DBM1201 EMPLOYEE PERFORMANCE andCOMPENSATION PDF

DEPARTMENT OF MANAGEMENT
DHR 132: EMPLOYEE PERFORMANCE AND

COMPENSATION
MODULE AUTHOR: LAWRENCE WAINAINA
DHR 132: EMPLOYEE PERFORMANCES AND COMPENSATION
Purpose: To expose learners to employee performance evaluation and compensation

approaches, tools and skills
Expected Learning Outcomes of the Course:
By the end of the course, students should be able to:
Establish performance standards

Describe mechanisms for developing reward systems
Discuss the role of government in regulating incentive plans
discuss the integration of internal equity and external market considerations in wage
system through use of job evaluations and market surveys
Course outline
WEEK 1: CHAPTER 1: ESTABLISHING PERFORMANCE STANDARDS
Purpose of Performance standard

Competence standards
Standard for managers and supervisors
Defining the Employees Goals and work standards
Competences necessary for effective performance
WEEK 2: CHAPTER 2: DEVELOPING EVALUATION METHODS AND DESIGNING

EFFECTIVE REWARD SYSTEMS
Job evaluation
Introducing job evaluation
Popular job evaluation method
Designing effective reward systems
Motivation and Incentives
WEEK3: CHAPTER 3: DETERMINING PAY RATES
Basic factors in determining pay rates

Principle Purpose of determining pay rate
Factors determining pay
Wage Payment Policies
WEEK 4: CHAPTER 4 :ADJUSTMENT OF PAY STRUCTURES

2
Pay structures
Types of grade and pay structure
Salary structures
Salary administration methods
Pay review bodies
WEEK 5: CHAPTER 5: REMUNERATION SYSTEMS
Skilled based pay

Performance Based Pay
Advantages and disadvantages of PBP
Critiques of PRP
Merit based systems
WEEK 6: CHAPTER 6: INTEGRATION OF INTERNAL EQUITY AND EXTERNAL

MARKET CONSIDERATIONS
Introduction
Internal versus external equity
Achieving internal equity: job evaluation
Achieving external equity: market surveys
Achieving individual equity: within-pay-range
WEEK 7: CHAPTER 7 COMPENSATION AS A MEANS OF EFFECTIVE

RECRUITMENT, MOTIVATION, AND RETENTION OF EMPLOYEES
Introduction
Attracting employees
Motivating employees
Retaining staff
WEEK 8&9: CHAPTER 8: BENEFITS PROGRAM DESIGN, COST CONTAINMENT,

AND PROGRAM MANAGEMENT
Benefits
Types of benefits
Cost containment
Crafting an effective benefits communication programme
WEEK 10&11: CHAPTER 9: PERFORMANCE APPRAISAL PROCESSES AND

IMPLEMENTATION OF MERIT SYSTEMS
Traditional appraisal methods

Types of appraisal
Appraisal methods
Potential rating problems and errors
How to avoid appraisal problems
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Implementation of merit systems
WEEK 12: CHAPTER 10: STATUTES AFFECTING COMPENSATION PRACTICES
The legal environment and pay system governance

Statutes in Kenya: Employment Act 2007
WEEK 13: CHAPTER 11: IMPACT OF GOVERNMENT REGULATION ON

INCENTIVE PLANS
Incentives and government regulations

Profit sharing as an incentive
Compensation laws
Course Assessment
Examination
- 70%
Continuous Assessment Test (CATS)
- 20%
Assignments
- 10%
Total
- 100%
Recommended Text Books:

Armstrong, M. (2008). A Hardbook of Human Resource Management Practice. London: Kogan
Page
Text Books for further Reading:
Subba Rao (1999). Essentials of Human Resource Management and Industrial Relations
Eugine T, (2003). Principles of Human Resource Management
TABLE OF CONTENTS
Page
COURSE OUTLINE.............................................................................................................i
TABLE OF CONTENTS.....................................................................................................iv
...1
CHAPTER 1 Establishing performance standards
1.1 Purpose of Performance standard1
1.2 Competence standards 1
1.3 Standard for managers and supervisors .2
1.4 Defining the Employees Goals and work standards3
1.5 Competences necessary for effective performance4
Review Questions6
Suggested further reading6
systems.7
CHAPTER 2 Developing evaluation methods and designing effective reward
2.1 Job evaluation.7
2.2 Introducing job evaluation8
2.3 Popular job evaluation methods..9
2.4 Designing effective reward systems16
2.5 Motivation and Incentives20
Review Questions.23
Suggested further reading..23
CHAPTER 3 Determining payrates24
3.1 Basic factors in determining pay rate24
3.2 Principle Purpose of determining pay rate. 25
3.3 Factors determining pay ..25
3.4 Wage Payment Policies.27
3.5 Types of wage payment system.28
Review questions32
Suggested further reading.32
5
CHAPTER 4 Adjustment of paystructures33

4.1 Pay structures..33
4.2 Types of grade and pay structure.35
4.3 Salary structures..37
4.4 Salary administration methods.. 39
4.5 Pay review bodies ..41
Review questions.41
CHAPTER 5 Remuneration systems42
5.1 Skilled based pay.42
5.2 Performance Based Pay....47
5.3 Advantages and disadvantages of PBP..47
5.4 Critiques of PRP.49
5.5 Merit based systems50
Review Questions50
..52
CHAPTER 6 Integration of internal equity and external market considerations
6.1 Introduction..52
6.2 Internal versus external equity..52
6.3 Achieving internal equity: job evaluation ..54
6.4 Achieving external equity: market surveys.56
6.5 Achieving individual equity: within-pay-range..58
Review questions.59
CHAPTER 7 Compensation as a means of effective recruitment, motivation, and
retention of employee60
7.1 Introduction60
6
7.2 Attracting employees...61

7.3Motivation....64
7.4 Retaining staff.68
Review questions68
CHAPTER 8 benefits program design, cost containment, and program
Management....69
8.1 Benefits...69
8.2 Types of benefits...70
8.3 Cost containment..75
8.4 Crafting an effective benefits communication programme .78
Review questions.79
Suggested further reading..79
....80
CHAPTER 9 Performance appraisal processes and implementation of merit systems
9.1 Traditional appraisal methods...80
9.2 Types of appraisal 81
9.3 Appraisal methods.82
9.5 Potential rating problems and errors ..84
9.6 How to avoid appraisal problems ;85
9.8 Implementation of merit systems........86
9.9 Merit pay as an incentive.88
Review questions.......89
Suggested further reading...89
CHAPTER 10 Statutes affecting compensation practices...90
10.1 The legal environment and pay system governance...90
10.2 Statutes in Kenya: Employment Act 2007....94
Review question..95
ion on incentive PLANS.96
CHAPTER 11 Impact government regulat
regulations
11.1 Incentives and government
96
11.2 Profit sharing....98
7
11.3 Compensation laws ....100
CHAPTER 1
ESTABLISHING PERFORMANCE STANDARDS
Learning objectives
General Objective: By the end of the end of the topic the learner should be able to establish
performance standards
Specific Objectives
By the end of this topic the learner should be able to:
a) State the purpose of performance standards
b) Outline how standard are set
c) Define the Employees Goals and work standards
1.1 Purpose of Performance standards
It is sometimes necessary to specify the quantity or quality of work which should be attained by
the holder of a certain job. The most frequent use of performance standards is found in appraisal
and training: to assess an employee either in his or her normal work or after training it is
essential to have a criterion against which to compare actual performance. Performance
standards are also used in some wage systems.
1.2 Competence standards
Standards of competence are benchmarks indicating what people should be capable of doing in
specific workplace situations. Competencies typically involve the ability and willingness to
performance particular tasks and to transfer knowledge and skills from the performance of one
type of work to others. Personal competencies are the individual characteristics that people bring
to their duties, for example leadership ability or good communication skills. Occupational
competencies are the outputs and performance levels that individuals are expected to attain.
1.2 Competence standards
Performance standards are most easy to set when some kind of physical activity takes place.
They can state how many articles should be produced, how many documents completed or how
many selling calls made in a day. When the task becomes varied, e.g. when articles of several
different types are made during a working day or the calls are scattered over a large area,
standards expressed in such simple terms become misleading. A performance standard should
also contain some reference to the quality of work.
1.3 Standard for managers and supervisors
It is a very difficult problem to set performance standards for managers and supervisors because
their work is extremely varied and emphasizes mental rather than physical activity. In some
cases there may be obvious targets, e.g. a sales manager may be expected to maintain sales at a
certain minimum level, or a supervisor to keep waiting time in his or her section below a certain
level. Criteria such as these are particularly valuable when they can be measured objectively and
are within the control of the person concerned. A target for a supervisor to maintain satisfactory
industrial relations within the section would be valueless, first because of the subjective
interpretation of the word satisfactory and secondly because the quality of industrial relations
would depend on many factors outside the supervisors control. It is often claimed that careful
analysis aided by ingenuity will show that any job contains elements for which performance
standards can be expressed in terms of measurable behavior, and some approaches to appraisal
and training are based on this assumption.
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1.4 Defining the Employees Goals and work standards

The idea that the employees effort should be goal directed is central to performance
management and appraisal.
Managers should appraise employees based on the specific
standards by which the employees expected to be measured. And, the employees goals a
nd
performance standards should make sense in terms of the companys strategic goals.
In practice, clarifying what you expect from employees is trickier than it may appear. Job
descriptions are rarely the answer. Employers usually write job descriptions not for specific
jobs, but for groups of jobs, and the descriptions rarely include specific goals. Your sales
managers job description may list duties like supervise salesforce. But, for strategic purposes,
you may expect your sales managers to personally sell at least $600,000 worth of products per
year by handling the divisions two largest accounts; and to keep the salesforce happy.
The most straightforward way to do this (for the sales manager job above, for instance) is to set
measurable standard s for each objective. You might measure the personal selling activity in
terms of how many dollars of sales your manager is to generate personally; perhaps measure
keeping the salesforce happy in terms of turnover (on the assumption that less than 10% of the
salesforce will quit in any given year if morale in high). Guidelines for effective goal setting
include the following.
a) Assign specific goals employees with specific goals usually perform better.
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b) Assign measurable goals Express goals in quantitative terms and include target dates
or deadlines. Goals se t in absolute terms (such as an average daily output of 300 units)
are less confusing than goals set in relative terms (such as improve production by 20%).
If measur able results will not be available, then satisfactory completion
such as
satisfactorily attending workshop or satisfactorily completed his or her degree is the

next best thing. In any case, always include target dates or deadlines.
c) Assign challenging but Doable goals. Goals should be challenging, but not so difficult
that they appear impossible or unrealistic
d) Encourage Participation.
The evidence suggest that partcipatively set goals do not consistently result in higher
performance than assigned goals, nor do assigned goals consistently result in higher performance
than participatively set ones. It is only when the participatively set goals are more difficult than
the assigned ones that the participatively set goals produce higher performance. In practice,
participatively set goals tend to b e set higher. Its the fact that goal is more difficult, not that it
was participatively set, that explains the higher performance.
As a shorthand way of remembering how to set goals, many managers use the acronym,
SMART. Goals should specific, and clearly state the desired results. They are measurable, and
answer the question how much. They are attainable, and not too tough or too easy. They are
relevant, and clearly derive from what the managers and company want to achieve. And, they
are timely, and reflect deadlines and milestones.
1.5 Competences necessary for effective performance.
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The term competences has come to be used to describe the attributes necessary for effective
performance. Competences can be purely role related, or be mix of personal and job attributes.
Competences can be highly specific as we suggest here for use in a person specification
or
they can be generic, i.e. general for certain types of work (e.g. managerial work at different
levels), for an organization. Many companies use competences as the touchstone for the whole
human resources system so that recruitment, appraisal and training and development are all
based on a common of effective performance.
If any job, no matter how simple or complex is analysed, it will become apparent that the
requirements for effective performance can be described in four interdependent, overlapping
categories:
a) knowledge,
b) skills,
c) attitudes and
d) personal attributes.
While skill and knowledge are necessary, they are not sufficient for success. High performance
that is sustainable requires appropriate attitudes, traits and motives. For example, the effectively
performing lawyer could be said to need knowledge of the law and court procedures and
customs, skills in relating to variety of people, particular skills in advocacy, together with
attitudes and personal attributes such as honesty, integrity, conscientiousness, care, patience and
calm temperament. Competence in performance sometimes tends to be considered mainly in
terms of professional aspects, i.e. knowledge and skills. But the personal qualities that an
employee brings to a job may make all the difference between success and failure as we
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discussed in regard to emotional intelligence. Of what use to an employer, for example, is the
employee who is professionally the most proficient member of the work group, but at the same
time has a disruptive influence because of an uncooperative attitude, and is a constant source of
friction with colleagues and clients.
The criteria for effective performance are established by the process known as job analysis. Job
analysis can be conducted for a variety of reasons.
a) First, it can be used to established what is required for recruiting purposes;
b) secondly, as part of a development programme, to discover competences and attributes
of high performance;
c) and thirdly, as part of job evaluation, to determine rewards.
Review Questions
a) State the purpose of performance standards

b) Briefly Outline how standard are set
c) Explain how the Employees Goals and work standards are set
Suggested further reading
Dessler ,G.(2008) . Human Resource Management Upper Saddle River (NJ): Practice Hall
Tyson,S. (2005). Essentials of Human Resource Management. London: Butterworth Heinemann
Jordan Hill
Graham, T, Bennet, R. (1998). Human Resource Management. London: Prentice Hall
Torrinton, D, Tylor, S.(2008) Human Resource Management. London:G Prentice Hall
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CHAPTER 2
DEVELOPING EVALUATION METHODS AND DESIGNING EFFECTIVE REWARD
SYSTEMS
Learning objectives
General Objective: By the end of the end of the topic the learner should be able to develop
evaluation methods and design effective reward system
Specific Objectives
a)
b)
c)
d)
e)
Define the term job evaluation

Highlight the purpose of job evaluation
Explain four common method of jobs of job evaluation used in organizations
Highlight the various features of job evaluation
Describe how an effective reward system can be developed
2.1 Job evaluation

Job evaluation is a process of systematically analyzing jobs to determine the relative worth of
jobs within the organization. This analysis is the basis of a job hierarchy and pay ranges. The
result is a pay system with the pay rate for each job commensurate with its status within the
hierarchy of jobs. Job evaluation should not be confused with performance evaluation, the
process of determining how well employees are accomplishing their jobs. Job evaluation does
not review the employees within a position but rather assesses the worth of the position to the
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organization. Thus employees in positions of less worth to the organization are paid less than
employees in position of greater worth. For example, a systems analyst would not receive a
salary higher than the director of data processing.
Through job evaluation, management can recruit productive employees to fill position and
maintain internal perceptions of pay equity by paying each position fairly in comparison with all
other positions within the organization. Job evaluations may also be used to involve employees
in the evaluation process. By understanding how the organizations compensation system is
established and maintained, employees can ensure that the system is accurate and complete. Also
employee involvement will help communicate to other employees that the system is equitable.
Job evaluation provides a basis for achieving equitable pay and is essential as a means of dealing
with equal pay for work of equal value. Job evaluation is a systematic process for defining the
relative worth or size of jobs within an organization in order to establish internal relativities. It
provides the basis for designing an equitable grade and pay structure, grading jobs in the
structure and managing job and pay relativities.
2.2 Introducing job evaluation
A new or altered job evaluation system is a change which must be very carefully introduced by
management because it affects the vital subject of pay.
The method of evaluation must be clearly explained to employees and their representatives, some
modifications perhaps being made at the employees' request. It is usual to guarantee that no
employee at present employed by the company will receive a reduction in pay, though if the job
is found to be overpaid his or her successors in it may be given a lower wage.
Some companies have found that the fairness o f the scheme in the employees eyes is increased
15
if an appeals committee is set up to listen to complaints that jobs have not been given the value
they deserve. Employee representatives, e.g. shop stewards, often sit on these committees.
Purpose of job evaluation

a. To make pay administration easier by reducing the number of separate rates of pay.
b. To harmonies internal rates of pay with those found in other companies.
c.
to provide a means by which a reasonable rate of pay can be fixed for new or changed
jobs within the company
d.
To protect the employee from arbitrary decisions by management
e.
To justify wage differentials and hence avoid frequent invocations of grievance

procedures
f.
To facilitate fair promotion systems based on rationally determined job grading

structures (each grade should specify all the qualifications and personal attributes needed
to occupy a job within that grade).
2.3 Popular job evaluation methods

The most popular job evaluation methods used internationally, include job ranking, the factor
comparison method, the classification method and point method
1.
Ranking method
This is the simplest and least precise method. The job with the most 'worth' to the company is
identified first; then the next job with the most worth will follow. This continues until all the jobs
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are placed in a hierarchical order. Unfortunately the rankings do not differentiate between the
jobs in terms of their relative importance.
Advantages and disadvantages of job ranking method will include the following:
Advantages
a) It is fast and easy to complete
b) Because it can usually be done in hours , it is relatively inexpensive
c) It is easy to explain as its easily understood
d) It is particularly suitable for fairly homogeneous jobs for example all clerical or where it
is known that the pay structure is already reasonably satisfactory.
Disadvantages
a) It is limited to smaller organizations where employees are very familiar with various jobs
thus its impractical in large companies
b) The method assumes equal intervals between the ranking and this is usually not true
c) The method is highly subjective and therefore its difficult to defend its based on almost
intuitive judgments
d) It does not indicate the spaces between positions in the rank order i.e. job A may be
judged to be more worth than job B, but the method will not show how much more
2. Classification method
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It is slightly more sophisticated than job ranking but still not very precise. Here a decision on
how many grade levels the job value structure is to be broken into is made (usually varies from 5
to 15) and generic descriptions at each level are written. The lowest grade for example will be
defined as containing those jobs which require little skills and are closely supervised. With each
successive grade skills, knowledge and responsibilities increase. The job descriptions are then
compared with the description of the grade level. Each job is then assigned to the grade level it
most closely matches. Eventually every job in the company will have been allotted to a grade.
Advantages and disadvantages of classification method will include the following:
Advantages
a) It is relatively simple quick and inexpensive
b) The decision of the
committee in-charge of the
grading can be supported by the
definitions of the grades

c) Because it has been used by numerous companies for years it is readily accepted by
employees
d) It is readily adaptable to very large organizations with many offices that are
geographically dispersed
e) Because the classifications are broad and not specific, the system can last for years
without substantial change
Disadvantages
a) The classification descriptions are so broad that they do not relate to specific jobs, this
causes employees to question the grades of their respective jobs
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b) Complex jobs are often difficult to fit into the system as a job may have the
characteristics of two or more grades
c) Because of the broad and general classifications, job evaluators may abuse the system
3. Factor comparison method

Here compensable factors such as responsibility, skill, mental effort and working conditions are
selected and the jobs described in terms of these factors. The jobs are ranked on each factor.
Each factor is weighted in terms of its relative importance to the organization by allocating a part
of each job's current wage rate to each factor, e.g. a worker receives Ksh.100 per hour. This
amount is apportioned as follows: sh 30 for responsibility, sh 20 for skill, sh25 for mental effort,
sh 10 for physical effort and sh 15 for working conditions. The total value for each job is then
calculated.
Advantages and disadvantages of factor comparison method will include the following:
Advantages
It is relatively detailed and specific - jobs are evaluated on a component basis and
compared against other jobs
It is usually easier to develop than the point method
It is tied to external market wage rates.
Disadvantages
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It is relatively difficult to explain to employees'
It is not easily adapted to changes in-the jobs being evaluated
4. Point method
It is used more than any other method. Here the same compensable factors as above are
evaluated but more detail is added by breaking the factors down into sub factors (e.g. skillexperience, education, dexterity and effort - physical, mental). A number of factors are first
agreed against which jobs can be analyzed. A very simple set of factors for manual jobs might be
a) Skill
b) Effort
c) Responsibility
d) Working conditions
Instead of using wages, points are allocated at, for example, a number of levels (level 1 - 25
points, level 5 - 100 points) for each factor. The jobs are analyzed in terms of each factor and the
individual points added to obtain the total points for each job. Factors judged to be more
important have wide range of points attached to them.
Advantages and disadvantages of point method methods are as follows:
Advantages
It is detailed and specific - jobs are evaluated on a component basis and compared against
a predetermined scale
Employees generally accept this method because of its mathematical nature

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The system is easy to keep current as jobs change
Because of its quantitative nature, it is easy to assign monetary values to jobs
Disadvantages
It is relatively time-consuming and costly to develop
It requires significant interaction and decision making by the different parties involved in
conducting the job evaluations
With the appearance of computerized job analysis systems, many of these methods have been
computerized, which makes their implementation much easier. As a result of the changing nature
of work in organizations, as well as the movement away from the traditional pyramid hierarchies
to competitive network problems experienced with the traditional job evaluation systems
necessitated development of new approaches.
The latest job evaluation system evaluates, among other things, work complexity, the level of
skill and knowledge involved, as well as strategic value that employees contribute towards the
organizations goals, is known the Job Appreciation System JAS).
Job evaluation committee
The process of job evaluation is expensive and not completely objective. Primarily problemsolving, subjective judgmental process, job evaluation requires the best input from individuals
within the organization. Because it is impossible for one individual to have adequate knowledge
of all the jobs in the organization, a job evaluation committee is necessary .The expertise and
varying backgrounds of different committee members contribute to the accuracy of the
evaluation process. The members of the committee should have adequate knowledge of all key
areas within the organization and a basic familiarity with the jobs within each department.
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Members should be trained in the basic concept of job evaluation and specifically in the method
chosen by the organization to develop job evaluation .Organizations often maintain a permanent
job evaluation committee.
Outside assistance
The first decision the job evaluation committee makes is whether the organization should
produce a job evaluation system or hire outside consultants. Outside consultants like' Delloitte,
PricewaterhouseCoopers and many others offer experience and expertise in the area because they
are employed by many firms to produce similar systems year after year. Often faster and more
objective than internal employees, outside consultants need substantial internal input to analyze
jobs and make difficult comparison decisions. Many decisions critical to the job evaluation
process can be made only by individuals familiar with the organization and its basic jobs.
A better alternative is hiring an evaluation consultant to organize the evaluation process and train
the job evaluation committee. Once trained, the members do the decision making; the consultant
can be brought in at the end of the process to make necessary adjustments.
Main Features job evaluation
The main features are that its
-
Systematic
Judgmental
Concerned with person not the job
Deals with internal relativities
Systematic
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Analytical job evaluation is systematic because the relative value or size of jobs is determined on
the basis of factual evidence on the characteristics of the jobs that have been analysed within a
structured framework of criteria or factor.
Judgmental
Human judgment has to be exercised at a number of points in the job evaluation process.
The aim is to maximize objectivity but its difficult to eliminate a degree of subjectively.
It is recognized that to a certain extent any assessment of a
jobs totals demands relative to
another will always be subjective.

Concerned with job not the person
It means that when evaluating the job the only concern is the job content in terms of the demand
made on the job holder. The performance of the job holder must not be taken into account.
Concerned with internal relativities
When used within an organization, job evaluation can only assess the relative size of jobs in that
organization. It is not concerned with external relativities, that is, the relationship between the
rates of pay of jobs in the organization and the rates of pay of comparable jobs elsewhere
(market rates)
2.4 Designing effective reward systems

The first step when designing an effective reward system is to come up with reward policies.
Reward policies address the level of rewards taking into accounts how internal rates of pay
should compare with market rate. They also address achievement of equal pay in the
organization, the approach to total reward and the scope for the use of contingent rewards related
23
to performance, competence, contribution or skill. Reward practices are those practices that
provide financial and non financial rewards.
Developing a Pay Programme
Developing a pay plan is important in all business organization whether large or small. Paying
wage rates that are too high may be unnecessarily expensive and paying less may make the
employees to leave the organization. Furthermore if the internal wage rates are inequitable it may
reduce the morale of employees and endless badgering by employees demanding rises. It would
therefore be important for a manager to establish pay rate that will be equitable both internally
and externally. This can be done by carrying out salary survey. This will be followed by job
evaluation, grouping similar jobs and pay grades and then pricing them.
Salary Survey
A salary survey is aimed at determining prevailing wage rates. A good salary survey provides
specific wage rates for specific jobs. Formal written surveys are the most comprehensive, but
telephone surveys and newspaper advertisements are also sources of information.
Salary survey data is used to price benchmark jobs. Benchmark jobs are the anchor jobs around
which they cost their other jobs based on each jobs relative worth to the firm. The salary survey
can still be used on benefits like insurance, sick leave and vacations to provide a basis for
decisions regarding employee benefits. A management should ensure the survey is extensive to
cover things like number of employees, overtime policies, starting salaries and paid vacation.
24
A salary survey that is well conducted will lead to equitable pay and employee will feel
motivated to work in the organization. This will in turn lead to effectiveness in the organization
and the objectives will be achieved.
Job Evaluation
Job evaluation is aimed at determining a job relative worth. It is a formal and systemic
comparison of jobs to determine the worth of one job relative to another. A salary structure is
obtained after a job evaluation. This is hierarchy showin g what various jobs will earn. Its the
managers role to ensure that those jobs that are more complex, have more responsibilities and
greater qualifications are paid more. Jobs are compared in terms of required effort, responsibility
and skills.
An organization should minimize use of intuitive approach when evaluating jobs. Compensable
factors would be better to use. These are factors that establish how the jobs compare to one
another and that determine the pay for each job. Compensable factors can be developed
internally or an outsourced. Identifying compensable factor plays a central role in job evaluation.
For exam ple decision making can be a compensable factors for a manager. It is the role of the
manager to identify the need for a job evaluation, get corporation from the other employees and
then choose the evaluation committee. The manager should ensure that the employees cooperate
in the evaluation. The committee chosen should be well represented to gain acceptance from the
employees. The committee should also include employees who are familiar with the job in
question.
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After determining the relative worth of each job the jobs are grouped into pay grades. The pay
rates are assigned to each job. The committees will probably group similar jobs in to grades for
pay purpose.
Price Each Pay Grade
After creating pay grades the committee should ensure that each grade is assigned a pay. If pay
grades are not slotted then the manager should ensure that each individual job is assigned its pay
rate. The committee should try to be as objective as possible. A wage curve can help in
assigning pay rates to each pay grade or to each pay job. A wage curve shows the pay rates
currently paid for jobs in each pay grade relative to the points or rankings assigned to each job
or grade by the job evaluation. If the employees feel that the committee was objective in arriving
at the pay rates, they will accept their pay and are likely to work towards the achievement of the
organization goals.
An evaluation committee should ensure that pay ranges are established within the pay grades.
Pay range are a service of steps or levels within a pay grade , usually based upon years of
service. Pay ranges lets the employer to take a more flexible stance in the labor market . For
example it makes it easier to attract experienced, higher paid employees in to a pay grade at the
top of the grade, since starting salary for the pay grades lowest step may be too low to attract
them. For an organization to achieve its objectives it requires to hire experienced people and then
put measures to ensure that such employees are retained a fair reward system will lower the
employee turnover rate.
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Compensating managers managerial jobs tend to stress harder to quality factors like judgment
and problem solving more than do production and clerical jobs. Managers pay may also be
based on his performance or the result rather than the working conditions.
Compensating Professional Employees.
When compensating professional employees like engineers and scientists compensable factors
should be considered. These factors tend to focus on problem solving, creativity, job scope and
technical knowledge and expertise .the magnitude to which these factors are used will determine
the kind of compensation a professional employee will receive. A manager can also establish the
values for the benchmark jobs after exploring the market. A share structure is then established
with various grade levels and salary ranges, attracting and retaining professionals in the
organization would help an organization achieve its objectives.
Competency Based Pay
An organization can also apply competency based pay in the organization. This is where the
company pays for the employees range, depth and types of skills and knowledge rather than for
the title he or she holds. In this case a manager will base the jobs pay rate on the level of
competencies of an employee. Competencies are demonstrable characteristics of a person,
including knowledge, skills and behaviors that enable performance. Since employees build job
competences through experience on the same or similar job, then if this approach is used
experienced people are likely to be compensated highly. When competency based pay is used
employee will be motivated to acquire knowledge for example through training so that they can
gain more knowledge and consequently earn more.
2.5 Motivation and Incentives
27
An organization can also use incentives to motivate employees. Incentives can be financial or
non financial. Financial incentives are financial rewards paid to workers whose production
exceeds some predetermined standards. Employee recognition is a form of non
financial
incentives. A manager who is designing an incentive plan should first remember that different
people react to different incentives in different ways .some prefer financial and others non
financial rewards.
According to Fredrick Herberg two factors theory people are motivated when they are assigned
challenging work and also when they are recognized. Other motivators are autonomy,
responsibility, advancement and the work itself. Managers should use the above motivators to
motivate their employees. Motivated employees will be more productive leading to the
attainment of the organization goals.
According to Herzberg better pay and working conditions just help to keep the person from
becoming dissatisfied. A manager who is interested in creating a self- motivated work force
should emphasize motivator factors.
Individual Employee Incentives
There are some incentives that a HR - manager can offer to individual employees. Piece work
plan is an example of such a plan. Here the manager pays the worker a sum called the piece rate
for each unit he or she produces. Piece rate appear equitable in principle and its a powerful
incentive since reward are proportionate to performance.
Another individual employee incentive is the merit pay. Merit pay or merit raise is any salary
increase the firm awards to an individual employee based on his/her individual performance.
28
Employees like salespersons receive individual incentives inform of commission. . Commission

plan pays sales people for the results.
Team /Group Incentives
Organizations are increasingly using teams to manage their work and achieve their objectives. A
team or group incentives plan is 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. These
incentives encourage team work. Other incentives are organization wide. These are incentives
plans in which all or most employees can participate, and which generally tie reward to some
measure of companywide performance. An example of organization wide incentive plans is the
profit sharing plans. This is where employees receive a share of profit. Profit sharing boosts
the productivity and morale of the employees. Another incentive is employee stock ownership
plan. This has been used in many organizations where the employees are allowed to buy shares
from the organization. Employees will feel attached to the organization and such an arrangement
will encourage employees to develop a sense of ownership in and commitment to the firm.
Benefits
Benefits are indirect financial and non financial payment employees receive for continuing their
employment with the company. They include things like health and life insurance pension, time
off with pay, and child care assistance. In addition to salary, allowances and incentives, benefits
should also be part of the employee reward. Those employees who value health benefits will be
attracted to work in organizations where there are good health schemes.
29
HR managers need to design benefits packages with a lot of care. Employee needs to know the
benefits they are being offered, who will be covered and how the benefits will be financed. Other
important aspects to consider include the degree of employee choice in determining benefit and
how to communicate benefits options to employees. In all the benefit schemes the HR manager
has a role of getting employees more involved and empowered in programs.
Total Reward
Total reward includes all types of rewards
indirect as well as direct, and intrinsic as well as
extrinsic (Armstrong, 2008). It includes base pay contingent pay and employee benefits on one
side and the non financial rewards like learning and development and work experience on the
other side. All these transaction and relational rewards make the total reward. A HR manager
should advocate for this holistic approach to rewarding people. A total reward embraces
everything that employees value in the employment relationship.
Conclusion
In conclusion, it is through job evaluation and market rate analysis that the pay for an employee
is determined. It is from the two above that grade and pay structures are prepared. In addition to
rewarding employee through basic pay, contingent pay and other employee benefits should be
used. Other rewards include the non- financial ones from the work itself for example recognition,
autonomy and achievement. All these rewards make the total reward. The aim is to maximize the
combined impact of a wide range of reward. It is through learning and development that
employees gain the skills and knowledge to enable them to work. When an employee is able to
work the organizational objectives will be achieved.
30
Review Questions
a)
b)
c)
d)
Define the term job evaluation

Highlight the purpose of job evaluation
Explain four common methods used in organizations to carry out job evaluation
Describe how an effective reward system can be developed

Armstrong, M. (2008). A Hard book of Human Resource Management Practice. London: Kogan
Page
Jordan Hill
Balkin, B, Cardy, L (2007) Managing Human Resources. London: Prentice Hall
Grobler, P. (2006) Human Resource Management in South Africa. London: Cengage Learning
EMEA
CHAPTER 3
DETERMINING PAY RATES
Learning objectives
General Objective: By the end of the end of the topic the learner should be able to determine pay
rates in an organization
31
Specific Objectives
a)
b)
c)
d)
State the principle purpose of determining pay rates

Highlight the factors determining pay rates
Explain the types of wage payment system
State what is contained in wage payment policies
3.1 Basic factors in determining pay rates

Employee compensation refers to all forms of pay going to employees and arising from their
employment. It has two main components,
a) direct financial payments (wages, salaries, incentives, commissions, and bonuses), and
b) indirect financial payments (financial benefits like employer paid insurance and
vacations).
In turn, there are basically two ways to make direct financial payments to employees:
a) Base them on increments of time, or
b) On performance.
Time-based pay is still the foundation of most employers' pay plans. Blue-collar and clerical
workers get hourly or daily wages, for instance, and others like managers or Web designers, tend
to be salaried and paid by the week, month, or year. The second direct payment option is to pay
for performance. Piecework as example ties compensation to the amount of production (or
number "pieces") the worker turns out. For instance, you divide a worker's target hourly wage by
the standard number of units he or she is to produce in one hour, then for each unit he or she
produces; the person earns the calculated rate per piece. Sales commissions are another example
32
of performance-based (in this case, sales-based) compensation. Of course, employers also devise
pay, plans in which employees receive some combination of time-based pay plus incentives.
3.2 Principle Purpose of determining pay rates
Every attempt in pricing any job must consider the following principles
a) Retention of employees who have satisfactory performance
b) Fulfilling legal obligation/statutory requirement e.g. minimum wage, hardship allowance.
c) Providing for incentive for employees
d) Keeping pace with inflation/cost of living
e) Attraction of sufficient and suitable employees
f)
Rewarding of employees for effort, loyalty experience and achievement.
3.3 Factors determining pay

A wage or salary is influenced by many different factors. Some of these affect the basic pay for
the job and others the pay that individual employees receive. The factors include the following:
a) Supply and demand - eventually, when the supply of a particular type of labour
is scarce, its price, i.e. its wage or salary, will rise, and vice versa. The operation
of this economic law is, however, affected by the following:
i.
People are often unwilling to move to another district.
ii.
Pay is not the only reward gained from employment
iii.
Knowledge of the various rates of pay offered is not widespread
iv.
Training for a new occupation may take some years.
33
b) Difficulty of the job - it is generally agreed that jobs which require a high' level
of intelligence, experience, knowledge or skill deserve a high rate of pay.
c) Unpleasant working conditions.
d) Productivity, merit or length of service - often determining the pay received by
an individual over and above the basic rate.
e) The ability to pay: e.g. - Profitability - Adequate cash flow - Sufficient return on
investment
f)
Prevailing wage rate comparability. It is also called going wage rate, or

prevailing market rate. This is obtained through wage survey in a given
geographical locality/region or industry. Employers and unions and staff compare
their pay with similar players in the industry
g) Bargaining power/strength of trade unions e.g. use of Collective Bargaining

Agreement (CBA), strike, go-slows, mediations
h) Labour market conditions
i.
Employees paradise e.g. most European countries ,
ii.
Employers paradise e.g. most third world countries
iii.
Ideal conditions - situation where supply and demand of labour in a market is matching.
Such condition are mainly found in developed economies
iv.
Stagnation -- situation where supply and demand for labour is low as experienced in
most basket case countries
i)
Existing differential or customs and practices, Organizations have their own

culture of payment e.g world bank, UN systems, Microsoft, IBM are known well
payers .Encouragement of bonuses and over time by some organization increases
34
levels of pay Custom and practice- IT based firms, PR firms have tendencies of
relative high compensation
j)
Government intervention and Labour Legislations. National, regional or

international laws may demand certain level of compensation for certain common
jobs for example, East African community, European Union, etc. Wages
legislation for example, minimum wages, salaries for public servants,
constitutional office holders, allowances like hardship, medical etc
k) Cost of living/inflations. Wages/salaries should not only meet basic needs but
also sufficient to keep one healthy both in body and mind.
l)
Attraction and retention intent. Wages/salaries should be competitive enough

to attract and retain competent workforce and reduce turnovers. Job requirements
Difficult jobs and jobs requiring higher responsibilities often carry higher wages
for example C.E.Os, surgeons, space engineers etc
m) Union - Management relations, - may be influenced by friendly CBA supportive management philosophy and attitude may relatively increase wage
levels management.
3.4 Wage Payment Policies
Well-considered wage policies should address both the employees and employers needs and in
particular,
a) Attract, retain, and motivate sufficient number of suitable employees to meet production
needs.
b) Encourage optimum productivities from employees
35
c) Ensure high level of quality output

d) Recognize the value of jobs in relation to each other
e) Enable employees to share in the growth and prosperity of the organization
f) Ensure that labor cost is suitably controlled in relation revenues and other costs Wages
structures
Wages structure
Wage structure is the hierarchy of job grades or rates that compares jobs in terms of:
a) Skills
b) Responsibility
c) Mental effort
d) Physical effort.
e) Working condition etc
3.5 Types of wage payment system
1. Time rate system
In this system payments are made at predetermined rates per hour or per week. It is not based on
effort made or result obtained by the employee. This system is common in paying causal
workers. However, allowances are paid for example, for shift premiums, overtime etc,
This is the system which has been used since ancient times Worker is hired for a given time and
paid for his labour. He is paid at the end of the time period. Here the payment is not conditional
to the output. In other words, wages are not linked to the productivity. This system is most
popular among "white collar" employees, supervisors and managers. Since workers are paid at
36
the end of the fixed period, these systems inculcate a sense .of security in them. Supervisors
however must ensure the worker is not idling during the working hours fixed. This system is also
useful when types of jobs are of non-standard in nature. Year or annual increment, merit
increments, bonuses and promotion chances are means of motivation in this system.
Sh.
Output/result
Advantages
1. Management in control of the operation.
2. Labour flexibility
3. . Simple to operate
4. . Labour cost can be controlled
5. . Labour output can be predicted
2. Payment by result or piece rate
Payment directly tagged to output for example, number of items produced at an agreed rate per
item. Commonly used in sales, agency services etc .Here the payment is given to the employee in
relation to his work output. This system is popularly known as piece-rate system- or incentive
37
payment system. There are a number of incentive payment systems. Relationships as given
below:
a) Payment in proportion higher than the output.
b) Payment in different proportion with different levels of output.
c) Payment in proportion less than the output.
d) Payment in the same proportions to output.
For details see next section where wage Incentive plans are discussed.
Earning
Output/result
Figure 3: Piece Rate Systems
3. Combined time rate and piece rate

Bonuses earning on performance
Basic rate (guaranteed)
38
75%
Figure 4 : Combined time rate and piece rate

In this system the employee is assured of some base pay irrespective the output. In this
illustration 75% basic performance standard is guaranteed but the remaining 25% pay is
determined by employees direct output.
Advantage
a) Employees are secured against bad times for example, during sickness, economic
fluctuation etc
b) Competent employees may utilize their effort
4. Company wide incentives scheme
a) Bonuses is paid to all employees on the basis of productivity achieved within the
organization as a whole
b) It relies on group collaboration but does not encourage individual competition
5. Single status schemes
a) This is a scheme meant to remove the discrimination between the manual workers and
white collar workers.
b) It is meant to create harmony in the work place and eliminate perceived inequities
c) The workers enjoy similar privileges and working conditions. for example, holidays
pays, etc
39
6. Skills - based pay (SBP)

a) In the light of flexible working and just-in-time manufacturing systems as expounded by
Japanese work culture, several firms have introduced SBP
b) Pay is linked to the skills that the employee have and can use at the work place
c) The employees enjoy the advantages of multi-skills
d) The organization enjoys reduced administrative costs and reduced turnovers.
e) Given that employees are involved in member of jobs hence clarity of requirement,
standards & circumstances is vital
Review questions
a)
b)
c)
d)
State factors the factors determining pay rates

Explain four types of wage systems used when determining pay
State the advantages and the disadvantages of time rate systems

Page
CHAPTER 4
ADJUSTMENT OF PAY STRUCTURES
Learning objectives
General Objective: By the end of the end of the topic the learner should be able to describe how
pay structures are adjusted
40
Specific Objectives
a)
b)
c)
d)
Distinguish between a grade and pay structure

State the guiding principles for the preparation of a grade and pay structure
Highlight the different types of grade and pay structure
Explain how salaries and wage structure are adjusted
4.1 Pay structures

Once job analysis has been done organizations need to decide upon the pay structures. Pay
structure refers to the process of setting up the pay for a job in an organization. The process deals
with internal and external analysis to estimate the compensation package for a job profile.
Internal equity, External equity and Individual equity are the most popular pay structures. Job
description provides the in depth knowledge about the job profile and its worth.
Pay structures are the strong determinant of emplo
yees value in the organization . It helps in
analyzing the employees role and status in the organization. It provides for fair treatment to all
employees. Pay structures also include the estimation of incentives. Grade and pay structures are
important parts of a reward systems. Grade structure serves as a medium through which the
organizations communicate the career and pay opportunities available for employees. A grade
structure consists of a sequence or hierarchy of grades bands or levels into which groups of jobs
that are broadly comparable in size are placed.
A pay structure defines the different levels of pay for jobs or groups, of jobs by reference to their
relative internal value as determined by job evaluation, to external relativities as established by
market rate surveys and sometimes, to be negotiated rates for jobs. It provides for pay
progression in accordance with performance, competence, contribution or service (Armstrong,
2008).
41
There may be a single pay structure covering the whole organization or a number of pay
structures, one for staff and another for manual workers or one for management and one
employee. There is a move towards harmonizing them especially in the public sector. A grade
structure becomes a pay structure when pay ranges brackets or scales are attached to each grade,
band or level.
Guiding principles for grade and pay structure
Grade and pay structures should;
a) Be appropriate to the culture, characteristics and needs organization and its employees.
b) Facilitate the achievement of equity fairness consistency and transparency in managing
grading and pay.
c) Be capable of adapting to pressure arising from market rate changes and skill shortage.
d) Clarify reward lateral development and career opportunities.
e) Be constructed logically and clearly so that the basis upon which they operate can readily be
communicated to employees.
4.2 Types of grade and pay structure

The main types of pay structures include:
a) Narrow graded structure
b) Broad graded structure
42
c) Broad banded structure

d) Job family
e) Career family
f) Pay spine
a) Narrow graded structure
It consist of sequence of jobs grades in to which jobs of broadly equivalent values are placed.
There may be 10 or more grades in that structure. Job evaluations assist in determining the grade.
b)Broad grade structure
They have six to nine grades rather than 10 or more grades contained in narrow graded structure.
They may include a references point which indicates the rate of pay for a fully competent
performer in the grade and are aligned to market rates in accordance with market stance policy.
c) Broad banded structures
Broad banded structures compress grades structures into four or five "bands. The
process of
developing broad - banded structures is called banding". Job evaluation is increasingly used to
define the boundaries of the band and to size jobs as a basis for deciding where reference points
should be placed in conjunction with market pricing.
d) Job family structures
Job families consist of jobs in a function or occupation such as marketing, operations, finance, IT
HR, administration or support service, which are related through the activities carried out and the
43
basic knowledge and skills required, but in which the level of responsibility, knowledge, skills
or competence levels required differ.
e)Career family
Career family structures resemble job family. The only difference is that in a career family job in
the corresponding levels across each of the career families are within the same Size range. Pay
ranges in corresponding levels across the career families are the same.
f) Pay spine
They are commonly found in the public sector. Pay spine consist of a series of incremental 'pay
points' extending from the lowest to the highest paid jobs covered by the structure.
Wage structure
A wage is the payment made to manual workers. It is nearly always expressed as a rate per hour.
In addition to the basic rate the worker will often receive other payments, the most common
examples of which are:
(a) Overtime pay for any work done beyond normal hours. It is usually paid at premium rates, at
time and a quarter, time and a half, double time, etc., the rate varying according to the time of the
day on which the overtime is worked.
(b) Shift pay for employees who work unusual or changing hours, to compensate them for
inconvenience and hardship. The amount of shift pay varies in different industries, but seems to
range from about 10 to 20 per cent of the basic rate.
44
c) Special addition, e.g. danger money, dirt money or wet money which are paid to the employee
during abnormal working conditions.
(d) Merit or length of service additions to employees either on the results of appraisal or on
completion of a certain period of service. Merit payments are not very popular with wageearners, who feel they are influenced by prejudice and subjective judgments.
(e) Cost of living allowances are given quite commonly in response to a rise in the general price
level or to employees who work in high-cost areas.
(f) Policy allowances cover miscellaneous extra payments, like the addition to the job-evaluated
rate for temporarily scarce employees.
4.3 Salary structures

A salary is a fixed periodical payment to a non-manual employee. It is usually expressed in
annual terms, implying a relatively permanent employment, relationship, though normally paid at
monthly intervals. In many ways, it resembles a retaining fee. Salaried workers are usually
termed staff.
Characteristics of salaries
A salary differs from a wage in many respects, reflecting the different attitudes traditionally held
by an employer towards the firm's non-manual compared with manual employees.
45
(a) A salary is usually all-inclusive; there are no additional payments of danger money or
productivity bonus, for example.
(b) A salary is progressive, in most cases increasing annually, whereas a wage-earner reaches the
standard rate for the job early in adult life and does not receive annual increases.
c) A salary is often regarded as personal to the individual, but a wage is the sum paid to all
workers at a particular job.
(d) A salary is often confidential, but there is no secret about a wage.
(e) In the private sector of employment, salaries are less likely than wages to be the subject of
trade union negotiations.
Salary administration
This comprises a set of processes for determining, controlling and monitoring the salaries paid to
employees. It is particularly concerned with the design and operation of salary structures
(including the choice of criteria for salary grade), with determining relations between fringe
benefits and basic salary, the timing of salary reviews, and the administration of salary
progression systems. The objectives of salary administration are:
(a) To enable the organization to forecast accurately its future salary bills and to control these
effectively.
(b) To establish fair differentials between various grades of staff.
(e) To provide incentives to employees through offering them a career ladder through which they
may progress.
46
(d) To relate salaries to employees' contribution to the organization.

(e) To attract, retain and motivate employees of the appropriate caliber.
An effective salary system will keep the organi zations salary levels in line with market levels,
will adjust salaries as the cost of living changes; will be consistent yet sufficiently flexible to
allow for additional salary increases for employees of exceptional merit; and will be easy to
operate and clearly understood by all salaried staff.
4.4 Salary administration methods
Implementation of a salary system requires the following:
(a) A survey of the salary levels offered by comparable firms.
(b) Determination of salary budgets for various employee categories.
(c) Job analysis and evaluation
(d) Decisions concerning salary ranges and overlaps.
(e) Policies regarding merit and performance-related pay increases.
There are a number of ways in which a company can administer its salaries:
(a) Ad hoc, in which there is no attempt at any kind of job evaluation to assess a fair level of
salary for a job. Increases in salary are given erratically, often at the demand of the employee
rather than at the initiative of the company. In a small company this method is workable, but in a
large company it can produce an illogical and unfair salary structure which will cause discontent
and jealousy. For obvious reasons salaries paid by this system are intended to be confidential.
47
(b) Merit review, usually found in medium and large companies in the private sector. After job
evaluation, a salary range is attached to every staff job. Employees are appraised and given
personal merit increase each year which will move their salaries at varying speeds through the
range. In this way individual effort and merit are rewarded. Very many employees
simultaneously receive high merit increases the organization is presented with a large unexpected
salary bill
It is customary for salaries under this system to be kept confidential; Incremental scale found
above all in the public sector, e.g. the civil service, local government and nationalized firms,
though its use appears to be increasing in the private sector. All staff jobs are evaluated and
graded, the salary range appearing as, for example, 18,000 x 500 - 23,500 indicating that
there is a standard increment of salary each year of 500. In this system long service and loyalty
are encouraged by regular salary increases and merit by the speed of promotion of a higher
grade. It is customary for salaries in the incremental system to be non-confidential.
(c) Rate for age. This is an incremental scheme frequently applied to young workers, who
receive pay rises of a predetermined amount on each of their birthdays up to a certain age
(usually 21 years). Thus it assumes that the employee's contributions to the firm increase
according to his or her experience and maturity.
4.5 Pay review bodies
48
In the public sector there exist 'pay review bodies' which determine the pay of workers in certain
fields. A pay review body is nominally independent, comprises outsiders with no direct interest
in outcomes, and prepares a report for consideration by the government (which need not accept
the body's recommendations). Key considerations in formulating a pay review body's proposals
include:
a) changes in the cost of living,
b) pay trends in comparable industries,
c) skill levels of relevant groups of workers, and
d) the number of employees leaving the public sector to work for private firms in related
fields
The above factors will make it necessary for the pay structures to be adjusted.
Review questions
a)
b)
c)
d)
Distinguish between a grade and pay structure

State the guiding principles for the preparation of a grade and pay structure
Highlight the different types of grade and pay structure
Explain how salaries and wage structure are adjusted

Page
Jordan Hill
CHAPTER 5
REMUNERATION SYSTEMS
49
General Objective: By the end of the end of the topic the learner should be able to describe
various remuneration systems.
Specific Objectives
a) Explain the meaning of skill-based pay, performance based pay and merit
b) State the reasons for using skill-based pay
c) Highlight the advantages and disadvantages of both skill and performance based systems
The main remuneration systems include skill-based pay, pay for performance and merits-pay.
5.1 Skilled based pay
Skilled based pay is also known as competency-based pay. Employers traditionally base a
jobs
pay rate on the relative worth of the job. The compensation team compares jobs using
compensable factors such as effort, skill and responsibility. This allows' them to compare jobs to
one another, and to assign internally equitable pay rates for each job. Thus, the pay rate for the
job principally depends on the job itself, not on who is doing it.
An increasing number of compensation experts and employers are moving away from assigning
pay rates to jobs based on the jobs' numerically rated, intrinsic duties. Instead, they advocate
basing the job's pay rate on the level of "competencies" the job demands of those who fill it.
Meaning of skill-based pay

50
In a nutshell, skill- based pay means the company pays for the employees range depth, and types
of skills and knowledge, rather than for the job title he or she holds. Experts variously call this
competence-, knowledge-, or skill-based pay.
Different organizations define "competencies" in somewhat different ways. Most, like the U.S.
Office of Personnel Management,' use "competencies" synonymous with the knowledge, or
skills, or abilities required to do the job. We can simply define competencies, as demonstrable
knowledge, skills, and behaviors that enable performance.
In practice, competency-based pay usually comes down to using one or both of two basic types
of pay programs: pay for knowledge or skill based pay. Pay-for-knowledge pay plans reward
employees for learning organizationally relevant knowledge. Skill-based pay tends to be used
more for workers with manual jobs for example a carpenter will earn more as he becomes, more
proficient at finishing cabinets.
Several things distinguish the competency-based pay approach:
1. First, employees build job competencies (knowledge and/or skills) through
experience on the same or similar jobs.
2. Second, competence-based pay ties the person's pay to his or her competencies. Pay is
more person oriented. Employees here get paid based on what they know or do-even
if, at the moment; they don't have to do it.
Traditional job evaluation-based pay plans tie the worker's pay to the worth of the job based on
the job description. Pay here is more job oriented.
Reasons for using skill -based Pay
51
Why pay employees based on the skill, knowledge, or competencies level they achieve rather
than based on the duties of the jobs they're assigned to?
There are three good (and interrelated) reasons for doing so.
1. Support High performance work system. First, traditional pay plan may actually
backfire if a high performance work system is your goal. The whole thrust of these
systems is to encourage employees to work in a self-motivated way, by organizing the
work around teams, by encouraging team members to rotate freely among jobs (each with
its own skill set), by pushing more responsibility for things like day-to-day supervision
down to the workers, and by organizing work around projects or processes where ' jobs
may blend or overlap. In such systems, you obviously want employees to be enthusiastic
about learning and moving among other jobs.
2. Support Strategic Aims. Second, paying for skills, knowledge, and competencies is
more strategic. For example, Canon Corp. needs competencies in miniaturization and
precision manufacturing to design and produce its cameras and copiers. It thus makes
sense for Canon to reward some employees based on the skills and knowledge they
develop in these two strategically crucial areas, not just based on the jobs to which they
are a signed.
3. Support Performance Management. Performance management means aligning
employees' goals, training, appraisals, and rewards so that they support the company's
strategic goals. The manager can influence an employee's competencies (skills and
knowledge). Paying for competencies rather than duties thus gives them more control
over managing the employees performance.
52
Skill-Based Pay in Practice

In practice, skill/competency/knowledge-based pay programs generally contain four main
elements.
1. A s ystem for defining Specific skills, and a process for tying the persons pay to his or her
skill level;
2. A training system that lets employees seek and acquire skills;
3. A formal competency testing system; and
4. A work design that lets employees move among jobs to permit work assignment flexibility.
Unlike job based compensation plans, skill based compensation plans use skills as the basis of
pay. All employees start at the same pay rate and advance one pay level for each new skill they
master.
Three types of skills may be rewarded. Employees acquire;
a) Depth skills when they learn more about a specialized area or become expert in a given
field.
b) Horizontal or breadth skills when they learn more and more jobs or tasks within the firm
and
c) Vertical skills when they acquire "self-management" abilities, such as scheduling,
coordinating, training, and leadership.
Potential advantages of skill-based pay to the firm,
53
1.
It creates a more flexible workforce at is not straitjacketed by job descriptions specifying

work assignments for a given job title
2. Second, it promotes cross-training, thus preventing absenteeism
and turnover from
disrupting the work unit's ability to meet deadlines

3. Third it calls for fewer supervisors, so management layers can be cut to produce a leaner
organization, it increases employees
over their compensation because they know in
advance what it takes to receive a pay raise (learning new skills).

The disadvantages are as follows
Skill-based pay does pose some risks to the organization and this may help explain why only a
relatively small proportion (5 to 7%) of all firms use it
1. It may lead to higher compensation and training costs that are not offset by greater
productivity or cost savings. This can happen when many employees master or all the
skills and thus receive a higher wage than they would under a Job-based pay rate
2. Unless employees have the opportunity to use all the skills they have acquired, they may
become rusty.
3. When employees hit the top of the pay structure, they may become frustrated and leave
the firm because they have no further opportunity to receive a pay raise.
4. Attaching monetary values to skills can become a guessing game unless external
comparable pay data are available
5. Skill-based pay may become part of the problem it is intended to solve (extensive
bureaucracy and inflexibility) if an elaborate and time-consuming process is required to
monitor and certify employee skills.
54
5.2 Performance Based Pay

In nearly all methods of payment by results the employee receives a basic rate to which is added
a variable payment based on output. For each job a standard is set expressed either as a quantity
produced per unit of time or as the time taken to do the job; bonus becomes payable when the
employee exceeds this standard. If a company installs a PBP system for the first time it therefore
needs to take the following steps:
(a) The scheme is communicated to the employees with perhaps some modifications after
consultation with representatives.
(b) A standard rate of output is set for each job by measuring the reasonable time taken to do it
and making allowances for rest periods and personal needs.
(c) Administrative arrangements are made to record each employee's output, calculate his or her
bonus, and add it to the worker's basic wage.
5.3 Advantages and disadvantages of PBP
Advantages
A well-designed and well-maintained scheme will increase productivity from the same number
of employees and the same equipment and thus reduce unit costs. The work study which it
requires may well show more efficient methods of production, and the supervisor need not
control subordinates, so closely because the monetary incentive makes human control
unnecessary.
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The popularity of PBP is shown by the fact that about 40 per cent of manual workers are paid by
this method. To operate at its best, however, it requires a steady flow of measurable work, the
pace of which is within the control of the worker.
Disadvantages of PBP
There has been a reaction against PBP in recent years because the advantages described above
are sometimes outweighed by the following disadvantages:
(a) A PBP system is exceptionally liable to decay; new methods and materials, introduced
gradually, may slowly cause a standard to become loose so that workers can earn high bonuses
very easily.
(b) It is a constant source of shop floor conflict, both when a new rate is being fixed and when a
worker is asked to move from a job where the rate is loose to another where the rate is tight.
(c) Supervisors are tempted to show favoritism in allocating jobs when it is easy to earn bonus in
some but difficult in others.
(d) Salaried supervisors sometimes earn less than their subordinates who are paid by PBP.
(e) Output norms are frequently found. A group of employees decides that no one shall exceed a
certain level of output.
Output is restricted because:
(i) Employment is safeguarded
(ii) By reducing discrepancies in performance, the unity of the group is maintained.
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(iii) Earnings can fluctuate because an employee is not given a steady supply of work; at certain
times therefore he or she is not able to earn bonus.
(iv) Quality and safety may be adversely affected.
5.5 Critiques of PRP
a) Employees paid by PRP, especially where the incentive is substantial tend to develop a
narrow focus to their work. They concentrate on those aspects which they believe will
initiate payments, while neglecting other parts of their jobs.
b) PRP, because of its individual nature, tends to undermine team working. People focus on
their own objectives at the expense of cooperation with colleagues.
c) PRP, because it involves managers rating employees, can lead to a situation in which a
majority of staff are demotivated when they receive their rating. This occurs where
people perceive, their own performance to be rather better than it is considered to be by
their supervisor.
d) Even the most experience managers find it difficult to undertake fair and objective
appraisal o f their employees performance. Subjective
judgments are often taken into
accounts leading to perception of bias.

e) In organization subject to swift and profound change, objectives set for the coming year
may become obsolete after a few months. employees then find themselves with
incentives to meet goals which are no longer priorities for the organization
f) PRP system tend to discourage creative thinking, the challenge established ways of doing
things and a questioning attitude among employees.
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g) Budgetary constraints often lead managers to reduce rating, creating a situation in which
excellent individual performance is not properly rewarded.
h) It is difficult to ensure that each line manager take a uniform approach to the rating of
his or her subordinate. Some tend to be more generously disposed in general than others,
leading to inconsistency and perception of unfairness.
i) PRP systems invariably increase the pay bill. This occurs because managers fear
demotivating their staff by awarding low or zero rises in th
e first years of a systems
operation. Poorer performers are thus rewarded as well as better performers.

5.6 Merit based systems
Merit based systems simply involve the immediate supervisor undertaking an appraisal of
each subordinates work performance during the previous year. This will typically be done
following a formal appraisal interview and often requires the completion of standard
documentation drawn up by HR department. A proportion of future remuneration is then
linked to a score derived from the supervisor's assessment, Some systems require supervisors
to a percentage mark against different criteria, while others oblige them to assess individual
performance as 'excellent', 'good', 'satisfactory' or 'inadequate'. Merit-based systems are
generally regarded as unsatisfactory because they allow considerable scope for assessors to
make subjective judgments or to allow personal prejudice to colour their assessments. There
is also a tendency to give undue weight to recent events at the expense of achievements
taking place early in the appraisal period
Review Questions
a) Explain the meaning of skill-based pay

58
b) Distinguish between skill-based pay and performance-based pay

c) State the advantages and disadvantages of performance based pay
d) Explain the meaning of merit pay
Jordan Hill
EMEA
CHAPTER 6
INTEGRATION OF INTERNAL EQUITY AND EXTERNAL MARKET
CONSIDERATIONS IN WAGE SYTEMS THROUGH USE OF JOB EVALUATIONS
AND MARKET SURVEYS
59
the internal equity and external market considerations in wage system can be integrated through
use of job evaluations and market surveys
Specific Objectives
a)
b)
c)
d)
Explain the meaning of internal and external equity in wage systems

Distinguish between distributive justice model and labour market model
Explain how internal equity can be achieved through job evaluation
Explain how external equity can be achieved through market surveys
6.1 Introduction
An employees paycheck is certainly important for its purchasing power. In most societies,
however, a persons earning also serve as an indicator of power and prestige and tied to feelings
of self-worth. In other words, compensation affects a person economically, sociologically, and
psychologically. For this reason, mishandling compensation issues is likely to have a strong
negative impact ion employees and, ultimately, on the firms performance.
6.2 Internal versus external equity
Fair pay is pay that employees generally view as equitable. These are two forms of pay equity:
a) Internal equity refers to the perceived fairness of the pay structure within a firm.
b) External equity refers to be perceived fairness of pay relative to what other employers
are paying for the same type to labour.
In considering internal versus external equity, managers can use two basic models; the
distributive justice model and the labour market model.
The distributive justice model
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The distributive justice model of pay equity holds that employees exchange their contributions or
input to the firm (skills, effort, time, and so forth) for a set of outcomes. Pay is one of the most
important of these outcomes, but nonmonetary rewards like a company car may also be
significant. This social-psychological perspective suggests that employees are constantly
(1) Comparing what they bring to the firm to what they receive in return and
(2) Comparing this input/outcome ratio with that of other employees within the firm.
Employees will think they are fairly paid when the ratio of their inputs and outputs is equivalent
to that of other employees whose job demands are similar to their own.
The labour market model
According to the labour market model of pay equity, the wage rate for any given occupation is
set at the point where the supply of labour equals the demand for labour in the marketplace. In
general, the less the employers are willing to pay (low demand for labour) and the lower the pay
workers are willing to accept for a given job (high supply of labour), the lower the wage rate for
that job.
The actual situation is a great deal more complicated than this basic model suggests. People base
their decisions about what jobs they are willing to hold on many more factors than just pay.
Moreover, the pay that an employer offers is based on many factors besides the number of
available people with the skills and abilities to do the job. The basic point of the labour market
model is that external equity is achieved when the firms pays its employees the going rate for
the type of work they do. For a growing number of managerial, professional, and technical
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occupations, the going rate is determined not only by local and domestic factors, but also by
global forces.
6.3 Achieving internal equity: job evaluation
Job-based compensation assesses the relative value or contribution of different jobs (not
individual employees) to an organization. The first part of this process, referred to as job
evaluation, is composed of six steps intended to provide a rational, orderly, and systematic
judgment of how important each job is to the firm. The ultimate goal of job evaluation is to
achieve internal equity in the pay structure. Job evaluation involves the following steps:
Step 1: Conduct job analysis Job analysis is the gathering and organization of information
concerning the tasks, duties, and responsibilities of specific jobs. In this first step in the jobevaluation process, information is gathered about the duties, tasks, and responsibilities of all jobs
being evaluated.
Job analysis can use personal interviews with workers, questionnaires
completed by employees and/or supervisors, and business records (for examples, cost of
equipment operated and annual budgets) to study the what, how, and why or various tasks that
make up the job.
Step 2: Write job descriptions
in the second step in the job evaluation process, the job
analysis data are boiled down into a written document that identifies, defines, and describes each
job in terms of its duties, responsibilities, working conditions, and specifications. This document
is called a job description.
Step 3: Determine job specifications job specifications consist of the worker characteristics
that an employee must have to perform the job successfully. These prerequisites are drawn from
the job analysis, although in some cases they are legally mandated (for example, plumbers must
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have a plumbing license). Job specifications are typically very concrete in terms of necessary
years and type of prior work experience, level and type of education, certificates, vocational
training, and so forth..
Step 4: Rate worth of all jobs using a predetermined system after job descriptions and job
specifications have been finalized, they help determine the relative value or contributions of
different jobs to the organization. This job evaluation is normally done by a three
to seven
person committee that may include supervisors, managers, HR department staff, and outside
consultants. Several well known evaluation procedures have evolved over the years, but the
point factor system is used by the vast majority of firms. Job evaluation methods are discussed in
details in chapter 2.
Step 5: Create a job hierarchy the four steps describes thus far produce a job hierarchy. A
job hierarchy is a list of jobs in order of their importance to the organization, from highest to
lowest.
Step 6: classify jobs by grade levels
For the sake of simplicity, most large organizations classify jobs into grades as the last step in the
job-evaluation process. Typically, the job hierarchy is reduced to a manageable number of grade
levels, with the assigned points used to determine where to set up dividing lines between grades.
All jobs in a given grade are judged to be essentially the same in terms of importance because the
points assigned to each are very close in number.
6.4 Achieving external equity: market surveys

63
To achieve external equity, firms often conduct market surveys. The purpose of these surveys is
to determine the pay ranges for each grade level. An organization may conduct its own salary
surveys, but most purchase commercially available surveys. Consulting firms conduct literally
hundreds of such surveys each year for almost every type of job and geographical area.
Assessing how much a position is worth in the marketplace
Salary survey data were commonly obtained by the HR department. But technology is making
this process almost obsolete. Line managers can now instantly access salary data analyzed by
location, by industry, and by work experience for hundreds of positions. This is possible through
online compensation surveys; three of them are Comp Online, Salary Source, and Survey Finder.
Why spend time and money on internal job evaluations when market data can be used to
determine the value of jobs.
a) First, most companies have job that are unique to the firm and therefore cannot be easily
matched to market data.
b) In a high-tech firm (where new-product creation is a key to competitive advantage) is
usually far more important than in a mature manufacturing company (where scientists are
often expected to perform only routine tests).
Salary surveys
A salary survey is aimed at determining prevailing wage rates. A good survey provides specific
wage rates for specific jobs. A salary survey plays a big role in pricing jobs. Formal written
questionnaires surveys are the most comprehensive, but telephone surveys and newspaper
advertisements are also sources of information.
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Salary surveys are tools used to determine the median or
average compensation paid to
employees in one or more jobs. Compensation data, collected from several employers, is
analyzed to develop an understanding of the amount of compensation paid. Surveys may focus
on one or more job titles, geographic regions, employer size, and or industries. Salary surveys
may be conducted by employer associations (e.g. SHRM), survey vendors, or by individual
employer. Survey data is often time sensitive and may become out-of-date quickly. Because of
the time sensitive information, surveys are often identified by the year or quarter in which the
data was collected. Surveys gather and summarize compensation information and provide a
means for comparison of salaries at the company.
Types of data gathered in a salary survey
salary surveys are analyses of compensation data.
This data may include quantifiable aspects of compensation such as:- base salaries, increase
percentages or amounts, merit increases, salary ranges, starting salary incentives/bonuses,
allowances and benefits and working hours.
Other data include production bonuses,
commissions and cost of living increases. Salary surveys may also include non-quantifiable
aspects of compensation such as:- educational requirements, geographic location, source of hire
(internal/external) and working conditions.
Using market surveys to link job-evaluation results to external wage/salary data generally
requires two steps; benchmarking and establishing a pay policy.
Step 1: Identify benchmark or key jobs
to link the internal job-evaluation hierarchy or
grade-level classification to market salaries, most firms identify benchmark or key jobs that is,
jobs that are similar or comparable in content across firms
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and check salary surveys to
determine how much these key jobs are worth to other employers. The company then sets pay
rates for jobs for which market data are not available by assigning them the same pay range as
key jobs that fall into the same grade level.
Step 2: Establish a pay policy because market wages and salaries vary widely the
organization needs to decide whether to lead, lag, or pay the going rate which is normally
defined as the midpoint of the wage/salary distribution in the survey. A firms pay policy is
determined by how it chooses to position itself in the pay market.
6.5 Achieving individual equity: within-pay-range
After the firm has finalized its pay structure by determining pay ranges for each job, it must
perform one last task: Assign each employee a pay rate within the range established for his of her
job. Companies frequently use previous experience, seniority, and performance appraisal ratings
to determine how much an employee is to be paid within the stipulated range for his or her job.
The objective of this last step is to achieve individual equity. Individual equity refers to fairness
in pay decisions for employees holding the same job.
Conclusion
Job evaluation is the systematic determination of the relative worth of job within the organization
that results in an organizations pay system. Primarily, jobs are compared on the traditional basis
of skills required to complete the job, effort required to perform the job, responsibility of the job
holder and working conditions on the job. The primary purpose of job evaluation is to develop a
system of compensation that employees will perceive to be equitable. Thus, job evaluation
strives to obtain internal consistency among jobs, while wage surveys help the organization to
maintain external consistency with other organizations in the local labour market. Internal
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consistency, often called internal equity, refers to the relationship between the pay structure and
the design of the organization and the work. It focuses attention on the importance of designing
a pay structure that supports the workflow, is fair to employees and directs their behaviours
towards organization objectives.
Review questions
a) How can internal equity be achieved through job evaluation
b) What is salary a survey?
c) How can a salary survey be conducted?
Page
EMEA
CHAPTER 7
COMPENSATION AS A MEANS OF EFFECTIVE RECRUITMENT, MOTIVATION,
AND RETENTION OF EMPLOYEES
67
General Objective: By the end of the end of the topic the learner should be able to discuss
compensation as a means of effective recruitment, motivation, and retention of employees
Specific Objectives
a)
b)
c)
d)
Explain the meaning of the terms motivation and retention

Explain the role of compensation in recruitment of employees
Explain the role of compensation in motivation of employees
Explain the role of compensation in retention of employees
7.1 Introduction
One of the traditional HR functions is determining employees compensation. In the modern
organization, with a variety of costly employee benefit programmes, wage incentive programmes
and structured pay scales, the compensation task is even more difficult and challenging for an
HR specialist. Employees compensation affects their productivity and their tendency to stay
with the organization, and although managers and researchers do not agree about the degree to
which compensation affects productivity, it is of great importance.
The term compensation is often used interchangeably with wage and salary administration;
however, the term compensation is actually a broader concept. Compensation refers not only to
extrinsic rewards such as salary and benefits, but also to intrinsic rewards such as achieving
personal goals, autonomy and more challenging job opportunities. The term wage and salary
administration usually refers strictly to the monetary rewards given to employees.
Primarily, the goals of any organization in designing a compensation system should be to attract
and retain good employees. Also the system should be motivational for employees.
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Compensation objective
1. Attract good applications
Obtained by
Wage survey to determine the going rate in the
labour market
2. Retain good employees
Job evaluation system that employees perceive as

equitable
3. Motivate employees
Reward good performance

Offer incentives
7.2 Attracting employees

Although most job applicants are not aware of the exact wages offered by different organization
for similar jobs within the local labour market, they do compare job offers and pay scales. Job
applicants who receive more than one offer will naturally compare monetary offers
Given the limited knowledge job-seekers often have about various employers, their general
perceptions of the type of work they perform and the exact salary being offered are the best
factors they have to consider.
Most employers will try to remain competitive within the local labour market by offering salaries
that are similar to those offered by competing employers. Usually this means determining what
the going rate is for jobs within the local labour market. This entails using wage surveys, which
estimate average salaries for entry-level positions. The employer has two alternatives:
69
a) the first is for the organization to conduct a wage survey and determine the going rate for
jobs in the local labour market;
b) the second is to use published market data.
Conducting a wage survey is a difficult, expensive process for an individual organization. The
HR specialist must determine that employers have roughly comparable positions within the local
labour market. By comparing brief job descriptions, the specialist must determine if the job is
similar to other organizations positions at a particular wage level.
A further requirement for conducting wage surveys is determining which information about each
job is necessary. The wages being paid for each job type included in the survey ranges,
incentives, normal wage changes such as cost of living increases and specific wage policies and
practices within each organization in the survey. Information about seniority provisions, paid
vacations, sick leave and the number of paid holidays per year is helpful. Also, any additional
pay, such as a uniform allowance or bonus plan should be reported. Lastly a wage survey should
include questions concerning unusual working conditions such as high levels of noise or fumes.
Reasons as to why organizations prefer published wage survey information
a) First, published information can be obtained quickly, at low cost and with little effort by
the organization.
b) Second, conducting wage surveys has become a science in recent years; few
organizations have personnel capable of undertaking such a task.
c) Third, using an organizations wage survey may cause problems in cases involving the
labour union.
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The relative availability of market data today has changed the basic approach to salary
classification work. Employers can receive wage survey of information from local chambers of
commerce, unions, the Department of Labour and consultants.
Job satisfaction is often considered to be a strong determinant of turnover. However, employee

perceptions of inequitable treatment have been found to even stronger predictors of absence and
job turnover than job satisfaction. If employees perceive that they will be more equitably treated
by other organization, the probability of their leaving will increase. To provide for equity among
jobs, administrators usually create a systematic relationship among the pay scales for various
jobs within an organization. This process is usually called job evaluation.
Compensation and attraction of staff
The reward package on offer must be sufficiently attractive vis--
vis that of an organizations
labour market competitors to ensure that it is able secure the services of the staff it needs. The
more attractive the package, the more applications will be received from potential employees and
the more choice the organization will have when filling its vacancies. Attractive packages thus
allow the appointment of high caliber people and often mean that organizations are able to fill
vacancies more quickly than is the case with a reward offering which is either unattractive or
poorly communicated. However, what is attractive in total reward terms in one labour market
will be less attractive in others because people vary in what they are looking for. There is thus a
need to establish what the target market values most and to tailor the offering accordingly.
No compensation programme will keep all employees satisfied all the time. If management is
able to minimize turnover and lost production due to perceptions of inequitable compensation,
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then its goal of retaining good employees has been achieved. Not only must an organization
have a very equitable system but this system must be explained to its employees. Administrators
must tell employees the various wage rates paid for different positions and how those wage
levels are determined with the establishment of workplace forums in organizations. Managers
will also have to involve employees in job classification and compensation matters. The most
equitable compensation system is useless unless employees perceive it to be equitable.
7.3 Motivation
A motive is a reason for doing something. Motivation is concerned with the factors that influence
people to behave is certain ways. Motivating other people is about getting them to move in the
direction you want them to go in order to achieve a result. People are motivated when they
expect that a course of action is likely to lead to the attainment of a goal and a valued reward
one that satisfies their needs. Self motivated people have clearly defined goals and take action
that they expect will achieve those goals. Most people however need to motivated to a greater or
lesser degree. Organizations provide the context within high levels of motivation can be
achieved by providing incentives and rewards and opportunities for learning and growth.
Managers use their motivational skills to ensures that employees give their best.
Compensation and Motivation

Employees except that their performances will correlate with the reward received from the
organization. Employees set expectations about rewards and compensation to be received if
certain levels of performance are achieved. These expectations determine goals or levels of
performance for the future. Employees achieving the desired levels of performance expect a
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certain level of compensation.
At some point, management evaluates and rewards the
employees performance. Examples of such rewards include

a) merit increases,
b) promotions and
c) intrinsic rewards such as goal accomplishment and
d) increased self-esteem.
Employees consider the relationship between their performance and the reward related to that
performance and then the fairness of that relationship. The final step in the process involves
employees setting new goals and expectations based on prior experience within the organization.
If employees see that hard work and superior performance are recognized and rewarded by the
organization, they will expect such relationships to continue in the future. Therefore, they will
set higher levels of performance, expecting higher levels or compensation. Of course, if
employees see little relationship between performance and rewards, then they may set minimum
goals in order to retain their jobs but will not see the need to excel.
To safeguard this relationship of performance and motivation which benefits the organization
and the employee, the organization must provide the following:a) Accurate evaluation management must develop a system of accurate performance
appraisal in order to identify those employees who are outstanding, average and poor
performers. Although developing an accurate performance appraisal system is not easy, it
is a critical link between employee performance and motivation.
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b) Performance rewards management should identity which rewards relate to

performance levels and tell employees that pay, increased benefits, change in hours or
working conditions or recognition will be directly related to high performance.
c) Supervisors feedback supervisors must give complete and accurate feedback
Types of motivation
The two main types of motivation include:a) Intrinsic motivation people can motivate themselves by seeking work that satisfies their
needs. Intrinsic motivation involves self generated factors that influence people to
behave in a particular way or to move in a particular direction. These factors include:responsibility, autonomy challenging work, opportunity to use ones
abilities and
opportunity for advancement.

b) Extrinsic motivation this is what is done to people probably by management to motivate
them. This can be done by rewarding increased pay, praise or promotion and punishment
e.g. disciplinary action, withdrawing pay or criticism.
Employees are motivated by motivator factors. The hygiene factors do not produce motivation
but can prevent motivation from occurring. Hygiene factors are not a big deal when present but
are a big deal when absent. It is from this model that Herzberg identified the two types of
motivation stated above.
Motivation and money
Money is a n extrinsic reward. According to Herzberg two factor model money is a hygiene
factor. Lack of money like all the other hygiene factors can cause dissatisfaction but its
provision does not result in lasting satisfaction. Salaried people feel good when they get an
74
increased but the euphoria later rapidly die away. However since different people have different
needs some people will be motivated by money more than others.
What cannot be assumed is that money motivates everyone in the same way and to the same
extent. According to Armstrong (2008), one would be nave to think that the introduction of a
performance related pay (PRP) scheme will miraculously transform everyone overnight into well
motivated, high performance individuals.
Nevertheless money is a powerful force as it is linked directly or indirectly to the satisfaction of
many needs. One is able to satisfy the basic needs of survival and security using money. It can
also satisfy the need for self esteem and status. Armstrong (2008) says that pay is the dominant
factor in the choice of employer and considerations of pay seem most powerful in binding people
to their present job.
Financial incentives and motivation
Financial incentives motivate those people who are strongly motivated by money and those
whose expectations that they will receive a financial reward are high. However less confident
employees may not respond to incentives that they do not expect to achieve.
7.4 Retaining staff

The costs associated with recruiting and developing people, as well as the growing significance
of specialist organizational knowledge in creating value and maintaining competitive advantage,
mean that retaining effective performers is a central aim of reward strategy in many
75
organizations, particularly those competing in knowledge intensive industries where highly

qualified people are in short supply. This requires a package which is attractive enough to
prevent people from becoming dissatisfied and looking elsewhere for career development
opportunities. It may also involve the development of policies which reward seniority so as to
provide an incentive for staff to stay when they might otherwise consider applying for alternative
work.
Review questions
a) Explain the meaning of the terms motivation and retention
b) Explain the role of compensation in recruitment of employees
c) Explain the role of compensation in motivation of employees
d) Explain the role of compensation in retention of employees
Page
EMEA
CHAPTER 8
BENEFITS PROGRAM DESIGN, COST CONTAINMENT, AND PROGRAM
MANAGEMENT
76
Learning objectives
General Objective: By the end of the end of the topic the learner should be able to explain how
benefits programs are designed
Specific Objectives
a) Design a benefit program
b) List various ways used to contain costs
c) State how a benefit program is managed
8.1 Benefits
The cost of benefits is high and getting higher. Employers spend an average of 26.7% of their
payroll on such benefits as retirement plans, medical plans, insurance plans, paid leave and
educational assistance. However, variations among industries are substantial. Internationally,
business service firms, for instance, spend an average of 18.4% of their payroll on benefits, while
the average in the automotive industry is 35.6%.
Few organizations, however, award benefits based on employee performance; instead, such
benefits as paid vacations and pension plans are tied to factors other than performance (e.g.
seniority). Benefits have not become a motivational tool because few employees realize the cost
of benefits or appreciate many of their benefits until later years.
Government influences employee benefits through regulations concerning safety, healthcare,
retirement and unemployment compensation and workers compensation. The government
appears to be actively transferring the cost of welfare or social programmes to private industries
in the form of required employee benefits. To stem the tide of the rising cost of benefits, many
companies have instituted flexible benefit plans.
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8.2 Types of benefits

The various benefits offered by employers can be divided five types:
(1) those that are required by law;
(2) retirement benefits;
(3) pay for time not worked;
(4) insurance; and
(5) employee services.
Each type presents a different challenge for the HR profession.
Rocketing costs of insurance and retirement benefits have forced employers to re-examine the
usefulness of those benefits, while at the same time employees are demanding more days away
from the workplace with pay.
1. Benefits required by law

The company must provide certain benefits to its employees whether it wants to or not, and they
must be provided in a non-discriminatory manner. These benefits include:a) Unemployment insurance provides for the insurance of employees who are
contributors to the Unemployment Insurance Fund against the risk of earning
arising out of unemployment due to the termination of their employment, illness,
and maternity, payments to female contributors who adopt children and for
payments to the dependants of deceased contributors.
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b) Compensation for injuries and disease in Kenya the Work Injury Benefits Act
(WIBA) regulates the payment of compensation to persons who are injure or who
contract a disease while working. The Act was previously known as the
Workmens Compensation Act.
2. Voluntary benefits
The number of benefits offered by an organization depends on managements budget or
creativity. The most popular found in organizations today include retirement plans, time off from
work and disability, medical and life insurance benefits.
Retirement benefits In most countries, individuals are expected to provide for their retirement
through either a private/government pension, or personal savings. Together these sources or
income can replace an employees pre -retirement disposable income, and thus can be considered
to create the ideal pension system. But today, it is not unusual for someone to have several
pensions, by means of a number of annuities obtained from companies like Old Mutual,
Momentum, Liberty Life and many others. Planning for retirement can be a highly complicated
process.
The consequences of poor retirement investments can be costly. Plans on how to handle various
retirement funds should be prudently thought out and implemented. Most retirees today need to
coordinate their decisions to maximize payouts and avoid tax traps. Consequently, getting expert
advice is often worth the added expense.
Financing Pension benefits received by employees are financed primarily through two plans.
Under a contributory plan the employee and employer share the cost of pension benefits. The
percentage contributed by the employer changes according to the type of contributory plan. A
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non contributory plan is financed entirely by the employer.
Employees and union
representatives make strong arguments for non-contributory plans. They argue that because
employers incur lower absenteeism and turnover costs with loyal employees who stay with the
company because of the pension plan, the employer should pay the pension costs.
3. Paid time off
Employees expect to be paid for holidays, vacations and miscellaneous days they do not work
paid time off work. Employers policies covering such benefits vary greatly. The most common
examples of time off with pay are:-
Holidays
Sick leave
Vacations
Time off to vote
Study leave
Acting as an election official
Paternity leave
Compassionate leave
Sabbatical leave
Maternity leave
Vacations Employees have long believed that vacations increased employees productivity on
returning to the job. Employees who take strenuous vacations may not receive physical rest from
the job but usually receive a mental break from the work place. Today virtually all organizations
have a schedule of paid vacations based on for example, years of services with the organization.
Longer leave, called Sabbatical, is also given for renewal or special services. Academics at
universities and school teachers normally quality for this type of leave after about five or six
years service. The length of this leave may vary between six and nine months.
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Public holidays For example New Years Day, Esther Monday, Christmas, Labour Day among
others.
Personal absences Employees may receive full pay for a number of personal absences, such as
attending a funeral on appearing as a witness in court or writing exams.
Sick leave sick leave is generally accrued by employees at a specific rate.
Maternity leave leave of absence associated with the birth of a child is normally granted to all
female workers and these days even male in Kenya.
4. Insurance
Many employers provide employees with life and medical insurance plans and pay part of the
plans costs. Health in
surance packages normally cover group life, accident and illness,
hospitalization and accidental death or dismemberment.

Medical aid schemes One of the most important components of the insurance package is the
membership of a medical aid scheme. This is one of the benefits most valued by employees
because it provides medical coverage for both themselves and their dependents, protecting them
from financial disaster in the event of a serious illness.
Life/disability insurance Many companies today recognize that salary continuation for
injuries and major illness is almost more important than life insurance. For this reason employees
are going for disability insurance.
5. Employee services
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Employee services include a variety of employee benefits. Organizations vary greatly in the
services they offer and the service costs they pay. Employee services have been developed to
increase employee loyalty to organizations and decrease absenteeism and turnover.
a) Childcare programmes One of the rapidly growing employer services is the provision
of childcare programmes. There are least four different approaches to childcare that can
be offered by employers. Each offers certain advantage and varying costs.
i) On site programmes Large employers, particularly in the healthcare industry, can
offer to build a facility on the premises or nearby, which allows employees to bring their
children to work and visit them during lunch.
ii) Flexible benefits Employers will provide, as one flexible benefit option, money
to employees to reimburse existing childcare programmes. Employees who do
not need childcare can spend their wages on other benefits.
iii) Consortium or employers Several organizations located together (in an
industrial park or shopping centre) pool their resources to purchase and manage a
childcare centre for their employees.
b) Food services Most companies provide some type of food facility to minimize the time
taken for breaks and lunch periods. Food services vary according to the size of the
company and the nature of the work.
c) Education expenses Many organizations offer employees partial
reimbursement.
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or total tuition
d) Transportation programmes Higher energy costs have caused employers to consider

methods of helping employees to get to work. Many alternatives in this regard are
available.
Paying a transport allowances;
Motor financing scheme (for all employees);
Company cars for certain grades; and
A company bus.
Housing subsidy An important component in the benefits offered by companies is the payment
of a housing subsidy.
8.3 Cost containment
With benefit costs absorbing up to 40% of total payroll costs, employers are re-evaluating their
total benefit packages. Many benefit packages have little effect on employee motivation and
performance. Since many costly and expensive benefits are tied to seniority, such as vacation
and retirement income, employers seldom link benefits to level of performance. Some HR
specialists believe that most employees do not truly understand the nature of their benefit
packages, nor do they appreciate the total cost of providing them with benefits. When given the
choice between additional benefits or disponsable income, employees overwhelmingly choose
additional disposable income. The organization may find it less expensive and more popular to
offer employees fewer benefits and higher wages.
Companies can best use their benefit
by assessing employees needs and determining which
benefits are truly demanded. Through meetings with employee representatives and union
leaders, employers may find that the employees do not truly desire certain costly benefits and
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have a greater need for benefits that may be less expensive. The companys total benefit
package should be reviewed as a whole and not a as separate components.
Flexible benefit plans An alternative to providing employees with a fixed combination of
employer provided benefits is a flexible package. In a typical flexible benefit plans, employees
are allowed to choose the benefits they believe will best meet their needs from a wide range.
Generally, however, their choices are limited to the total cost the employer is willing to assume.
The primary reason that employers are switching from fixed to flexible plans, in addition to
better meeting employee needs, is to contain their medical costs. In fact, flexible benefit plans
may be the most effective means employers have of containing medical costs.
Advantages of flexible plans Originally created as a means of better meeting the needs of
employees, flexible plans can often provide a growing number of advantages.
a) Meet diverse needs of employees
As our workforce changes, with an increasing
number of single parents, dual-career couples, second-career retirees, and so forth,

flexible plans become increasingly effective as a means of
matching employees needs
with their benefit plan.

b) Control benefit costs Of employers with flexible plans in the USA, 78% reported that
a major objective in their initiating a plan was to contain rising healthcare costs.
Improve benefits offered
Employers can better meet the needs of their employees by
expanding the variety of benefits offered to employees. Since the total cost of all benefits is set
by the employer, the cost of adding a new benefit to the package can be minimal.
Attract and retain employees
The changing workforce is causing employers in some
industries to consider flexible benefits as a tool in the recruitment and retention of employees.
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Avoid unions A flexible benefit plan can provide an effective tool against union organizers. It
is far more difficult for a union to promise to increase one or two benefits if employees already
have the ability to choose the benefits in a flexible plan.
Avoid duplicate coverage Another aspect of the changing labour force is the increased
number of working married couples with duplicate benefit coverage from separate employers.
Flexible plans may allow a married couple to save thousands shillings in wasted duplicate
coverage.
Publicizing benefits As employers reexamine benefit programmes and question if they are
cost-effective, they should determine whether there is a lack of communication with employees
concerning the benefit programmes regarding an effective benefits communications programmes.
Without such communication, some employees cannot visualize the entire benefit programme
and it value to them.
Considering companies investments in providing benefits to employees, it is unusual that more
companies do not do a better job of making employees aware of the costs of the benefits. Only
when a company translates benefits into shillings values can employees appreciate the magnitude
of what their company does for them.
8.4 Crafting an effective benefits communication programme
A well-designed benefits communication programme will greatly enhance employees
appreciation of their benefits while ensuring that employers receive the intended value of these
offerings. An effective programme will provide frequent information to employees in a costeffective and timely manner. Compensation specialists recommend the following points when
administering a benefits communication programme.
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In building an identity
Design materials that are eye-catching and of high interest to employees.
Develop a graphic logo for all material.
Identify a theme for the benefits programme.
In writing benefits materials
Avoid complex language when describing benefits. Clear, concise and understandable
language is a must.
Provide numerous examples to illustrate benefit specifics.
Explain all benefits in an open and honest manner. Do not attempt to conceal unpleasant
news.
Explain the purpose behind the benefit and the value of benefit to employees.
In publicizing benefits information
Use all popular employee communication techniques
Maintain employee self-service (ESS) technology to disseminate benefits information

and to update employee benefits selections.
Use voice mail to send benefits information.
Employ presentation software such as Microsoft PowerPoint or Lotus Freelance to

present information to groups of employees.
Maintain a benefits hotline to answer employee questions.
Review questions
a) Design a benefit program
b) List various ways used to contain costs
c) State how a benefit program is managed
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Page
EMEA
CHAPTER 9
PERFORMANCE APPRAISAL PROCESSES AND IMPLEMENTATION OF MERIT
SYSTEMS
Learning objectives
performance appraisals are conducted.
Specific Objectives
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a)
b)
c)
d)
e)
Define the term performance appraisal

Highlight the principal uses of appraisal
Describe various appraisal methods
Discuss various potential rating problems and errors and their solutions
Describe the implementation of merit systems
9.1 Traditional appraisal methods

Appraisal is the judgment of an employees performance in a job, based on consideration other
than productivity alone. It is sometimes called merit rating, more frequently when its sole object
is to discriminate between employees in granting increases in wages or salaries.
All managers are constantly forming judgments of their subordinates and are in that sense
continuously making appraisals; the term is, however, applied in personnel management to a
formal and systematic assessment made in a prescribed and uniform manner at a certain time.
9.2 Purpose of appraisal
The principal uses of appraisal are:a) To help a manager decide what increases of pay shall be given on grounds of merit.
b) To determine the future use of an employee, e.g. whether the employee shall remain in
his or her present job or be transferred, promoted, demoted or dismissed.
c) To indicate training needs, i.e areas of performance where improvements would occur if
appropriate training could be given.
d) To motivate the employee to do better in his her present job by giving the worker
knowledge of results, recognition of merits and the opportunity to discuss work with his
or her manager.
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9.3 Types of appraisal

Appraisal reviews are usually categorized into three types:a) Performance reviews, which analyze employees past successes and failures with a view
to improving future performance.
b) Potential reviews, which assess subordinates suitability for promotion and/or further
training.
c) Reward reviews, for determining pay rises. It is a well-established principle that salary
assessments should occur well after performance and potential reviews have been
completed, for two reasons.
Performance reviews examine personal strengths and weakness in order to improve efficiently. If
salary matters are discussed during these meetings, they might dominate the conversation.
Ultimately, salary levels are determined by market forces of supply and demand for labour. Staff
shortages could cause the firm to pay high wages quite independent of the objective worth of
particular workers.
9.4 Appraisal methods

The common methods of performance appraisal include the following:
a) Ranking. This method requires the manager to rank subordinates in order to merit, usually on
their total ability in the job but sometimes according to a few separate characteristics.
It is quite easy for a manager to use this method for a small number of subordinates, and usually
quite close agreement about the rank order is found among various judges who know the
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subordinates well. It can be used to decide pay, and to some extent to determine future use, but
not to identify training needs or provide motivation. Although it puts subordinates in order of
merit it does not show how much better the first is than the last.
b) Grading. This method allots employees into a predetermined series of merit categories
usually five on the basis of their total performance.

It works reasonably well for a homogeneous group of subordinates, and a fair agreement among
raters is usually obtained. There is, however, a strong tendency for extremes to be avoided (the
central tendency), i.e. very few subordinates are rated poor or exceptional. To overcome this, a
forced distribution is sometimes used; managers are instructed to ensure that subordinates are put
into the five categories in the following proportions, ensuring that the assessment of merit is
distributed normally:
Poor
10%
Below Average Average Above Average Exceptional

20%
4 0%
20%
10%
The forced distribution is, however, an unsound method to use if the number of subordinates is
below about 40. Grading has the same uses and limitations as ranking.
c) The rating scale is by far the most common method of appraisal. It consists of a list of
personal characteristics or factors against each of which is a scale, usually, of five points, for the
manager to mark his or her assessment of the subordinate. Instead of entitling the points of the
scale poor, below average, est. they are frequently defined to encourage consistency of
judgment among the raters. The factors are also defined, and there are sections at the end of the
form for general remarks and suggestions for future action.
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This method can be used for deciding pay, determining future use and indicating training needs.
It is rather difficult to use for motivating an employee, who may well be inclined to argue about
the details of the ratings rather than discuss the job constructively.
d) The open-ended method is a comparatively recent innovation, introduced because of
dissatisfaction with rating scales. Instead of requiring a manager to assess a number of personal
characteristics, not all equally relevant, the method emphasizes the way the job is performed and
expects the manager to write a few sentences about the subordinate rather than put ticks in
columns. The method has many varieties, a common one being to ask the manager four
questions about the subordinate:i) What are the employees strong points in relation to the job?
ii) What are the employees weak points in relation to the job?
iii) What is the employees promotion potential?
iv) What are employees training needs?
Another approach is simply to ask the manager to write a general account of the subordinates
work over the past year and suggest any action that might be taken to improve his or her
performance.
The open-ended method cannot be used directly to decide pay but if fulfils the other purposes of
appraisal very well. It is more intellectually demanding than the other methods and is perhaps at
its best when the subordinates jobs are relatively unstructured, allowing differences in
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performance to be clearly shown. In contrast, the rating scale can be completed with much less
thought and seems to be suitable for subordinates who have similar and rather routine jobs.
9.5 Potential rating problems and errors
a) Focusing on one or two critical incidents: Basing assessments on one or two big
incidents and disregarding the persons total performance.
b) Lower rating for less challenge: Rating some employees lower than others because they
are in jobs that you believe are less challenging.
c) Nobody can be that good. Strictness error, in other words, being overly stringent,
believing that no one can be that effective.
d) Similarity: Giving high ratings to employees who strike you as very similar to you in
back ground, work habits, or experiences.
e) Being influenced by prior performance : Believing, based on the persons prior of
performance ratings, that you must be wrong about how you appraise his or her current
performance, and that you must have overlooked something.
f) Rating for retention : Giving your employees higher ratings because youre afraid youll
lose them.
g) Style differences : Lowering an employees rating because he or she approaches the task
differently than you might.
h) Emotional rating: Allowing strong feelings about individuals to influence the rating
(positively or negatively).
i) Recent performance only: Also called the recency effect, letting what the employee has
done recently to blind you to hat his or her performance has been over the year.
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j) Friendships: Letting personal
relationships outside the office influence employees
rating.
9.6 How to avoid appraisal problems

1. Understand the problems
first, learn and understand the potential problems and their
solutions. Understanding the problems can help you avoid it.

2. Use right tool second, use or right appraisal tool. Each has its own pros and cons. For
example, the ranking method avoids central tendency but can cause bad feelings when
employees performances are in fact all high.
3. Train supervisors Third, train supervisors to reduce rating errors such as halo, leniency,
and central tendency. In one training program, raters watched a video of people of work, and
then rated the workers.
4 Control outside influence fourth, training isnt always enough to overcome the supervisors
outside distractions. e.g. union pressure
5. Keep a diary Firth, keep a diary of employees performance over the year.
Who should do the appraising?
Traditionally, the persons direct supervisor appraises his or her performance
. However, other
options are available and are increasingly used. Well look at the main ones.
1. The immediate supervisor Supervisors ratings are the heart of most appraisals.
2. Peer appraisals With more firms using self-managing teams, peer or team appraisals
the appraisal of an employee by his or her peers are becoming more popular.
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3. Rating committees many employees use rating committees. These committees usually
contain the employees immediate supervisor and three or four other supervisors.
4. Self-ratings The basic problem, of course, is that employees usually are themselves
higher than they are rated by supervisors or peers.
5. Appraisal by subordinates Many employees let subordinates anonymously rate their
supervisors performance, a process some call upward feedback.
9.8 Implementation of merit systems

Pay increases. Primarily, two types of pay increase are made: across the board increases, where
everyone in the organization receives an equal pay increase, and merit or seniority increases
given to selected individuals.
Merit increases - merit raises the designed to motivate employees by tying at least part of their
pay to their performance.
Merit pay systems rest heavily on three assumptions:
(1) Employee differences in performance can be accurately measured;
(2) Employees can effectively perceive pay differences as relating to performance differences
and
(3) Individuals will improve their future performance to gain more merit increases.
Critics of merits systems, however, point out their frequent problems:
1) There is only a slight relationship between performance appraisals and percentage pay
increases, and employees are quick to realize it;
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2) Supervisor bias remains more important in the appraisal process than employee productivity;
and
3) Employees simply do not perceive that raises are linked to their performance, whether true or
not. Thus management must audit its merit systems for these possible problems and must not
simply assume that it is effective because it is well intentioned.
Many managers believe that linking pay increases to performance is effective because
behaviours that are rewarded are more likely to be repeated; behaviours that are punished are less
likely to repeat . Also, rewards that are obtained as a result of ones performance will have
greater value than rewards that are given to everyone. Thus, a 7% merit increase in an
organization where the average is 5% will be more highly valued than if a 7% increase was given
across the board.
Some organizations give seniority increase to employees who have successfully performed their
jobs for a certain length of time. These increases move employees up one or more steps within
their pay grades.
9.9 Merit pay as an incentive
Merit pay or a merit raise is any salary increase the firm awards to an individual employee based
on his or her individual performance. It is different from a bonus in that it usually becomes part
of the employees base salary, whereas a bonus is a one -time payment. Although the term merit
pay can apply to the incentive raises given to any employee
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exempt or nonexempt, office or
factory, management or non management
the term is more often used for white-collar
employees and particularly professional, office, and clerical employees.

Merit pay is the subject of much debate. Advocates argue that only performance-based reward
(like merit pay) can motivate improved performance. They content that awarding pay raises
across the board (without regard to individual merit) may actually detract from performance, by
showing employees theyll be rewarded regardless of how they perform.
Detractors present good reasons why merit pay can backfire:
i)
One problem is that almost every employee thinks he or she is an above-average

performer, so getting a below-average merit increase can be demoralizing.
ii)
ny firms appraisal processes.
Another is the dubious nature of ma
Since many
appraisals are unfair, so too will be the merit pay you base them on. Similarly,
supervisors often give most employees about the same raise, either because of a
reluctance to alienate some employees or because of a desire to give everyone a raise
that will at least help them stay even with the cost of living.
Review questions
f) Define the term performance appraisal
g) Highlight the principal uses of appraisal
h) Describe various appraisal methods
i) Discuss various potential rating problems and errors and their solutions
j) Describe the implementation of merit systems

Jordan Hill
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CHAPTER 10
STATUTES AFFECTING COMPENSATION PRACTICES
Learning objectives
General Objective: By the end of the end of the topic the learner should be able to describe the
statutes affecting compensation practices
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Specific Objectives
a) Describe common compensation statutes used in US and UK
b) Highlight what is contained in Kenyas Employment Act 2007 concerning protection of
wages
10.1 The legal environment and pay system governance
The legal framework exerts substantial influence on the design and administration of
compensation system. The key federal laws that govern compensation criteria and procedures
are the Fair Labour Standards Act, the Equal Pay Act, and the Internal Revenue Code. In
addition to these, each state has its own sets of regulations that complement federal law. Labour
laws may also limit managerial discretion in setting pay levels.
The Fair Labour Standard Act
The Fair Labour Standards Act (FLSA) of 1938 is the compensation law that affects most pay
structures in the United States. To comply with the FLSA, employers must keep accurate
records of earning and hours worked by all covered employees and must report this information
to the Wage and Hour Division of the U.S. Department of Labour. Most businesses are covered
by the FLSA, except those with only one employee or annual gross sales under $500,000.
The FLSA defines two categories of employees: exempt and nonexempt. Exempt employees are
not covered by the provisions of the Act, nonexempt employees are covered. Exempt categories
include professional, administrative, executive, and outside sales jobs. The department of labour
provides guidelines to determine whether a job is exempt or nonexempt. Managers are often
tempted to classify as many jobs as possible as exempt to avoid some of the costs associated with
nonexempt status, principally the minimum wage and overtime payments. However, there are
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heavy penalties for employers who unfairly classify nonexempt jobs as exempt. This act
provides for minimum wages, maximum hours, overtime pay, and child labour protection. The
law has been amended many times and covers most employees.
Overtime
The FLSA requires that nonexempt employees be paid one and a half times the standard wage
for each hour they work over 40 hours a week. This provision was intended to stimulate hiring
by making it more costly to expand production using existing employees. In fact, however,
many firms would rather pay overtime than incur the costs associated with hiring additional
employees (recruitment, training, benefits, and so on).
The Equal Pay Act
The Equal Pay (EPA) was passed in 1963 in the U.S. It requires that men and women be paid the
same amount of money if they hold similar jobs that are substantially equal in terms of skill,
effort, responsibility, and working conditions. The EPA includes four exceptions that allow
employers to pay one sex more than the other:
(1) more seniority;
(2) better job performance;
(3) greater quantity or quality of production; and
(4) certain other factors, such as paying extra compensation to employees for working the night
shift.
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The 1963 Equal Pay Act The Equal Pay Act, an amendment to the Fair Labour Standards Act,
states that employees of one sex may not be paid wages at a rate lower than that paid to
employees of the opposite sex for doing roughly equivalent work. Specifically, if the work
requires equal skills, effort, and responsibility and involves similar working conditions,
employees of both sexes must receive equal pay, unless the differences in pay stem from a
seniority system, a merit system, the quantity or quality of production, or any factor other than
sex
Title VII of the 1964 civil right act
This act makes it unlawful for employers to discriminate against any individual with respect to
hiring, compensation, terms, conditions, or privileges of employment because of race, colour,
religion, sex, or national origin.
The 1974 Employee Retirement Income Security Act (ERISA)
This is an employee
retirement income security Act. This act provided for the creation of government-run, employerfinanced corporations to protect employees against the failure of their employers
Other legislation affecting compensation decisions include;
i) Age Discrimination in Employment Act prohibits age discrimination against employees
who are 40 years of age and older in all aspect of employment, including compensation.
ii) The Americans with Disabilities Act prohibits discrimination against qualified persons
with disabilities in all aspects of employment, including compensation.
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iii)
The Family and Medical Leave Act aims to entitle eligible employees, both men and
women, to take up to 12 weeks of unpaid, job-protected leave for the birth of a child
or for the care of a child, spouse or parent.
Each state has its own workers compensation laws. Among other things, these aim to provide
prompt, sure and reasonable income to victims of work-related accidents. The Social Security
Equal value
One of the major reasons for the growth in job evaluation in recent years has been the
development of equal pay law. When assessing the validity of equal pay claims, tribunals
employ the principles of job evaluation as a starting point, appointing a job analyst to undertake
a comparison of the content of different jobs if necessary.
The Equal Pay Act 1970 (UK) established that a woman could bring a case to an employment
tribunal claiming entitlement to equal pay with a man working at the same establishment of the
claimant and her chosen comparator were engaged in like work or work rated as equivalent
under an employers job evaluation study. A man can equally bring a case comparing hi s pay to
that of a female colleague.
Like work
When presented with a claim for equal pay an employment tribunal will first seek to establish
whether the claimant is engaged in like work with the more highly paid man she has named as
her comparator. The work does not have to be identical to justify equal pay under this heading,
but must be either the same or of a broadly similar nature.
The national minimum wage
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Since 1999 most workers in the UK have been entitle in law to be paid a minimum hourly rate
for the work that they do. The rate of the National Minimum Wage (NMW) is not linked to any
formula, but is set by the Secretary of State for Trade and Industry after consultation with a body
of experts and representatives from industry known as the Low Pay Commission. The aim is
always to set the highest rate possible that will not appreciably have an adverse impact on
employment levels. In practice it can be very different for employers to establish that they are in
fact paying staff or above the National Minimum Wage. One reason is the complexity of the
regulations on what payments and payments in kind can and cannot be included as part of
someones salary for NMW purposes.
Deductions from wages
A third way in which the administration of salaries is regulated concerns situations in which
employers make deductions from wage packets for one reason or another. All employees in the
UK are entitled in the law to receive an itemized pay statement which sets out the gross rate of
pay for the month or week and any deductions that have been made. The Employment Right Act
1996 sets out what deductions can lawfully be made, the implication being that other types of
deduction are unlawful and can lead to action in the employment tribunal.
10.2 Statutes in Kenya: Employment Act 2007

102
In Kenya, Employment Act 2007 is one of the statutes affecting compensation practices. Part IV
of the Act covers Protection of wages. Under the Employment Act, section 4, wages should be
paid in Kenyan currency to the employee or to an authorized person. The wages may be paid in
kind but this must not be in the form of alcohol or drugs. Also, the Act requires that wages be
paid in full, except authorized deductions, permitted by the law (under section 6 of the
Employment Act).
The Act also states the following:
Where a contract of service entered into under which a task or piece work is to be performed by
an employee, the employee shall be entitled
(a) When the task has not been completed, at the option of his employer, to be paid by his
employer at the end of the day in proportion to the amount of the task which has been performed,
or to complete the task on the following day, in which case he shall be entitled to be paid on
completion of the task; or
(b) In the case of piece work, to be paid by his employer at the end of each month in proportion
to the amount of work which he has performed during the month, or on completion of the work,
whichever date is the earlier. Subject to the statement above, wages or salaries shall be deemed
to be due
(a) In the case of a casual employee, at the end of the day;
(b) In the case of an employee employed for a period of more than a day but not exceeding one
month, at the end of that period;
(c) In the case of an employee employed for a period exceeding one month, at the end of each
month or part thereof;
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(d) In the case of an employee employed for an indefinite period or on a journey, expiration of
each month or of such period, whichever date is the earlier, and on the completion of the journey,
respectively.
Review questions
a) Describe common compensation statutes used in US and UK
b) Highlight what is contained in Kenyas Employment Act 2007
wages
concerning protection of

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CHAPTER 11
IMPACT OF GOVERNMENT REGULATION ON INCENTIVE PLANS
Learning objectives
General Objective: By the end of the end of the topic the learner should be able to describe the
impact of government regulation on incentive plans
Specific Objectives
a) State the various incentives used in organization
b) Explain how governments regulates incentive plans
11.1 Incentives and government regulations
Employee incentives plans are incredibly effective means to inspire loyalty, commitment and
hard work in organizations. The main incentives used in organizations include:
a) Piece rate
b) Commissions
c) Bonuses
d) Merit rates
e) Standard hour plan
f) Maturity curves
g) Gain sharing
h) Profit sharing
i) Stock options
j) Stock ownership
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One aspect of employee benefits that all governments are interested in is taxation, that is to say
whether this or that benefit should be relatively tax free or not. Salaries and wages are catered for
by the pay as you earn system of taxation, whereby the employer deducts tax fro source in
accordance with each individuals tax code and pays it to the treasury. Employee benefits and
incentives until recently, have been dealt with leniently by most governments. Now there is
greater interest in examining and implementing ways of taxing various incentives.
Employee Share Ownership Plans (ESOPs)
An Employee Share Option Plan (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. Under the ESOP plan, companies provide their employees the
opportunity to acquire the company's shares at a reduced price over a period of time.
Employee share ownership In European countries is strongly determined in detail by the relevant
company and tax law. Basically, forms of both individual and collective participation can be
found which are related to the company in which the employee is employed or also to other
company shares. In Europe large companies operating in several countries face practical
implementation problems with share ownership schemes. Because of different tax laws and
company statutes a participation offer of, for example, 10 shares in a company represents
different costs for the company and differing returns for individual employees, depending on the
country in which the scheme is being run. Two expert groups were set up to harmonise these
regulations in the EU but so far no real programme has been developed.
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Governments have introduce vesting in ESOP organizations. Vesting is the time an employee
must work before acquiring entitlement to benefits. Employees who leave before vesting will
forfeit their benefits. An ESOP must comply with minimum schedules for vesting, known as cliff
vesting or graded vesting. ESOP rules are also clearly outlined in Kenya.
Lower Rate of Taxation of Partial Motor Vehicle Benefit

In some organizations employees are allowed to use company cars. An employee who enjoys the
use of a company car is taxable on the higher 2 percent of the initial cost of the motor vehicle per
month and the Commissioners prescribed rate. Following the 2007/2008 Budget in Kenya, the
determination of motor vehicle benefi t for employees provided with their employers vehicle,
shall take into account the purpose and extent of use of the vehicle. This shall serve to reduce
the value of taxable benefit where the employee does not enjoy unrestricted use of the vehicle.
11.2 Profit sharing
Another common incentive is the profit sharing arrangement. Profit sharing refers to the process whereby
companies distribute a portion of their profits to their employees. Profit-sharing plans are well established
in American business. The annual U.S. Chamber of Commerce Employee Benefits Survey indicates that
somewhere between 19 and 23 percent of U.S. companies have offered some form of profit sharing since
1963. Other estimates place
the number of companies offering profit-sharing plans in the 1990s
somewhere between one-fourth and one-third of all U.S. firms. For small businesses, profit sharing
provides an important means of increasing employee loyalty and tying employee compensation to
company performance. Profit sharing is a particularly attractive option for newer small businesses with
uncertain profit levels, as it allows business owners to share the wealth during good times without
obligating them to do so during lean years.
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The Employee Retirement Income Security Act of 1974 (ERISA) provided a boost in the use of profitssharing plans. ERISA regulates and sets the standards for pension plans and other employee benefit plans.
Many employers found that a simple profit-sharing plan avoided many of ERISA's rules and regulations
that affected pension plans.
Types of profit-sharing plans
Companies may use any number of different formulas to calculate the distribution of profits to
their employees and establish a variety of rules and regulations regarding eligibility, but there are
essentially two basic types of profit-sharing plans. One type is a cash or bonus plan, under which
employees receive their profit-sharing distribution in cash at the end of the year. The main
drawback to cash distribution plans is that employee profit-sharing bonuses are then taxed as
ordinary income. Even if distributions are made in the form of company stock or some other type
of current payment, they become taxable as soon as employees receive them.
To avoid immediate taxation, companies are allowed by the Internal Revenue Service (IRS) to
set up qualified deferred profit-sharing plans. Under a deferred plan, profit-sharing distributions
are held in individual accounts for each employee. Employees are not allowed to withdraw from
their profit-sharing accounts except under certain, well-defined conditions. As long as employees
do not have easy access to the funds, money in the accounts is not taxed and may earn taxdeferred interest.
Under qualified deferred profit-sharing plans, employees may be given a range of investment
choices for their accounts, including stocks or mutual funds. Such choices are common when the
accounts are managed by outside investment firms. It is becoming less common for companies to
manage their own profit-sharing plans due to the fiduciary duties and liabilities associated with
108
them. A 401(k) account is a common type of deferred profit-sharing plan, with several unique
features. For example, employees are allowed to voluntarily contribute a portion of their salary,
before taxes, to their 401(k) account. The company may decide to match a certain percentage of
such contributions. In addition, many 401(k) accounts have provisions that enable employees to
borrow money under certain conditions.
11.3 Compensation laws
There are many federal, state, and local employment and tax laws that impact compensation.
These laws define certain aspects of pay, influence how much pay a person may receive, and
shape general benefits plans.
The Fair Labor Standards Act (FLSA) is probably the most important piece of compensation
legislation. Small business owners should be thoroughly familiar with it. This Act contains five
major compensation laws governing minimum wage, overtime pay, equal pay, recordkeeping
requirement, and child labor, and it has been amended on several occasions over the years. Most
of the regulations set out in the FLSA impact non-exempt employees, but this is not true across
the board.
The Equal Pay Act of 1963 is an amendment to FLSA, which prohibits differences in
compensation based on sex for men and women in the same workplace whose jobs are similar. It
does not prohibit seniority systems, merit systems, or systems that pay for performance, and it
does not consider exempt or non-exempt status.
To avoid immediate taxation, companies are allowed by the Internal Revenue Service (IRS) to
set up qualified deferred profit-sharing plans. Under a deferred plan, profit-sharing distributions
109
are held in individual accounts for each employee. Employees are not allowed to withdraw from
their profit-sharing accounts except under certain, well-defined conditions. As long as employees
do not have easy access to the funds, money in the accounts is not taxed and may earn taxdeferred interest.
Review questions
a) Which are the common incentives offered in organizations
b) Explain how government regulations affects incentives

110
End of Semester Examinations (sample paper)
DHR 132: Employee performance and compensation
Time: 2 Hrs
Instructions to Candidates: Answer question 1 (Compulsory) and any other TWO questions.
QUESTION 1 (30mks)
a)
b)
c)
d)
e)
f)
Explain the meaning of the term job evaluation (5 marks)

Distinguish between time rate system and piece rate system of wage payment (6 marks)
State four characteristics of salaries (4 mrks)
Explain three advantages of skill-based pay (6mrks)
Distinguish between intrinsic motivation and extrinsic motivation (4 marks)
Briefly explain how governments regulates incentive plans 5marks)
QUESTION 2
a) Explain any three methods used when conducting job evaluation (10 mrks)
b) Write short notes on
i.
Distributive justice model (5mrks)
ii.
Labour market model (5mrks)
QUESTION 3
Organizations pay their employees using rates that are different from those used by other
organizations. Discuss the factors that determine pay (20)
QUESTION 4
a) Explain the steps involved in carrying out job evaluation (10 marks)
b) Explain any five performance appraisal rating problems (10 marks)
QUESTION 5
There is a need to integrate internal equity and external market considerations in wage systems
Discuss (20 marks)
111
End of Semester Examinations (sample paper)
DHR 132: Employee performance and compensation
Time: 2 Hrs
Instructions to Candidates: Answer question 1 (Compulsory) and any other TWO questions.
QUESTION 1 (30mks)
a) Explain the meaning of the term performance appraisal (5mks)
b) Write short notes on
i.
Salary surveys
ii.
Total reward
iii. Distributive justice system
iv.
Merit based system (5mks each)
c) Highlight five disadvantages of using performance based pay (5mks)
QUESTION 2
a) Explain any three performance appraisal methods (12 marks)
b) Explain four reasons for using skill-based pay in an organization (4kks)
QUESTION 3
a) Describe any five types of wage payment systems (10 mrks)
b) Explain how salaries can be administered in an organization (10 marks)
QUESTION 4
Discuss how you can develop an effective reward system in an organization (20 mrks)
112
QUESTION 5
To what extent can fridge benefits be systematically applied in an organization as a partial
substitute for direct monetary rewards, as a means of :
a) Attracting potential employee
b) Retaining employees
c) Motivating employees (20 mks)
113

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DEPARTMENT OF MANAGEMENT

DHR 132: EMPLOYEE PERFORMANCE AND

MODULE AUTHOR: LAWRENCE WAINAINA

DHR 132: EMPLOYEE PERFORMANCES AND COMPENSATION

Purpose: To expose learners to employee performance evaluation and compensation

Establish performance standards

Purpose of Performance standard

WEEK 2: CHAPTER 2: DEVELOPING EVALUATION METHODS AND DESIGNING

WEEK3: CHAPTER 3: DETERMINING PAY RATES

Basic factors in determining pay rates

WEEK 4: CHAPTER 4 :ADJUSTMENT OF PAY STRUCTURES

WEEK 5: CHAPTER 5: REMUNERATION SYSTEMS

Skilled based pay

WEEK 6: CHAPTER 6: INTEGRATION OF INTERNAL EQUITY AND EXTERNAL

WEEK 7: CHAPTER 7 COMPENSATION AS A MEANS OF EFFECTIVE

WEEK 8&9: CHAPTER 8: BENEFITS PROGRAM DESIGN, COST CONTAINMENT,

WEEK 10&11: CHAPTER 9: PERFORMANCE APPRAISAL PROCESSES AND

Traditional appraisal methods

Implementation of merit systems

WEEK 12: CHAPTER 10: STATUTES AFFECTING COMPENSATION PRACTICES

The legal environment and pay system governance

WEEK 13: CHAPTER 11: IMPACT OF GOVERNMENT REGULATION ON

Incentives and government regulations

Continuous Assessment Test (CATS)

Recommended Text Books:

CHAPTER 4 Adjustment of paystructures33

7.2 Attracting employees...61

11.3 Compensation laws ....100

1.4 Defining the Employees Goals and work standards

Managers should appraise employees based on the specific

satisfactorily attending workshop or satisfactorily completed his or her degree is the

a) State the purpose of performance standards

Define the term job evaluation

2.1 Job evaluation

Purpose of job evaluation

To protect the employee from arbitrary decisions by management

To justify wage differentials and hence avoid frequent invocations of grievance

To facilitate fair promotion systems based on rationally determined job grading

2.3 Popular job evaluation methods

committee in-charge of the

grading can be supported by the

definitions of the grades

3. Factor comparison method

It is usually easier to develop than the point method

It is tied to external market wage rates.

It is relatively difficult to explain to employees'

It is not easily adapted to changes in-the jobs being evaluated

Employees generally accept this method because of its mathematical nature

The system is easy to keep current as jobs change

Because of its quantitative nature, it is easy to assign monetary values to jobs

It is relatively time-consuming and costly to develop

Concerned with person not the job

Deals with internal relativities

jobs totals demands relative to

another will always be subjective.

2.4 Designing effective reward systems

Employees like salespersons receive individual incentives inform of commission. . Commission

indirect as well as direct, and intrinsic as well as

Define the term job evaluation

Suggested further reading

State the principle purpose of determining pay rates

3.1 Basic factors in determining pay rates

Rewarding of employees for effort, loyalty experience and achievement.