EMPLOYEE

COMPENSATION,
BENEFITS AND
EVALUATION
UNIT 1
Activity
• Identify the factors that influence “employee compensation”
• Design a model which incorporates these factors
• Highlight which of these factors are intrinsic sources of
motivation and which are extrinsic sources of motivation
• Reflect whether these factors can be linked to performance
directly?
• If not to performance, what can the possible outcomes of
these factors be?
 • In-person, fully remote and hybrid
working teams- imperative to draw
a structure around it, identifying
Recent
performance measures
trends in
• This is crucial to keep workplaces
performance inclusive and where everyone’s
management contributions are recognised,
regardless of working situations
• 'Coach approach’ style of feedback
• 81% of HR leaders are changing their organisations’
performance management systems, and less than a
fifth feel that performance management is successful
right now (Gartner)
• HR leaders are replacing the annual onslaught with
ongoing 360-degree feedback and coaching, allowing
employees to keep track of and be supported through
their review journey.
 • Goal-setting
• Feedback
• Check- in (expected outcomes,
What are learnings, employee wellness)
these • ‘The end’ conversations (focus on
conversation processes and actions)
s about? • Money
• Career
The human experience

• Coined in the Deloitte Insights Global Human Capital Trend

Report in 2019, human experience is about giving meaning
to and personalising an employee’s work. This has shown to
be a good approach to productivity as it engages employees
and helps them to feel like they are making a positive
contribution to the business outcomes.
Performance
• Performance management is a
comprehensive process that involves
various activities aimed at ensuring that
Management an organization's employees are working
at their best to achieve the organization's
goals.
Goal setting
Performance monitoring
Feedback and communication
Performance appraisal
Development planning
Recognition and rewards
Employee engagement
Performance Improvement Plans (PIPs)
Documentation
Continuous improvement
What is the role
of software and
data/people
analytics in
creating the
human
experience?
Meaning of compensation

• Compensation is defined as all forms of pay or rewards

going to employees and arising from their employment. It
has two main components:
• Direct financial payments
• Indirect financial payments
Nature

Three components:
• Base pay
• Variable pay/incentives
• Benefits
Objectives

• Ensure fair compensation

• Attract and retain talent
• Boost motivation and enhance desired behavior
• Control costs
• Comply with legal regulations
• Ease of operations
Pay system
• Methods employers use to compensate employees in return for the work that they provide.
Performance based
Competitive
Transparent
Comprehensive
Progressive
Fair
Flexible
Goal- oriented
Factors determining compensation
• Aligning total rewards with strategy- creating a compensation package that
produces the employee behaviors the firm needs to achieve its competitive
strategy. The rewards should provide a clear pathway between each reward and
specific business goals. Steps to achieve total rewards strategy:
• The steps to achieve this are:
• a. Identifying strategic aims of the organization
• b. Identifying employee behaviors and skills required to achieve the organizational
strategic aims.
• c. Ideate and design compensation policies and practices, like salary, incentive
plans and benefits which will help produce the employee behaviors needed to
achieve strategic aims.
• Equity and its impact on pay rate- equity theory of
motivation by J Stacy Adams
• Expectancy theory by Victor Vroom- An employee's beliefs about
Expectancy, Instrumentality, and Valence interact psychologically
to create a motivational force such that the employee acts in ways
that bring pleasure and avoid pain.
• Expectancy: effort → performance (E→P)
• Instrumentality: performance → outcome (P→O)
• Valence: V(R) outcome → reward.
• Legal considerations- Minimum Wages Act, 1948, The Payment
of Wages Act, 1936, Equal pay for equal work (Article 39 (d)),
Equal Remuneration Act, 1976
• Trade unions bargaining power
• Job needs
• Ability to pay
• Cost of living
• Demand and supply of labor
Basic pay

• Basic pay refers to the fixed amount of compensation or

salary that an employee receives before any additional
allowances, bonuses, or benefits are included.
• It is the core component of an employee's salary structure
• Determined by the employee's position, experience,
qualifications, and the organization's pay structure.
• Foundation on which other forms of compensation are based
on
• Consistent and predictable
• Subject to income tax, social security contributions, and
other statutory deductions.
Incentives v/s Benefits

Incentives Benefits

• Rewards for achieving • Aim to enhance the overall well-

specific goals, performance being and job satisfaction of the
targets, or milestones. employee. They provide a sense
of security and support.
• Are often variable and may
• Benefits are more stable and
change based on individual predictable compared to
or collective performance. incentives. They are usually
They are not guaranteed. offered consistently.
Incentives Benefits

• Incentives are closely linked to an • Benefits are generally offered to all

employee's performance or the employees or specific groups within the
organization, regardless of individual
performance of the organization. performance.
The better the performance, the
• Benefits are often associated with long-
higher the incentive. term employment and are designed to
• Incentives are used to drive create a more stable and supportive work
environment. They contribute to employee
immediate performance
retention and loyalty.
improvements.
• Health insurance, retirement plans, paid
• Performance bonuses, commission time off (vacation and sick leave), life
structures, profit-sharing, stock insurance, dental coverage, and other
options, and recognition programs perks like wellness programs or tuition
reimbursement are common examples of
are common forms of incentives.
benefits.
Reflection
What potential challenges or drawbacks might arise when
implementing new incentive structures in a workplace?
How do cultural differences and diversity within a workforce
impact the effectiveness of incentive programs?
What role does communication play in ensuring employees
understand and appreciate the incentives and benefits offered?
How can organizations strike a balance between offering
competitive benefits and maintaining financial sustainability?
Individual employee incentives and
recognition programs
• Piecework
• Standard hour plan
• Merit pay
• Recognition programs
• Social recognition programs
• Employee feedback
Incentives for managers and executives

Short- term (cash) and long- term

incentives (stock options)
Long term incentives are a sign that the
firms strategies are succeeding.
Annual bonus= Plans that are designed
to motivate short-term performance of
managers and that are tied to company
profitability.
 Three factors involved=eligibility, fund
size, individual performance
Split award plan- one based on his or her
individual effort and one based on the
organization’s overall performance
Long term incentives- “golden
handcuffs”
Team and Organization wide incentive
plans
Team (or group) incentive plan- A plan in
which a production standard is set for a
specific work group, and its members are paid
incentives if the group exceeds the production
standard.
• The main disadvantage is the demotivating
effects of free rider workers who share in the
team-based pay but who don’t put their hearts
into it.
• Research says its counterproductive in nature.
• The problem of inequity
Organization-wide incentive plans are
plans in which all or most employees can
participate, and which generally tie the
reward to some measure of company-wide
performance.
Profit sharing plan- A plan whereby
employees share in the company’s profits.
• Boosts employee engagement and
commitment
• Cash profit sharing plans and deferred
profit sharing plans
Scanlon plan- An incentive plan developed in 1937
by Joseph Scanlon and designed to encourage
cooperation, involvement, and sharing of benefits.
The idea is that by pursuing employee’s goals the
employee is also pursuing the employer’s goals.
5 basic features:
philosophy of cooperation
Identity
Competence- expects high level of competence.
Involvement system (decision- making/ suggestions)
Sharing of benefits formula- If a suggestion is
implemented and successful, all employees usually
share in 75% of the savings.
Gain sharing plan
Earnings-at-risk pay plan- Plan that puts
some portion of employees’ normal pay at
risk if they don’t meet their goals, in return
for possibly obtaining a much larger bonus if
they exceed their goals.
Employee Stock Ownership Plan (ESOP)-
A corporation contributes shares of its own
stock to a trust in which additional
contributions are made annually. The trust
distributes the stock to employees on
retirement or separation from service.
• Tax deduction scheme for the employer
Tips:
Make improving employee engagement a
formal target of your compensation plan.
 Appraise and incentivize your supervisors
partly based on whether they take steps to
improve their subordinates’ engagement.
 If possible let employees participate in
devising the compensation plan.
Performance appraisal
• A performance appraisal is a regular review of an employee's
job performance and overall contribution to a company. Also known as
an annual review, performance review or evaluation, or
employee appraisal. A performance appraisal evaluates an
employee's skills, achievements, and growth.
• Performance management v/s Performance Appraisal
• Performance appraisal evaluates the employee's performance based on
how he has performed in the immediate past. Performance
management proactively manages an employee's performance
and ensures that the employee has accomplished all the goals, vision,
mission and the core values of the organization.
• One of the most prominent trends in performance appraisals
is the shift from annual or biannual reviews to continuous
feedback.
Continuous feedback
Multi-source feedback
Development oriented feedback
adopt a coaching mindset, ask open-ended questions,
listen actively, and offer support and resources.
Technology enabled feedback- AI, data analytics,
gamification
Objective and Key Results (OKRs)
Self reflection on:
Skills and competencies
Goal achievement
Collaborations
Initiatives and innovations
Work life balance
Career development
Process

The appraisal process evaluates employee performance by

measuring progress towards goals.
Establish performance standards
Communicate expectations
Measure actual performance
Compare actual performance with standards
Discuss the appraisal with the employee
Initiate corrective action if necessary
Methods of performance appraisal
• Three approaches exist for doing appraisals: employees can be appraised
against (1) absolute standards, (2) relative standards, or (3) outcomes.
• Evaluating absolute standards
Measuring an employee’s performance against established
standards. Their evaluation is independent of any other employee in a
work group. This process assesses employee job traits and/or behaviors.
The critical incident appraisal, the checklist, the graphic rating scale,
forced choice, and behaviourally anchored rating scales.
Critical incident appraisal
A performance evaluation that focuses on key behaviors that
differentiates between doing a job effectively or ineffectively.
Critical incidents, with their focus on behaviors, judge
performance rather than personalities.
List of critical incidents- desirable v/s need for improvement
Time consuming- as it requires regularity and descriptive
in nature.
Quantification can be an issue.
Comparison and ranking of employees may be difficult.
Checklist appraisal
The evaluator uses a list of behavioral descriptions and checks off
behaviors that apply to the employee.
Once the checklist is complete, it is usually evaluated by the HRM
staff, not the appraiser completing the checklist.
 An HRM analyst scores the checklist, often weighting the factors
in relationship to their importance to that specific job.
The final evaluation can either be returned to the appraiser for
discussion with the employee, or someone from HRM can provide
the feedback.
Reduces bias as rater and evaluator are different
Time consuming in developing the individualized checklist for
numerous job categories
Graphic rating scale
Oldest and most popular method
Rating scales can be used to assess factors such as quantity
and quality of work, job knowledge, cooperation, loyalty,
dependability, attendance, honesty, integrity, attitudes, and
initiative.
List of performance factors and rate on a continuum or
scale that best describes the employee
Challenge is to prevent ambiguity with respect to the factors
evaluated and scale points
Less time consuming to develop and administer
Quantitative analysis for comparison
More generalization of items makes it possible to compare
individuals in diverse job categories.
Forced- choice appraisal
A performance evaluation in which the rater must choose between
two specific statements about an employee’s work behavior.
The appraiser’s job is to identify which statement is most (or in
some cases least) descriptive of the individual being evaluated.
To reduce bias, the right answers are unknown to the rater;
someone in HRM scores the answers based on the answer key for
the job being evaluated. This key should be validated so HRM is in a
position to say that individuals with higher scores are better-
performing employees.
Reduces bias and distortion as the appraiser does not know
the right answers
On the negative side, appraisers tend to dislike this method;
many do not like being forced
to make distinctions between similar-sounding statements.
Raters also may become frustrated with a system in which
they do not know what represents a good or poor answer.
Possibility of guessing.
Behaviorally Anchored Rating Scales
A performance appraisal technique that generates critical
incidents and develops behavioral dimensions
of performance. The evaluator appraises behaviors rather
than traits.
The appraiser rates the employees based on items along a
continuum, but the points are examples of actual behavior on
the given job rather than general descriptions or traits.
Specify definite, observable, and measurable job behavior.
• Relative standards method
Evaluating an employee’s performance by comparing the
employee with other employees.
• Group order ranking, individual ranking, and paired
comparison
Group order ranking
Group order ranking requires the evaluator to place employees
into a particular classification, such as the “top 20 percent.”
But when used by appraisers to evaluate employees, raters
deal with all employees in their area.
The advantage of this group ordering is that it prevents raters
from inflating their evaluations so everyone looks good or from
forcing the evaluations, so everyone is rated near the average.
Individual ranking
Ranking employees’ performance from highest to lowest.
One employee can be the best
Does not allow for ties
Sample size matters
Paired comparison
Ranking individuals’ performance by counting the times any one
individual is the preferred member when compared with all other
employees.
Selects one job trait, and then compares each employee in a group
with the others.
A score is obtained for each employee by simply counting the number
of pairs in which the individual is superior at the job trait, ranking
each individual in relationship to all others on a one-on-one basis
Difficult for large samples
• Using achieved outcomes to evaluate employees
Employees are evaluated on how well they accomplished a
specific set of objectives determined as critical in the successful
completion of their job.
This approach may be referred to as goal setting but is more
commonly referred to as management by objectives (MBO).
Its appeal lies in its emphasis on converting overall objectives into
specific objectives for organizational units and individual
members.
The organization’s overall objectives are translated into specific
objectives for each succeeding level—divisional, departmental, and
individual—in the organization.
For the individual employee, MBO provides specific personal
performance objectives. Each person, therefore, has an identified
specific contribution to make to his or her unit’s performance.
4 elements n MBO programs
specific goals, participative decision making, a specific time period,
and performance feedback.
Specific, difficult goals, often referred to as “stretch goals,” produce higher
output than no goals or generalized goals such as “do your best.”
Feedback also favorably affects performance.
Research on goal setting indicates that MBO is most effective if the goals
are difficult enough to require some stretching (still feasible)
A major assumption of MBO performance systems is that employees will
be more committed to higher performance standards if the employee
participates in the setting of the performance standards to be evaluated.
The partnership of manager and employee in setting clear goals at the
start of the evaluation period is what sets the MBO process apart from
other evaluation methods.
Discussion points
• Share your perspective on the methods of appraisal, particularly the
traditional ones.
• Do you think traditional methods are relevant in today's dynamic work
environment?
• How can performance appraisals balance between objective and
subjective criteria?
• How can performance appraisal methods be adapted to be culturally
sensitive?
• How can technology enhance the efficiency and accuracy of performance
appraisals?
Competency mapping
The concept of competency was first popularized by Boyatzis
(1982).
He stated that there was a range of factors which
differentiated successful from less successful manager.
The factors included personal qualities, motives, experience
& behavioural characteristics.
A competency map is a list of an individual’s

competencies that represent the factors most critical to

success in given jobs, departments, organizations or

industries that are part of the individual’s current career

plan.

Benefits individuals and organizations