EOC, Manchester

Fay, CH et al (2004) Broadbanding, pay ranges and labour costs: an empirical test,
WorldatWork Journal, 13 (2), Second quarter, pp 26–34

Gilbert, D and Abosch, KS (1996) Improving Organizational Effectiveness through

Broad-Banding, American Compensation Association, Scottsdale, IL

IRS (2005) Rejecting pay hierarchy: broadbanding at Britannia, IRS Employment

Review, 828, pp 33–36

Incomes Data Services (2006) IDS HR Studies: Job families, IDS, London

Jaques, E (1961) Equitable Payment, Heinemann, Londo

Lytle, C. W. (1946). Job evaluation methods.

Lawler, EE (1986) What‘s wrong with point-factor job evaluation?, Compensation

and Benefits Review, March/April, pp 20–28

LeBlanc, PV (1992) Banding: the new pay structure for the transformed organization,
Journal of Compensation and Benefits, January/February, pp 34–38

Milkovich, G. T., Newman, J. M., & Milkovich, C. (2002). Compensation (Vol. 8).
New York: McGraw-Hill.

Nielsen, NH (2002) Job content evaluation techniques based on Marxian economics,

World at Work Journal, 11 (2), pp 52–62

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Quaid, M (1993) Job Evaluation: The myth of equitable settlement, University of
Toronto Press, Toronto

Schwab, D. P., & Grams, R. (1985). Sex-related errors in job evaluation: A" real-
world" test. Journal of Applied Psychology, 70(3), 533.

Ulrich, D (1998) A new mandate for human resources, Harvard Business Review,
January/February, pp 124–34

Module 6 Compensation

Unit 1 Concepts, Objectives, significance, Components and Policies

Unit 2 Compensation Design and Philosophy
Unit 3 Tying Compensation to retention and Human Resource
Unit 4 Wages theories
Unit 5 Downsizing and Voluntary Retirement Scheme

UNIT 1 CONCEPTS, OBJECTIVES, SIGNIFICANCE, COMPONENTS,

POLICIES AND TYPES OF COMPENSATION.

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Concept of compensation
2.2 Objectives of compensation management
2.3 Significance of compensation management
2.4 Components of compensation
2.5 Compensation policy
2.5.1 based compensation
2.5.2 factors affecting compensation policy
2.5.3 types of compensation
2.5.3.1 direct compensation
2.5.3.2 indirect compensation
2.6 factors to be considered when deciding compensation
2.6.1 external factors
2.6.2 internal factors
3.0 Conclusion
4.0 Summary

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1.0 INTRODUCTION
Compensation is a systematic approach to providing monetary value to employees in
exchange for work performed. Compensation may achieve several purposes assisting
in recruitment, job performance, and job satisfaction.

2.0 MAIN CONTENT

2.1 Concept of Compensation

Compensation management is the process of establishing and maintaining an
equitable wage and salary structure, an equitable cost structure. It involves job
evaluation, wage and salary survey, profit sharing and control of pay costs. The two
most important functions of compensation are:
 Equity function;
 Motivation Function.
Compensation of employees for their services is important responsibility of human
resource management. Every organization must offer good wages and fringe benefits
to attract and retain talented employees with the organization. If at any time, the
wages offered by a firm are not competitive as compared to other firms, the efficient
workers may leave the firm. Therefore, workers must be remunerated adequately for
their services. Compensation to workers will vary depending upon the nature of job,
skills required, risk involved, nature of working conditions, paying capacity of the
employer, bargaining power of the trade union, wages and benefits offered by the
other units in the region or industry etc., Considering that the current trend in many
sectors (particularly the knowledge intensive sectors like IT and Services) is to treat
the employees as ―creators and drivers of value‖ rather than one more factor of
production, companies around the world are paying close attention to how much they
pay, the kind of components that this pay includes and whether they are offering
competitive compensation to attract the best talent

Dessler (1974), sees Employee compensation to refer to all forms of pay going to
employees and arising from their employment.‖ The phrase ‗all forms of pay‘ in the
definition does not include non-financial benefits, but all the direct and indirect
financial compensations.

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According to Bergmann (1988), compensation consists of four distinct components:
Wage or Salary + Employee benefits +Non-recurring financial rewards+ Non-
pecuniary rewards.
Compensation refers to a wide range of financial and non-financial rewards to
employees for their services rendered to the organization. It is paid in the form of
wages,
salaries and employee benefits such as paid vacations, insurance maternity leave, free
travel facility, retirement benefits etc., Monetary payments are a direct form of
compensating the employees and have a great impact in motivating employees.
The system of compensation should be so designed that it achieves the following
objectives.
 The capable employees are attracted towards the organization
 The employees are motivated for better performance
 employees do not leave the employer frequently.

2.2 Objectives of Compensation Management

1. To Establish a Fair and Equitable Remuneration

Effective compensation management objectives are to maintain internal and external
equity in remuneration paid to employees. Internal equity means similar pay for
similar
work. In other words, compensation differentials between jobs should be in
proportion of differences in the worth of jobs. External equity implies pay for a job
should be equal to pay for a similar job in other organizations. Payments based on
jobs requirements, employee performance and industry levels minimize favoritism
and inequities in pay.

2. To Attract Competent Personnel

A sound wage and salary administration helps to attract qualified and hardworking
people by ensuring an adequate payment for all jobs. For example, IT companies are
competing each other and try their level best to attract best talents by offering better
compensation packages.

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 3. To Retain the Present Employees
By paying competitive levels, the company can retain its personnel. It can minimize
the incidence of quitting and increase employee loyalty. For example, employees‘
attrition is high in knowledge sectors (Ad-agency, KPO, BPO etc.,) which force the
companies to offer better pay to retain their employees.

4. To Improve Productivity
Sound wage and salary administration helps to improve the motivation and morale of
employees which in turn lead to higher productivity. Especially, private sectors
companies‘ offer production linked compensation packages to their employees which
leads to higher productivity.

5. To Control Cost
Through sound compensation management, administration and labour costs can be
kept in line with the ability of the company to pay. If facilitates administration and
control of pay roll. The companies can systematically plan and control labour costs.

6. To Improve Union Management Relations

Compensation management based on jobs and prevailing pay levels are more
acceptable to trade unions. Therefore, sound wage and salary administration
simplifies
collective bargaining and negotiations over pay. It reduces grievances arising out of
wage inequities.

7. To Improve Public Image of the Company

Wage and salary programs also seeks to project the image of the progressive
employer and to company with legal requirements relating to wages and salaries.

8. To Improve Job Satisfaction

If employees are happy with their jobs and would love to work for the company. They
are expected get fair rewards in exchange of their services.

9. To Motivate Employees
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Employees have different kinds of needs. Some of them want money so they work for
the company which gives them higher pay. Some of them value achievement more
than money, they would associate themselves with firms which offer greater chances
of promotion, learning and development. A compensation plan that hits workers‘
needs is more likely to motivate them to act in the desired way.

10. Peace of Mind

Offering of several types of insurances to workers relieves them from certain fears, as
a result, workers now work with relaxed mind.

11. Increases Self-Confidence

Every human being wants his/her efforts to get acknowledgment. Employees gain
more and more confidence in them and in their abilities if they receive just rewards.
As a result, their performance level shoots up.

2.3 Significance of Compensation Management

Compensation and Reward system plays vital role in a business organization. Since,
among four Ms, i.e. Men, Material, Machine and Money. Men has been most
important
factor, it is impossible to imagine a business process without Men. Every factor
contributes to the process of production/business. It expects return from the business
process such as rent is the return expected by the landlord, capitalist expects interest
and organizer i.e. entrepreneur expects profits. Similarly, the labour expects wages
from the process. Labour plays vital role in bringing about the process of
production/business in motion. The other factors being human, has expectations,
emotions, ambitions and egos. Labour therefore expects to have fair share in the
business/production process. Therefore, a fair compensation system is a must for
every business organization. A fair compensation system will help an organization in
the following ways:

 An ideal compensation system will have positive impact on the efficiency

and results produced by employees. It will encourage the employees to
perform better and achieve the standards fixed.

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 It will enhance the process of job evaluation. It will also help in setting up an
ideal job evaluation and the set standards would be more realistic and
achievable.
 Such a system should be well defined and uniform. It will be applied to all the
levels of the organization as a general system.
 It will raise the morale, efficiency and cooperation among the workers. It,
being just and fair would provide satisfaction to the workers.
 An ideal compensation system will have positive impact on the efficiency and
results produced by employees. It will encourage the employees to perform
better and achieve the standards fixed.
 It will enhance the process of job evaluation. It will also help in setting up an
ideal job evaluation and the set standards would be more realistic and
achievable.
 Such a system should be well defined and uniform. It will be applied to all the
levels of the organization as a general system. The system should be simple
and flexible so that every employee would be able to compute his own
compensation receivable.
 It should be easy to implement, should not result in exploitation of workers.
 It will raise the morale, efficiency and cooperation among the workers. It,
being just and fair would provide satisfaction to the workers.
 Such system would help management in complying with the various labor
acts.
 Such system should also solve disputes between the employee union and
management.
 The system should follow the management principle of equal pay.
 It should motivate and encouragement those who perform better and should
provide opportunities for those who wish to excel.
 Sound Compensation/Reward System brings peace in the relationship of
employer and employees.
 It aims at creating a healthy competition among them and encourages
employees to work hard and efficiently.
 The system provides growth and advancement opportunities to the deserving
employees.

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  A perfect compensation system provides platform for happy and satisfied
workforce. This minimizes the labour turnover. The organization enjoys the
stability.
 The organization is able to retain the best talent by providing them adequate
compensation thereby stopping them from switching over to another job.
 The business organization can think of expansion and growth if it has the
support of skillful, talented and happy workforce.
 A sound compensation system is a hallmark of organization‘s success and
prosperity.
 The success and stability of organization is measured with pay-package given
to its employees.

2.4 Components of Compensation

The following are the constituents of Compensation:

1. Basic Wages/Salaries
Basic wages / salaries refer to the cash component of the wage structure based on
which other elements of compensation may be structured. It is normally a fixed
amount which is subject to changes based on annual increments or subject to
periodical pay hikes. Wages represent hourly rates of pay, and salary refers to the
monthly rate of pay, irrespective of the number of hours put in by the employee.
Wages and salaries are subject to the annual increments. They differ from employee
to employee, and depend upon the nature of job, seniority, and merit.

2. Dearness Allowance
The payment of dearness allowance facilitates employees and workers to face the
price increase or inflation of prices of goods and services consumed by him. The
onslaught of price increase has a major bearing on the living conditions of the labour.
The increasing prices reduce the compensation to nothing and the money‘s worth is
coming down based on the level of inflation. The payment of dearness allowance,
which may be a fixed percentage on the basic wage, enables the employees to face the
increasing prices.

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 3. Incentives
Incentives are paid in addition to wages and salaries and are also called ‗payments by
results‘. Incentives depend upon productivity, sales, profit, or cost reduction efforts.
There are:
(a) Individual incentive schemes, and
(b) Group incentive programmes.
Individual incentives are applicable to specific employee performance. Where a given
task demands group efforts for completion, incentives are paid to the group as a
whole. The amount is later divided among group members on an equitable basis.

4. Bonus
The bonus can be paid in different ways. It can be fixed percentage on the basic wage
paid annually or in proportion to the profitability. The Government also prescribes a
minimum statutory bonus for all employees and workers. There is also a bonus plan
which compensates the managers and employees based on the sales revenue or profit
margin achieved. Bonus plans can also be based on piece wages but depends upon the
productivity of labour.

5. Non-Monetary Benefits
These benefits give psychological satisfaction to employees even when financial
benefit is not available. Such benefits are:
(a) Recognition of merit through certificate, etc.
(b) Offering challenging job responsibilities,
(c) Promoting growth prospects,
(d) Comfortable working conditions,
(e) Competent supervision, and
(f) Job sharing and flexi-time.

6. Commissions

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Commission to managers and employees may be based on the sales revenue or profits
of the company. It is always a fixed percentage on the target achieved. For taxation
purposes, commission is again a taxable component of compensation.
The payment of commission as a component of commission is practiced heavily on
target based sales. Depending upon the targets achieved, companies may pay a
commission on a monthly or periodical basis.

7. Mixed Plans
Companies may also pay employees and others a combination of pay as well as
commissions. This plan is called combination or mixed plan. Apart from the salaries
paid, the employees may be eligible for a fixed percentage of commission upon
achievement of fixed target of sales or profits or Performance objectives. Nowadays,
most of the corporate sectors are following this practice. This is also termed as
variable component of compensation.

8. Piece Rate Wages

Piece rate wages are prevalent in the manufacturing wages. The laborers are paid
wages for each of the Quantity produced by them. The gross earnings of the labour
would be equivalent to number of goods produced by them. Piece rate wages
improves productivity and is an absolute measurement of productivity to wage
structure. The fairness of compensation is totally based on the productivity and not by
other qualitative factors.

9. Fringe Benefits
Fringe benefits may be defined as a wide range of benefits and services that
employees receive as an integral part of their total compensation package. They are
based on critical job factors and performance. Fringe benefits constitute indirect
compensation as they are usually an extended of condition of employment and not
directly related to performance of concerned employee. Fringe benefits are
supplements to regular wages received by the workers at a cost from their employers.
They include benefits such as paid vacation, pension, health and insurance plans, etc.
Such benefits are computable in terms of money and the amount of benefit is
generally not predetermined. The purpose of fringe benefits is to retain efficient and

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capable people in the organization over a long period. They foster loyalty and acts as
a security base for the employees.

10. Profit Sharing

Profit-sharing is regarded as a stepping stone to industrial democracy. Profit-sharing
is an agreement by which employees receive a share, fixed in advance of the profits.
Profit sharing usually involves the determination of an organization‘s profit at the end
of the fiscal year and the distribution of a percentage of the profits to the workers
qualified to share in the earnings. The percentage to be shared by the workers is often
predetermined at the beginning of the work period and is often communicated to the
workers so that they have some knowledge of their potential gains. To enable the
workers to participate in profit sharing, they are required to work for certain number
of years and develop some seniority.
The theory behind profit-sharing is that management feels its workers will fulfill their
responsibilities more diligently if they realize that their efforts may result in higher
profits, which will be returned to the workers through profit-sharing.

2.5 Compensation Policy

It is a general practice the world over that employees make comparisons between
themselves and their co-workers. They perceive what they get from a job situation
(outputs) in relation to what they must put into it (inputs). They also compare their
output-input ratio with the output-input ratio of their fellow-workers. If a person‘s
ration and that of others are perceived to be equal a state of equity is said to exist. If
they are unequal, inequity exists i.e., the individual (employee) considers
himself/herself as ‗under rewarded‘ or ‗over rewarded‘. When an employee envisions
an equity, he may choose anyone or more of five alternatives:
i. distort either his own or other inputs or outputs;
ii. behave in the same way as to induce others to his own inputs or
outputs;
iii. behave in some way as to change his own inputs or outputs;
iv. choose a different comparison referent; and
v. leave the job.

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Equity approach recognizes that individuals are concerned not only with the absolute
amount of money they are paid for their efforts but also with the relationship of this
amount to what others are paid. They make judgment as to the relationship between
their inputs and outputs with those of the others. Based on one‘s inputs such as effort,
education and competence - one compares outputs - such as salary levels, raises and
other factors. When people perceive an imbalance in their input output ratio relative to
others tension is created. It may result in lower productivity, more absenteeism, etc.
This tension provides the basis for motivation, as one strives for what he perceives as
equity and fairness.
To get relief, the employee may decrease his inputs while holding his output constant,
or increase his outputs while holding inputs constant - possibly resulting in fighting
the system, increased absenteeism, or other undesirable behaviours.

2.5.1 Base compensation- Job

One of the most difficult functions of personnel management is that of determining
rates of monetary compensation. Not only is it one of the most complex duties, but it
is also one of the most significant to both the organization and the employee. It is
important to the organization, because wages and salaries often constitute the greatest
single cost of doing business; in 1929 employee compensation amounted to 58
percent of the nation‘s income, as compared with 75 percent in recent years. It is
important to the employee because the paycheck often is the sole means of economic
survival: it is also one of the most influential factors determining status in society. As
far as the organization is concerned, employee compensation programs are designed
to do three things:
i. To attract capable employees to the organization,
ii. To motivate them toward superior performance,
iii. To retain their service over an extended period of time.

When coupled with surveys of rates paid by competing firms, the organization can
establish a pay policy that will meet its desired goal of attracting sufficient personnel
to accomplish work tasks. In many cases, organizations prefer that their employees
perform at a rate higher than average.

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2.5.2 Factors Affecting Compensation Policy
Though a considerable amount of guesswork and negotiation are involved in salary
determination, certain factors have been extracted as having an important bearing
upon the final naira decision. Among these factors are the following:
i. Supply and demand for employee skills,
ii. Labor organizations,
iii. The firm‘s ability to pay,
iv. Productivity of the firm and the economy,
v. Cost of living, and
vi. Government.
Each of these will be discussed briefly in order to demonstrate the exceedingly
complex nature of compensation. Perhaps a realization of these complexities will lead
to a greater appreciation and acceptance of job evaluation despite its arbitrariness and
scientific failings.

1. Supply and demand and demand for employees. The supply and demand
for employees through the commodity approach to labour, is not completely
correct, it is nevertheless true that a wage is a price for the services of a human
being. The firm desires these services, and it must pay a price that will bring
forth the supply, which is controlled by the individual worker or by a group of
workers acting in concert. The primary practical result of the operation of this
law of supply and demand is the creation of the ―going-wage rate.‖ It will be
demonstrated later how the wage and salary survey of this going rate is
incorporated into a job evaluation approach to wage determination. We shall
discuss the charges of certain groups that the market going rate reflects
fundamental biases towards female employees. This simple statement on the
effect that the demand and supply of labor have on wages belies its
complexity. It is not practicable to draw demand-and-supply curves for each
job in an organization, even though, theoretically, a separate curve exists for
each job. But in general, if anything works to decrease the supply of labor,
such as restriction by a particular labor union, there will be a tendency to
increase the compensation. If anything works to increase the employer‘s
demand for labor, such as wartime prosperity, there will be a tendency to

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 increase the compensation. The reverse of each situation is likely to result in a
decrease in employee compensation, provided other factors do not intervene.
In a strike for higher wages, the employer‘s demand for labor to meet a market
need is pitted against a supply withheld by the union. Union leaders are often very
adroit in selecting the appropriate time to strike as judged by the markets for the
employer‘s products. To strengthen their control over the supply of labor, unions
seek such goals as union or closed shops, regulated or restricted substitution of
capital for labor through technology, and controlled entry into apprenticeship
programs. All compensation must come from products sold in a market that is
usually competitive in nature. Inequitable compensation to any or all will create
trouble in maintaining the health of the organization. The increase in the strength
of labor unions is due, in part; to the fact the employees‘ interests had not been
receiving attention equal to that given to other components of the enterprise.

2. Labour. The ability to pay Labor unions have often demanded an increase in
compensation on the basis that the firm is prosperous and able to pay.
However, the fundamental determinants of the wage rate for the individual
firm issue from supply and demand.
3. Ability to pay If the firm is marginal and cannot afford to pay competitive
rates, its employees will generally leave it for better-paying jobs. Admittedly,
this adjustment is neither immediate nor perfect because of problems of labor
immobility and lack of perfect knowledge of alternatives. If the firm is highly
successful, there is little need to pay far more than the competitive rate to
obtain personnel. Such a firm, however, may choose to adopt a policy of
paying above the competitive rate in order to attract a superior caliber of
personnel. If firms in general are prosperous and able to pay, the tendency is to
bid up the price of labor as a whole.
4. Cost of Living. Another formula hailed by many as the answer is the cost-of
living adjustment of wages. Among the problems engendered by this approach
are the following:
a. No cost-of-living formula will indicate what the base compensation should be-
it merely indicates how that rate should vary;
b. This approach tends to increase monetary income but freeze real income, a
result with which labor is not content; and
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 c. As in the case of productivity indexes, there are certain measurement problems
in ascertaining cost-of-living increases. The Consumer Price Index of the
Bureau of Labor Statistics, however, is widely accepted and followed by many
employers and labor organizations. Cost-of-living adjustment of compensation
constitutes no fundamental solution to equitable compensation to employees.
It is useful as a stopgap device in times of inflation when labor is pressed to
keep up with the rise in prices.
5. Government Our varying levels of government often have very specific
things to say about wages and salaries despite the theoretical and nebulous
nature of equitable compensation. There are at least three major federal laws
that deal directly with the subject of compensation. Employees assigned to
executive, administrative, or professional positions are usually excluded from
coverage by the act. Labor organizations constantly press for increases in the
minimum wage, decreases in the standard workweek, and increases in the
penalty for overtime hours, all in the interest of increasing total compensation
for labor.

2.5.3 Types of Compensation / Base and Supplementary Compensation

Total compensation returns are more transactional. They include pay received directly
as cash (like base, merit, incentives, cost of living adjustments) and indirectly as
benefits (like pensions, medical insurance, programs to help balance work and life
demands, brightly coloured uniforms). Programme to pay to people can be designed
in a wide variety of ways, and a single employer typically uses more than one.

1. Direct /Base 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 and at a definite time.

A. 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
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from his/her employer by rendering his/her services.

B. 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.

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

D. 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.

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

F. 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.

G. 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.

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 Medical Leave
Reimburse
ment
Travel
Allowance

Basic Special
Salary Allowances

Direct
Compensation

Conveyance Bonus

House
Rent
Allowance

Figure 6.1 Direct compensation components

2. Indirect /Supplementary 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
Overtime Policy, Leave policy, Car policy, Hospitalization, Insurance, Leave travel
Assistance Limits, Retirement Benefits, Holiday Homes.

A. 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.

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 B. 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.

C. 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.
D. 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.
E. 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.
F. 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.

G. 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.

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 Leave Hospitali
Policy sation
Insurance

Flexible
Timing Retirement
Benefits
Indirect
Compensation

Holiday
Homes
Leave
Travel

Leave Overtime
Travel Policy

Figure 6.2 Indirect compensation Components

2.6. Factors to be considered when Deciding Compensation

Employers decide on what is the right compensation after taking into account the
following points. The Job Description of the employee that specifies how much
should be paid and the parts of the compensation package. The Job Description is
further made up of responsibilities, functions, duties, location of the job and the other
factors like environment etc. These elements of the job description are taken
individually to arrive at the basic compensation along with the other components like
benefits, variable pay and bonus. It needs to be remembered that the HRA or the
House Rental Allowance is determined by a mix of factors that includes the location
of the employee and governmental policies along with the grade of the employee.

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Hence, it is common to find a minimum level of HRA that is common to all the
employees and which increases in proportion to the factors mentioned above.

Figure 6.3 Determining factors in deciding compensation

The Job Evaluation that is a system for arriving at the net worth of employees based
on comparison with appropriate compensation levels for comparable jobs across the
industry as well as within the company. Factors like Experience, Qualifications,
Expertise and Need of the company determine how much the employer is willing to
pay for the employee. It is often the case that employers compare the jobs across the
industry and arrive at a particular compensation after taking into account the specific
needs of their firm and in this respect salary surveys and research results done by
market research firms as to how much different companies in the same industry are
paying for similar roles. The components of compensation that have been discussed
above are the base requirements for any HR Manager who is in charge of fixing the
compensation for potential employees. Hence, all HR professionals and managers
must take this following aspect into account when they determine the compensation to
be paid to employees.

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 1. External Factors
The following are the external factors to be considered in deciding compensation in
an organization:
A. Demand and Supply of Labour
Wage is a price or compensation for the services rendered by a worker. The firm
requires these services, and it must pay a price that will bring forth the supply which
is controlled by the individual worker or by a group of workers acting together
through their unions. The primary result of the operation of the law of supply and
demand is the creation of the going wage rate. It is not practicable to draw demand
and supply curves for each job in an organization even though, theoretically, a
separate curve exists for each job.
B. Cost of Living
Another important factor affecting the wage is the cost of living adjustments of
wages. This tends to vary money wage depending upon the variations in the cost of
living index following rise or fall in the general price level and consumer price index.
It is an essential ingredient of long-term labour contract unless provision is made to
reopen the
wage clause periodically.
C. Labour Union
Organized labor are able to ensure better wages than the unorganized one. Higher
wages may have to be paid by the firm to its workers under the pressure or trade
union. If the trade union fails in their attempt to raise the wage and other allowances
through collective bargaining, they resort to strike and other methods hereby the
supply of labour is restricted. This exerts a kind of influence on the employer to
concede at least partially the demands of the labour unions.
D. Government
To protect the working class from the exploitations of powerful employers, the
government has enacted several laws. Laws on minimum wages, hours of work, equal
pay for equal work, payment of dearness and other allowances, payment of bonus,
etc., have been enacted and enforced to bring about a measure of fairness in
compensating the working class. Thus, the laws enacted and the labour policies
framed by the government have an important influence on wages and salaries paid by
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the employers. Wages and salaries can‘t be fixed below the level prescribed by the
government.

E. Prevailing Wage Rates

Wages in a firm are influenced by the general wage level or the wages paid for similar
occupations in the industry, region and the economy as a whole. External alignment
of wages is essential because if wages paid by a firm are lower than those paid by
other firms, the firm will not be able to attract and retain efficient employees. For
instance, there is a wide difference between the pay packages offered by multinational
and Indian companies. It is because of this difference that the multinational
corporations are able to attract the most talented workforce.

2. Internal Factors
Some of the internal factors that are considered when deciding compensation decision
are:
A. Ability to Pay
Employer‘s ability to pay is an important factor affecting wages not only for the
individual firm, but also for the entire industry. This depends upon the financial
position and profitability of the firm. However, the fundamental determinants of the
wage rate for the individual firm emanate from supply and demand of labour. If the
firm is marginal and cannot afford to pay competitive rates, its employees will
generally leave it for better paying jobs in other organizations. But, this adjustment is
neither immediate nor perfect because of problems of labour immobility and lack of
perfect knowledge of alternatives. If the firm is highly successful, there is little need
to pay more than the competitive rates to obtain personnel. Ability to pay is an
important factor affecting wages, not only for the individual firm but also for the
entire industry.

B. Top Management Philosophy

The wage rates to be paid to the employees are also affected by the top management‘s
philosophy, values and attitudes. As wage and salary payments constitute a major
portion of costs and /or apportionment of profits to the employees, top management
may like to keep it to the minimum. On the other hand, top management may like to
pay higher pay to attract top talent.
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 C. Productivity of Workers
To achieve the best results from the workers and to motivate him to increase his
efficiency, wages have to be productivity based. There has been a trend towards
gearing wage increase to productivity increases. Productivity is the key factor in the
operation of a company. High wages and low costs are possible only when
productivity increases appreciably.
D. Job Requirements
Job requirements indicating measures of job difficulty provide a basis for determining
the relative value of one job against another in an enterprise. Explicitly, job may be
graded in terms of a relative degree of skill, effort and responsibility needed and the
adversity of working conditions. The occupational wage differentials in terms of
a) Hardship,
b) Difficulty of learning the job
c) Stability of employment
d) Responsibility of learning the job and
f) Change for success or failure in the work.
This reforms a basis for job evaluation plans and thus, determines wage levels in an
industry.
E. Employees Related Factor.
Many employees related factors interact to determine his remuneration. These include
i. Performance: productivity is rewarded with a pay increase. Rewarding
performance motivates the employees to do better in future in the organisation.
ii. Seniority: Unions view seniority as the most objective criteria for pay
increases whereas management prefer performance to effect pay increases.
iii. Experience: Makes an employee gain valuable insights and is generally
rewarded
iv. Potential: organizations do pay some employees based on their potential.
Young managers are paid more because of their potential to perform even if
they are short of experience.
F. Organizational Politics
Compensation surveys, job analysis, job evaluation and employee performance are all
involved in wage and salary decisions. Political considerations may enter into the
equation in the following ways:

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 i. Determination of firms included in the compensation survey: managers
could make their firm appear to be a wage leader by including in the survey
those organizations that are below them in terms of pay.
ii. Choice of compensable factors for the job evaluation plan: Again, the job
value determined by this process could be manipulated
iii. Emphasis placed on either internal or external equity and
iv. Results of employee performance appraisal may be intentionally disported by
the supervisor.
Thus, a sound and objective compensation system may be destroyed by organizational
politics.

3.0 Conclusion
Compensation is a systematic approach to providing monetary value to employees in
exchange for work performed. Compensation refers to a wide range of financial and
non-financial rewards to employees for their services rendered to the organization.
Various objectives of compensation were highlighted which include; to establish a
fair and equitable remuneration, to attract competent talents, to retain current
employees, improve productivity and give a good reputation of the firm among other
benefits. This unit will conclude by saying, When people perceive an imbalance in
their input output ratio relative to others tension is created. It may result in lower
productivity, more absenteeism, etc. This tension provides the basis for motivation, as
one strives for what he perceives as equity and fairness. It should also be noted that, a
sound and objective compensation system may be destroyed by organizational
politics.

4.0 Summary
In this unit, we discussed the concept of compensation, the various objectives of
compensation, components of compensation, compensation policy, internal and
external factors that affects compensation policy was discussed among other things.

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UNIT 2 COMPENSATION DESIGN, PHILOSOPHY AND TYPES

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Compensation design
2.2 Compensation design policies
2.3 Basic essentials of compensation design
2.4 Components of compensation design
2.5 Compensation philosophy
2.5.1 Factors determining compensation philosophy
2.5.2 Processes involved in compensation philosophies
2.5.3 types of compensation philosophies
2.5.3.1 productivity philosophy
2.5.3.2 purchase philosophy
2.6 compensation evaluation
2.7 approaches to compensation
2.7.1 total compensation approach
2.7.2 traditional compensation approach
3.0 Conclusion
4.0 Summary

1.0 INTRODUCTION
Compensation design determines the value of specific, properly executed
accomplishments toward the achievement of desired outcomes. The value of the
accomplishment, not the level of activity, is used to establish the nature and amount of
compensation. A compensation philosophy lays out the guiding principles for a
company compensation policy.

2.0 MAIN CONTENT

2.1 Compensation Design
Compensation design determines the value of specific, properly executed
accomplishments toward the achievement of desired outcomes. The value of the
accomplishment, not the level of activity, is used to establish the nature and amount of
compensation. Ultimately, compensation design should foster a productive and
equitable, long-term relationship among members, and between each member and the
organization.
The process begins by identifying desired outcomes for the organization or operating

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unit. Importance and value are attached to the results people achieve with reference to
the need of the organization. Compensation is based on the achievement of results that
are critical to organizational success. Attracting, retaining and motivating employees
in today‘s business environment requires utilizing a host of tools including base pay,
incentives, equity, performance management, and benefits. Balancing these tools in an
equitable, affordable and real manner can present difficulties for even the most
dedicated employers. No universal, standard programme exists that can meet every
organization‘s needs. In order for the total rewards programme to work, it must fit the
organization‘s culture and strategic initiatives and compensation objectives.

2.2 Compensation Design Policies

The following are the compensation design Policies:
 Pay for the person rather than just the job
 Built-in controls and cost constraints
 An understandable and equitable system
 Rewards for skill acquisition
 Management flexibility to assign a range of duties
 Internal equity among employees
 Parallel career paths for managers and technical employees
 Flexibility to adapt quickly to market changes
 External competitiveness to recruit and retail
 To reward performance through salary without grade promotions

2.2.1 Basic essentials of compensation Design

The following are the basic essentials of compensation Design:
1. Link with Productivity
Some part of the total pay should be linked to productivity. Such linkage is necessary
because workers expect a share in productivity gains. This will help to control labour
costs.
2. Maintain Real Wages
At least part of the increase in the cost of living should be neutralized so as to protect
the real wages of labour. Dearness allowances are used in India for this purpose.

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 3. Internal Equity
It implies a proper relationship between wages paid for different jobs within the
company. For example salary of a senior Manager is lower than a manager; there is
lack of internal equity. Pay differentials should be related directly to differential in job
requirements. Fair pay differentials between jobs can be established with the help of
job evaluation.
4. External Competitiveness
Wages and salaries in the organization should be in line with wages and salaries for
comparable jobs in other organization. Otherwise the organization may not be able to
attract and retain competent personnel. Data relating to pay levels in other
organizations
can be collected through wage and salary survey.
5. Increments
Compensation policy can be good motivator if pay increases are linked with merit.
But annual increments should partly be linked to seniority or years of service. The
logic for seniority based increments is that as a person accumulates experience his
skill get sharpened and his efficiency tends to increase.
6. Built-in Incentive
Wage or salary plan should contain a built-in incentive so as to motivate employees to
perform better. Such an incentive can be developed through performance based
payment. A part of the total payment should be linked to individual or group
performance. A sound performance appraisal system should be used to measure
accurately and objectively the performance of individual employees.
2.4 Compensation Design Components
Determine the best total rewards philosophy for the organization. Reviewing the
current compensation and benefits system to see how it compares to labour market
competition and Formulating effective communication strategies focused on the value
of the compensation, performance management and benefits programme.
1. Base Pay: To determine the base pay the following is to be taken into
consideration:
 Conducting job analysis and documenting job content
 Developing systematic base pay structures
 Using market benchmarking or job evaluation methods
 Development of employer specific base pay strategic
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  Analysis of employee base pay to new base pay structures and
 Job description development
2. Incentive Programme: To develop the incentive programme the following
must be taken into consideration:
 Developing motivating variable pay programmes for production, office,
management and sales employees that tie organizational strategies and goals to
individual or team performance and
 Creating pay-for-performance system including performance appraisal tools
and merit increase guidelines
3. Benefits Programme: To develop benefit programme the following
must be considered:
 Assessing employees‘ satisfaction with your current benefit package through a
Benefit Assessment Survey
 Analysis of current benefit offerings and recommendation of effective benefit
changes
2.5 Compensation Philosophy
A company‘s compensation philosophy refers to the set of guiding principles that
drive decision making about compensation. In its compensation philosophy, the firm
will spell out why it makes the choices it does about how to pay employees. This
philosophy
differs from business to business, but every company seeks to hire and retain the best
talent, and it will express that sentiment in its compensation philosophy. All
companies with employees must determine how and what to pay their workers and
when to offer things like raises, bonuses and other incentives. Businesses of all types
tend not to do this haphazardly. Rather, they evolve what is called a compensation
philosophy. This is an actual plan for how employees are to be paid, when payments
will rise, and when bonuses are appropriate. Such a plan is often made available to
employees, so they have a sense of the organization‘s philosophy and can thus
determine their treatment by the organization, as it relates to compensation, not just at
present but also in the future.
2.5.1 Factors Determining Compensation Philosophy
Some of the factors that influence compensation philosophy include; present revenue
of the company and expected profits in the future, market value of the jobs for which
the company is hiring, and degree of competitiveness in the types of jobs a company
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offers. The way an organization views its employees and its responsibility to those
employees factors into the development of a compensation philosophy too.
Essentially, many different elements may contribute to the way an employer
determines rate of pay, raises and bonuses.

Figure 6.4 Factors influencing compensation philosophy

It may be easy to create a compensation philosophy in some fields. For instance, those
that require rising levels of expertise and education usually have set rates, and they
may have a salary range that matches market value prices and that gives employees
something to aim for. Hospitals, for example, can hire employees of numerous types,
and clearly compensation will be different for nurses than it is for doctors or janitors.
2.5.2 Processes involved in Developing Compensation Philosophies
A compensation philosophy lays out the guiding principles for a company
compensation policy. It serves as a mission statement of the company policy. The
following are the tips for creating compensation Philosophy:
 Be as concise as possible. Company philosophy should be about two
paragraphs in length.
 The Company to maintain an optimistic yet realistic tone.
 The Company should keep in mind that the organization has and will go
through changes. Policy can change, but remember, company compensation
philosophy should withstand these changes with few adjustments.

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  The Company should ensure that compensation philosophy reflects some of
the values already listed in your company‘s mission statement.
 The Company should see attractive, flexible, and market based pay,
competitive in recruiting and retaining employees through high-quality
compensation plans, or compensation program aligned with shareholder
interest.
2.5.3 Types of Compensation Philosophy
Usually, there are two types of philosophies of compensation rates/wage rates
including the productivity philosophy and purchasing power philosophy.
1. Productivity Philosophy: which relates to high wages and low unit cost of
production which assumes:
 That the employers should provide the best possible tools, machines, goods
and buildings etc., while the management should apply the latest production
technique.
 That the production should increase without the uses of commensurate
physical efforts of employees while the unit cost of production should
decrease leading to lower prices of goods.
 That the market for goods should expand leading to enhanced sales volume
and
 That the part of resultant enhanced profits should be used to increase the
wages of the employees and remaining can be ploughed back in the business

2. Purchasing Power Philosophy: makes the following propositions:

 That the workers should be paid high wages because they form a large
proportion of the work force and are equipped with a higher propensity to
consume. It results in expansion of the economy‘s purchasing power supply
 That effective demand for goods and services produced should enlarge in each
establishment
 That productivity per worker should increase while the unit cost of output
should decrease leading to enhanced profits and
 That increased wages should be paid from this enhanced income to average
the cycle.

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2.6 Compensation Evaluation
Today‘s compensation systems have come from a long way. With the changing
organizational structures, workers‘ need and compensation systems have also been
changing.
From the bureaucratic organizations to the participative organizations, employees
have started asking for their rights and appropriate compensations. The higher
education standards and higher skills required for the jobs have made the
organizations provide competitive compensations to their employees. Compensation
strategy is derived from the business strategy. The business goals and objectives are
aligned with the HR strategies. Then the compensation committee or the concerned
authority formulates the compensation strategy. It depends on both internal and
external factors as well as the life cycle of an organization

2.7 Approaches to Compensation

Compensation Management is an integral part of the management of the organization.
Compensation is a systematic approach to providing monetary value to employees in
exchange for work performed. It may achieve several purposes assisting in
recruitment,
job performance, and job satisfaction. It 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. It is a tool used by management for a variety of
purposes to further the existence and growth of the company. It may be attuned
according to economic scenario, the business needs, goals, and available resources.
Compensation Management contributes to the overall success of the organization in
several ways. There are three different main goals of compensation management
recruiting, motivating and retaining good people have not changed over the time, but
the ways in which some companies approach them differ dramatically from previous
approaches. Performance based pay, tailored to the strategic circumstances of each
organization, may consist of base pay, an annual bonus, and a choice of various other
benefits. This is known as ―total rewards‖ package.

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 1. Total Rewards Approach
It tries to place a value on individual rather than just the jobs. Widespread use of
various inventive plans, team bonuses, organizational gain sharing programmes, and
other designs serves to link growth in compensation to results. However, management
must
address the following two main issues when using variable pay systems:
a. Should performance be measured and rewarded based on individual, group or
organizational performance?
b. Should the length of time for measuring performance be short term (less than
one year) or longer term (more than one year)

2. Traditional Compensation Approach

For some organizations, a traditional compensation approach makes sense and offers
certain advantages in specific competitive situations. It may be more legally
defensible, less complex, and viewed as more ―fair‖ by average and below average
employees. It reflects a logical, rational approach to compensating employees.

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Figure 6.5 Traditional Approach to compensation

Total Reward Approach Traditional Reward Approach

Variables pay is added to base pay Compensation is primary base pay
Long term incentives are provided to all Bonuses/perks are for executives alone
Flexible and portable benefits are Fixed benefits are tied to long term
offered tenure
Multiple plans, consider job family, Organizational wide standard pay
location and business units plan exists
Knowledge/ skill-based broad band‘s Knowledge/ skill-based broad band‘s
determine pay grade determine pay grade
Table 6.2 Total and Traditional Reward Approaches

3.0 Conclusion
Compensation is a systematic approach to providing monetary value to employees in
exchange for work performed. Compensation design determines the value of specific,
properly executed accomplishments toward the achievement of desired outcomes. A
compensation philosophy lays out the guiding principles for a company compensation
policy. Some of the factors that influence compensation philosophy include; present
revenue of the company and expected profits in the future, market value of the jobs
for which the company is hiring, and degree of competitiveness in the types of jobs a
company offers. Finally, this unit concludes that if Compensation is a systematic
approach aimed at providing monetary value to employees in exchange for work
performed, then Compensation Management should be an integral part of the
management of the organization.
4.0 Summary
In this unit, we discussed the concept of compensation design, its various policies, its
essential components, compensation philosophy, factors determining compensation
philosophy, types of compensation philosophy and approaches to compensation was
discussed among other things.

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UNIT 3 STRATEGIC COMPENSATION PLANNING, PROCESS OF
DETERMINING COMPENSATION, EQUITY AND
COMPENSATION AND COMPENSATION AS A RETAINING
STRATEGY
CONTENT
1.0 Introduction
2.0 Main Content
2.1 Strategic compensation planning
2.2 Process of determining compensation
2.2.1 traditional system
2.2.2 modern system
2.3 Equity and compensation
2.4 Compensation as a retention strategy
2.5 Understanding what motivate an employee
2.6 Effective steps to retain employees
2.7 Wage theories
2.7.1 Economic theories
2.7.2 Motivational theories
2.8 differences between compensation and reward
3.0 Conclusion
4.0 Summary

1.0 INTRODUCTION
Once employees have done their jobs and been appraised, they expect to be paid.
Each
employee‘s pay should make sense in terms of the company‘s overall pay plan.
Developing a pay plan is as important in a small firm as a large one. Paying wage
rates that are too high may be unnecessarily expensive, and paying less may guarantee
interior help and high turnover.

2.0 MAIN CONTENT

2.1 Strategic Compensation Planning
Once employees have done their jobs and been appraised, they expect to be paid.
Each
employee‘s pay should make sense in terms of the company‘s overall pay plan.
Developing a pay plan is as important in a small firm as a large one. Paying wage
rates that are too high may be unnecessarily expensive, and paying less may guarantee

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interior help and high turnover. Furthermore, internally inequitable wage rates will
reduce morale and cause endless badgering by employees demanding rises.
The strategic compensation planning otherwise called the process of looking
ahead at what an organization needs to do about its reward policies and practices in
the future. The strategic compensation management deals with both ends and means.
As an end, it describes a vision of what reward policies will look like in a few years‘
time. As a means, it shows how the vision will be realized. Therefore, strategic
compensation management is also called visionary management. But it is also called
empirical management which decides how, in practice, it is going to get there.

2.2 Process of Determination of Compensation

Today the compensation systems are designed aligned to the business goals and
strategies. The employees are expected to work and take their own decisions.
Authority is being delegated. Employees feel secured and valued in the organization.
Organizations offer monetary and non-monetary benefits to attract and retain the best
talents in the competitive environment. Some of the benefits are special allowances
like mobile, company‘s vehicle; House rent allowances; statutory leaves, etc. The
wage determination process consists of the following steps:

1. Traditional Compensation Systems

In the traditional organizational structures, employees were expected to work hard and
obey the bosses‘ orders. In return they were provided with job security, salary
increments and promotions annually.

Figure 6.6 Evolution of compensation system

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The salary was determined on the basis of the job work and the years of experience
the employee is holding. Some of the organizations provided for retirement benefits
such as, pension plans, for the employees. It was assumed that humans work for
money, there was no space for other psychological and social needs of workers.

Change in Compensation Systems

With the behavioral science theories and evolution of labour and trade unions,
employees started asking for their rights. Maslow brought in the need hierarchy for
the
rights of the employees. He stated that employees do not work only for money but
there are other needs too which they want to satisfy from their job, i.e. social needs,
psychological needs, safety needs, self-actualization, etc. Now the employees were
being treated as human resource. Their performance was being measured and
appraised based on the organizational and individual performance. Competition
among employees existed. Employees were expected to work hard to have the job
security. The compensation system was designed on the basis of job work and related
proficiency of the employee.

2. Modern Compensation Systems

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Figure 6.7 Steps in Modern Compensation Systems
a. The Salary/Wage Survey
It is difficult to set pay rates if one doesn‘t know what others paying, so salary survey
of what others are paying will play a big role in pricing jobs. Virtually every employer
conducts at least an informal telephone, newspaper, or internet salary survey.

b. Job Analysis
Job analysis is a systematic approach to defining the job role, description,
requirements, responsibilities, evaluation, etc. It helps in finding out required level of
education, skills, knowledge, training, etc for the job position. It also depicts the job
worth i.e. measurable effectiveness of the job and contribution of job to the
organization.
Thus, it effectively contributes to setting up the compensation package for the job
position.

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Figure 6.8 Job analysis

i. Job Description
Job description refers the requirements an organization looks for a particular job
position. It states the key skill requirements, the level of experience needed, level of
education required, etc. It also describes the roles and responsibilities attached with
the job position. The roles and responsibilities are key determinant factors in
estimating the level of experience, education, skill, etc required for the job. It also
helps in benchmarking the performance standards.

ii. Job Position

Job position refers to the designation of the job and employee in the organization. Job
position forms an important part of the compensation strategy as it determines the
level
of the job in the organization. For example, management level employees receive
greater pay scale than non-managerial employees. The non-monetary benefits offered
to two different levels in the organization also vary

iii. Job Worth

Job Worth refers to estimating the job worthiness i.e. how much the job contributes to
the organization. It is also known as job evaluation. Job description is used to analyze

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the job worthiness. It is also known as job evaluation. Roles and responsibilities helps
in determining the outcome from the job profile. Once it is determined that how much
the job is worth, it becomes easy to define the compensation strategy for the position.

c. Job Evaluation
The relative value of every job is determined through job evaluation. The relative job
value is then converted into money value so s to fix. Wage Survey: Wage or salary
surveys are conducted to find out wage or salary levels prevailing in the region or
industry for similar jobs. Other organizational problems such as recruitment policy,
fringe benefits, etc., are also considered.

2.3 Equity and Compensation

If our first goal of attracting capable employees to the organization is to be achieved.
personnel must perceive that the compensation offered is fair and equitable. Equity is
concerned with felt justice according to natural law or right. Homans‘s exchange
theory predicts greater feelings of equity between people whose exchanges are in
equilibrium. When an employee receives compensation from the employer,
perceptions of equity are affected by two factor:
i. the ratio of compensation to one‘s inputs of fort, education, training,
endurance of adverse working conditions, and so on.
ii. the comparison of this ratio with the perceived ratios of significant other
people with whom direct contact is made. Equity usually exists when a person
perceives that the ratio of outcomes to inputs is in equilibrium both internally
with respect to self and in relation to others. Employee contributions exceed
their outcomes of money resulting dissatisfaction often leads to efforts to
reestablish equilibrium, such as ―borrowing‖ from the supply room to increase
rewards, trying to adversely affect the effort and pay of others, convincing self
that pay is not out of line, quitting or frequently absenting oneself from the
organization, promoting labor organization, and so on
2.4 Compensation as a retention strategy
Compensation can have a direct impact on employee retention. While employers may
use employee incentives and monetary rewards to retain employees, there are ways to
complement compensation that have a much greater impact. Based on the type of

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compensation, along with the terms and conditions of an employee compensation
package, an employer can boost employee retention.
Employee retention refers to the number or percentage of employees your
organization
retains. The term retention is often used in discussions about employee turnover. The
differences between retention and turnover are subtly related; however, retention is
more about improving satisfaction of current employees by providing challenges,
development opportunities and incentives such as retention bonuses and
compensation that encourages your most talented employees to stay with the
company. Turnover, on the other hand, is inevitable within any organization.
Turnover occurs both involuntarily and voluntarily for a number of reasons. Attempts
to reverse turnover using retention strategy that includes compensation is ill-advised,
not to mention counterproductive.
An effective retention strategy has several components that must be addressed
in order to retain top employees. ―Strategies for Staff Retention‖ outlines eleven key
learning‘s, which are summarized below and help define compensation‘s role in the
overall retention strategy. These are:
i. A retention strategy is pragmatic. An effective strategy leads to fewer
turnovers which results in fewer costs due to turnover and increased
productivity.
ii. The culture and values of an organization are expressed primarily by its
actions, and through the actions of management and employees. When
hiring new employees, cultural values should be in the forefront to ensure
employees ―fit‖ the organization‘s needs.
iii. Leadership and management’s responsibilities include motivating
employees and encouraging commitment. Their job is not just ensuring
tasks are done, but also that employees are engaged.
iv. Communication should reflect the culture and value of the organization.
Effective communication can inspire while poor communication can create an
atmosphere of cynicism and distrust.
v. A performance management system that compensates employees fairly
leads to trust and commitment by employees. In addition to above-market
pay, employees seek flexible work schedules, opportunities for advancement,
and a share in profits and operations of the organization.
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 vi. Managing poor performance is just as important as recognizing good
performance. Non-performers can be a factor that demotivates good
employees.
vii. Terms and conditions are not key to a retention strategy as long as they
are perceived as competitive with the market and equitable among
employees. The organization should regularly benchmark its salaries and
benefits against others in the market and communicate to employees that their
salary and benefits are distributed in a fair and equitable manner.
viii. Effective resourcing strategies and policies provide a competitive
advantage. Hiring and promoting the right people ensures companies have the
right people in place to succeed in achieving the organization‘s business
strategy.
ix. Promotions provide employees with a motivating factor to remain at an
organization and to be productive. A clear and well-communicated
promotion policy provides guidelines and prevents resentment in the future.
x. Career development motivates employees and also allows them to build
skills for promotion. Opportunities for personal and professional growth
occur through training and education, challenging assignments and career
movement.
xi. Talent management provides a channel to monitor and maintain morale
and motivation. When the learning curve begins to plateau, talented
individuals are at risk of getting bored and underperforming or looking for
opportunities outside the organization.
1. Function
Companies concerned with employee retention will make concessions to ensure
employees are satisfied and that morale is high. Pay increases and bonuses are
examples of ways a company can compensate employees to encourage continued
employment.
2. Strategies
Some companies may offer employees attractive benefits such as flexible work
schedules, vacation time and attractive health insurance packages in lieu of higher
wages. Some employees may find flexibility in the workplace a greater benefit than
money, which may influence the employee to stay with a company when times get
tough.
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 3. Reason for Employees Switch Over
Employees looking voluntarily to make a change want to continue their career with a
company that offers promotion and development opportunities, a collegial work
environment and a leadership team that‘s openly appreciative of its human capital.
Compensation and benefits may be important factors in the decision to look for
employment elsewhere; however, many reports indicate compensation is low on the
list of priorities in looking for another position. Employees have an intrinsic need for
respect, motivation and challenging work, which are compelling reasons for seeking
employment elsewhere. Employers who consider compensation as part of the strategy
for employee retention are headed in the right direction, but are looking at just one
half of the equation. Compensation coupled with better opportunities to develop
employee skills is a more complete way of formulating an effective retention strategy.

Factor Description
Lack of challenge and opportunity The position not offering adequate
challenges and the opportunity to learn new
tasks and responsibilities
Lack of career advancement opportunities Not being able to advance in one‘s career
within a reasonable time and with higher
levels of performance.
Salary Not being paid at or above market and not
having internal and external equity.
Lack of Recognition Not being rewarded fairly for work
performed. Rewards may be financial or
non-financial.
Ineffective Leadership The inability of leaders to develop and
communicate the Company‘s vision and
effectively developing employees to
maximize their potential.
Not having the opportunity for a flexible The inability to work a flexible work
work schedule schedule including reduced hours,
telecommuting, four ten-hour days per week
and job-sharing
Inadequate emphasis on teamwork The lack of effort exerted by employees and

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 leaders to foster a teamwork type
environment.
Lack of trust in senior Lack of confidence in the Senior
management Management to do what is right for the
employees.
Too long of a commute The distance an employee has to commute
to and from work.
Inadequate opportunities The unavailability and inadequate
for training & development opportunity to take classes at local colleges
and universities and participating in the in-
house training program.
Low overall job satisfaction Not feeling a sense of satisfaction from
performing one‘s job.

Table 6.3 Reasons for employees leaving organization

4. Tying Compensation to Retention

One of the most effective ways compensation can have a positive impact on employee
retention is to construct an employee development plan that promises employees
career track opportunities with the company. Being on an upward career track should
come with corresponding salary and merit increases. In addition, performance-based
bonuses motivate employees in terms of aligning their individual goals with company
goals. Implementing incentives such as stock options, profit sharing and spot rewards
are other ways compensation affects retention. These forms of compensation
demonstrate how critical employee performance is to the organization‘s overall
profitability. Spot rewards are usually not as lucrative; however, they provide
immediate recognition, reward and compensation when company leadership observes
an employee performing superior work. Appreciation is key to employee retention,
and if compensation is a part of recognition, then compensation is likely to increase
employee retention.
5. Successful Human Resource Retention Strategies
Employee retention is a critical goal for any organization. The successful retention of
employees is always a business priority, even during tough economic times when
there

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are more employees available for open positions. Strategies to improve retention
include understanding what motivates employees, providing open channels of
communication, maintaining competitive pay and benefits packages and providing
employees opportunities for making decisions that impact them. Employee rewards
represent an important factor in keeping employees engaged, loyal and productive.
Each employee is different and will have different motivations. Fortunately, managers
can choose from a number of incentives —monetary and non-monetary — to impact
retention, including pay, benefits, recognition, involvement and flexibility. Even small
organizations can compete against larger companies by focusing on those rewards that
are most valued by their employees.
2.5 Understanding What Motivates an Employee
Employees are not all alike in terms of their beliefs, attitudes and preferences. This
has an impact on HR‘s ability to develop strategies to successfully motivate and retain
an increasingly diverse employee audience. Understanding what motivates employees
is the first step toward developing pay, benefits and policies that increase motivation
and, ultimately, retention. This can be done formally through quantitative surveys that
provide an indication of overall workforce preferences and relative weights. It can
also be done through ongoing communication between supervisors/managers and
employees and through a culture of open communication where employees feel free to
share their thoughts and concerns.
A. Providing Open Channels of Communication
Providing open channels of communication is an important means of ensuring that the
organization is getting input on issues that matter to employees on an ongoing basis.
Open channels of communication start at the employee/supervisor level, but that
should not be the only opportunity employees have to give or receive feedback. Other
communication channels include a company intranet, a suggestion program, online
forums and social media channels, company meetings and any number of other
opportunities for employees to interact with each other, with their managers and
supervisors and with the organization‘s leaders.
B. Maintaining Competitive Pay and Benefits Packages
Organizations operate within an increasingly competitive environment, even when
economic times are tough. Organizations are always concerned about attracting and
retaining the most qualified and effective employees. Ensuring that pay and benefits
packages are competitive is a key part of this process. HR professionals should be
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constantly monitoring the external pay and benefits environment, paying particular
attention to the organizations that they compete directly with for employees, generally
those within the same geographical area or industry where staff members are being
recruited.
C. Clear Direction and Open Feedback
Employees need to know what is expected of them and how their work contributes to
the overall successful performance of their work team, department, division and the
organization at large. Goals should be clear and measurable, with opportunity for
employees to influence the establishment and monitoring of these goals. Feedback
should be open, immediate and specific so that employees have a clear understanding
of how they might change their actions and behaviors or increase their skills and
knowledge in specific areas to improve their performance.

D. Understanding the Competitive Landscape

No business operates in a vacuum. Employers need to have a solid understanding of
their competition relative to employee recruitment and retention, including an
understanding of the pay and benefit packages offered by other organizations.
Competition may be local, regional or even national depending on the position and the
availability of candidates. Importantly, pay alone is often not the most important
factor in retaining employees. For instance, today‘s employees who often find
themselves juggling the demands of both children and parents often appreciate
flexibility in the workplace, which can be accommodated through flexible schedules,
the ability to work remotely and an understanding of work/life balance needs.

E. Understanding Employee Motivators

To be effective in administering reward packages that positively impact retention,
employers must understand the motivators that drive their employees to high levels of
performance. While there is much literature on the subject, organizations will vary
depending on their industry, geography and the unique make-up of their employee
population. One way of understanding employee motivators is to literally ask
employees what motivates them to perform at high levels — this can be done one-on-
one or through quantitative surveys or employee assessments.

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 F. Recognizing the Impact of Non-Monetary Incentives
Employees are motivated by more than money. Non-monetary incentives can have a
major impact on employee satisfaction, engagement and retention. Non-monetary
incentives include such things as recognition, the opportunity to be involved in
decisions that impact their daily work, opportunities for learning and development,
and work/life balance and flexibility. Since no two employees will be impacted in the
same way, companies that have a variety of ways to reward employees allow their
managers and supervisors to be flexible in their implementation of these rewards.
G. Ongoing Assessment and Modifications
The effectiveness of reward packages is impacted by internal and external factors and
it is important for employers to continually monitor, evaluate and adjust their rewards
and benefits packages to ensure that they continue to meet employees‘ needs.
Changes in the competitive landscape, in the economy, in employee needs and in
demographics can all impact how effectively existing packages meet employee needs.
Ongoing assessment of both internal drivers and external environmental impacts can
help ensure that companies‘ reward packages serve to drive retention in a positive
way.
How do you make them feel?
Small things add up. Many decisions are made, at least partly, based on how an
individual feels. Being proactive about giving compliments to employees and pointing
out what they are doing right can help increase positive vibes at your workplace.
Looking for win-win solutions in conflict situations also helps promote positive
feelings. Take the time to form meaningful relationships and connect with others.
H. Encourage Work-Life Balance
Offer flexible working arrangements, such as telecommuting. Even allowing
telecommuting one day a week goes a long way in promoting positive retention rates.
However, make sure that whatever options for flexibility you provide are distributed
fairly among employees.
I. Offer horizontal mobility and training
People specialize in a wide variety of skills. Offer some form of continued training
that increases an employee‘s ability to achieve greater horizontal and vertical
mobility. If someone is getting bored with his job, finding a way that he can
contribute in a different
department, while still using the skills in his current department, helps retention.
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 J. Benefits
Offer competitive benefits packages which best fit the needs of the employee. Think
about a specific type of pension plan that is competitive with what other similar
companies are offering. Also consider health and life insurance premiums that are
reasonable.
K. Perks
Bring in bagels or donuts once a week. Find ways to include environmental
stewardship such as incentives for carpooling or riding a bicycle. Some businesses
offer reduced gym membership fees or have a gym on site where employees can work
out while on the clock.
2.6 Effective Steps to Retain Employees
Retaining your workforce requires consistent effort. Once you attract and bring that
great new employee on board, the last thing you want to do is lose him to a
competitor. For optimal success, write a retention plan that addresses events
throughout the employee lifecycle. Influencing whether your employees to stay or
leave begins with initial recruiting.

i. Recruit with integrity. The key to recruiting an employee who stays is selling
them an accurate picture of your business. Resist promising what is not real. A
new employee who feels lied to is more likely to leave.
ii. Develop a hiring process that explains your company value proposition.
Make sure employees who manage the hiring process can communicate
reasons to join and stay. Keep the hiring process high-touch (lots of contact),
and treat your candidate with respect.
iii. Implement an orientation process for employees with the end goal of
retention. To combat early attrition, space orientation activities over the first
month and require frequent manager and employee one-on-one meetings.
Effective employee orientation promotes retention.
iv. Create training programs that place the new employee in key meetins, in
interactions with key players, and that provides her with the tools necessary to
do the job. To reduce attrition, provide early opportunities for trial and error in
a supportive environment.

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 v. Provide mentorship for your new employee. Train mentors to demonstrate
passion for their work. Strong mentors are key to effective employee-retention
plans.
vi. Engage in fair evaluation processes. If the new employee‘s first evaluation
experience is poor, she will begin to question her value to the business. Key to
an effective evaluation process is delivery of feedback that is not just manager
to employee but is also employee to manager.
vii. Manage the employee departure process well. Even if you do everything
right, some employees will need to leave. Exit interview processes need to
encourage honesty. Share exit data in aggregate form to the whole
organization, and openly work to combat problem areas. If an employee feels
respect on his way out, he will certainly share that feeling with people still
employed by you.
2.7 WAGE THEORIES
Labour is an important factor and also a peculiar factor of production. Among all
factors labour alone perishable and inseparable from the labourer. At any time, the
landlord may withhold the supply of land or the capitalist may withhold supply of
capital but the
labourer is forced to sell labour at whatever price is available in the market. Because
of this peculiarity, there is always a danger that the labour shall get less than what is
actually due to him. It is on account of this important aspect of wage determination
that from the very early times economists have formulated theories explaining the
determination of wages.
There are many theories of wages, but most of them are either wrong, or insufficient
to explain the rate of wages. A consideration of the earlier theories in spite of their
defects and shortcomings will help us in properly comprehending easily the
explanation of wages by modern economists.

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Figure 6.8 Wage Theories

A theory is a generalization that expresses relationship between facts. Compensation

theories attempt to explain the magnitude and composition of the reward packages
and its impact upon the behavior of the employees. To be meaningful and practically
useful, a theory must address specific and important questions. Two distinct branches
of compensation theories are:

2.7.1 ECONOMIC THEORIES

The Central Questions of a Wage Theory
There are three types of questions which a wage theory attempts to answer. These are
discussed below:
 Wage Level Related Questions?
What determines the general wage level or causes it to be what it is? General wage
level is defined as an average, or some measure of central tendency, of wage rates for
some given universe. The wage level in question may be for a job, an occupation, an
establishment, a plant, a firm, an industrial grouping, or an entire country.
 Wage Structure Questions?
The theory attempts to generalize what determines the wage structure? A wage
structure has been defined as a hierarchy of jobs, for some defined universe, to which
wage rates have been attached.

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  Variations in Wage Rates and Structures:?
Why do wage rates and structures vary widely between nations, firms industries and
geographic regions?

A. The Subsistence Theory of Wages

This theory was formulated by the French economists Physicorates later elaborated by
David Ricardo Lassale who called this theory as iron law of wages. This theory is
based on two assumptions namely
i. The law of diminishing return applies to industry
ii. There is a rapid increase in population
Analysis of the Theory
The theory stated that the wages of labour always remained at the subsistence level.
Just the normal value of a commodity under free competition is determined by its cost
of production, so value of commodity ‗labour‘ is determined by its cost of production.
This theory meant that the minimum subsistence are required for the support of the
labourer and that of his family in order to expense a continuous supply of labour.
According to the theory, the labourer should be paid just enough to live and
perpetuate his clan. The theory quotes if wages exceeded the minimum subsistence
level, population would increase and with it supply of labour, until wages were again
at bare subsistence level. If on the other hand, wages fell below the level there would
be a reduction in population and therefore in the supply of labour, until wages were
raised to the subsistence level. Thus the theory is closely associated with the doctrine
of Malthusian over population.
Criticism Against the Theory
 There is no reason why a labourer should increase the number of children in
his family if he gets a higher wage. It would be more natural for the labourer
to think of improving his standard of living instead of increasing the number.
The standard of living when once improved will powerfully influence the rate
of wages in future.
 If the subsistence theory was accepted, the wages of all labourers, assuming
the each has an equally big family to support, would be more or less equal.
But in practice we find it is not so. More efficient labourers get higher than
less efficient. The theory is too pessimistic and does not contemplate about the
role of efficiency in determining wages.
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  It is absurd to imagine that the labour population would increase if the wage
rate were increased above subsistence. The former is a long-term
phenomenon, while the change in wage rate is a short-term phenomenon.
 The theory considered only the supply side of labour, but not the demand side.
Even taking the analogy of general theory of value, the positive role is played
by demand and the supply gets adjusted. The former is a long phenomenon,
while the change rate is a short-term phenomenon.
 Any way the theory contains an element of truth as it indicates that wages
cannot fall below a certain minimum level.

B. Wage Fund Theory

Introduced by John Stuart Mill (1891), this theory assumes that there is a fixed wages
fund (Lump Sum) which is distributed equally among all the labourers. In other
words:

Thus, if the fund is large, wages would be high, if it is small wages would be reduced
to the subsistence level. The demand for labour and the wages that could be paid are
determined by the size of the fund. J.S. Mill said that wages mainly depend upon the
demand and supply of labour or the proportion between population and capital
available. The amount of Wages Fund is fixed. Wages cannot be increased without
decreasing the number of workers and vice versa. It is the wages fund which
determines the demand for labour. However, the supply of labour cannot be changed
at a given time. But if the supply of labour increases along with increase in
population, the average wages will go down. Therefore, in order to increase the
average wages, firstly, the wages fund should be enlarged, secondly, the number of
workers asking for employment should be reduced.
Analysis of the Theory
 It puts more emphasis on demand of labour (wages fund) compared to the
supply of labour

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  It attempts to study wage level in the short-term. It tried to take into account
long run too by suggesting wage fund might grow or shrink in the long run but
that was not the focal point of the theory.
 The theory generalizes about the general level of wages for an entire economic
system, however it can be applied to an employer.
 Just like subsistence theory, this theory also attempts to answer the question of
wage level and not of wage structure and differentials. The reasons may be
that they were developed during the time when economies, even of America
and Europe were agrarian.
 In the short run, many organizations, particularly those in the public sector, do
allocate a fixed run for payment of wages. However, critics argue that the
assumption of a fixed sun itself is wrong as the sum can be increased. Even
J.S. Mill also accepted this criticism.

Criticism Against the Theory

 The wage fund theory is criticized on the following grounds:

 It is not clear from where the wages fund will come
 No emphasis has been given to the efficiency of workers and productive
capacity of firms
 This theory is unscientific, as wages fund is created first and wages are
determined later on. But, in practice, the reverse is true.
 This theory does not explain differences in wages at different levels and in
different regions
 This theory is more applicable to pure agrarian society where the gap between
two crops is too big. Now as labour moved to manufacturing and there is a
move to pay for performance, it is possible to pay workers out of the surplus
of current operations also.

C. Marginal Productivity Theory of Wages

The general theory of distribution has been extended to wages and this has come to be
known a marginal productivity theory of wages. The theory as has been studied
assumes
certain conditions to enumerate the concept of marginal productivity. This theory was
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developed by Phillips Henry Wicksteed (England) and John Bates Clark (USA).
According to this theory, wages are based upon an entrepreneur‘s estimate of the
value that will probably be produced by the last or marginal workers. In other words,
it assumes that wages depend upon the demand and supply of labour.
Consequently, workers are paid what they are economically worth. The result is that
the employer has a larger share in profit as he has not to pay o the non-marginal
workers.
As long as each additional worker contributes more to the total value than the cost or
wages, it pays the employer to continue hiring. Where this becomes uneconomic, the
employer may resort to superior technology. It is said to be the most highly perfected
and logically contributed theory of wages. As it is based on economics, this remains
the best theory to explain the long-run wage levels of an economic system as well as
understanding of short run wage determination within the firm.
It is based on the assumptions of a perfect economy which are as under.
 Homogeneous factors of production
 Multiplicity of buyers and sellers- so many that no one can control supply and
demand
 Certain fixed factors of production
 Perfect knowledge
 Full employment of all the resources
 Perfect knowledge
 Full employment of all the resources
 Perfect mobility of factors of production
 Profit maximization as the guiding force
 Law of diminishing returns

Analysis of the Theory

 It is totally emphasized demand for labour and supply of labour has not
received its due importance
 It was developed making assumptions about a firm operating in short-run.
However, it has been refined and has greater usefulness when applied to long
run problems.
 The theory can be used for the study of both for the micro as well as macro
level. When factors of production are presumed to be constant, it is applicable
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 at micro level; when all the factors can be increased or decreased, it becomes
operational at macro level.
 Just like subsistence theory and wages fund theory, this theory also attempts to
answer the question of ―wages level‖ only.
 This theory focuses on productivity and productivity is undoubtedly a
crucially important concept to practitioners.

Criticism Against the Theory

 In practice, the employers offer wages less than the marginal productivity of
labour. In many cases, the labour unions are able to bargain for wages higher
than the marginal productivity of labour.
 This theory is based on perfect competition in the market which is solely
found in practice
 It is wrong to assume that more labour could be used without increasing the
supply of production facilities.

D. Investment Theory of Wages

This theory was developed by Gilelman for the replacement of marginal productivity
theory. Whereas marginal productivity theory focuses on the output of labour.
Investment theory concentrates on labour inputs, another side of the same coin. The
theory proposes that the productivity of an individual employee is a function of his
personal attributes with which his labour is combined. Workers attributes include
values, personality, and physical abilities.
In a sense, however, these attributes are reflected in education, training, and
experience. Highly motivated, emotionally mature and energetic individuals are
essentially investments in productivity. The larger the investments possessed by
workers, the wider the geographic scope of the labour market in which he has a
potential to participate. So he is highly mobile. Wages are related to mobility
potential.

Analysis of the Theory

 It focuses both on the supply of and the demand for labour. It emphasizes
worker‘s investment in productivity
 Its emphasis is on short-run
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  It emphasizes the micro aspect
 It tries to answer wage structure as well as the wage level
 If wages are assumed to be a return on investment, logically one would
assume that the larger the investment, the higher the wage. However, in
practice, this will not be true always as employees seek a number of other
satisfaction from job, income being only one of them.
Further, the wage decisions are influenced by the organization‘s policy in regard to
job design, employment and lay-off as these factors affect profitability of the
organization and its ability to pay. Generally stated, employment (demand for labour)
is a function primarily of the demand for output and only several times removed it is a
function of wages as wages affect costs, costs –prices – demand- employment.
Despite its limitations, the theory can be tested empirically and has great value for the
practitioners.
2.8 Differences between Compensation and Reward
In a layman‘s language the word Compensation means something, such as money,
given or received as payment or reparation, as for a service or loss. Reward means
something given or received in recompense for worthy behavior or in retribution for
evil acts.
The word Compensation may be defined as money received in the performance of
work, plus the many kinds of benefits and services that organizations provide their
employees.
On the other hand, the word Reward or Incentive means anything that attracts an
employees‘ attention and stimulates him to work. An incentive scheme is a plan or a
programme to motivate individual or group performance. An incentive programme is
most frequently built on monetary rewards (incentive pay or monetary bonus), but
may also include a variety of non-monetary rewards or prizes.

3.0 Conclusion
In a layman‘s language the word Compensation means something, such as money,
given or received as payment or reparation, as for a service or loss. Reward means
something given or received in recompense for worthy behavior or in retribution for
evil acts. Compensation can have a direct impact on employee retention. While
employers may use employee incentives and monetary rewards to retain employees,
there are ways to complement compensation that have a much greater impact. Finally,
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this unit will conclude by saying, understanding what motivates employees is the first
step toward developing pay, benefits and policies that increase motivation and,
ultimately, retention.

4.0 Summary
In this unit, we discussed the strategic compensation planning, processes of
determining compensation (traditional and modern), compensation as a strategy,
reasons for employees switching over, understanding what motivate an employee,
effective steps to retain employees and theories of wages were discussed among other
things.

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UNIT 4 FRINGE BENEFITS, OBJECTIVES, TYPES/AREAS
COVERED, PRINCIPLES, FACTORS DETERMINING/REASONS
FOR DOWNSIZING, VOLUNTARY RETIREMENT SCHEME,
REASONS FOR DOWNSIZING, PARADOX OF DOWNSIZING,
REASONS FOR PREPARING PROCEDURE, STEPS IN
INTRODUCING AND IMPLEMENTING VRS, CHALLENGES IN
IMPLEMENTING EMPLOYEE EXIT, ADVANTAGES AND
DISADVANTAGES OF VRS, MERGERS AND ACQUISITION.

CONTENT
1.0 Introduction
2.0 Main Content
2.1 Concept of Fringe Benefits
2.1.1 objectives of fringe benefits
2.1.2 types/areas covered by fringe benefits
2.1.3 principles of fringe benefits
2.1.4 factors determining/reasons for offering fringe benefits
2.2 concept of downsizing
2.2.1 paradox of downsizing
2.3 voluntary retirement scheme
2.3.1 reasons for proposing VRS
2.3.2 Procedures for VRS
2.3.3 Steps to take when introducing and implementing VRS
2.3.4 Challenges in implementing VRS
2.3.5 Advantages of VRS
2.3.6 Disadvantages of VRS
2.4 Mergers and Acquisition
3.0 Conclusion
4.0 Summary
5.0 Tutor-marked questions
6.0 References/Further Reading

1.0 INTRODUCTION
Fringe benefits are indirect form of compensation given to employees in addition to
the various forms of cash pay- base pay, dearness allowance and inventive pay. In the
course of our discussion, we shall explain the objectives, types, principles, factors
determining downsizing and various challenges in implementing employee exist in
our 21st century modern organizations.

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2.0 MAIN CONTENT
2.1 Concept of Fringe Benefits
Fringe benefits are indirect form of compensation given to employees in addition to
the various forms of cash pay- base pay, dearness allowance and inventive pay. They
provide a quantifiable value for individual employees. They are the indirect form of
compensation as they are not related to the performance but are granted to the
employees for just being a member of the organization. They are called benefits as the
employees stand benefited on account of such provisions. They are not in the form of
wages, salaries and time related payments. For example, key executives in large
companies might also enjoy fringe benefits like use of time-share condominiums, paid
continuing education, use of a company jet, use of a company credit card, discounted
or free health club memberships, and a significant amount of paid vacation. The
primary effect of fringe benefit, type of compensation is to retain the employee in the
organization on a long term basis. There is little or no evidence that the tremendous
variety of supplementary pay plans often termed fringe benefits served to motivate
employees to higher productivity. For example, in a study of 550 white collar
employees, it was concluded that the average employee was aware of about one half
of the supplementary pay programme feature- this despite an unusually
comprehensive and active programme of communication with respect to employee
benefits available. One of these firms most costly and widely publicized benefits; a
disability wages was essentially unheard of by 60% of those responding to the
questionnaire. When asked if they felt that they knew enough about these plans over
three quarters replied that they did. Also, in a second study in another company 249
new employees were queried concerning their knowledge of benefits explained during
a comprehensive induction programme. A correlation between knowledge and attitude
towards the company‘s fringe benefit programmes proved to be quite low. Despite the
absence of motivational affects employee benefit programme make up a significant
portion of most personnel department budgets. Therefore, it should be a major
concern in any organization to make their employees abreast about the fringe benefit
programmes in order to motivate them and thereby improving the status of their
organization.

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2.1.1 Objectives of Fringe Benefits
The employer‘s views are that fringe benefits form an important part of employee
incentives to obtain their loyalty and retaining them. The following are the objectives
of fringe:
 To create and improve sound industrial relations
 To boost up employee morale.
 To motivate the employees by identifying and satisfying their unsatisfied
needs.
 To provide qualitative work environment and work life.
 To provide security to the employees against social risks like old age benefits
and maternity benefits.
 To protect the health of the employees and to provide safety to the employees
against accidents.
 To promote employee‘s welfare by providing welfare measures like recreation
facilities.
 To meet requirements of various legislations relating to fringe benefits.
 To create a sense of belongingness among employees and to retain them.
Hence, fringe benefits are called golden hand-cuffs.

2.1.2 Types/ Areas covered by Fringe Benefits

Some of the Fringe benefits offered to employees in an organization are:

1. For Employment Security

Benefits under this head include unemployment, insurance, technological adjustment
pay, leave travel pay, overtime pay, level for negotiation, leave for maternity, leave
for
grievances, holidays, cost of living bonus, call-back pay, lay-off, retiring rooms, jobs
to the sons/daughters of the employees and the like.

2. For Health Protection

Benefits under this head include accident insurance, disability insurance, health
insurance, hospitalization, life insurance, medical care, sick benefits, sick leave, etc.

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 3. For Old Age and Retirement
Benefits under this category include: deferred income plans, pension, gratuity,
provident fund, old age assistance, old age counseling, medical benefits for retired
employees, traveling concession to retired employees, jobs to sons/daughters of the
deceased employee and the like.

4. For Personnel Identification, Participation and Stimulation

This category covers the following benefits: anniversary awards, attendance bonus,
canteen, cooperative credit societies, educational facilities, beauty parlor services,
housing, income tax aid, counseling, quality bonus, recreational programs, stress
counseling, safety measures etc.

5. Employee Security
Physical and job security to the employee should also be provided with a view to
promoting security to the employee and his family members. The benefit of
confirmation of the employee on the job creates a sense of job security. Further a
minimum and continuous wage or salary gives a sense of security to the life.

6. Retrenchment Compensation
The Industrial Disputes Act, 1947 provides for the payment of compensation in case
of lay-off and retrenchment. 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. Workers are eligible for compensation as stated above even
in case of closing down of undertakings.

7. Lay-off Compensation
In case of lay-off, 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.
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 8. Health Facility
Employee‘s health should be taken care of in order to protect the employee against
accidents, unhealthy working conditions and to protect worker‘s capacity. In India,
the
Factories Act, 1948, stipulated certain requirements regarding working conditions
with a view to provide safe working environment.

9. Safety Facility
Provisions relating to safety measures include fencing of machinery, work on or near
machinery in motion, employment of young person‘s 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.

10. Accident or Health Plans

The value of accident or health plan coverage provided by the employer is usually not
included in the income. However, benefits may be taxable to employee. If employer
does not pay the entire cost of your health insurance, employee may be able to enter
into a ―salary reduction agreement‖ with employer. Under these agreements,
employer reduces salary or wages by the amount of cost of the health insurance and
pays the full amount.

11. Adoption Assistance

Employee may be able to exclude from your income amounts paid or expenses
incurred by your employer for qualified adoption expenses if employee attempt to
adopt an eligible child.
12. DeMinimis Benefits
These are benefits having a minimal value. If the cost is so small it would be
unreasonable for the employer to account for it, the value is not included in employee
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income. Examples would include use of the copy machine, coffee, discounts at
company cafeterias, and the cost of company picnics.

13. Holiday Gifts

If employer gives employee a ham, turkey, or other item of nominal value at
Christmas or other holidays, it is not included in employee income. However, cash,
gift cards, or similar items are included in the income regardless of the amount.
14. Qualified Employee Discounts
These are not taxable if the discount for services does not exceed 20%. Discounts for
merchandise are limited to the employer‘s gross profit percentage. No discounts are
allowed for real estate, stock, or other investment property. This is available to
employees, spouses, dependents and retirees.

15. Working Condition Benefits

These include items such as professional dues paid by the employer or subscriptions
to professional publications and are not included in income.
16. Qualified Transportation Fringe Benefits
Employer may provide to the employee transit passes and tokens for parking. These
amounts are excluded from employee income. Also, transportation in a commuter
highway vehicle, provided by employer, between employee home and place of work
is not taxable income.
17. Recreation and Athletic Facilities
The use of employer-owned athletic or recreation facilities is not taxable income. This
benefit is available for employees, spouses, dependents and retirees.
18. Educational Assistance
Employer provides educational assistance to employee to go for higher studies,
training, children‘s education etc., Benefits consist of items or awards which are
supplementary to normal pay. Some– such as pensions and sick pay - are essential
entitlements, so the common term ‗fringe benefits‘ is perhaps misleading. Certain
provisions of the maintenance of adequate standards of living have been underwritten
by the state, which has legislated for employees and employers alike to, bear some of
the cost. They are awarded to anyone who meets certain qualifying conditions and as
such are independent of the employer‘s discretion and performance considerations.
Other benefits such as cars, medical insurance and ‗perks‘, are more in the nature of
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optional extras and as such may be part of the recruitment retention and incentives
strategies of the organization.
19. Pension Provisions
Pensions are generally regarded as the most important benefit after basic pay. They
are a kind of deferred pay, building up rights to a guaranteed income on retirement (or
too dependents on death). They are financed by contributions from the company, with
facilities for contribution by employees as well.
20. Sick Pay
It is understandable that sickness or other enforced absence from work would haunt
workers with the prospect of lost earnings, unless there was some son of provision for
genuine sufferers. Many employers supplement the state benefit by additional sick
pay schemes, which may be tailored to the organization‘s particular objectives
(looking after long serving employees, or generosity from the outset to attract
recruits‘.
21. Maternity Leave and Maternity Pay
Benefit given to the female employees of an organization when a baby(ies) is born
22. Holidays
This is a benefit, which is often taken for granted, but it was only recently working
Time Regulations 1998 in India, that any formal entitlement to annual leave was
formulated. Employees who have been continuously employed for 13 weeks are
entitled to 15 days‘ leave per annum, rising to 20 days for leave commencing after
November 1999. Although this varies from organisations to others and from country
to country, and may be granted by contract terms. Additional holiday entitlements
may be regarded as a fringe benefit, including sabbaticals and long-service leaves.
23. Company Cars
It is a highly-regarded benefit in the UK, especially among managerial staff for whom
they have connotations of status, despite the reduction in tax incentives over the years
- and those whose work requires extensive road travel (eg. sales and service staff).
24. Employer-Provided Vehicles
Employer provides a vehicle employees personal use is a taxable non cash fringe
benefit. Employer must determine the actual value of the benefit and include that
amount on employees account.
25. Retirement Planning Services

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Employer has a qualified retirement plan, qualified retirement planning services
provided by the employer to employee and his spouse are not included in employee
income. This does not include the value of tax preparation, accounting, legal, or
brokerage services provided by employer. These items are taxable income to
employee.
26. Retirement Plan Contributions
Employer‘s contributions qualified retirement plans for the employee are not included
in his income. Generally speaking, contributions into a non-qualified plan are taxable
income.
27. Stock Options
These are classified as non-statutory or statutory options. If it is a non-statutory option
employee will have income when he receives the option, when he uses the option, or
when he sells or otherwise dispose of the option. With a statutory option, employee
does not recognize any income until you sell or exchange your stock from the option.
Employer can tell you which type of options employees have.
28. Meals and Lodging
Meals provided by an employer may be excluded from an employee‘s income if the
meals are furnished on the employer‘s premises and are for the convenience of the
employer. Lodging provided by an employer may be excluded from an employee‘s
income if it is furnished on the employer‘s premises, is for the convenience of the
employer, and is required that the employee accept the lodging as a condition of
employment.
29. Educational Programmes
In-house study opportunities, or sponsorship of external study (not necessarily work-
related).
30. Family-friendly Policies
Such as workplace nurseries, term-time hours‘ contracts, career break schemes. It has
been recognized that certain benefits must be supplied by the organization for its
employees, regardless of whether it wants to or not. With few exceptions, the hiring
of any employee requires the organization to pay social security premiums,
workmen‘s compensation, etc. Similarly, the payment of these costs by the
organization provides the employee with financial protection at retirement,
termination, or as a result of injury, and it also provides to the workers‘ dependants in
case of the employees‘ death
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 31. Transport Assistance
Examples may include loans for the purchase of annual season tickets, or bulk buying
of tickets by employers for distribution to staff.
32. Housing assistance
Allowances to staff who have been transferred or relocated removal and traveling
expenses, lodging, convincing fees and so on or assistance with house purchase
bridging loan, preferential mortgage terms.
33. Medical Benefits
Provision of private medical and/or dental insurance. Some medical services may also
be provided at the workplace: For example, eye and hearing tests (where relevant to
the industrial context).
34. Catering Services
Most commonly, subsidized food and drink at the workplace or Luncheon Vouchers
35. Recreational Facilities
It is a subsidy and organization of social and sports clubs or provision of facilities
such‘ as a gymnasium or bar.
36. Allowances
For telephone costs, professional subscriptions or work related reading matter.
Discounts or preferential terms on the organization‘s own products services. Bank
employees, for example, may receive: a mortgage subsidy: discounts on unit trusts or
insurance products; bonus interest on accounts or savings plans; or reduced interest
rates on overdrafts and loans.
37. Dependent Care Benefits
These benefits are employee-financed programs that provide care for an employee‘s
children or other dependents. The care must be care that would qualify for the
dependent care credit if the employee had paid the amounts.
38. Employee Death Benefits
These are payments made to the family or friends of a relative who dies. They may or
may not be taxable, depending on the facts and circumstances. If the payments were
for past services such as bonuses, accrued wages, or unused vacation pay they are
taxable income to the family. The important issue here is if the employee would have
received these payments had he lived.

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2.1.3 Principles of Fringe Benefits
The following principles must govern the administration of fringe benefits:
i. Benefits and services must be provided to the employees on the basis of a
genuine interest in the protection and promotion of their well-being. The
management should not feel that the fringes are thrust upon them. Nor should
the management feel that they are providing the benefits as a matter of charity.
ii. The benefits must satisfy a real need. Employees resist or are indifferent to
any benefit which is not like by them
iii. The benefits must be cost-effective
iv. The benefits should be as broad based as possible
v. Administration of the benefits should be preceded by sound planning
vi. The wishes of employees expressed by their union representatives and the
bargaining power of the union must be considered
vii. Employees should be educated to make use of the benefits.

2.1.4 Factors Determining /Reasons for Offering Fringe Benefits

When a company wants to hire or keep an employee, they look at all the standard and
non-standard compensation they can offer. The set of perks the business comes up
with
is known as a fringe benefits package. Creating one of these packages is challenging
because even though the company wants to look like a good, competitive employment
choice, they cannot make offers that put financial strain on the business. They must
find a balance between meeting or exceeding market expectations and maintaining the
company budget. Companies also know that employees will want benefits to increase
over time, so they need to create a package that has room to grow. The following are
the main reason company offers fringe benefits:

1. Social Security
The employers must pay in whole or in part for certain legally mandated benefits and
insurance coverage also known as social security. According to ILO, social security
refers to the protection which society provides for its members through a series of
public measures against the economic and social distress that otherwise would be
caused by the stoppage or substantial reduction of earnings resulting from sickness,
maternity, employment injury, unemployment invalidity, old age and health.
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 2. Paternalistic or Humanistic Consideration
Historically, fringe benefits were introduced with humanistic considerations to
support wage compensation with certain infrastructure or facilities to provide for
health, education and housing as also social, cultural, religious and recreational
activities.
3. Tax Considerations
There are individual and organizations to develop ingenious methods of avoiding the
obligations through restructuring the pay packet. The various fringe benefits like
house rent, education expenses, travel charges and many more are shown as re-
imbursement of expenditures. However, in recent years the tax authorities are taking
exception to such camouflaging and disallowing non-wage benefits beyond certain
limits.
4. Utilization of Leisure Time
There is awareness about the effects of off-duty life style on working life and vice
versa. The importance of leave and holidays for rest and recuperation is increasingly
being understood. Keeping these in mind, organizations are providing various
facilities for leave travel including expenses of travel maintenance of guest houses
etc.
5. Competitive considerations
A variety of incentives and benefits are being offered like company housing liberal
loan facilities, construction of schools or re-imbursement of education expenditure,
membership in clubs/professional associations, sponsorship for training and
conference abroad etc to attract and retain people based on the competitor‘s
companies in the field.
6. To Meet Price Rises
Rising prices and cost of living has brought about incessant demand for provision of
extra benefit to the employees. Employers too have found that fringe benefits present
attractive areas of negotiation when large wage and salary increases are not feasible.

7. To Attract and Retain Best Talents

As organizations have developed more elaborate fringe benefits programs for their
employees, greater pressure has been placed upon competing organizations to match
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these benefits in order to attract and keep employees. Recognition that fringe benefits
are nontaxable rewards has been major stimulus to their expansion.

8. To Protect Employees from Adverse Impact

Rapid industrialization, increasingly heavy urbanization and the growth of a
capitalistic economy have made it difficult for most employees to protect themselves
against the adverse impact of these developments. Since it was workers who are
responsible for production, it was held that employers should accept responsibility for
meeting some of the needs of their employees. As a result, some benefits-and-services
programs were adopted by employers.

9. Due to Government Legislation

The growing volume of labor legislation, particularly social security legislation, made
it imperative for employers to share equally with their employees the cost of old age,
survivor and disability benefits.

10. Collective Bargain by Trade Unions

The growth and strength of trade unions has substantially influenced the growth of
company benefits and services.

11. Labour Scarcity and Competition

Labor scarcity and competition for qualified personnel has led to the initiation,
evolution and implementation of a number of compensation plans.

2.2 Concept of Downsizing

Downsizing is a positive and purposive strategy, a set of organizational activities
undertaken on the part of management of an organization and designed to improve
organizational efficiency, productivity, and/or competitiveness. Downsizing thus
defined falls into the category of management tools for achieving desired change,
much like ―rightsizing‖ and ―re-engineering‖. Clearly, the definition is overly
expansive. Downsizing may and very likely will impact or impinge on systemic
change efforts such as the introduction of ―total quality management, ―reengineering,‖
or ―reinventing‖ initiative. They are not one and the same. Downsizing does not
necessarily imply a reduction in the assets of the organization; for example, an
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organization may contract out a function that was previously done by permanent
employees. The elimination of the jobs of the employees constitutes downsizing.

2.2.1 The Paradox of Downsizing

Information will be examined as a prime determinant in the value of a stock.
Specifically, the choice of how many workers a firm wil1 hire or fire may be
interpreted as news that signals the health of that firm. Downsizing will be defined in
the context
of a special case of the labor input strategy of a firm. Questions relating to how
downsizing functions as a signal of firm health will be raised, and the methods for
answering those questions will be presented. The economy was strong, inflation was
falling, and real GNP was growing at a steady, confident pace. Corporate profits had
reached historically high levels, and investors were on a buying spree in the stock
market, pushing it from one record close to the next. Unemployment had fallen to a
level that many economists felt was consistent with non-accelerating inflation.
Expectations of inflation were abated, and the boom seemed to be poised to last for a
long time, with no economic downturn in sight. At the same time, the major
corporations in the US appeared to be firing workers by the hundreds of thousands,
and job insecurity had risen to a surprisingly high level. Regardless of seniority, the
company‘s profitability, or the surging demand for the firm‘s outputs, the threat to an
employee of finding a pink slip in the next pay envelope was real and widespread. No
job seemed safe.
The above statements, describing the US economy in the mid1990s, seem
inconsistent not only with a standard textbook characterization of an economic boom,
but also with any historically observable relationship between the labor market and
other economic arenas, such as the financial market or the goods market. Politicians
and unions pointed to the greed of corporate America, and the insensitivity of
management to the contributions and value of workers. Standard micro economies
were at a complete loss to explain the phenomenon. If strong firms were anticipating a
greater demand for their products during the economic boom, and labor costs were not
rising excessively relative to productivity, why were firms firing workers? The term
―downsizing‖ was coined to describe the action of dismissing a large portion of a
firm‘s workforce in a short period of time, particularly when the firm was highly
profitable. In a standard downsizing story, a profitable firm well-poised for growth
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would announce that it was firing a large percentage of its workforce. The equity
market would get excited, and initiate a buying frenzy of the firm‘s stock. This goes
counter to a standard micro-economic analysis, in which a weak firm anticipates a
slump in the demand for its products, and lays off workers, while a strong firm
foresees a jump in the demand for its products, and hires more workers to increase
production.
In Nigeria, during Chief Obasanjo‘s regime (199-2007), the issues of downsizing and
right sizing were put up. Many workers in public sectors were lay off. The private
sector was not left out too. These affected many people/families negatively. Standard
micro economies were at a complete loss to explain the phenomenon. If strong firms
were anticipating a greater demand for their products during the economic boom, and
labor costs were not rising excessively relative to productivity, why were firms firing
workers? The term ―downsizing‖ was coined to describe the action of dismissing a
large portion of a firm‘s workforce in a short period of time, particularly when the
firm was highly profitable. In a standard downsizing story, a profitable firm well-
poised for growth would announce that it was firing a large percentage of its
workforce. The equity market would get excited, and initiate a buying frenzy of the
firm‘s stock. This goes counter to a standard micro-economic analysis, in which a
weak firm anticipates a slump in the demand for its products, and lays off workers,
while a strong firm foresees a jump in the demand for its products, and hires more
workers to increase production.
2.3 Voluntary Retirement Scheme
The Governments in most countries, depending on the systems of their economy,
adopts policies whereby it relaxes and in certain instances removed restrictions on
import and export. This usually results in significant changes in industrial and
business sectors. One of the important aspects of the liberalized economic policy is
the Exit Policy. Under this policy the government allows business and industrial
establishments, to reduce their excess staff and employees. The reduction of excess
staff is a result of restructuring of organisations due to modernizing, applying new
technology and new methods of operation, so that the industrial organisations could
operate economically and withstand the competition with companies and
organisations which have accepted foreign collaborations, innovative methods and
technology up gradation, rendering some employees surplus.

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This policy usually results in retrenchment which involves a lot of legal hurdles and
complex procedures, the Government authorized schemes of voluntary retirement of
employees after offering them suitable voluntary retirement benefits, and giving some
tax relief on such payments to employees who are eligible to retire voluntarily under
the guidelines issued by the Government and Income Tax authorities
In some instances, most of the public sector undertakings were not cost effective. The
trade unions have been opposing retrenchment under the existing labour laws. The
government, therefore, found a solution to the problem of surplus staff by allowing
voluntary retirement both in public and private sectors. The human resources in the
industrial sector have become surplus on account of:
a) existing level of technology
b) will become surplus with adoption of newer technologies and technological
up-gradation.

2.3.1 The Reasons for Proposing VRS

i. Recession in business
ii. Intense competition, which makes the establishment unviable unless
downsizing is resorted to
iii. Changes in technology, production process, innovation, new product line
iv. Realignment of business - due to market conditions
v. Joint-ventures with foreign collaborations
vi. Takeovers and mergers
vii. Business re-engineering process
viii. Product/Technology obsolescence.
2.3.2 Procedure for Voluntary Retirement Scheme
The employer has to issue a circular communicating his decision to offer voluntary
retirement scheme - mentioning therein.
i. The reasons for downsizing
ii. Eligibility i.e. who are eligible to apply for voluntary retirement
iii. The age limit and the minimum service period of employees who can apply
(Employees who is 40 and above and those who have completed minimum 10
years of service in the establishment.)
iv. The benefits that are offered. It should be noted that employees who offer to
retire voluntarily are entitled as per law and rules the benefits of Provident
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 Fund,‘ Gratuity and salary for balance of privilege leave up to the date of their
retirement, besides the voluntary retirement benefits.
v. The right of an employer to accept or reject any application for voluntary
retirement.
vi. The date up to which the scheme is open and applications are received for
consideration by the employer.
vii. The circular may indicate income tax incidence on any voluntary retirement
benefits.
viii. It should also indicate that those employees who opt for voluntary retirement
and accept the benefits under such scheme shall not be eligible in future for
employment in the establishment.

2.3.3 Steps to be taken for introducing and implementing voluntary retirement

scheme
a) If the company is public sector undertaking obtain approval of the
government.
b) Identify departments/employees to whom VRS is to be offered (Target group
of employees -age above 40 years and employees with more than 10year
service in the company or organisation).
c) If there is a union of employees ‗in the establishment involve the union by
communicating to them the reasons, the target group and the benefits to be
offered to those who opt for the scheme.
d) Formulate terms of V R S and benefits to be offered are to be mentioned in the
circular or communication to employees and decide the period during which
the scheme is to be kept open.
e) Motivate the managers through counseling.
f) Counselling employees is an essential part of implementing the scheme. The
counselling should include what the retiring employee can do in future i.e.
rehabilitation, how to manage the funds received under the scheme.
g) After receipt of applications for accepting VRS, scrutinize, decide whose
applications are to be accepted and those whose are not to be accepted.
h) For those whose application are to be accepted prepare a worksheet showing
the benefits each will receive including other dues like Provident Fund,

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 gratuity and earned leave wages for the balance un-availed earned leave, and
tax incidence involved.

2.3.4 The challenges in implementing employees Exit

i. The reasons and need to introduce VRS should be discussed with all
management staff including top management.
ii. The effect of downsizing including on the work or activities of the
establishment carried on is to be considered i.e. post reduction operations to be
carried on should also be planned - post plan reduction employee deployment.
iii. Ensure all concerned employees and managers participate in the decision
making to down size.
iv. The downsizing plan should match with the Strategic plans of the company.
v. Transparency should be seen and used in choice of persons to be retired.
vi. Be prepared to manage the after effects of the downsizing both social and
psychological.
vii. Motivate employees who will stay with the company, remove their
apprehensions and fears, if any.
viii. Provide professional assistance to employees who agree to accept V R to plan
their post retirement, activities and financial management including, out
placement.
ix. The VRS should be made attractive and no pressures should be used to ease
out people.
2.3.5 Advantages of Voluntary Retirement Scheme
i. There is no legal obstacle in implementing VRS - as is predominantly
encountered in retrenchment under the labour laws.
ii. It offers to the employee an attractive financial compensation than what is
permitted under retrenchment under the law.
iii. Voluntary nature of the schemes precludes the need for enforcement, which
may give rise to conflicts and disputes.
iv. It allows flexibility and can be applied only to certain divisions, departments
where there is excess manpower.
v. It allows overall savings in the employee costs thus lowering the overall costs.

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2.3.6 Disadvantages of Voluntary Retirement Scheme
a) To certain extent it creates fear, a sense of uncertainty among employees.
Sometimes the severance costs are‘ heavy and outweigh the possible gains.
Trade unions generally protests the operation of such schemes and may cause
disturbance in normal operations. Some of the good, capable and competent
employees may also apply for separation which may cause embarrassment to
the managements.
b) It is found in practice that organisations may have to repeat the scheme if there
is no response or poor response to the scheme by the employees. However,
there are instances when the managements have really made the schemes very
attractive by making it ―Golden Hand Shake.‖
c) It is incumbent on the establishments that they do not recruit similar staff
immediately after the implementation of voluntary retirement scheme. Such
recruitment, in spirit and essence is contrary to the principle of staff being
excessive or surplus.
d) Restructuring a means of implementing strategic change aimed at improving
performance by reducing the level of differentiation and integration and
downsizing the number of employees to decrease operating costs.

2.4 Mergers and Acquisitions

The implications of a merger or acquisition on pay and conditions of employment do
not seem to be considered seriously enough in most take-over battles. Executives and
employees are too often pawns in a game of chess played by remote grandmasters.
However, acquisitions or mergers do not always live up to expectations and one of the
principal reasons for failure is the demotivation of managers and staff. This is
inevitable if insufficient attention is paid to their needs and fears as well as any
existing imbalances between the reward strategies and remuneration levels of the
organizations set to merge. This issue has assumed increasing significance as
globalization leads to mega-mergers between organizations starting from very
different places in the reward philosophy spectrum.

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The degree to which staffs are affected by a merger or acquisition does of course,
vary, at one extreme the holding company adopts a completely ‗hands-off approach,
leaving the acquired company to run its own business, in its own way, and with its
own terms and conditions of employment as long as it delivers the goods, At the other
extreme, the acquisition is merged entirely into the parent company and all terms and
conditions
of employment are ‗harmonized‘. The employees affected, however, might have
different views about the extent to which the process is harmonious. Between these
two extremes there is a measure of choice. In some cases, it is only the pension
scheme that is merged. In others, it is the pension scheme and all the other benefits
that are harmonized, leaving separate pay structures. In making decisions about what
should be done and how, the points on the following check-list should be considered
jointly and in advance by the parties concerned.
The advantages seem obvious. A common basis is established throughout the group
which facilitates movement and a consistent approach to salary administration. The
disadvantage is the disturbance and potential cost of merging, bearing in mind the
regarding and salary increases that might be necessary as well as the expense of job
evaluation.
Why go to all this trouble if the operations in the respective companies are dissimilar
and they are located in entirely different parts of the country? It could even be
damaging. If salary structures have to be merged, how should this be done? The
choice is between:
a) A full job evaluation exercise involving re benchmarking which may be
disturbing, time consuming and expensive but may now have to be looked at
in the light of recent equal values cases; or
b) The arbitrary slotting of jobs into the new structure using existing job
descriptions (if any):- This could result in gross inequities unless full job
descriptions are available or there is already a good fit between the two salary
structures; or (c) A compromise between (a) and (b), slotting in jobs without a
full evaluation if the fit is obvious, but evaluating doubtful or marginal cases.
Note that if pay is negotiated with a trade union or staff association they would
have to be involved and they will obviously fight against any detrimental
changes.

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 c) Using this as an opportunity to adopt a new structure based on job family
models/generics and broader pay bands.
3.0 Conclusion
Fringe benefits are indirect form of compensation given to employees in addition to
the various forms of cash pay- base pay, dearness allowance and inventive pay. They
provide a quantifiable value for individual employees. They are the indirect form of
compensation as they are not related to the performance but are granted to the
employees for just being a member of the organization. Companies also know that
employees will want benefits to increase over time, so they need to create a package
that has room to grow. Downsizing is a positive and purposive strategy, a set of
organizational activities undertaken on the part of management of an organization and
designed to improve organizational efficiency, productivity, and/or competitiveness.
Voluntary retirement scheme can be said to be incumbent on the establishments, this
is because management might not recruit similar staff immediately after the
implementation of voluntary retirement scheme. Notwithstanding, voluntary
retirement scheme allows flexibility and can be applied only to certain divisions,
departments where there is excess manpower.
4.0 Summary
In this unit, we discussed the concept of fringe benefits, its types, objectives,
principles and reasons for fringe benefits, concept of downsizing, its paradox,
voluntary retirement scheme, reasons and requirements for VRS were discussed
among other things.

5.0 TUTOR-MARKED ASSIGNMENT

1. In your own words, what do you understand by the term fringe benefits, what

types are in our organizations and why do organizations practice it?

2. What is downsizing and why do you think organizations practice it?

3. What do you understand by the term voluntary retirement scheme and why do

you time employee propose for it?

4. What theories do you think are guiding wages?

5. What are the various policies and philosophies guiding compensation

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 6. What are the various ways through which an organization can retain and

attract potential or current employees?

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