Compensation And Benefits Management - Notes

UNIT 2
What is Wage ?

A wage is the payment made to the workman for his services to the organisation. Wage is differentiated
from the salary on the basis of "how the organisation computes an employee's compensation". Wages
(Wage) are generally paid hourly to blue-collar workers such as production and maintenance workers
while salary is a monthly payment made to an employee for the services he has rendered to the
organisation.

Definition of Wage

According to P.M. Stochank :

"Wage is that labour's remuneration which creates the utility".

According to Yoder and Heneman :

"Wages are the compensation of wage earners, the numerous employees who use the tools and
equipment's for their employers to produce goods and services that are sold by their employers".

According to Benham :

"Wages means the amount paid to the labour for his services to the employer".

Methods of Wage and Salary Payments

Various methods of wage payment or types of wages are as follows :

1) Time Rate/Wage System

Time rate or time wage system is also called as day wage system. Under this system, wages are paid to
the worker according to the time that a worker spends on his/her work in the workplace. The unit of
measurement of time may be based of an hour, a day a week, or a month. Although, in this system of
wage payment, for actual amount of the work completed by the workers, no record is maintained.

As per formula :

Wages = No. of Days Worked x Rate per Day

Or,

Wages = No. of Hours Worked x Rate per Hour

Advantages of Time Rate System :

Time rate system has the following advantages :

i) Simple :

Time rate system is very easy to administer and needs nominal clerical work.

ii) Secure :

In this system, no deduction made in the wages of a worker, in case if he is temporarily unable to
perform a job due to injury. Hence, it induces a sense of security among workers.

iii) Superior Quality :

In time wage system, worker gets sufficient time to perform his work. This results into superior quality
of products.

iv) Fairness in Remunerations :

Workers who perform same type of job get the same wages. This induces a feeling of equality in the
workers.

v) Favorable for Beginners :

With this scheme, a certain and specific amount is guaranteed even to the workers those who are not
capable to achieve the specified target, in the initial stages of their jobs.

vi) Minimal Waste :

Under time wage system, workers never compete to earn more money by producing more out. They
pay attention towards the quality. As a result, the piece produced by them is less defective and wastage
is also nominal.

vii) Helpful for Trade Unions :

Time wage system does not differentiate among employees on the basis of their output, due to this
reason it is always preferred by trade unions.

Disadvantages of Time Rate System :

Time rate system suffers from the following disadvantages :

i) Lack of Motivation :

The time wage system does not differentiate between workers according to their performance,
consequently, efficient workers get no recognition or reward for their better performance which
ultimately results in lack of motivation in the efficient workers to work hard.

ii) Enhanced Supervision :

A great amount of supervision is required in order to prohibit the workers from wasting their time on
unproductive activities.
iii) Rise in Cost of Production :

In this scheme, as the workers are being paid on the basis of time, the total production of the output
is bound to be low.

iv) Discontentment :

Under time wage system, all workers tend to be treated equally by the management which brings a
great disappointment to the efficient workers. Finally, it leads to disappointment and creates conflict
among the workers.

2) Piece/Wage Rate System

In the piece rate system, an employee is being remunerated on the basis quantity of work, regardless
of the time taken to complete the work. The system does not give guarantee of a fixed amount of
wage, but a fixed rate is compensated for each unit of output produced. This system is used by those
organisations where the workers have to do the same kind of work again and again or produces same
quantity of output. Wages of a worker under this system is calculated in the following

Manner :

The wage of a worker under piece rate system can be given as :

Wage = N (Number of Units Produced) x R (Rate per Unit)

Advantages of Piece Rate System :

Piece rate system has the following advantages :

i) Higher Incentive for Higher Production :

It differentiates between the competent and incompetent workers and it also offers strong motivation
to the efficient workers to achieve their desires.
ii) Justified :

As wages are related to the performance and output of the workers, they are considered as justified.
Employees with reduced efficiency are highly criticized in this system.

iii) Easy to Ascertain the Cost :

The cost of labour at per unit of production remains stable and as a result employer can easily ascertain
labour cost for each job.

iv) Reduced Supervision :

In the piece wage system, the workers are engaged in increasing their wages by increasing their output.
As the wages are remunerated on the basis of production, hence continuous monitoring is not required
under this system.

v) Cost Saving :

This system ensures cost reduction in production because the cost of production decreases with
increase in output.

vi) Improved Planning and Efficient Control :

Piece wage system results in improved planning and efficient control. This is so because the possibility
of achieving production target is high.

Disadvantages of Piece Rate System :

Disadvantages of piece rate system are as follows :

i) Poor Quality of Output :

Employees are more focused on the quantity of production instead of quality of production. This may
lead to poor quality of output unless strict supervision and efficient measures of quality check are
implemented.
ii) Minimum Wages are not Assured :

Wages of workers depends upon the quantity of the work; hence, any kind of disturbance in the work
may reduce their wages. Consequently, a sense of insecurity prevails among them.

iii) Unfit for Beginners :

This system is not appropriate for the workers, who have just began their career as initially they may
produce little quantity of product.

iv) Poor Health :

Under this scheme. the employees try to go beyond their normal capacity in order to maximize their
payments. Hence, they can become unhealthy.

v) Lack of Harmony :

The rapport between workers and management becomes poor and stressed when low output of the
employees is because of some defects in the scheme.

vi) Complexity in Fixing Piece Rates :

It is difficult to fix the piece rate of work, which is satisfactory to both workers and management, in
some production processes, like sugar production.

vii) Resistance from Unions :

Trade unions are against piece wage system as it increases the probability of unfair competition
between the employees.

3) Balance or Debt System

This system is a mixture of both piece and time rate system. In this system, a worker gets a fixed time-
rate payment with an option of piece rate. In case, if the wages designed at piece rate are more than
the time rate, the worker gets the incentive in addition to the normal time-rate based wages. On the
contrary, if time wages go beyond piece wages, the worker is paid wages based on time, and the
shortage is carry-forwarded for future settlement.

The balance system creates a feeling of security in employees. At the same time, an employee gets a
chance to improve his earnings more than the fixed time wages. This-system is more suitable for the
industries where the work flow is low, e.g., dock employees. The wage rates should be fixed on the
most scientific basis in this method.

Concept of Wages/Types of wages

While evolving wage policies, following wage concepts are generally considered :

1) Minimum Wage

According to Government Committee on Wages, 1948,

"Minimum wage is a wage which must provide not only for bare sustenance of life but for the
preservation of efficiency of the worker". Minimum wage should also provide for the requirements like
education of children, medical facilities, etc. It is fixed by an agreement between worker and the
management but usually it is determined by the legislation's related to wages.
This is mostly visible in unorganized sector in which labour is unionized. While fixing the minimum
wages, other factors like organisation's ability to pay, type of job, etc, are also taken into consideration
along with the needs of workers.

According to Professor Dobb,

"Minimum wages can be defined as the standard rate which a trade union attempts to establish by
collective bargaining".

The resolutions undertaken at the 15 Indian Labour Conference, which was held in 1957, related to
minimum wage, are as follows :

1. To compute the minimum wage, the standard working cost per family must be taken, which
consist of three consumption units for one earner. The wages of children, adolescents and
women should be ignored.

2. Dr. Aykroyd has recommended consumption of 2700 calories for the average Indian adult who
performs moderate activity. This minimum requirement of food should be taken into
consideration for minimum wages.

3. 18 yards per year of clothing need, as per capita consumption, must be considered. This
yardstick is considered for a family of four people on an average, which makes the total of 72
yards of clothing.

4. In the case of housing, the accommodation provided by the government, in any area; under
the scheme of subsidy for low income groups, should have a norm of charging minimum real.

5. 20 per cent of the total minimum wages must consist of expenses on fuel, lighting, and other
miscellaneous items.

2) Fair Wage

Fair wage is a wage which is above the minimum wage. It can be studied in two senses, wiz, narrow
and broad sense. In narrow sense, wage can be considered fair, if it is equal to present market rate in
the same industry and in the surrounding industries, performing same type of work. In a broad sense,
fair wage is that wags which is equal to the principal rate for same type of work throughout the country,
when the labors a organised systematically and they have power to bargain.

According to Professor Pigou,

"A wage rate is fair in the narrower when it is equal to the rate current for similar workmen in the same
trade and neighborhood and fair in the wider sense when it is equal to the predominant case for similar
work throughout the country and in the generality of trades".

According to The Indian National Trade Union Congress,

"A fair wage is a step towards the progressive realization of a living wage".

The committee on Fair Wages announces that the fair wage is a wage, which lies in between a least
wage and a sustainable wage.

Diverse features of fair wage are as follows :

1. Fair wage is determined and fixed by owner of the organisation.

2. Fair wages in greater than the minimum wage hon lower than the living wage.

3. The amount of fair wages differs from industry to industry.

4. The fixation of fair wage is done by the employer.

5. It is linked to a fair load of work and the ability to earn.

6. Fair wage helps the employee to live a standard life, provide his family with food, cloth, shelter,
basic education to children, primary health cars, etc.

3) Living Wage

Laving wage can be described as an earning which is higher than the amount of a fair wags Living wage
enables a wage earner not only to afford the minimum requirements of life like food, clothing, shelter,
basic education and health needs, but also the need of luxuries which include higher and better health
and ea facilities for family and children, fulfilling societal desires, ensuring safe and insured future, and
thus, procuring a comfort life at present.

To determine the living wage, the gross economic condition of the nation should be taken into
consideration because living wage differs from nation to nation. In developed countries, living wage
itself is the basis for determining minimum wage. In India, minimum wage is dependent on sweated
industries which come under Minimum Wage Act, 1948.
Living wage is necessary to ensure economic equality. The living wage is decided by following
principles :

1) Full time employees should be able to sustain their family beyond the line of poverty.

2) Employers should be given living wage by the employer so that both employees and employers can
derive following benefits :

1. A raise in the tax base, procures more money for the government to provide better services.

2. Facilitates to increase purchasing power of people thereby increasing standard of organisation

and society as a whole.

3. Reduces attrition rate of low-wage jobs, which in turn minimizes the recruitment, selection,
training cost of employers and enhances the service quality to customers.

4. Increases healthy competition between the employers those who give good wages and those
who are paying only fair wages.

5. Enables the employed people to give support to their family members with a single job, and
spend quality time in their social life.

4) Real Wage

Real wages are the wages which are attuned with inflation, Real wages can be represented as follows
:

Wn

Wr = ------

PG

where,

Wr = real wages

Wn = nominal or money wages

PG = the general price level

According to Adam Smith,

"The real wages of labour may be said to consist of the quantity of necessaries and conveniences of
life that are given for its nominal wages, in the quantity of money. The laborer is rich or poor, is well or
rewarded in proportion to the real, not the nominal wages of his labour".

Wage Determination Theories

Most wage theories reflect overemphasis on one or another of the elements determining wages.
Theories of wages can be broadly classified into two groups which are as follows :

Economic Theories

Economic theories of wage provide guidance in formulation of wage policies. All economic theories
are founded on assumptions about the relationships between the owners of land, labour and capital
which are known as the factors of production. Economic theories of wages can he broadly classified as
follows :

1) Macro Theories :
Macro theories are essentially macro in nature because each attempts, in some way, to describe or
account for the broad economic influences of society that affect the level of compensation of workers
Various macro theories are as follows :

i) Subsistence Theory :

David Ricardo developed the subsistence theory of wage. It is also known as the Iron Law of Wages or
the Brazen Law of Wages. This theory states that: "The laborers are paid to enable them to subsist and
perpetuate the race without increase or diminution". The theory was based on the assumption that if
the workers were paid more than subsistence wage, their numbers would increase as they would
procreate more, resulting in spurt in supply of labor and this would bring-down the rate of wages. If
the wages fall below the subsistence level, the number of workers would decrease -as many would die
of hunger, malnutrition, disease, cold, etc., and many would not marry, when that happened the wage
rates would go-up.

ii) Wage Fund Theory :

Adam Smith developed this theory. His basic assumption was that wages are paid out of a
predetermined fund of wealth which lay surplus with wealthy persons - as a result of organisation
savings. This fund could be utilized for employing labourers for work. If the fund was large, wages
would be high, if it was small, wages would be reduced to the subsistence level. The demand for labour
and the wages that could be paid by them were determined by the size of the fund Francis A. Walker
attacked the wage fund theory. He argued that wages were paid out of the product of labor and not
from some previously accumulated capital. It is production that furnishes true measure of wages. This
theory is further explained by John Stuart Mill According to him, wages depend upon two quantities :

• Wage fund or the circulating capital set aside for the purchase of services of laborers.

• The number of laborers seeking employment.

iii) Supply and Demand Theory :

This theory in economics relates to the laws of supply and demand. In essence this assumes that
employers pay enough to recruit and retain employees, but avoid paying too much since that adds
unnecessarily to labour costs and may make a business noncompetitive in the marketplace.

Supply and demand theory, however, is based on the premises that "other things are equal" and that
a "perfect market: for labour exists. In the real world, of course, other things are never equal and there
is no such thing as a universally perfect market, i.e., one in which everyone knows what the going rate
is there is free movement of labor within the market and there are no monopolistic or other
forces interfering with the normal processes of supply and demand. The existence of internal markets
means that individual firms exercise a good deal of discretion about how much they pay and how
much attention they give to external market pressures.
iv) Residual Claimant Theory :

The residual claimant theory is a version of wage fund theory. It has been advanced by the American
economist Francis A. Walker. He hypothesized that the wage was derived not from previous year's
operations, but simply from residue of the total revenues after deducting all other legitimate expenses
of business operations, such as, rent, taxes, interest, and profits. According to this theory, after all
other factors of production have received compensation for their contribution to the process, the
amount of capital left over will go to the remaining factor. Following this through to its logical
conclusion, if the "other expenses" consumed all of the revenue, labour, being the "residual claimant",
would receive no wages and presumably would not be entitled to them.

v) National Income Theory:

In the 1930, John Maynard Keynes developed the national income theory. It is also known as Full
Employment Wage Theory. This theory states that full employment is a function of national income.
National income in turn, is equal to the total of consumption plus private or public investment. If the
national income falls below a level that commands full employment, it is the responsibility of the
Federal Government to manipulate any or all of the three variables to increase national income and
return to full employment.

vi) Neo-Keynesian Distribution Theory :

It is a modified version of the national income theory. It explains how full employment conditions can
be achieved without conflicting with general living standards or with stable prices. It also recognizes
the fact that entrepreneurial decisions can determine the general level of sages in the shout-run.
Money wage rates, with limits, are determined by bargaining between the capitalist and the employee.
This theory acknowledges that economic forces alone do not determine the wage level.

vii) Consumption/Purchasing Power Theory :

The wage theories got closely associated with the employment practices. It concerns the relation
between wages and employment and the business cycle. According to this theory, wage increases are
desirable because they raise labour income, thereby stimulating consumption. Since wage earners
spend a very large proportion of their incomes, it is held that higher wages will result in a rise in
consumer spending and thus act to sustain or to stimulate the economy.

viii) Investment Theory :

This theory proposed that labour markets vary in the scope of worker investment required for their
particular industry. Generally, the wider the labour market is, the higher the wages are. The individual
worker's 'investments consist of the education, training, and experience that the worker has invested
in a lifetime of work. Individual workers vary in their desire to maximize income, just as employing
organisations vary in their worker investment requirements.

2) Micro Theories :

Following theories have been termed "micro" because they treat the wage structure within a given
industry or even a given company, directly involving the bargain and the exchange between employer
and employee. Various micro theories are as follows :

i) Human Capital Theory :

Concepts of human capital are significant to reward managers since the focus is switched from viewing
pay and benefits as costs to be minimized to one in which the organisation is seen to invest in the
employee. Hence, it is in the interests of both employee and employer to increase skill levels and to
retain these in the business. In an analysis based on the 1998 Workplace Employee Relations Survey,
Forth and Mill-ward find some evidence that pay increases are larger when there is evidence of some
form of up-skilling of the workforce. However, the evidence is not clear-cut.

Human capital theory as stated by Ehrenberg and Smith, "Conceptualizes workers as embodying a set
of skills which can be rented-out' to employers. The knowledge and skills a worker has - which come
from education and training, including the training that experience brings-generate a certain stock of
productive capital".

For an employee, the returns on human capital investment are a higher level of earnings, greater job
satisfaction and, at one time, if less so now, the belief that security of employment is assured. For the
employer the return on investment in human capital is improved performance, productivity,
flexibility, and the capacity to innovate resulting from an enlarged-skill base and increasing levels of
competence.

ii) Bargaining Theory :

According to this theory, wages are determined by the relative bargaining power of workers or trade
unions and of employers. When a trade union is involved, basic wages, fringe benefits, job differentials,
and individual differences tend to be determined by the relative strength of the organisation and the
trade union. The bargaining theory of wages holds that wages, hours, and working conditions are
determined by the relative bargaining strength of the parties to the agreement. Smith hinted at such
a theory when he noted that employers had greater bargaining strength than employees. Employers
were in a better possible to unify their opposition to employee demands, and employers were also
able to withstand the loss of income for a longer period than could the employees. This idea was
developed to a considerable extent by John Davidson, who proposed in The Bargain Theory of Wages
that the determination of wages is an extremely complicated process involving numerous influences
that interact to establish he relative bargaining strength of the parties. This theory is applicable
whether wages are being set by collective agreement or otherwise, i.e. Individually.

iii) Marginal Productivity Theory :

The theory has been propounded by economists like Philips Henry and J.B. Clark, who argued that a
business firm would be willing to pay a productive agent only what he adds to the firm’s well-being or
utility; that it is clearly unprofitable to buy, for example, a man-hour of labour if it adds less to its
buyer’s income than what it costs. This marginal yield of a productive input came to be called the value
of its marginal product, and the resulting theory of distribution states that every type of input will be
paid the value of its marginal product. 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 worker.

iv) Productive Efficiency Theory :

This is an refinement, of the marginal productivity theory in that each worker is provided the
opportunity to increase his or her wages by increasing his or her productive efficiency. This theory
provides the basis for an array of monetary motivational tools, such as, incentives systems, bonuses
and profit-sharing plans. Many economists feel that because of its realistic application, the productivity
theory is the most constructive of recent wage theories.

Behavioural Theories

Behavioural theories revolve around the concept that organisations offer better compensation to deter
undesirable behavior by making a job too good to lose. Prominent behavioral theories are as follows :

1) Employer's Acceptance of a Wage Level :

This type of thinking takes into consideration the factors, which may induce an employee to stay on
with a company. The size and prestige of the company, the power of the union, the wages, and benefits
that the employee receives in proportion to the contribution made by him all have their impact. Thus,
compensation is viewed as more than providing for livelihood and includes other inducements to
accept or continue employment.
2) Internal Wage Structure :

Social norms, traditions, customs prevalent in the organisation and psychological pressures on the
management, the prestige attached certain of social status, the need to maintain internal consistency
in wages at the higher levels, the ratio of the maximum and minimum wage differentials, and the
norms of span of control, and demand for specialized labour, all affect. the internal wage structure of
an organisation. Thus, this theory implies that compensation is an internal structural issue of the
organisation which is influenced by market and social factors.

3) Wage and Motivators :

Money often is looked upon as means of fulfilling the most basic needs of man. Food, clothing, shelter,
transportation, insurance, pension plans, education, and other physical maintenance and security
factors are made available through the purchasing power provided by monetary income. Thus,
performance-based rewards such as merit increases, bonuses, commissions, stock options, etc., are
required to motivate employees.

4) Tournament Theory :

This model was developed by Lazear and Rosen and it focuses on an organisation's hierarchy as an
incentive instrument. This model compares life in an organisation to a sporting match, for example, a
golf tournament. Each round in the tournament represents a competition for a position at a higher job
level. All contestants are ranked based on their performance. The winners will go on to the next round.
The advantage of tournaments to an employer is that it is often easier to observe relative performance
than absolute performance. Additionally, it may be in the interests of the organisation to structure pay
so that the winner makes very large sums as a way of spurting on those lower in the hierarchy as well
as giving the CEO himself the incentive to perform well. The ultimate carrot and reward in tournament
theory is the possibility of becoming the Chief Executive Officer (CEO). Thus, tournament theory
provide one possible explanation for the high compensation of employees and more generally,
compensation differential within organisations. It helps organisations to limit costly labour turnover
and distinguishing poor from employees.

Wage Policy in India

Wage policies determine the wage structure of the organisation. Being a financial issue, initially it was
the concern of management while the Indian government was following a laissez faire policy. But, with
the industrial development, wage determination and fixation have become a concern for the employer,
employee and the government as well. Aims of wage policy are as follows :

1. To bring to an end the mismanagement and unfair practices of wage payment.

 2. To ensure that the unorganized, inefficient or weak workers, who are not in the position of
bargaining, get the minimum wages along with the expansion of trade unions as well as
collective bargaining.

3. To ensure that the employees are getting their justified share of profits.

4. To ensure that the expenses on utilization of goods is in contrast with accessible materials so
that the inflation pressure could be minimized.

5. To ensure proper utilization of human resources by the way of incentives, bonus, etc.

The issues of wage policy are very important for the workers, management, and the government. The
rising prices directly affect upon the living standards of workers; the demand of high wages and
improved working conditions create problems for the management but the load of solving the
problems related to wage policy rests on the shoulders of the government only.

Indian economy till date has not designed any standardized and complete wage policy for all sectors.
Labour exploitation is a serious problem in unorganized sector due to lack of literacy. ineffective
bargaining power. Usually Central and State Governments decides the minimum wage in the scheduled
employments which falls under Minimum Wages Act, 1948 regardless of any jurisdiction.

Difference Between Salary and Wages

Differences between wages and salaries are as follows :

Wages Salary

1) Salary is paid to the employee irrespective of

1) Wages are paid according to the number of
hours worked by him. The amount is fixed and is
hours worked by the employee. In other words,
paid monthly.
the employee needs to be physically present and
working in terms of hours to earn wages.

2) The recipients of wages are not permanent. 2) Only permanent employees are paid salary.

3) Employees who are paid wages are called 3) The other name for salary-based employees is
non-exempt employees. exempt employees.

4) The chances of getting overtime are very less

4) Overtime is paid to wage-based employees. for salary based employees.

5) The amount paid to wage-based employees is 5) No deduction in salary takes place for salary-
deducted if they take leaves. based employees or leaves or time-offs.

6) Calculation of wages is done on hourly or daily

basis. 6) Annual calculation is done in case of salary.
 7) Wage-based workers are not entitled to paid 7) Salary-based employees enjoy the
holidays, sick leaves, casual leaves, etc. entitlement to paid holidays, sick leaves, etc.

8) No benefits or perks are given to wage 8) A wide range of benefits, perks, and rewards
earners. are received by salary-based employees.

9) The positions which face

9) A relatively high employee turnover is lesser employee turnover are taken up by salary-
noticed among-st wage-based employees. based employees.

Meaning of Wage Determination

The process of finding such wage rates which organisation will provide to employee and such wage
related employment conditions at which employee will work immediately after getting the job is
known as wage fixation.

Wage fixation is also sometimes known as wage determination.it is a procedure of defining the wages
or pay for specific work.

Process Of Wage Determination

Wage determination is a complex process.

wage determination process consists of the following steps:

1. Job Analysis:

Job analysis describes the duties, responsibilities, working conditions and inter-relationships between
the job as it is and the other jobs with which it is associated. It attempts to record and analyse details
concerning the training, skills, required efforts, qualifications, abilities, experience, and responsibilities
expected of an employee.

After determining the job specifications, the actual process of grading, rating or evaluating the job
occurs. A job is rated in order to determine its value relative to all the other jobs in the organization
which are subject to evaluation. The next step is that of providing the job with a price. This involves
converting the relative job values into specific monetary values or translating the job classes into rate
ranges.

2. Wage Survey:

In determining the wages for a specific job it is very necessary to work as to what wages are being
given for the same job in other enterprises.

If, on the basis of utility, the wages for a specific job are determined below the wages for the same
job on other enterprises, following will be its disadvantages:

(a) Good persons and persons of merit will not be available.

(b) If such people are at all obtained for employment, they will shift to another enterprise after
some time.

It is, therefore, necessary to keep in mind the following in wage-survey:

(i) Term of survey (weekly or monthly)
(ii) The whole wage-payment-knowledge of daily working hours or monthly payment
(iii) Definition of jobs
(iv) Appropriate questionnaire for collecting information
(v) Scientific technique of collecting the data

3. Group Similar Jobs into Pay Grades:

After the results of job analysis and salary surveys have been received, the committee can turn
to the task of assigning pay rates to each job, but it will usually want to first group jobs into
pay grades.
A pay grade comprises the jobs of approximately equal difficulty or importance as determined
by job evaluation. Pay grading is essential for pay purposes because instead of having to deal
with hundreds of pay rates, the committee might only have to focus on a few.

4. Price Each Pay Grade:

The next step is to assign pay rates to pay grades. Assigning pay rates to each pay grade is
usually accomplished with a wage curve. The wage curve depicts graphically the pay rates
currently being paid for jobs in each pay grade, relative to the points or ranking assigned to
each job or grade by the job evaluation.
The purpose of wage curve is to show the relationship between:
(i)The value of the job as determined by one of the job evaluation methods and
(ii) The current average pay rates for the grades.

5. Fine-Tune Pay Rates:

Fine tuning involves correcting out of line rates and developing rate ranges.
(i) Correcting Out of Line Rates:
The average current pay for a job may be too high or too low, relative to other jobs in the firm.
If a rate falls well below the line, a pay rise for that job may be required. If the rate falls well
above the wage line, pay cuts or a pay freeze may be required.
ADVERTISEMENTS:
(ii) Developing Rate Ranges:
Most employers do not pay just one rate for all jobs in a particular pay grade. Instead, they
develop rate ranges for each grade so that there might be different levels and corresponding
pay rates within each pay grade. The rate is usually built around the wage line or curve.
One alternative is to arbitrarily decide on a maximum and minimum rate for each grade. As an
alternative, some employers allow the rate for each grade to become wider for the higher pay
ranges reflecting the greater demands and performance variability inherent in these more
complex jobs.

6. Wage Administration Rules:

The development of rules of wage administration has to be done in the next step. It is
considered advisable in the interests of the concern and the employees that the information
about average salaries and ranges in the salaries of group should be made known to the
employees concerned; for secrecy in this matter may create dissatisfaction and it may also
vitiate the potential motivating effects of disclosure. Finally, the employee is appraised and
the wage is fixed for the grade he is found fit.

Methods of Wage Determination in India

1.Fixation of wages is a recent phenomenon in India.
2.There was no effective machinery until 2nd world war for settlement of disputesfor fixation
of wages.
3.After independence of India, industrial relations become a major issue and therewas
phenomena increase in industrial dispute mostly over wages leading tosubstantial loss of
production.
4.Realizing that industrial peace is essential for progress on industrial as well aseconomic front,
the central govt. convened in 1947, and a tripartite conferenceconsisting of representatives of
employers, labour and government.Govt. of India formulated industrial policy resolution in
1948 where the govt. hasmentioned to items which has bearing on wages

•statutory fixation of minimum wages

•Promotion of fair wages.

5.To achieve 1st objective, the minimum wages act, 1948 was passed to lay downcertain norms
and procedures for determination and fixation of wages by centraland state govt

6.To achieve 2nd objective govt. of India appointed in 1949, a tripartite committeeon fair wages
to determine the principles on which fair wages should be fixed.

Wages and salary incomes in India are fixed through several institutions. These are

•Collective bargaining
•Industrial wage bound
•Govt. appointed pay commissions
•Adjudication by courts & tribunals

1.COLLECTIVE BARGAINING:-

•Collective bargaining relates to those arrangements under which wages and conditions of
employments are generally decided by agreements negotiated between the parties.

•Broadly speaking the following factors affect the wage determination by collective bargaining
process

Alternate choices & demands

Institutional necessities
The right and capacity to strike

•In a modern democratic society wages are determined by collective bargaining in contrast to
individual bargaining by working.

•In the matter of wage bargaining, unions are primarily concerned with
General level of wage rates
Structure of wages rates (differential among occupations
 Bonus, incentives and fringe benefits, Administration of wages
.
2.INDUSTRIAL WAGE BOARDS:-

• Concept of wage board was first enunciated by committee on fair wages.

• It was commended by first five year plan and second five year plan alsoconsidered wage
board as an acceptable machinery for setting wagedisputes.
• Wage boards in India are of two types

Statutory wage board

Tripartite wage board

Statutory wage board means a body set up by law or with legal authorityto establish minimum
wages and other standards of employment which arethen legally enforceable in particular
trade or industry to which board’sdecision relate.Tripartite wage board means a voluntary
negotiating body set up bydiscussions between organized employers, workers and govt. to
regulatewages, working hours and related conditions of employment.
•Wage board decisions are not final and are subjected to either executive or judicious review
or reconsideration by other authority or tribunals.
•The powers and procedure of wage boards are same as those industrialtribunals unsaturated
under ID Act 1947.

3. PAY COMMISSIONS:-

•First pay commission was appointed by govt. of India in 1946 under chairmanship of justice
vardachariar to enquire in to conditions of serviceof central govt. employees.
•The vardachariar commission in its report said that in no case should amans pay less than
living wage
•The 2ndpay commission was appointed in aug. 1957. and commissionsubmits its report in
1959, examined the norms for fixing a need basedminimum wage set up 15th session of ILC.
•Govt. of India appointed third pay commissions in 1970’s which submit itsreport in April
1973. In this report commission express its support for asystem in which pay adjustments will
occurs automatically upon anupward movement in consumer price index.
•After thirteen years, govt, appointed fourth central pay cimmissions under chairmanship of
justice P.N.Singhal on July 26, 1983 to examine structureof all central govt. employees,
including those of union territories.Officers belong to all India service and armed forces.
Commission submitsits report on July 30, 1986 and recommended drastic changes in pay
scale.
•The 5thpay commission (1952-1996) made certain recommendationregarding restricting of
pay scales.

• The 6thpay commissions was established on 2006 and committee submitits report on March
2008.

3. Adjudication
Since independence adjudication has been one of the main instruments for settlement of
disputes, improvement in wage scales and standardization of wages andallowances. Though
courts and tribunals were primarily intended to deal with settlementof industrial disputes, in
 practiae, wage fixation has become an important element in their work and functioning. This
is because of large of disputes concerning of wages andallowances. Numerous wage disputes
in many industries have been referred for adjudication to labour courts and tribunals during
past ten decades. The high courts andSupreme Court have also adjudicated upon such
disputes. The awards given by theseauthorities not only helped in formulation of a body of
principles governing wagefixation but laid foundation for present wage structure in many of
major industries. Somemajor legislation which governs the principles of wage fixation -
Minimum wages Act1948, Payments of wages Act 1936, Equal Remuneration Act 1976,
IndustrialDisputes Act 1947 and Companies Act 1956

Wage Boards

Wage Boards have a long history in the Indian industrial relations systems. As early as 1931
the Royal Commission on Labour recommended the setting-up of Wage Boards for
determination of wages. It was envisaged in the First Five Year Plan that permanent. Wage
Boards with a tripartite composition should be set up in each state and at the Centre to deal
comprehensively with all aspects regarding the question of wages. The above
recommendation, however, did not receive adequate attention and the wage disputes
continued to be settled through Industrial Tribunals. The Second Plan also considered the
Wage Board to be more acceptable machinery as it gives the parties a more responsible role
in reaching decisions.

The first Wage Board was appointed for the cotton textile industry in March 1957, and
subsequently Wage Boards were also appointed for sugar, cement, tea, coffee, rubber
plantation, iron, and steel industry, etc. It is a statutory body established by the government
to handle the disputes relating to the employers or the employees.

Constitution/Structure of Wage Board

Wage Board consists of a Chairperson, an equal number of representatives of employers and

employees (two members each), and two other independent members (an economist and a
consumer's representative) nominated to the Board. The Chairman shall be appointed by the
Appropriate Government in consultation with the Chief Justice of the High Court concerned or
Supreme Court of India, as the case may be. Any person who is or has been or is eligible to be
appointed as a Judge of the High Court shall be qualified for appointment as the Chairman. It
has been the practice to nominate a Member of the Parliament to represent the interests of
the consumer/ public. The members representing the employers shall be appointed by the
Appropriate Government on the recommendation of the most representative organisations of
the employers in the activity.

Nature of Wage Board

Nature of Wage Board is as follows :

1) Tripartite in Character :
Wage Boards are tripartite in character in which representatives of workers, employers and
independent members participate and finalize the recommendations.

2) Statutory and Non-Statutory :

Except for the Wage Boards for journalists and non-journalists newspaper and news-agency
employees, which are statutory Wage Boards, all other Wage Boards are non-statutory
in nature. Therefore, recommendations made by these non-statutory Wage Boards are not
enforceable under the law.

3) Protect Workers from Exploitation :

Wage Boards are charged with the duty of seeing that the fair wages fixed for any particular
industry are not very much out of line with wages in other industries in the region because
wide disparities inevitably lead to movement of labour and consequent industrial unrest not
only in the industry concerned but in other industries as well.

4) Operates in its Own Sphere :

Wage Boards were set up for individual industries as no two industries were exactly alike in
respect of size, capital invested workers employed place in regional/national economy, goods
produced and their utility to general consumers, financial capacity, export-oriented nature,
etc., and as there could be no general prescription in regard to formulation of wage structure.
Bach Wage Board operates in its own sphere depending upon the special
characteristics/features of the industry. covered.

Functions of Wage Board

The functions of Wage Board may roughly be classified into two categories - primary and
subsidiary - though it is difficult to draw an exact demarcation line between the two :

1) Primary Function :
The primary function of the Wage Board shall be to determine the wages payable to the
employees of the activity. The Appropriate Government or the recognized organisations of
employers and employees, by mutual agreement, may refer to the Wage Board any other
matter for determination. The Wage Board shall follow such procedure as may be prescribed;
provided that wherever the Appropriate Government has not prescribed any procedure, the
Wage Board may evolve its own procedure.

2) Subsidiary Functions :
 Subsidiary functions of Wage Board relate to allied problems such as hours of work, holidays
with pay, provision for adolescent, sub-standard workers, etc.

Importance of Wage Board

Wage Board is important due to following reasons :

• It standardizes wage structure throughout the industry concerned.
• It determines which categories of employees (manual, clerical, supervisory, etc.) to be brought
within the scope of the wage fixation.
• It works out a wage structure based on principles of fair wages as formulated by the
Committee on Fair Wages.
• It evolves a wage structure based on the requirements of social justice.
• It evolves a wage structure based on the need for adjusting wage differentials in a manner to
provide incentives to workers for advancing their skill.
• It aligns the wage settlements with the social and economic policies of the government.
• It provides better climate for industrial relations.
• It represents consumers/public interests.
• It works out a system of payment by results.

Criticisms / Limitations of Wage Board

Major criticisms leveled against the Wage Board are as follows :

• Single machinery for wage fixation in all types of industries will not be suitable and therefore
depending upon the nature of the industry, Wage Boards, collective bargaining or adjudication
could be utilized for wage determination.
• Recommendations given by Wage Boards are sometimes non-implemented or even
unanimous.
• The question of linking wages with productivity has not been considered seriously by any of
the Wage Boards.
• Wage Boards suffer from serious and lengthy procedural delays.

SALARY PROGRESSION

Salary progression procedures relate increases in salary to merit. It should be aimed at relating
salary compensation to performance consistently and equitably while retaining an adequate
degree of control over salary costs. The essential features of a systematic procedure for salary
progression should be:
The salary ranges are divided into defined areas or zones, as earlier. The individual will
pass these zones as he or she progresses.
There should be incremental systems which will indicate the rates at which individuals can
progress according to merit or experience.
There must be guidelines for determining merit increments and planning salary progression.
 Incremental Systems
There are different kinds of incremental systems which vary in their rigidity and flexibility. At
one end you have extremely rigid procedures with fixed and predetermined movements
through a scale related to age and service in the organisation or experience in the job, while
at the other end there are flexible systems in which management exercises complete
discretion over the award and size of increments without any guidelines. Between the two
extremes there are middle-ranged, semi-flexible systems.
The choice of approach will naturally depend on the organisational climate and managerial
style of the organisation. A bureaucratic organisation is likely to believe in strict control over
managerial judgments by using a rigid system of salary administration, while a less autocratic
organisation which allows the managers to exercise discretion would adopt a more flexible
system. While there is no doubt about the advantages of a flexible system, we must at the
same time be aware of the need to exercise control over the salary system.
It is extremely important to ensure that individuals are correctly placed in their range in
relation to their performance and also that they move through and between salary grades at
a rate appropriate to their progress and potential. Most salary planning decisions are short-
term ones which are concerned with deciding on the next increment to be paid because of
merit or promotion. Long term salary plans are closely linked with career planning procedures.
Short-term salary planning can be carried out by means a variable system with
guidelines which will indicate the various rates at which people can progress through a zoned
salary range.

Incentives schemes –

Incentive Meaning – Incentives or payment by results are monetary benefits paid to workmen
in recognition of their outstanding performance. They are defined as “variable rewards granted
according to variations in the achievement of specific results”. Unlike wages and salaries which
are relatively fixed, incentives generally vary from individual to individual, and from period to
period for the same individual.

Incentive systems are an important part of organisational motivation and are central to helping
managers understand the forces that drive the organisation. Incentive systems can encourage
or discourage employee and work group behaviour. A good incentive system also encourages
employees to be productive and creative, fosters loyalty among those who are most productive,
and stimulates innovation. Incentives can be broadly classified as financial and non-financial
incentives.
 Types of Incentive Schemes

(1) Individual Incentive Plans

Individual incentive plans are widely accepted today and most of them contain provisions that
encompass corporate and group objectives. But what makes them truly individual incentive
plans is the fact that the actual awards to employees are differentiated based on individual
performance criteria.

Types of Individual Incentive Plans Individual incentive plans are many and varied. The
International Labour Organisation (ILO) classifies all the schemes of payment by result into
following four categories –

(i) Earnings Varying in Same Proportion as Output – The chief characteristics of the schemes
where incomes vary in proportion to output is that any gains or losses resulting directly from a
worker’s output accrue to him or her (leaving to the employer any gains or losses in overhead
costs per unit of output). In contrast, when the worker is paid. by the hour, day or month, all
gains or losses resulting from changes in his or her output accrue to the employer. There are
two incentive schemes under this category –

• Straight Piece – Work

• Standard Hour Plan

(ii) Earnings Varying Proportionately Less than Output – Four allied but different systems come
in this group, namely, Halsey, Rowan, Barth, and Bedaux. The common feature of all these is
that time is used as the measure of output and bonus is paid on the time saved, that is, the
difference between the standard time- set for the job and the time actually taken. These plans
are explained below –

• Halsey Plan
• Rowan Premium Plan
• Barth Variable Sharing Plan
• Bedaux Plan
(iii) Earnings Varying Proportionately More than Output – This category includes two methods
–

• High Piece Rate – Under this system, the earnings of the worker are in proportion
to his or her output, as in straight piece-work, but the increment in earnings for each
unit of output above the standard is greater. For example, for each one per cent
increase in output above the standard, there may be a 4/3 times increase in earnings
as compared to one per cent increase in earnings under the straight piece-rate
system. The higher rates start applying after the standards have been reached.
Similar logic applies to the high standard hour system.
• High Standard Hour System – Under the high standard hour system, the rate per
unit of time is higher. For example, there may be a 10 per cent increase in the time
rate earnings of a worker for every one per cent increase in output above the
standard.

(iv) Earnings Differing at Different Levels of Output – This group includes several schemes.
These systems can be best explained by describing how earnings vary from minimum to
maximum at different levels of output. Earnings for one part of the range may vary
proportionately less than output and for another part proportionately more, or more usually in
the same proportion as the output. Systems which fall under the category where earnings differ
at different levels of output are as follows –

• Taylor’s Differential Piece – Rate System

• Merrick’s Multiple Piece – Rate System
• Gantt Task and Bonus Plan
• Emerson’s Efficiency Plan
• Accelerating Premium System

(2) Group Incentive Plans

Group incentives are the incentive wage plans which motivate the group to produce more. The
group might consist of a couple of individuals, an entire department, or an entire company.
Group incentive plans are useful where the workers’ jobs are highly interrelated. Group
incentive plans are intended to get employees to work as a collective unit. Types of group
incentive plans are as follows –

(i) Priestman’s Production Bonus Plan – In this plan, a group of experts set the standard
performance in terms of the number of units for the whole work to be carried out by a group
within a specific period. Then, the actual performance of the group is measured and this
performance is compared with the standard performance. When the actual performance
exceeds the standard performance, the group members are entitled to a bonus computed on
the basis of the excess production achieved by them. However, when the group’s performance
is below the standard performance, they are paid on the basis of time rate without any bonus.

(ii) Cost Efficiency Bonus Plan – Under this plan, the organisation first determines the standard
cost for the various elements of cost. These may be material cost, labour cost and overheads
associated with production. Of course, an organisation may also decide the standard cost for
the total cost of all these elements.
Next, it measures the actual cost incurred by the group in accomplishing the production goals
or targets. Finally, the actual cost incurred by the group and the standard cost are compared to
determine the savings in the cost achieved by the group. As per the cost efficiency plan, a
predetermined percentage of the savings is distributed in the form of bonus to the employees.

(iii) Gainsharing Plan – Gainsharing matches an improvement (gain) in company performance

to some distribution (sharing) of the benefits with employees. Usually, gainsharing is applied to
a group or all employees, rather than an individual. Gainsharing focuses on the company’s most
vital performance metrics. Payout is often monthly or quarterly in gainsharing.

(iv) Towne Plan – This method considers the savings in labour cost alone for determining the
rewards payable to the group. In the first step, the standard labour cost for the entire work is
determined in advance. Then the actual labour cost for that work is measured and compared
with the standard labour cost. Now, the saving in the labour cost is computed and a proportion
of the saving in monetary terms is distributed to the group members. However, a part of the
saving is usually given to the supervisors as a recognition of their role in cost saving. Of course,
the organisation may get a share in the saving achieved in labour cost.

(3) Enterprise Incentive Plans

Enterprise incentive plans differ from individual and group incentive plans in that all
organisational members participate in the plan’s compensation payout. Enterprise incentive
plans reward employees on the basis of the success of the organisation over an extended time
period-normally one year, but the period can be longer. It seeks to create a “culture of
ownership” by fostering a philosophy of cooperation and teamwork among all the
organisational members. Types of Enterprise Incentive Plans Types of enterprise incentive plans
are as follows –

(i) Profit-Sharing Plan – The profit-sharing plans are based on predetermined economic sharing
rules that define the split of gains between the company as a principal and the employee as an
agent. For example, suppose the profits are x, which might be a random variable. Before
knowing the profits, the principal and agent might agree on a sharing rules(x). Here, the agent
will receive s(x) and the principal will receive the residual gain x-s(x).

(ii) Stock Options – Employee stock options are options granted by a company to its employees
as a compensation for work. Stock options are opportunities for employees to purchase a
specified number of shares of company stock in the future at a guaranteed price.

(iii) Employee Stock Ownership Plan (ESOP) – An ESOP is a defined contribution employee
benefit plan that allows employees to become owners of stock in the company they work for.
It is equity based deferred compensation plan. It is an alternative to selling the company to
outside investors or to another company is to sell the company to its employees.
Merits of Incentives

The following are the advantages derived by providing incentives to employees:

• Higher output: By providing incentives to his employees, the employer is able to

induce them to work better. This leads to higher output.
• Greater profits: Needless to say, higher output results in greater profits for
the business. This happens in two ways. First, the cost per unit becomes less
and second, the enterprise is able to keep the selling price low and this results
in greater sales.
• No problem of idle time: In an organisation where no proper incentives are available
for the workers, the tendency will be to while away the time. When suitable incentives
are available, the workers become time conscious. They begin to see every minute in
terms of money.
• Supervision does not pose any problem: When suitable incentives are available, the
workers become duty conscious. The need for close supervision, thus, does not arise.
• Efficient workers are able to earn more: Such of those workers who are highly
efficient are able to earn more by way of , higher commission and so on.
• Possible to identify inefficient and dull workers: If, in spite of the
incentive schemes, some workers are able to earn only their normal wage, it should
mean that they are basically dull. The employer, therefore, has to decide whether
to retain them or subject them to rigorous training.
• Rate of labor turnover is bound to be low: If adequate incentives are available to
the workers, they may not have a feeling of dissatisfaction. Such workers are sure to
have greater work commitment and therefore may not leave the organisation. The rate
of as a result, is bound to be low.
• Reduction in complaints and grievances: As the organization makes
available suitable incentives to the workers, they may not have anything to
complain about. This leads to reduction in complaints.

Demerits of Incentives Schemes -

The following problems are bound to arise while:

• Quality of work may suffer: The workers, those in the production department in
particular, may give undue importance to the quantity of output produced neglecting
the quality of output.
• Inter-personnel relationships may suffer: Only those employees who are really
efficient will be benefited out of incentives. This may promote ill feeings among the
organization of employees.
• Wear and tear of machines may be more: As the employees are keen on increasing
the output all the time, they may handle the machines carelessly. This increases the
wear and tear of machines.
 • Health of the workers may get affected: Some workers tend to overwork in order
to earn more and this may affect their health.
• Increase in accidents: There is always a preference to step up output disregarding
even safety regulations and this may increase the rate of accidents in the workplace.
• Increase in paper work: Proper administration of any incentive scheme involves lot
of paper work. It necessitates the maintenance of proper records and books.

Characteristics of a Good Incentive Plan

The basics of a good incentive plan are:

a. Simple and easy to understand

b. Lessor is not costly to operate

c. Must be discussed with employees before implementation

d. Assist in supervision

e. Able to evaluate employee’s performance

f. Induce cooperation among the employees

g. Encourage workers to perform better

h. Acceptable to employee and employer

i. Ensure sufficient monetary compensation and recognition to employees

j. Ensure reduction in unit production cost

k. Standardized methods of implementation

l. Eliminate distrust between the employee and employer

Financial incentive plans

1. Financial (Monetary) Incentives

Financial incentive pertains to those incentives which are in the form of money or can be
measured in monetary terms. This is sometimes referred to as monetary benefit offered to
consumers, employees, and organizations to encourage behavior or actions which otherwise
would not take place.

These incentives can be given on an individual or group basis and satisfy the monetary and future
security needs of individuals. It lifts the eagerness and self-confidence of the employees thus,
resulting in better productivity and performance.

The most commonly used financial incentives are:

Pay and allowance salary is the basic incentive given to every employee to work efficiently and
effectively in an organization. This includes the basic pay, dearness allowance, clothing
allowances, house rent allowances, and other similar allowances. It is paid most commonly
monthly.

Typically, employees are given annual increments in their basic pay and allowances depending on
the employee’s performance during the year.

Bonus
It is a sum of money added to the basic salary or wages on a seasonal basis, as a reward for a good
performance. Many companies offer bonuses during the festivals of Diwali, Christmas, New Year,
etc.

Productivity linked Wage Incentives

This refers to performance-linked compensation given to increase productivity. Wage incentives
are offered to employees to make them perform beyond the accepted standards.

For example, a manufacturing worker is paid 50 dollars per item if he produces 50 items a day but
if he produces more than 50 items a day, he is paid 5 dollars extra per item. Thus, on the 51st item,
he will receive 55 dollars.

Profit-Sharing
It is an incentivized compensation program in which an employee receives a direct share of the
company’s profits. The amount granted is normally based on the company’s positive earnings
over a set period. This motivates them to perform efficiently and give their best to increase the
company’s profits.

Retirement benefits
Retirement benefits like gratuity, pension, provident fund, leave encashment, etc. provide
financial security to the employees upon retiring from the company Hence, they work properly
during their term of service.

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Commission
Some companies offer a commission on top of the employee’s salary for successfully hitting
targets over a set period. This incentive motivates the employees to increase the client base of the
organization.

Perquisites
Several organizations offer perquisites and fringe benefits such as free accommodation, medical,
educational, and recreational facilities, car allowances, etc. in addition to the salary and
allowances to their employees. Sometimes, this incidental payment, benefit, or privilege is
enjoyed as a result of one’s position.

Co-partnership/Stock Option
Under this incentive system, employees are offered shares at a price that is lower than the market
price. This practice helps in creating a feeling of ownership among employees and motivates them
to give their all-out contribution towards organizational growth and success.

2. Non-Financial (Non-Monetary) Incentives

These are types of rewards that do not form part of an employee’s pay or cannot be measured in
terms of money.

While the monetary and future security needs are important, the fulfillment of an individual’s
social, psychological, and emotional needs also plays an important role.

Status
It is one’s social or professional position. In an organization, this refers to the position in the
hierarchy of the organizational chart. Management-level employees have more authority,
responsibility, recognition, salary, etc., than those of the rank-and-file employees.

The level of authority and responsibility determine the status of an employee in an organization.
Status increases the self-esteem, confidence, and psychological needs of an individual resulting in
a motivated attitude at work.

Organizational Climate
Organizational climate refers to the environmental characteristics of an organization as perceived
by its employees. It conveys the impression that people have towards the internal environment of
the company within which they work and have a key influence on their performance.

This differs from one organization to another. Several factors may influence the organizational
climate of a company, such as organizational structure, individual responsibility, risk and risk-
taking, warmth, and support within the company, its tolerance and conflict, and more. A positive
organizational climate tends to increase the efficiency of employees at work.

Career Advancement Opportunity

Organizations have to establish the appropriate skill and career development programs, and even
a sound promotion policy for their employees, that serves as a booster for them to perform well
and get promoted. Upward progress in one’s career, such as promotion, shows recognition and
appreciation of an employee’s work, motivating him to do better.

Job Enrichment
It refers to the designing of jobs in such a way that it involves challenging and variety of tasks,
requiring a higher level of knowledge and skill, more autonomy and responsibility, and more
growth opportunities and thus, could also increase employees’ pay. Sometimes, when the job
itself is interesting, it already serves as a good source of motivation.

Job Security
Job security offers future stability and a sense of security among the employees in an
organization. Not having to worry about the future gives a sense of enthusiasm at work. While
there is an undesirable aspect of this incentive, like employees taking their jobs for granted, the
increasing rate of unemployment in our country makes this a great work incentive.

Employee Recognition Programs

The organization adopts this to raise employee morale, attract and retain key employees, elevate
productivity within an organization, and increase competitiveness. This pertains to employers’
initiatives to reward their employees for achievements, new behaviors, anniversaries, and
milestones unlocked during their stay in the company.
For example, rewarding the best performer of the month, and announcing and displaying their
names on the notice boards, are programs for employee recognition.

Employee Participation and Empowerment

This refers to the employee’s involvement in decision making on the matters related to them
(participation) inducing a sense of belongingness and giving them more autonomy and powers to
subordinates (empowerment) to make them feel the importance of their presence and service to
the organization.

In a 2009 survey conducted by McKinsey & Company, non-financial incentives were valued as more
influential motivators than financial incentives.

The top three financial rewards were performance-based cash bonuses, an increase in base pay,
and stock or stock options. The top three non-financial incentives were praise and commendation
from an immediate manager, attention from leaders, and opportunities to lead projects or task
forces.

The most popular incentive – praise from the boss

The second most popular – attention from leaders
The least popular – stock or stock options
All three of the non-financial incentives were more popular than the leading financial incentive

According to the survey, the top two incentives are based on getting praise and validation from
their immediate supervisors or management. These two elements are considered vital to all
dealings, including employee-employer. Commendation and validation should be the focus of no
n-financial incentives for employees.

Team based compensation

it is a way of rewarding performance in team settings. That is, individuals are rewarded based on the
performance of the team as opposed to individual performance. There are different kinds of
compensation such as a portion of base pay, other financial rewards such as gain-sharing, and non-
financial rewards such as movie passes and gift certificates.

Team compensation is a way of rewarding performance in team settings. That is, individuals
are rewarded based on the performance of the team as opposed to individual performance. Team
compensation is often referred to as team-based rewards or team-based pay. People learn to
behave in certain ways based on the rewards they receive. Therefore, in order to convey to people
that they want them to produce more in teams, reinforcement of behaviors that lead to and sustain
team performance is necessary. Individual bonuses work against the team, thus lessening the team
spirit.

Advantages
▪ Foster collaboration and teamwork. The team has a defined goal. For it to be achieved,
every member’s participation is critical. The team is only as strong as its weakest link.
 ▪ The great equalizer. Every team member will get the same reward. (This can either be
dollar amount, or % of wage.) In my experience, both our higher and lower paid team
members appreciated this fact. There were differences in hourly rates, but the group
members were treated equally when aiming for the common goal.
▪ Override individual goals. Individual goals can get in the way of productive work. There are
differences in what your employees are after. Team incentives focus on the common goal of
the group.
▪ Self-actualizing. Teams that are given a goal and the increased freedom to decide how to
achieve it are demonstrating the issue ownership and self-actualizing behavior that we all
seek to create in our organizations. Management is no longer the “parent” telling the
children what to do and how to do it.
▪ Pride and sense of achievement. Teams that determine the best course of action to achieve
a goal have an incredible sense of pride when they do so. In my experience, we had teams
that achieved far more than we would ever have asked for, and their pride in doing it on
their own was incredible.
▪ Ownership and self-policing. Since the fortune of the team rises or falls on the performance
of all members, the team can become self policing and works to ensure that all members
contribute. In our case, we used team-based incentive programs to improve
productivity. We had managers tell us that their jobs were easier as the teams were self-
policing on behavior that jeopardize or lower the potential payout. Disadvantages

Disadvantages

▪ Possible infighting. It is possible that employees will be dissatisfied if they feel that other
team members are dragging them down or pressuring them up.
▪ Overwhelm poor performers. Those that are weaker performer may feel pressure to up
their game. I am not sure this is a negative as I am generally okay with poor performers
going to work for the competition. I think it can be more successful to have peer pressure
improve performance rather than leave it up to the manager. However, if your goal is a
harmonious work environment, this is something to consider.
▪ Possible free riders. Higher performing employees may perceive that the low performers
are getting a free ride. If all are receiving the same reward yet not making the same
contribution, this may be a problem. This is what happens when the group is unable or
unwilling to self-police. It will be imperative that the manager continue to observe
and address low performance.
▪ Invisible employee. It is possible that the emphasis on team performance may result in the
manager being unaware of individual performance and contribution. This may be a problem
with high performance or high maintenance employees. This can be countered and is why
we always continued a strong individual review and merit program.

What is Pay for Performance?

Pay for Performance is a compensation strategy that uses salary, bonuses, or other benefits
to directly incentivize employee performance. Employee Performance is generally measured
by pre-defined metrics or qualitative evaluations (performance appraisals).

Pay for Performance compensation plans are commonly employed in industries where the actions of
the employee result in revenue by the company and the results of those actions are readily
ascertainable. For example, individuals working in sales or business development commonly
compensated based upon performance - as their performance leads to increased customers, clients,
or sales revenue for the company.

Pay for Performance compensation plans are very helpful for a company if it implements them
effectively. It can meet the following objectives:

• Employ and retain the best quality workers

• Convey and reinforce the goals, values and motives of the company.

• Engage workers in the success of the company

• Benefit value creators

Moreover, the rewards policies instituted by a company as part of a pay for performance plan should
assist employees in understanding:

• Company Vision: where the organization heads. e.g. foxfire

• Company Strategy: how is the business going to reach them

• Employee Expectations and Roles: what kind of role is assigned to each employee in the
plan and what does the company expect from him/her.

• Employee Rewards: how employees get financial benefits and rewards from the expected
achievements linked to their roles.

Pay for Performance Benefits

Pay for performance is a compensation strategy that ties employee pay to their individual
performance. This type of pay structure motivates employees to continuously improve their
performance and stay engaged with their work. Additionally, pay for performance can help
Human Resources professionals more effectively manage employee performance and
increase the competitiveness of businesses.