Human Resource Management Unit 4 Performance Appraisal

By Dev Kirtonia / Human Resource Management

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Human Resource Management Unit 4 Performance Appraisal

Human Resource Management Unit 4 Performance Appraisal Notes cover all the exercise questions in UGC Syllabus. Human Resource Management Unit 4 Performance Appraisal provided here ensures a smooth and easy understanding of all the concepts. Understand the concepts behind every Unit and score well in the board exams.

Performance Appraisal

HUMAN RESOURCE MANAGEMENT

VERY SHORT TYPES QUESTION & ANSWERS

1. Performance appraisal is also known as

(a) Judgment.

(b) Merit rating.

(d) Compensation.

Ans: (b) Merit rating.

2. To plan promotion and transfer is a –

(a) Work related objective of performance appraisal.

(b) Career development objective of performance appraisal.

(d) Organisational objective of performance appraisal.

Ans: (b) Career development objective of performance appraisal.

3. Performance Appraisal is done by-

(a) Human Resource Manager.

(b) Sales Manager.

(d) Accounts Manager.

Ans: (a) Human Resource Manager.

4. The tendency to evaluate the performance of an employee on the basis of a single characteristic is called –

(a) Similarity Error.

(b) Hallo Error.

(d) Miscelleneous Error.

Ans: (b) Hallo Error.

5. Confidential report are prepared –

(a) Annually in private agencies.

(b) Weekly in government departments.

(d) Annually in government departments and public sector enterprises.

Ans: (d) Annually in government departments and public sector enterprises.

6. Transfer is a-

(a) Internal source of recruitment.

(b) External source of recruitment.

(d) None of the above.

Ans: (a) Internal source of recruitment.

7. What is performance appraisal?

Ans: Performance appraisal is the technique of evaluating the employees against the expected role performance. It is a process of evaluation of performance and personality of an employee and identifying the deficiencies.

8. What are the objectives of performance appraisal?

Ans: The objectives of performance appraisal are broadly divided into work related objectives, career development objectives, communication objectives and organisational objectives.

9. What is employee counselling?

Ans: Employee counselling is the process of helping an individual undergoing a problem and to regain his self esteem and confidence and to put back his concentration at work.

10. What is demotion?

Ans: In demotion the employee is shifted to a job lower in status, grade and responsibilities, Demotion refers to the lowering down of the status, salary and responsibilities of an employee. When an employee is demoted, his pride suffers a more severe jolt than it does when he is superceded by his junior.

11. What is transfer?

Ans: Transfer is a horizontal and lateral movement of an employee from one job, section, department, shift, plant or position to another at the same or another place, where his salary, status and responsibility are the same.

12. What is downsizing?

Ans: Downsizing means reducing the size of the organisation. It is a restructuring of the organisation where by non-core activities are disposed off. Downsizing involves elimination of certain job with a view to improve work efficiency. Where there is surplus staff trimming will be essential.

13. Mention the various basis of promotion.

Ans: The various basis of promotion are:

(a) Seniority as a Basis of Promotion.

(b) Merit as a Basis of Promotion.

14. What are the various causes of demotion?

Ans: The various causes of demotion are:

(a) Incompetence.

(b) Adverse Business Conditions.

15. Mention the methods of Job Evaluation.

Ans: The methods of Job Evaluation are –

(i) Ranking or Job Comparison.

(ii) Grading or Job classification.

(iii) Point Rating.

(iv) Factor comparison.

16. What are the main principles of wage and salary administration?

Ans: The main principles that govern wage and salary fixation are:

(i) External Equity.

(ii) Internal Equity.

(iii) Individual Worth.

SHORT & LONG TYPE QUESTION & ANSWER

1. Define performance appraisal. Do you think performance appraisal can be improved by suggestions?

Ans: Performance appraisal is an objective evaluation of an individual’s performance against well defined benchmarks. It measures quantitatively and qualitatively an employee’s past or present performance against the expected role performance. Thus it is a systematic process where the employee’s strengths and weaknesses are determined. It is not a one shot deal. Performance appraisal programmes are beneficial are taking decisions regarding promotion, demotion, financial rewards, incentive etc. Performance appraisal is impartial rating of an employee’s excellence in matters relating to their present job. If there are deficiencies detected by performance appraisal programmes, corrective actions are taken by imparting training and development.

Followings suggestions can be put forwarded in this regard:

(a) Trained appraisers: The success of the appraisal programmes depends upon the efficiency of the trainer. Common errors such as hallo effect, leniency error can be minimised if the trainer is objective in his judgement.

(b) Reliability: The top management should facilitate conducive environment for carrying out effective appraisal plans e.g.- awareness of organisation goal, open communication etc.

(c) Mutual trust: The relationship between the supervisor (trainer) and the subordinates (trainees) should be mutual so that deficiencies can be openly discussed and suggestions are actively implemented for the benefit of the organisation.

(d) Standards: The standards adopted for performance appraisal must be uniform and must provide rational comparison.

(e) Issues in appraisal: The trainer should highlight on job related issues and performance of the employees on the job.

(f) Feedback: Another suggestion that can be provided in this context is whenever appraisal results are negative regarding an employee that should be communicated immediately for prompt results.

2. What is the significance of the appraisal programmes?

Ans: An effective performance appraisal programme is very vital for an organisation.

Its significance can be understood by the following:

(a) Performance appraisal helps the managers to know the respective strengths and weaknesses of their employees. It facilitates better placement of employees in the organisation.

(b) Performance appraisal facilitates an objective basis for salary enhancement and special increment

(d) It also helps the supervisors in making objective decisions regarding promotion, transfer etc.

(e) Performance appraisal programmes also helps in maintaining discipline and order in the organisation.

(f) As systematic appraisal provides objective evaluation, it facilitates an atmosphere of justice and transparency among the employees.

3. What are the various purpose or objectives of promotion? Highlight the principles of promotion.

Ans: The following are the purpose or objectives of promotion:

(i) To recognize an employees skill and knowledge and utilize it to improve the organisations effectiveness.

(ii) To reward and motivate employees to higher productivity.

(iii) To develop competitive spirit and inculcate the zeal in the employees to acquire skills, knowledge etc.

(iv) To promote employees satisfaction and boost their morale.

(v) To promote employees interest in training and development programmes and in team development areas.

(vi) To reward committed, loyal and deserving employees.

(vii) To retain talented and skilled people.

(viii) To promote good human relations.

(ix) To impress the other employees that opportunities are available to them too if they also perform well.

Highlight principles of promotion are:

(a) The promotion policy must be in written form and not verbal. Written policies regarding promotion provides clear understanding and removes employee’s doubts and suspicion.

(b) The promotion policy must provide clear information regarding what percentage of vacancies are there in higher jobs that are likely to be filled up.

(d) The promotion policy should reveal clearly that on what basis promotion is provided i.e., whether on merit or seniority or a combination of both.

(e) The promotion should be provided on probation. If the employee’s performance remain satisfactory, he should be made permanent.

(f) Promotion must be provided on objective evaluation of employees. The adopted forms, procedures should be standardised.

4. Define potential appraisal? What are the various steps involved in performance appraisal?

Ans: Potential of a person refers to his abilities which are not being utilised. It is the latent capability to discharge their obligations and responsibilities in future roles. Potential appraisal of employees is a very important job of HR managers. It helps them in deciding about transfer, promotions etc. The potential of an employees can be judged by-present performance appraisal, analysing personality traits, considering age and qualifications, considering past experience and unused knowledge and skills etc.

Performance appraisal is done periodically to evaluate the performance of the employees and taking objective decisions regarding promotion, demotion, salary enhancement, transfer, etc.

The steps inherent in performance appraisal are:

(i) Determining standards: First and foremost the established standards are determined. It is a measure on basis on which the performance is said to be good, bad or average.

(ii) Proper communication: The employees should be informed about the established standards. In absence of standards the employees will keep guessing and get misdirected.

(iii) Measurement of actual performance: After establishing standards and communicating to employees, the next step is measuring the actual performance. It can be done through observation, interview, written reports etc.

(iv) Comparing performances with standards: Next, the actual performances are compared with the set standards. Comparisons helps in clear results i.e., whether the performance is static, improving or deteriorating.

(v) Taking corrective action: After comparison, if deficiencies are found it is discussed with the employees and corrective actions are taken in form of counselling, training, advice. These helps employees improve their performance.

5. What are the causes of Transfer?

Ans: Transfer is a change in job place. It is movement of an employee from one job to another with the same duties, responsibilities, status and salary. It may involve promotion or demotion or no change in status and responsibility.

There can be following reasons or objectives of transfer:

(a) Transfer may be given to fill up some organisational vacancies in branches or other units. Transfer can be given to stabilise employment in an organisation.

(b) Sometimes transfer is given to meet employee’s personal request. For e.g… near a family, urban place etc.

(d) Transfer also makes employees versatile and reduce conflicts and disputes in a particular area.

6. State the various objectives of potential appraisal?

Ans: The objectives of potential evaluation are:

(i) To promote an employee to higher levels of jobs involving higher order or responsibilities which the employee can effectively discharge without being overburdened and stretched.

(ii) Assist the organisation to allocate jobs among employees as per their capabilities so that organisational responsibilities are discharged effectively.

(iii) The other purpose of potential appraisal of an employee to know what she/he can do or perform.

7. What are the various steps involved in evaluating employee potential?

Ans: The potential of employees can be evaluated by the following steps:

(i) Determination of Role Dimensions: Job description and job specification help in determining the role dimensions. The former provides information about the responsibilities involve in a job, while the latter provides information on attributes the job holder should possess.

(ii) Determination of Mechanism: Having determined the role dimensions, a mechanism to evaluate these attributes in an employee is evolved. Obviously, the mechanism should be appropriate to appraise the potential of employee by a designated appraiser.

(iii) Linking Potential with other Elements: In order to evaluate potential in a meaningful manner, other elements of HRM such as feed back counselling, training, job rotation etc. should also be linked with it.

8. Distinguish performance appraisal form from potential appraisal.

Ans: A performance appraisal system judges the performance of an employee over a given period of time. It is an indication of how he has performed in the PAST, but may necessarily not be an indication of his performance in the future. Depending on his past performance, a person is rewarded suitable with an appropriate cash incentive or bonus.

A potential appraisal system is done to judge the capability of the person for a future role, meaning you are trying to assess a person to see whether he has the necessary skills, aptitude, attitude and competency for an increased level of responsibility and accountability or a leadership role. It can be enhanced with giving him specific T & D, or assigning him a mentor. You are trying to judge his future performance based on the potential appraisal.

It is commonly mistaken that promotion is an outcome of performance appraisal. But ideally speaking promotion should be the outcome of a potential appraisal because only when a potential appraisal is done will you come to know if the person is ready for a bigger responsibility.

9. What are the causes of demotion?

Ans: The various causes of demotion are as follows:

(i) Incompetence: When a promotee is found unable to meet the challenges posed by the new higher job, he may be demoted to jobs suitable to him to correct errors in promotion.

(ii) Adverse Business Conditions: In case of lay-offs and bumping process, junior employees may be required and senior employees may be required to accept lower level jobs, until normally is restored. However such a dimension is not a black mark against an employee.

(iii) Disciplinary Measures: Demotion is also used as a disciplinary measure against erring employees. It is a penalty imposed on employee for violation of company rules of conduct.

10. What are the Objectives of employee counselling are? Write the Important Characteristics of Employee counseling.

Ans: (a) Provide an opportunity for the employee to discuss his frustration, tension, conflicts, concerns and problems.

(b) Understand his behaviour and reasons for such behaviour.

(d) Help him to understand his strengths and areas for development.

(e) Understanding the work environment.

(f) Improve his personal and interpersonal effectiveness.

Below giving are the characteristics of employee counselling:

(i) Counselling is an exchange of ideas and feelings between two people.

(ii) It tries to improve organisational performance by helping the employees to cope with the problems.

(iii) It makes organisation be more human and considerate with people’s problems.

(iv) Counselling may be performed by both professionals and non- professionals.

(v) Counselling is usually confidential in order to have free talk and discussions.

(vi) It involves both job and personal problems.

(vii) Counselling deals with emotional problems and is not generally concerned with technical, commercial or legal problems which are by nature non-emotional problems.

(viii) Counselling involves discussions and it is an act of communication.

(ix) The main purpose of counselling is to understand or decrease an employees’ emotional disorder.

(x) Professionally trained counsellors are required for resolving serious emotional problems. Managers and superiors can counsel for non-serious emotional problems faced by the employees.

11. Write a note on the Japanese Carrier Model.

Ans: The Japanese model emphasises life time employment and promotions based on seniority. The Japanese have realised the importance of a stable work force long back and have consciously put legal restrictions on terminations. The extensive use of automation and robotics in work place also contributed to the practice of life time employment in Japan. One reason for the widespread use of such advanced technology is that employees know that they will not lose their jobs. Extensive training is also offered to workers so that they will not lose their jobs.

12. What are the advantages of job evaluation? What are the main problems or limitations of job evaluation?

Ans: The significance of job evaluation are-

(i) Job evaluation is an objective method of ranking jobs. It helps in removing inequalities in wage structure.

(ii) It helps in fixing new jobs in existing wage structure.

(iii) It leads to greater uniformity in wage rates, thus simplifying wage administration.

(iv) Any dispute arising for wages can be settled by referring it to job evaluating committee.

(v) It also provides a sound basis for bonus schemes and helps in job classification and work simplification.

(vi) The change in technology also changes job contents. Job evaluation also helps in reviewing job rates.

The problems of job evaluation are:

(i) The factors selected for job evaluation sometimes overlap. The weightage given to them and their reliability becomes questionable.

(ii) Job Evaluation programmes takes long time and requires specialised technical personnel.

(iii) This system is suitable to big concerns only because it is very expensive.

(iv) Job evaluation leads to frequent and substantial changes in wage and salary structures. This, in turn, creates financial burden on organisation.

(v) Job evaluation methods being lacking in scientific basis are often looked upon as suspicious about the efficiency of methods of evaluation.

(vi) Given the changes in job contents and work conditions, frequent evaluation of jobs is essential. This is not always so easy & simple.

13. What are the features of fringe benefits? Write the objectives of Fringe Benefits?

Ans: The main features of fringe benefits are:

(i) Fringe benefits are supplementary to regular wages or salaries.

(ii) These are paid to all the employees based on their membership in the organisation.

(iii) Fringe benefits involve a labour cost for the employer and are not meant directly to improve effeciency.

(iv) Fringe benefits raise the standard of the employees.

(v) These benefits may be statutory or voluntary. Provident Fund in s statutory benefits whereas housing is a voluntary benefit.

(vi) Fringe benefits are indirect compensation because these are usually extended as a condition of employment and are not directly related to performance.

Fringe Benefits are given to achieve the following objectives:

(i) To recruit and retain the best employees.

(ii) To protect employees against certain hazards e.g life insurance, old age pension etc.

(iii) To improve motivation and morale of the employees by satisfying some unsatified needs.

(iv) To improve work environment and industrial relations,

(v) To ensure health, safely and welfare of employees.

(vi) To ensure sense of belongingness and loyalty among workers.

14. Write short notes on Minimum Wage?

Ans: Minimum wage: Minimum wage is that wage which must be paid whether the company earns any profit or not. Minimum wage may be fixed by an agreement between the management and the workers but is usually determined through legislation. In the fixation of minimum wages, besides the needs of workers, other factors like ability of the concern to pay nature of the jobs etc., are also considered.

15. Write short notes on Fair Wage?

Ans: Fair wage is that wage which is above the minimum wage but below the living wage. It can be fixed only by comparison with an accepted standard wage. According to the Committee on Fair Wages, 1948 fair wage should be determined taking into consideration the following factors-

(i) Productivity of labour.

(ii) The level of national income and its distribution.

(iii) The prevailing rates of wages in the same localities.

(iv) The place of industry in the economy of the country.

16. Write short notes on Living Wage?

Ans: Living Wage: This wage was recomended by the Committee as a fair wage and as ultimate goal in a wage policy. It define a living wage as “one which should enable the earner to provide for himself and his family not only the essential of food, clothing, and shelter but a measure of comfort, including education for his children, protection against in health, requirement of essential social needs and a measure of insurance against the more important misfortune including old age. In other words, a living wage was to provide for a standard of living that would ensure good health for the worker and his family as well as measure of comfort, education for his children and protection.

17. Explain the objectives of sound wage and salary administration?

Ans: The purpose or objectives of wage and salary administration can be described as follows:

(i) To establish a fair and equitable compensation offering similar pay for similar work.

(ii) To attract competent and qualified personnel.

(iii) To retain the present employees by keeping wage levels in tune with competitive units.

(iv) To establish job sequences and lines of promotion wherever applicable.

(v) To protect a good image of the company.

(vi) To keep labour and administrative costs in line with the ability of the organisation to pay.

(vii) To improve motivation and morale of employees and to improve union management relations.

18. What conditions are esssential for the success of Job Evaluation Programme? What are the basic principles of Job Evaluation?

Ans: A job evaluation programme will be successful only if it is well understood by each and every person in the organisation and is based on certain principles. The following measures will help in its success.

(i) A job evaluation system should be clear to the supervisors.If supervisors are not clear about the system then they will not be able to publicise it properly.

(ii) The supervisors should be given proper training to implement the system properly.

(iii) The system should be well publicised in all its aspects. The employees should be made well aware of the procedure to be used and the factors to be taken up in a job evaluation programme.

(iv) It must have the full approval and continued support and backing of the top management.

(v) The administration of the Job evaluation programme should be properly explained to employees.

(vi) It must have obtained the acceptance of trade unions.

(vii) There should be separate pay structure for all major categories of employees. It will not be possible to group together employees having different nature of jobs. It may be possible to group together employees.

The basic principles of Job Evaluation are:

(i) Rate the job and not the man. Each element should be rated on the basis of requirements of the job.

(ii) The elements selected for rating purpose should be easily explainable in terms that would avoid any overlapping.

(iii) The elements should be clearly defined and properly selected.

(iv) Foremen should participate in the rating of jobs in their own departments.

(v) Any job rating programme must be told to foremen and employees.

(vi) The employees will give maximum co-operation to job-evaluation programme if they have an opportunity to discuss job rating.

(vii) In talking to foremen and employees any discussion of value should be avoided.

(viii) Too many occupational wages should not be established. It should be unwise to adopt an occupational wage for each total point values.

19. State the principles of wage and salary administration. What are the internal factors affecting wage and salary administration?

Ans: Following principles can be followed for adequate wage and salary management –

(a) Wage and salary plans should be flexible enough to accommodate changes in internal and external environment of the organisation.

(b) Wage and salary plans must be consistent with other departmental goals and complement the overall organisational goal.

(c) Wage policy should be formulated by keeping in consideration various groups like employees, workers, consumer, employer etc.

(d) Workers participation must be sought while preparing wage policies.

(e) The wages and salaries fixed should be in line with the prevailing rates of the labour market.

(f) The employees should be provided with adequate salary at regular time intervals and workers should receive a guaranteed minimum wage.

Internal factors affecting wages and salary administration are:

(a) Ability to pay: A firm’s ability to pay clearly determines the wages and salaries payable to the employees. A profit making firm will pay more wages whereas a loss making firm’s policy will be different.

(b) Nature of job: The nature of job plays an important role in determining wages and salaries. If the job is of complex nature requiring lot of skill and knowledge the pay structure will be high however routine jobs with minimum skills will attract low pay.

(c) Management strategy: The strategy adopted by management regarding organisational goals determines the remuneration to employees. If the company’s strategy is earning profits in the short run then wages and salary will be low whereas it will be higher if the company follows growth strategy or expansion in the long run.

(d) Wages are also determined by individual performance, seniority, experience etc.

20. Explain the merits and demerits of wages payment and incentive schemes.

Ans: Advantages of in wages payment and incentive schemes:

(i) Inspires Employees: Employees are motivated to accomplish their best through individual incentives, encouraging them to learn from high performers. Top performers are rewarded and recognized for their achievements. This may encourage them to keep improving. Underachievers may feel compelled to work more in order to receive incentives.

(ii) Increased Productivity: Employees are encouraged to go above and beyond the set goal. It contributes to an improvement in productivity. It motivates and rewards top achievers for their achievements.

(iii) Higher Job Satisfaction & Low Staff Turnover: Individual incentives, which are appropriate for an individualistic culture, assist employees in achieving a better degree of job satisfaction. They ensure that pay is distributed fairly. It aids in the retention of high-performing individuals inside the company. As a result, staff turnover is minimal as it aids in retaining top performers.

(iv) Cost Minimization: Individual incentive plans aid in improving the performance of the workforce, resulting in fewer downtimes and greater output. Increased productivity aids in the reduction of the cost of production.

(v) Healthy Competition: They cultivate a culture that prioritizes sales. An incentive plan gives something for which your workforce may compete if your company likes a healthy and positive competitive spirit.

(vi) Clarity: They clearly distinguish between those who contribute and those who do not. They aid in the correlation of remuneration to individual performance. Needless to say, individual incentives are simple to manage and implement.

Disadvantages of in wages payment and incentive schemes:

(i) Higher Attrition: Although individual incentive plans have been shown to boost performance, there have been some doubts raised. Low-performing employees are discouraged via individual incentive plans.

(ii) Lack of Teamwork: Individual incentive plans motivate employees to achieve higher levels of performance. As a result, there is a lack of collaboration at the workstation. Setting performance goals takes work, and unreasonable expectations hinder drive further.

(iii) Sacrificed Quality: Employees may be encouraged to enhance productivity and concentrate solely on volume. Hence, individual incentive plans such as piece rates may induce employees to maximize the quantity of output while compromising quality if quality control measures are insufficient.

(iv) Conflicts: These initiatives, in particular, may mean that the staff are competing with one another, which might have negative consequences. For example, commission-based department store salesmen may compete for consumers, pushing them away.

21. What are the various fringe benefits in India?

Ans: Various fringe benefits can be divided into eight groups which are mentioned below:

(a) Payment for time not worked: Here, benefits are extended to the employees in the form of paid holidays, shift premium, paid vacation etc.

(b) Employee security: Various acts have been enacted for providing minimum wages to the workers and to ensure for their health and safety.

(d) Workmen’s compensation.

(e) Health benefits.

(f) Voluntary arrangements.

(g) Welfare and recreational facilities.

(h) Old age and retirement benefits.

22. What do you understand by Performance Appraisals? What are the benefits of such appraisal? Explain the nature or features of Performance Appraisal.

Ans: After an employee is selected and placed in an organisation his performance should be evaluated from time to time in order to understand his contribution towards the organisation. Every job has some requirements and employees are expected to behave in a certain manner and to bring success to the business unit. Performance appraisal is a systematic and organised effort to evaluate employee’s performances and attitude on the job against the expected job performance. It evaluates both past and present performance. Performance appraisal may be either formal or informal. Formal system is preferred as it provides fairness and objectivity.

The significance or benefits of performance appraisal can be understood by following:

(i) When employees performances are evaluated the evaluator comes to know the strength and weaknesses of employees. They come to know the real potential of employees which helps in better placement in the organisation.

(ii) Performance appraisal programmes are the bases on which decisions are made regarding direction and supervision of employees for effective performance.

(iii) It also facilitates objective decisions relating to salary enhancement and incentives to workers.

(iv) Performance appraisal can be used for transfer and promotions. If the performance is good he will be promoted to higher jobs but if performance is not up to expectation he may be shifted to other job area where he is best suited.

(v) Performance appraisal facilitates human resource planning, career planning.

(vi) The results of performance appraisal can be used to identify the effectiveness of existing training programmes.

(vii) Objective appraisals build up an atmosphere of justice and peace among the employees and a feeling of confidence and satisfaction among them.

Following are the different features of performance appraisal.

(i) Systematic Process: Main feature of performance appraisal is that it is a systematic process, which includes three steps, such as

(a) Setting work standards

(b) Assessing employee’s actual performance relative to these standards.

(ii) Establish Plan: Another important feature of performance appraisal is that it tries to find out how well the employee is performing the job and tries to establish a plan for further improvement.

(iii) Periodically Done: The performance appraisal is carried out periodically, according to a definite plan. It is certainly not a one short deal.

(iv) Future Oriented: Basically the performance appraisal is future oriented activity showing employees where things have gone wrong, how to set everything in order, and deliver results using their potential in a proper way.

(v) Not Job Evaluation : Performance appraisal is not job evaluation. It refers to how well someone is doing an assigned job. Job evaluation, on the other hand, determines how much a job is worth to the organisation and therefore, what range of pay should be assigned to the job.

(vi) Set New Goals: Performance appraisal is not limited to “calling the fouls”. Its focus is on employee development. It forces managers to become coaches rather then judges. The appraisal process provides an opportunity to identify issues for discussion, eliminate any potential problems and set new goals for achieving high performance.

(vii) Formal or Informal: Performance appraisal may be formal or informal. The informal evaluation is more likely to be subjective and influenced by personal factors. Some employees are liked better than others and have, for that reason only, better chances of receiving various kinds of rewards than others. The formal system is likely to be more fair and objective, since it is carried out in a systematic manner, using printed appraisal forms.

23. Explain the main advantages or importance of performance appraisal. Write the objectives of performance appraisal.

Ans: The main advantages or importance of performance appraisal are:

(a) Performance Feedback: Most employees are very interested in knowing how well they are doing at present and how they can do better in a future. They want this information to improve their performance in order to get promotions and merit pay. Proper performance feedback can improve the employee’s future performance. It also gives him satisfaction and motivation.

(b) Employee Training and Development Decisions: Performance Appraisal information is used to find out whether an employee requires additional training and development. Deficiencies in performance may be due to inadequate knowledge or skills. For e.g. A professor may improve his efficiency by attending workshops or seminars about his subject. Performance appraisal helps a manager to find out whether he needs additional training for improving his current job performance. Similarly, if the performance appraisal results show that he can perform well in a higher position, then he is given training for the higher level position.

(c) Validation of Selection Process: Performance appraisal is a means of validating both internal (promotions and transfers) and external (hiring new employees from outside) sources. Organisations spend a lot of time and money for recruiting and selecting employees. Various tools used in the selection process are application blanks, interviews, psychological tests, etc. These tools are used to predict (guess) the candidate’s performance on the job. A proper performance appraisal finds out the validity of the various selection tools and so the company can follow suitable steps for selecting employees in future.

(d) Promotions: Performance appraisal is a way of finding out which employee should be given a promotion. Past appraisals, together with other background data, will enable management to select proper persons for promotion.

(e) Transfers: Performance appraisal is also useful for taking transfer decisions. Transfers often involve changes in job responsibilities, and it is important to find out the employees who can take these responsibilities. Such identification of employees who can be transferred is possible through the performance appraisal.

(f) Layoff Decisions: Performance appraisal is a good way of taking layoff decisions. Employees may be asked to lay off, if the need arises. The weakest performers are the first to be laid off. If there is no performance appraisal, then there are chances that the best men in the department may be laid off.

(g) Compensation Decisions: Performance appraisal can be used to compensate the employees by increasing their pay and other incentives. This is truer in the case of managerial jobs and also in the case of employees in non-unionized organisations. The better performances are rewarded with merit pay.

(h) Human Resource Planning (HRP): The appraisal process helps in human resource planning (HRP). Accurate and current appraisal data regarding certain employees helps the management in talking decisions for future employment. Without the knowledge of who is capable of being promoted, demoted, transferred, laid off or terminated, management cannot make employment plans for the future.

(i) Career Development: Performance appraisal also enables managers to coach and counsel employees in their career development.

The main objectives of performance appraisal has been discussed in the following:

(i) It provides feedback to employees so that they came to know where they stand and can improve their job performance.

(ii) It provide a vital database for personnel decisions concerning placements, pay, promotion, transfer and punishment etc.

(iii) It diagnose the strengths and weaknesses of individuals so as to identify further training needs.

(iv) It provides coaching, counselling, career planning and motivation to subordinates.

(v) It helps to develop positive superior-subordinate relation, and thereby reduce grievances.

(vi) It facilitates research in personnel management.

(vii) It also helps to test the effectiveness of recruitment, selection, placement and induction programmes.

(viii) To maintain records in order to determine compensation packages, wage structure, salaries raises, etc.

(ix) To identify the strengths and weaknesses of employees to place right men on right job.

(x) To maintain and assess the potential present in a person for further growth and development.

(xi) To provide a feedback to employees regarding their performance and related status.

(xii) To provide a feedback to employees regarding their performance and related status.

(xiii) It serves as a basis for influencing working habits of the employees.

(xiv) To review and retain the promotional and other training programmes.

24. Explain the techniques of performance appraisal.

Ans: The techniques of performance appraisal can be broadly classified into-

(a) Traditional methods. and

(b) Modern Methods.

Traditional method also known as trait approach is based on assessment of qualities in an employee. The evaluator rates the employees on the basis of certain traits and dimensions.

The various traditional techniques of performance appraisal are a follows:

(i) Confidential report: Under this method, the performances, ability and character of the employees is rated and a report is prepared annually. The report is kept confidential and the employees who are being evaluated never knows their strengths and weaknesses. The report is subjective in this method and is adopted in government department and public enterprises.

(ii) Graphic scales method: This method is very simple and easy to evaluate the performance. A rating scale is used in this method which defines the traits and the value of each trait on performances. The supervisor rates each employees on each trait and then the assigned values are totalled. Graphic scale uses mixture of characteristics such as initiative, honesty etc. and contributions like quantity of output, quality control etc.

(iii) Straight ranking method: It is an old method under which the employees are rated flatly on the basis of job performance. Employees who are most productive are placed at the top whereas those who are characterised by less profitability are ranked below. If facilitates comparison of all grades of employees irrespective of the nature of work performed.

(iv) Paired comparison method: In this method each employee is compared with another employee against a trait. If in a group there are 5 employees, each employee is compared with each of them like A with B, C with D, E with A, A with C, A with D and so on.; Again B is compared with each of them. This method gives more reliable ranking than straight ranking method.

(v) Grading systems: Under this system, certain basic traits like decision making power, cooperativeness, job-knowledge etc. are selected. The employees are given grades for their performance. For e.g.:

A = Excellent.

B = Very good.

C = Satisfactory.

D = Average.

E = Poor.

(vi) Forced distribution method: Under this method the management decides in advance what percentage of employees will be placed in outstanding how many in good group or how many in average group. The main idea in this system is to spread ratings in a number of grades. The employees are not rated properly. Forced distribution of ranking is feasible for a large group of employees. Besides it is easy to understand.

(vii) Checklist method: Here, the evaluator presents some statements or printed forms containing descriptive questions about the performance of employees. After the supervisor finishes answering, the forms are sent to personnel department where final rating is done. The supervisor may however be biased in answering questions regarding individual employees.

(viii) Free essay method: Under this method, the evaluator writes a free essay on the performance of employees by sheer observation and supervision at work place.

The various modern methods are:

(i) Assessment centre: This method was first developed in U.K. and U.S.A. Assessment centre is a place or centre where the managers gather and participate in job related matters to be evaluated by trained evaluators. The managers participate in role-playing, in – basket-exercises, business games, group discussions etc. and the evaluators observe their performance and give ratings. Assessment centre judges interpersonal skills, managerial skills, communication skills, stress management, presence of mind etc.

(ii) Human Resource Accounting: Man is the most powerful asset of an organisation. The deducted and loyal employees should be retained by the organisation. Under this method the cost of an employee in regard to interview, placement, training, compensation is compared with the profits generated by his performance and skills. If revenue is more than costs the employee is regarded as an invaluable asset to the company.

(iii) Management by objectives (MbO): Management by objectives is considered to be a landmark in controlling techniques in the field of management.

The employees under this method user set their own objectives and departmental goals. The top management is also involved in the discussion. After that the departmental heads compare the performances of the employees with the expected results set by the employees themselves. Periodic review is facilitated. This method is based on self direction and self control.

(iv) 360 Degree Performance Appraisal (2015): Under this method the employee is evaluated on the basis of datas collected from his/her associates like superiors, immediate subordinates, peers and self. The 360 degree appraisal provides a broad prospective about an employee’s performance. However the evaluator must assess the performance without bias.

(v) Behaviourally Anchored Rating Scales (BARS): Behaviourally anchored rating scales combines the features of critical incident method and grading scales method. Under this method the employees or supervisors are asked to describe some critical incidents in the job place i.e……, their behaviour, reaction and performance on these incidents. The evaluators divide the incidents into sets of performance dimensions say from 1 to 5. Another group of expert is employed who know the job and reallocate the original critical incidents. They are described the definitions of small sets of performance dimensions. They also assign rates. The rates of both group of experts are compared. Those critical incidents are retained that get 50% to 80% from both evaluators. The second group generally rates the employees on critical incidents on a seven or nine points scale.

25. Write briefly about the objectives of Potential Appraisal. Explain the importance of potential appraisal.

Ans: The important objectives are given below:

(i) Identification of Employees Having Capabilities to Perform Higher Level Jobs: It identifies people who have potential to take over higher jobs. This task is difficult to accomplish in industrial settings. It may take the help of assessment centre/development centres to find out suitable/capable employees for promotion.

(ii) Assessment of General Potential: It assesses whether the employees have abilities to perform some types of work. Employees’ aptitudes, level of competency, skill are appraised for better utilization in the organization activities.

(iii) Identification of Training Needs of Employees: For growth and development of organization employees’ development of skill, knowledge, abilities is needed. This is possible through training. Potential appraisal identifies the area which requires training for reinforcement/ improvement.

(iv) Implementing Succession Planning Activities: It helps organization to effectively carry out succession planning activities by way of providing data/information in respect of employees who are suitable for filling in vacant posts.

(v) Assisting Employees in Personal Development Process: It makes the employees aware of their strengths and weaknesses through feedback/counselling, discussion programmes so that they can prepare their personal development plan effectively.

(vi) Helping Organization to Decide its Strategy: It makes organization know its competent, effective, potential workforce as also non-achievers, dead woods, non-performers. Looking into strength of human resources, organization can decide its strategy. For example, the organization can decide whether it can go for business process reengineering, diversification of activities, reduction of employees through VRS etc.

The importance of potential appraisal.

(a) Evaluation of Capabilities: With the help of the potential appraisal form, the employees are judged on various performance and behavioural parameters. Appraising employee’s potential helps to evaluate his capability to take greater challenges, responsibilities and positions in the organisational hierarchy. It helps organization to identify the employees who are capable of taking more challenging roles & responsibilities in future.

(b) Succession Planning: Succession planning is a process for identifying and developing new leaders, who can replace old leaders when they leave, retire or die. Such planning increases the availability of experienced and capable employees that are prepared to assume these roles as they become available. Most organisations incorporate potential appraisal in their appraisal processes for identifying and developing suitable employee base for succession planning.

(c) Career Development: The potential appraisal results in identification of hidden talents and skills of an employee. The employee himself might not be aware of his certain competencies. The potential appraisal aids in career development of an employee by giving him opportunity to work on his potential capabilities.

(d) Motivate Employees: It leads to identification of hidden talents & thereby motivates the employees to further develop their skills and competencies. It also benefits the organization as it results in versatile workforce who can assume greater roles & responsibilities in future.

(e) Identify Training Needs: The potential appraisal helps the organization to identify the training needs. Such appraisal throws light on the hidden competencies of employees which could be developed further with the help of appropriate training programmes.

(f) Organizational Goals: The potential appraisal concentrates on the future. It helps to create a pool of experienced and capable employees by giving them opportunity to discover their hidden talent. It also helps employees to develop their personal interests in alignment with the organisational goals.

26. How does job evolution contribute to effective manpower planning in an organisation?

Ans: It helps understand a job’s core duties, responsibilities, and requisite skills. Job evaluation is pivotal in determining fair compensation. It aids firms in making well-informed decisions on pay scales, promotions and career development opportunities.An effective job evaluation helps the employee understand what he is doing well and whether he has capabilities beyond his current job function. For the organization, a job evaluation can help the organization to implement effective salary structures and grow efficiently. Understanding the benefits of a job review to the company can help managers better prepare for, and execute, their employee evaluations.The purpose of an employee evaluation is to measure job performance. Many evaluations provide quantitative measurements essential for a production-oriented work environment. Other employee evaluations provide employers with metrics regarding the quality of employees’ work. The importance of an employee evaluation is that it’s instrumental in determining whether an employee’s skill set is appropriately matched to the employee’s job.

27. Explain the techniques of potential appraisal.

Ans: The techniques of potential appraisal are as follows:

(a) Self-Appraisals: A self-appraisal form is prepared, which is required to be filled by the employee.

(b) Peer Appraisals: The HR Head may design a form for peer appraisal or ask the peers in confidence in small size companies, to take feedback on the employee.

(c) Superior Appraisals: The superiors are always required to carry out appraisal in every setup, which may be defined annual appraisals by way of confidential reports or any other method.

(d) MBO: The use of management objectives was first widely advocated in the 1950s by the noted management theorist Peter Drucker. MBO (management by objectives) methods of performance appraisal are results-oriented. That is, they seek to measure employee performance by examining the extent to which predetermined work objectives have been met.

Usually the objectives are established jointly by the supervisor and subordinate. Once an objective is agreed, the employee is usually expected to self-audit; that is, to identify the skills needed to achieve the objective Typically they do not rely on others to locate and specify their strengths and weaknesses. They are expected to monitor their own development and progress.

(e) Psychological and Psychometric Tests: Since the early 1900’s, psychologists have employed testing in an effort to quantify people’s intelligence, preferences, and behaviors. Today these assessments, called psychometric tests are used in schools, the military, mental health clinics, psychotherapists’ offices, correctional facilities, and in companies. Market analysts commonly use psychometric testing to determine people’s preferences for products, packaging, and branding.

A consumer might be asked, for example, if he or she prefers one product color to another, or which packaging type they are most likely to purchase. Employment specialists use these tests to determine if someone is a good fit for a job. For example, personality, intelligence, and aptitude tests can be used to capture specific preferences and skills for required tasks and responsibilities. Those preferences are then matched by the employer to particular job functions.

(f) Management Games like Role Playing: Employee motivation commonly benefits from suitable and well run team building games, exercises, and activities, including puzzles and quizzes. The company can also use team building games and exercises ideas as ice-breakers and energizers to warm up meetings, workshops, training, and conferences. Many of these group activities are also effective in specialized training sessions and seminars.

Team building games and activities are also useful in serious business project meetings, as games and activities help delegates to see things differently and use different thinking styles. Games, exercises and quizzes help to stimulate the brain, improving retention of ideas, learning, and increasing fun and enjoyment.

(g) Leadership Exercises: Team coaching programs have a lot of merit; one-on-one leadership coaching can be a very fulfilling process. Having some insight into the life of someone who has walked a similar path can often be encouraging management/HR Head can give the employee, specific leadership development activities where employees learn to lead by leading.

28. What do you mean by “compensation management”? Explain its objectives and importance.

Ans: Compensation management is the process of managing, analyzing, and determining the salary, incentives, and benefits each employee receives. Compensation management is a crucial part of any talent management and retention strategy. Creative compensation includes monetary and non-monetary benefits companies can employ to boost engagement and productivity, reduce attrition, and attract top talent. Compensation managers aim to attract, retain, and engage employees by offering broad and competitive compensation plans within the company. Effective compensation management benefits both the employer and the employee. Professionals who receive a fair base salary, generous benefits, and incentives in return for their work are much more likely to stay at their job and maintain a high performance level and morale.

Objectives of Compensation Management:

(i) Attract and Retain Talent: To remain competitive, organizations must not only attract skilled individuals but also retain them. This involves crafting compensation packages that go beyond industry norms, offering attractive remuneration to secure and keep top-tier talent. In a fiercely competitive job market, distinctive and compelling compensation becomes a strategic tool for talent acquisition and retention.

(ii) Motivate Employees: Compensation is a potent motivator when structured thoughtfully. By establishing clear links between employee efforts and rewards, organizations encourage high performance. Well-designed compensation systems contribute to fostering a culture of achievement and dedication, where employees are driven to excel due to the tangible connection between their contributions and financial recognition.

(iii) Fair and Equitable Treatment: The objective of ensuring fairness and equity in compensation extends beyond the monetary aspect. Open communication about compensation criteria reduces dissatisfaction among employees, creating a sense of trust and loyalty. Fair compensation practices contribute significantly to employee satisfaction and the overall well-being of the workforce.

(iv) Cost Control: Striking a balance between offering competitive compensation and managing costs is a delicate but crucial aspect of compensation management. Effective strategies involve meticulous budgetary considerations to sustain reward programs without compromising the organization’s financial stability. This requires a comprehensive understanding of market trends, internal financial capabilities, and the strategic alignment of compensation with overall business objectives.

(v) Legal Compliance: Compliance with labour laws and regulations is not only a legal necessity but also a fundamental objective for compensation management. Adhering to legal requirements mitigates the risk of legal issues, lawsuits, and penalties. Beyond safeguarding the organization’s reputation, it reinforces the commitment to ethical employment practices.

Importance/benefits of Compensation Management:

(i) Helps to ensure that wages and offers to job candidates are competitive.

(ii) Can be used as part of employee benefits auditing and evaluations.

(iii) Helps establish the business’s compensation philosophy, documentation of company policies regarding wages, bonuses, and benefits, and its commitment to fair and equitable pay.

(iv) Demonstrates to employees that you prioritize and value their hard work, which can lead to long-term improvements in worker retention engagement, and morale.

(v) Can help HR teams analyze and measure diversity within the company while also identifying areas of opportunity.

(vi) Helps address complex pay considerations, such as adjusting pay for remote employees who live in low- or high-wage regions.

(vii) Helps businesses comply with applicable federal, state, and local pay equity laws.

29. Write a note on employee counselling. Explain the functions of employee counselling.

Ans: HRM is basically a process of dealing with people. A manager has to deal with various types of people, subordinates, superiors, problem makers, problem solvers, strong temperaments and so on. The instrument with which the manager can achieve a balance and maintain a congenial interpersonal relationship with the employees is counselling. Employee counselling is a discussion of an emotional problem with an employee. So that he can cope with the problem in much better way counselling tries to improve the mental health of the employee. Every management desires that their employee should not only be physically fit but also mentally alert. Counselling helps an emotionally distorted employee to become normal develop self confidence and self control and understanding so that he can work efficiently.

The features of employee counselling are:

(i) Counselling in an exchange of idea and feeling between two people i.e., a counselor and a counselee. Thus it is an act of communication.

(ii) Counselling facilitates the employee in coping with their emotional problems which its turn helps in improving the organisational problems.

(iii) Counselling may be performed by both professional and non professional.

(iv) Counselling is generally confidential and hence employees feel free to talk openly about their problems involving both jobs and personal problems.

(v) Counselling enhances job satisfaction and moral of the employees.

There are many functions of counselling, They are discussed below:

(i) Advice: The counsellor after careful listening to the problems of counsellor make judgement about the counsellors ‘problems’ and guide him towards desired forces of action. It has been observed that advising developed a very good relationship between the counsellor and counsellor.

(ii) Reassurance: Reassurance provides courage, confidence and strength and develops a positive feelings that he is pursuing a suitable course of action. Reassurance is needed when a employee is assigned a challenging task.

(iii) Clarity Thinking: Clarity thinking is another function of counselling. It encourages a person to think in a rational and realistic manner. Clarity thinking encourages a person to accept responsibility and be more realistic in solving the emotional problems.

(iv) Release of Emotional Tension: An important function of counselling is relies of emotional tension. When people share their emotional problems with someone they get emotional relies from their tensions and frustration.

(v) Communication: Counselling facilitates in improving upward and downward communication. In upward communication process, the feeling and emotional problems of employees can be interpreted to management. It also helps in achieving downward communication as the counsellors interpret companies activities and give work insides to employees.

30. What are the methods or types of Employee Counselling. Briefly explain the causes of counselling.

Ans: (i) Directive Counselling: It is full counselling. It is the process of listening to an employee’s problem, deciding with the employee what should be done and telling and motivating the employee to do it. This type of counselling mostly does the function of advice, reassurance and communication. It may also perform other functions of counselling.

(ii) Non-Directive Counselling: This type of counselling is at the opposite end of the continuum. It is the process of skilfully listening and encouraging a counselee to explain troublesome problems, understand them and determine appropriate solutions. The employee also plays a vital role in this type of counselling. Employee primarily controls the direction of counselling, takes up the responsibility to develop solutions, assumes equal status with the counselor and is psychologically independent as a person.

(iii) Participative Counselling: Both directive and non-directive methods suffer from limitations. While the former is often not accepted by independent employees, the latter needs professionals to operate and hence is costly. Hence, the counselling used in most situations is in between these two.

This middle path is known as participative counselling. Participative is a counselor-counselee relationship that establishes a cooperative exchange of ideas to help solve an employees’ problems. It is neither wholly counselor-centered nor wholly counselee-centered. Counselor and counselee mutually apply their different knowledge, perceptions, skills, perspectives and values into the problems and find solutions.

(iv) Cooperative Counselling: Use of non-directive counselling is quite limited in organisations as it requires professional counselors and is quite expensive. On the other hand, directive counselling is of-ten not accepted by modern, independent and democratic employees. This is why most of the organisations use counselling which is called middle-of-the- road approach or in other words cooperative counselling.

It is called cooperative because it uses the cooperative efforts of both the counselor and the employee. It is neither entirely counselor-centred nor employee-centred, but requires that both of them come forward with their valued knowledge, perspectives, and insights to resolve the employee’s problem in a work together setting.

In the present fast moving society, the employee is confronted with numerous problems which may be personal in nature or related to his job. Some of the conditions like frustration job dissatisfaction, resistance to change, intergroup conflict, interpersonal relationships are the major cause of counselling needs. In such a situation, counselling facilitates in reducing his stressful conditions and thereby return to normal job performance and behavior. Thus, counselling helps an emotionally disturbed employee to become normal, self control and understanding so that he can work effectively.The causes of counselling needs are explained below:

(i) Conflict: Conflict arises when there is disagreement between two or more individuals or groups and each individuals or group tries to gain acceptance of its view or objectives over the other one. Conflict is undesirable and it should be avoided and resolved as soon as possible. Personal conflict is more emotional in nature and reflects feelings anger, distrust, fear, tension etc.

On the other hand the organisation conflict involves disagreement on such factors as allocation of resource, organisational policies and procedures, nature of assignments and distribution of rewards.

The management experts are of the view that an environment of goodwill and trust should be developed in order to avoid conflict. Proper organisational structures, authority relationship and good human relations can help in prevalently conflict.

(ii) Stress: Stress is a condition of straign that has a direct bearing on emotions through process and physical conditions of a person when it is excessive it can retail one’s ability to cope with the environment people who are stressed may become nervous and developed chronic worry stress also leads to physical disorders, because the internal body system changes to try to cope with the stress.

The cause of stress can be classified order two heads:

(a) On the job stress.

(b) Off the job stress.

(a) On the job stress: The job itself may stand as the basis cause of stress. Employees may not be able to cope with the demand of the job or the requirements of the jobs may be unclear to them. On such occasions the employees may feel that they have a work overland, pressures and they can’t cope with tension, anxiety and insecurity. All these feelings cause stress.

(b) Off the job stress: Off the job stress also affects the functioning of the employee. Some of them are financial problems, death in the family, problems with children and so on.

(iii) Frustration: Frustration is another major cause of stress when an employee is respectly interfered with an employee hundred in such a way that parents him from achieving a desired goal, it results in frustration. There are various kinds of reaction to frustration such as aggression, withdrawn, physical disorder, substitute objective, negative etc.

31. Explain the various purposes or needs of transfer?

Ans: Transfer are generally resorted to with a view to attain the following:

(i) To Meet the Organisational requirements: Changes in technology, volume of production, production schedule, product line, quality of products, organisational structure etc. necessitate an organisation to reassign job among employees so that right employee is placed on the right job.

(ii) To satisfy Employee Needs: Employees may request for transfer in order to satisfy their desire to work in a particular department, place and under some superior.

(iii) To Better Utilize Employee: When an employee is not performing satisfactorily on one job and management thinks that his/her capabilities would be utilized better elsewhere, he/she may be transferred to other job.

(iv) To make the employee more versatile: In some organisations like banks, employees after working on a job for a specified period are transferred to other job with a view to widen their skills and knowledge and also reduce monotony. This is also called job rotation.

(v) To adjust the work force: Work force can be transferred from the departments/plants where there is less work to the departments/plants where is more work.

(vi) To provide relief: Transfers may be made to give relief to the employees who are overburdened or doing hazardous work for long period.

(vii) To punish employee: Management may use transfer as an instrument to penalize employees who are indulged in undesirable activities.

(viii) To Accommodate Family Related Issues: Family related issues causes transfer, specially among female employees. When they get married, the female employees want to join their husbands and this fact necessitates transfers or resignations.

32. Discuss the various type of transfer?

Ans: Employee transfers may be classified into following types:

(i) Production Transfer: Such transfers are made when labour requirements in one division or branch is declining. The surplus employees from such division are transferred to those divisions or branches where there is shortage of employees. Such transfers help avoid lay off and stablize employment.

(ii) Remedial Transfer: Such transfers are affected to correct the wrong selection and placement of employees. A wrongly placed employee is transferred to more suitable job. Such transfers protect the interest of the employee.

(iii) Replacement Transfer: Replacement transfer are affected when labour requirements are declining and are designed to replace a new employee by an employee who has been in the organisation for a sufficiently long time. The purpose of these transfers is to retain long services employees in the organisation.

(iv) Versatility Transfer: These transfers are also known as job rotation. In such transfer, employees are made move from one job to another to gain varied and broader experience of work.

(v) Shift Transfer: These transfers are affected in the organisations where work progressed for 24 hours or in shifts. Employees are transferred from one shift to another usually on the basis of mutual understanding and convenience.

(vi) Penalty Transfer: Management may use transfer as an instrument to penalize employees involved in undesirable activities in the organisations.

33. What are the various policies of transfer?

State the principles on which policy must be based.

Ans: The management must frame a policy on transfers and apply it to all the transfers instead of treating each case on its merit.

Such a policy must be based on the following principles:

(i) Transfer policy must be in writing and be made known to all the employees of the organisation.

(ii) The policy must very clearly specify the type and the circumstances under which company initiated transfers will be made.

(iii) It should indicate the executive who will be responsible for initiating and approving the transfers.

(iv) It should be prescribed in the policy whether the training or retraining is required on the new job.

(v) Transfers should be clearly defined as temporary or permanent.

(vi) The interests of the organisation are not to be forgotten in framing a policy of transfer.

(vii) The fact of transfer should be intimated to the person concerned well in advance.

(viii) Transfers should not be made frequent and not for the sake of transfer only.

34. What is Promotion? Why it is necessary?

Ans: Promotion is an internal source of recruitment. Employees want advancement in an organisation as a recognition of their hard work and sincerity. Promotion is an upward movement of an employee from present job to another job that carries higher pay, higher responsibility and status. Only shifting of job does not constitute promotion. Promotion must be characterised by a rise in pay, authority and responsibility. It is advancement of an employee to a better job that comprises of greater responsibilities, status, prestige and especially increased salary or pay.

Promotion are generally given in an organisation to meet the following purposes:

(i) Recognition of Efficiency: One of the main purposes of promotion is to recognise the efficiency of employees. So promotion is a reward for recognition of efficiency and performance.

(ii) Prevents and Employee from Leaving Job: Another important purpose of promotion is prevent an employee from leaving job through resignation.

(iii) Motivation: Promotion aims at motivating employees. It motivates the employees because they feel secured and worry free that their efficiency will be rewarded with promotion to a higher position.

(iv) Organisational Effectiveness: Because of having promotion opportunities, employees of an organisation always try to perform their duties at their level best, which ultimately help in achievement of organisational goals and thereby make the organisation effectiveness.

(v) Sense of Belonging: Promotion increases the sense of belongingness among the employees.

(vi) Job Satisfaction: Promotion increases the job satisfaction among the employees of an organisation.

(vii) Increase Morale: Another important purpose of promotion is to increase the level of moral among the employees of the organisation.

(viii) Loyalty: Promotion promotes the loyalty among employees to their respective organisations.

(ix) Create Impression: Creating impression is another purpose of promotion. Promotion provides the employee better opportunities and a bright service career. So it can easily impress the employees.

(x) Reduce Labour Turnover: Promotion provides upgradation to the employees so every employee always tries to continue his service in an organisation for long and long time. Hence, it can reduce labour turnover.

35. How does an effective compensation management programme help an organization to achieve its strategic objectives?

Ans: In layman’s language the word ‘compensation’ means something, such as money, given or received as payment for service. The word compensation may be defined as money received in the performance of work, plus the many kinds of benefits and services that organization provides their employee. It refers to wide range of financial and non-financial rewards to employee for their service rendered to the organization. It is paid in the form of wages, salaries, special allowance and employee benefits such as paid vacation, insurance, maternity leaves, free travel facility, retirement benefits etc.

Objectives of Compensation Management:

A sound compensation structure tries to achieve these objectives:

(a) To attract manpower in a competitive market.

(b) To control wages and salaries and labour costs by determining rate change and frequency of increment.

(d) To induce and improved performance, money is an effective motivator.

Importance of Compensation Management:

(a) To Employees:

(i) Employees are paid according to requirement of their jobs i.e. highly skilled jobs are paid more compensation than low skilled jobs. This eliminates inequalities.

(ii) The chances of favouritism are minimised.

(iii) Jobs sequence and lines of promotion are established wherever they are applicable.

(iv) Employee’s moral and motivation are increased because of the sound compensation structure.

(b) To Employers:

(i) They can systematically plan for and control the turnover in the organization.

(ii) A sound compensation structure reduces the likelihood of friction and grievance over remunerations.

(iii) It enhances an employee morale and motivation because adequate and fairly administrative incentives are basis to his wants and need.

(iv) It attracts qualified employees by ensuring and adequate payment for all the jobs.

(v) In dealing with a trade union, they can explain the basis of their wages programme because it is based upon a systematic analysis of jobs and wages facts.

36. Discuss the concept of “Compensation”. What are the factors which affect compensation of employees in an industrial organisation?

Ans: Compensation refers to any payment given by an employer to an employee during their period of employment. In return, the employee will provide their time, labor, and skills. This compensation can be in the form of a salary, wage, benefits, bonuses, paid leave, pension funds, and stock options, and more. Compensation is anything of value that is provided to employees in exchange for their service to a company. Compensation management is a system that is put into place with the goal of maximizing employee performance and bringing together the goals of all people involved with running organizations.

The factors which affect compensation of employees in an industrial organisation:

(i) Productivity of workers: Productivity-based compensation helps derive the best results. The higher the productivity of employees, the more should be the compensation.

(ii) Prevailing Wage Rates: Wages in a firm are influenced by the general wage level or the wages paid for similar occupations in the industry, region and the economy as a whole. External alignment of wages is essential because if wages paid by a firm are lower than those paid by other firms, the firm will not be able to attract and retain efficient employees.

(iii) Government Policies: Government also has certain policies to protect employee interests. The employer has to pay the employees as per governmental regulations and provide benefits such as PF, medical insurance, grautity, and pension.

(iv) Society: Compensation paid to employees often affects pricing of the firms goods or services. For this reason, consumers may also become interested in compensation decisions. Businesses in a local labour market are also concerned with the pay practices of new firms locating in their area. The Supreme Court has been keeping social and ethical considerations in adjusting wage and salary disputes.

(v) Industry Standards: No employee would like to join a company whose compensation is below the industry standards. Therefore you need to analyse the standard market rates of different roles and pay your employees accordingly.

(vi) The Economy: The economy definitely affects financial compensation decisions. For example, a depressed economy generally increases the labour supply and lowers the market rate. On the other hand, a booming economy results in greater competition for workers and price of labour is driven upward.

37. What are various bases of giving promotion in an organisation?

Ans: (i) Seniority as a basis of promotion: Seniority is the length of service an employee extends in his organisation. If seniority is adopted as a basis for giving promotion then the most senior person irrespective of his post, grade shall be promoted whenever there is a vacancy in upper post. Seniority is selected as a basis because it is assumed that there is direct relation between the length of service and the knowledge or skill required for job performance. Moreover senior employees are loyal employees. This method is easy to give promotion as it is easy to measure the length of job. Trade unions prefer this method and there is no scope for favoritism and discrimination in this method.

Advantages:

(a) In an organisation the system has been adopted with a view to patronizing the employees.

(b) Utilization of seniority in making various employment decisions brings an objective means of distinguishing among personnel.

(c) Seniority as the basis of promotion creates a sense of security in employees for they can predict in advance when and how certain changes will be effected.

(d) Seniority as a means of employment decisions creates more peace in the organisation for these decisions made always strictly on the basis will be acceptable to all. This will keep employee’s satisfied and help in avoiding the charges of bias, favouratism and nepotism.

(e) Seniority as a basis of promotion is also acceptable to management because it reduces the rate of labour turnover. Employees will remain within an organisation even when they are aware of better opportunities elsewhere on reason being the loss of seniority resulting from quitting.

Disadvantages:

(a) The assumption that the employees lean more with length of service is not valid as employees may learn upto a certain stage and learning capabilities may diminish beyond a certain age.

(b) It demotivates the young and more competent employees and results in greater employee turnover.

(c) It kills the zeal and interest to develop, as everybody will be promoted without showing any all round growth or promise.

(d) Judging the seniority, though it seems to be easy in a theoretical sense is lightly difficult in practice as the problems like job seniority company seniority, zonal/regional seniority, service in different organisations, experience as apprentice trainee, trainee, researcher, length of service not only by days but by hours and minutes will crop up.

(ii) Merit as a basis of promotion: Merit is the positive energy or capability of an employee. It denotes an employee’s ability, skill, competence and efficiency. When merit is adopted as a basis for promotion the most competent person gets the opportunity to work in the upper grade and is valuable to the organisation. This induces competitive zeal among the employees and they improve their efficiency for getting prompt promotion. Merit can be determined by observation, interviews, performance appraisal reports and oral examinations. Here ability ignores the value of experience. However, sometimes merit measurement is subjective.

Advantages:

(a) It recognizes and rewards extra knowledge competence and initiative of the employees. Even juniors can expect promotions.

(b) It generates greater motivation in the competent employees as they do not have to depend on more seniority for their advancement.

(d) It results, generally in increased productivity is promotions will be based on an evaluation of the employees performance.

(e) It is a scientific and logical system for promotions. Management prefer this system as it increases the efficiency and profitability of the enterprise.

Disadvantages:

(a) It is not easy to measure merit. Personal prejudices, biases and union pressures may come in the way of promoting the best performer.

(b) When young employees get ahead of other senior employees in an organisation (based on superior performance), frustration and discontentment may spread among the ranks. They may feel insecure and may even quite the organisation.

(c) Moreover, past performance may not guarantee future success of an employee. Good performance in one job (as a Foreman for example is no guarantee of good performance in another as a supervisor).

(iii) Seniority cum merit basis: In some organisations while giving promotion the managers follow combination of merit and seniority. Management prefer merit as a basis of promotion because the valuable services of able employees can be utilised at higher levels which bring laurels to the organisation. However, the seniority factor is not completely ignored. Thus among two employees which possess equal merit rating should be promoted on the basis of seniority. And when two employees are of equal seniority merit should be the deciding factor. Thus combination of merit and seniority is the philosophy behind promotion in this method.

38. “Performance appraisal fails due to personal bias.” Discuss the statement in the light of appraising employees in an objective manner.

Ans: Performance appraisals are always stickily for everyone. While managers make an effort to be as objective as possible, there are always concerns about specific performance appraisals, and their accuracy. If you are going to evaluate your staff, then it wise to be aware of factors that may affect your assessments. In this short article we outline a few factors you should be aware of, so that you can examine your own assessment processes to ensure that they are as free from bias as possible.

(a) Halo Effect: The halo effect is the tendency to rate someone high or low in all categories because he or she is high or low in one or two areas. Results in appraisals that do not help develop employees, because they are two general or inaccurate as to specifics. Evaluating someone lower is sometimes also called the “devil effect.”

(b) Standards of Evaluation: If you are using categories such as fair, good, excellent, etc. be aware that the meanings of these words will differ from person to person. In any event, the use of these categories is not recommended because they do not provide sufficient information to help employees develop.

(c) Central Tendency: The habit of assessing almost everyone as average. A person applying this bias will tend not to rate anyone very high or very low.

(d) Recency Bias: Tendency to assess people based on most recent behaviour and ignoring behaviour that is “older”.

(e) Leniency Bins: Tendency to rate higher than is warranted, usually accompanied by some rationalisation as to why this is appropriate.

(f) Opportunity Bias: Ignoring the notion that opportunity (factors beyond the control of the employee) may either restrict or facilitate performance, and assigning credit or blame to the employee when the true cause of the performance was opportunity.

(g) False Attribution Errors: We have a tendency to attribute success or failure to individual effort and ability (at least in North America). So when someone does well, we give them credit, and when someone does less well, we suggest it’s somehow their fault. While there is some truth in this, the reality is that performance is a function of both the individual and the system he or she works in. Often we misattribute success and failure and assume they are both under the complete control of the employee. If we do, will never improve performance.

39. What is job evaluation? What are its underlying objectives? Explain the various methods of Job evaluation with their merits and demerits.

Ans: Job evaluation is a systematic and planned process of studying the relative worth of various jobs in the organisation. It analysis the value of various jobs on an objective basis and compares them in an organisation and among several organisations. Job evaluation highlights job ranking. It helps in ranking all the jobs. Job evaluation provides decisions for wage and salary administration. It attempts to compare the relative intrinsic value or worth of jobs within an organisation. Thus, it is a comparative process. However, job evaluation evaluates job and not the employees. This process ignores the individual abilities of the job holder.

The objectives of job evaluation are enumerated below:

(a) To provide a standard basis for ascertaining the real worth of the jobs.

(b) Job evaluation provides a base of providing different wage structures to the employees and workers in an organisation on the basis of job.

(d) To eliminate subjective judgements and differential treatment in wage fixation. Job evaluation judges the job and not the employees.

(e) Job evaluation aims at specifying functions, responsibilities and authority.

(f) Job evaluation also aim towards fixing incentives and bonus plans.

(g) Job evaluation aims at excellent career planning for the employees in the organisation by comparing various job structures.

(h) Job evaluation facilitates objective comparison of jobs. Thus it aim towards removing drawbacks of wage and salary administration and prepares the guidelines for promotion.

Job evaluation method can be divided into two categories. These are-

(A) Non-quantitative method.

(B) Quantitative method.

The above method are further subdivided into different types which are explain below one by one-

(A) Non-Quantitative Method: The Non-quantitative method are divided into categories. These are ranking method and job grading method.

These are discussed below-

(i) Ranking Method: Under this method, all the jobs are arranged or ranked in order of the importance from simpliest to the hardest order. A comittee of several executives in constituted, which evaluate the job description and ranks them in order of importance. A committee does not have specific factors before it but the things like nature of the job, working conditions, supervision needed, responsibilities involved etc are kept in mind while ranking the job.

Merits:

Ranking method of job evaluation has the following merits-

(i) It is very easy to understand and easy to explain to the employees.

(ii) This method is economical in operation as compare to other methods.

(iii) It can be installed without any delay as it requires much less time.

Demerits:

(i) The ranking method is not based on standard criteria and so human bias can’t be ruled out.

(ii) These remain chances of inaccurate ranking.

(iii) Under this method jobs are only ranks in some order as the exact difference between different jobs is not determined.

(ii) Job Grading Method: Under this method, a no of pre-determined grades of classification are divided by the committee and each job is assigned to one of the grades of classes. With the help of job analysis, information about different job is collected and they are put under different grades as per their nature and importance. The jobs may be graded as skilled, unskilled, clearical, administrative etc. This method is considered to be an improved over ranking method:

Merits:

(i) This method is simple to understand and easy to operate. It does not requires any technical help.

(ii) It is easy to determine pay scales for various grades or classes.

(iii) This method is successfully use in govt. services.

Demerits:

(i) No job analysis is essential in this method, so there is a chance of wrong classification for jobs.

(ii) With the increase in number of jobs, the system becomes difficult to operate.

(iii) This method is not suitable for large organisation because of its rigidity.

(B) Quantitative Method: The quantitative method of job evaluation are described with their respective merits and demerits in the following paragraphs-

(a) Point Method: This is the most widely used method of job evaluation. It involves quantitative and analytical approach to the measurement of job worth. A no of important factors to be considered in each job are determined. The degree of each factor is also determined in the assigning points. The point system is based on the assumption that important factors of each job can be determined for evaluating it. The points of different jobs are converted into money value or wage rates system.

Merits:

(i) It gives a numerical basis for wage differentials.

(ii) The scale once decided can be used for farely long time.

(iii) This system of job evaluation is more acceptable to workers.

(iv) This method is more accurate as compare to other method.

Demerits:

(i) The use of this method involves high cost. Thus it can be used only by big concerns.

(ii) The task of defining job factors and their degree of factors is a time consuming process.

(iii) The selection of factors and then sub factors is a difficult task.

(b) Factor comparision method: This method is a combination of ranking and point system. It was first developed by E.J.Berge in 1926. Under this method the relative rank of the job are evaluated in relation to monetary scale. Some pay jobs are selected at the first instance and then ranked by considering one factor at a time. In this method, 5 factors are generally evaluated for each job, such as mental requirement, skills, physical requirements, responsibilities and working conditions:

Merits:

(i) This method is systematic, where every job is qualified.

(ii) It can be easily explained to employees.

(iii) The number of factors used being limited, it helps in avoiding overlapping.

Demerits:

(i) It is very difficult to operate.

(ii) The system is complexed and can’t be easily understood by non- supervisory stuff.

(iii) This method is expensive and small concern can’t affort to use it.

40. What are the essentials of a good incentive plan?What are the Principles of scheme of incentive wage plan?

Ans: An incentive plan should be fair for both to employer and employees. Following are the essentials of a good incentive plan-

(i) Simple to understand: A good incentive plan should be simple to understand by the workers. They should be able to know the extra amount to be paid to them.

(ii) Just and Equitable: A system will succeed only if it is just and equitable. A worker should fully rewarded for the effort put by him.

(iii) Attractive: Incentive payments should be large enough to attract workers for improving their performance. If the incentive is small then workers will not feel tempted towards it. Incentive should be large so that workers are tempted to earn it.

(iv) Willing cooperation of workers: The scheme should have willing support of worker. Before introducing an incentive scheme it should be discussed with workers and their viewpoints should be incorporated as far as possible.

(v) Clarity of objectives: Management should be clear about the goals to be achieved from the incentive schemes. It should be properly communicated to the workers also. The aim of such schemes may be able to raise output, improve quality of goods etc.

(vi) Conducive of Health: A scheme should not tempt workers to overstrain them. When an incentive plan is such where workers are required to work for long hours or expected to work at much speed then their health will be adversely affected.

(vii) Reasonable Standard: The standards fixed under incentive plans should be attainable with some extra efforts.

Any scheme of incentive wage plan must be based on some principles which may be stated as follows:

(a) Because many employees are sceptical of incentive plans, and also because the plans, must be adopted to situation in which they are used, an incentive plan must be thoroughly worked out and explained to all those who will be affected by it.

(b) Expected earnings must be higher than those provided by hourly rates. Increases ranging from 15 to 25% are widely regarded as about right.

(c) A small proportion of all employees those who are especially apt in various operations earn as much as 50 percent more than this average.

(d) Arrangements that provide for a declining rate higher levels of output are not generally acceptable, except possibly at very high levels. Where a negative may protect the health of the employee.

(e) Establishing bases on standards of output is a matter of concern in all incentive plans. Time studies for each jobs represent the most satisfactory means of setting fair standards. Base rates derived from experience under unstandardized conditions seldom reliable.

(f) Rate on various job must be properly interrelated. Job evaluation is probably the most satisfactory means of establishing such relationship.

(g) Means must be provided for periodic review of rates to make use that they are appropriately related to each other and fair in terms of possible earning’s on other jobs.

(h) Means must be provided to insure prompt adjustment in rates for changes in job content.

41. What is wage and salary administration? Explain the external factors affecting wages and salary administration?

Ans: Wage and salary administration is a very intelligent work because it affects employee motivation, commitment and loyalty towards the organisation. The employees put their hard work, time and efforts in the organisation and get compensated in return. Wage and salary plans must be designed with much care and intelligence. Monetary rewards can be of many types. Wage and salary administration is the process of managing a company’s compensation programme. It aim towards establishing and sustaining an equitable wage and salary structure.

The various external factors affecting wage and salary administration are:

(a) Demand and supply: The demand and supply position in the labour market affects the wage rates of individual companies. When the demand for a particular labour is more than supply of that labour than the wages are more and vice versa.

(b) Cost of living: Wages rates may differ from one geographical territory to another. Wage rates are influenced by cost of living of a place. The workers demand wages which is necessary to maintain a minimum standard of living.

(c) Bargaining power of trade unions: Trade unions strength also affect the wage rates. The strength of trade unions is measured by membership, financial position and type of leadership. More is the strength of trade union higher is the wage rate.

(d) Government legislation: Government has enacted various laws for uplifting the social status and financial condition of workers. Minimum wages Act has been passed in 1948 which guarantees minimum wages to workers.

(e) Social factors: The workers and employees are social beings. They want to get fair and equitable wage rates. Moreover compensation plans should be designed by keeping the psychology of employees under consideration.

(f) Economic and market factors: The prevailing wage rates of the market and the general economic cycle also affects the decision of a manager while designing wage plans.

42. What is incentive scheme or plan. What are the essentials of a good incentive plans?Write the features of Incentive plans?

Ans: An incentive scheme is a plan or programme to motivate Individual or group performance. An incentive programme is most frequently built on monetary rewards (incentive pay or monetary bonus), but may also include a variety of non-monetary rewards or prizes.’

Incentives or bonuses are paid to workers in order to reward their efficiency and to motivate them to perform at above average level of productivity. If workers are given incentives, they fell encouraged to raise the volume of production. Such a rise in the volume of production is advantages to the employer since it results in reduction of unit cost of products primarily on account of lower charge for overheads. Hence in determining an incentive system the productivity factor must be kept in view.

Essential of good Incentive plans:

Following are the essential of good Incentive plans:

(i) Cooperation of workers: The cooperation of workers in the implementation of an incentive scheme is essential because the employees some how devise, if they do not like a scheme, ingenious ways of evading or sabotaging the plan, often with the tacit connivance of the foreman or supervisor. Workers co-operation may be secured through proper discussion with their representatives.

(ii) Scientific work measurement: The scheme must be based on scientific work measurement. The standards set must be realistic and must motivate workers to put in better performance. Workers must be provided with necessary tools, equipment and materials so as to enable them reach their standards.

(iii) Coverage of indirect workforce: Indirect workers, such as supervisors, foremen, charge hands, helpers, crave operators, canteen staff store keepers and clerical staff should also be covered by incentive schemes.

(iv) Management commitment: There should be management commitment to the cost and time necessary to administer incentive schemes properly, and these must be carefully assessed before embarking on an incentive programme.

(v) Careful Planning: There is greater need for planning many incentive schemes, started hurriedly, planned carelessly and implemented indifferently have failed and have created more problems for the organization than they have tried to solve.

The characteristics of Incentives plans are:

(i) Minimum wages are guaranteed to all workers.

(ii) An incentive plan may consist of both monetary and non-monetary elements.

(iii) For a successful incentive plan, the essential are timing, accuracy and frequency of incentives.

(iv) The incentive plan requires that it should be properly communicated to the workers.

43. What are the essential of a satisfactory wage system?What are the various methods of wage payment?

Ans: An ideal system of wages must possess the following characteristics:

(a) Simplicity: The system should be simple to understand otherwise, the workers look at it with suspicious. The complex wage system may lead to strike and agitations and may be hindrance in having harmonious employer employee relationship.

(b) Satisfactory: The system should be satisfactory from the point of view of both employees and employers, i.e. the reward to the employee should be fair and must give low per unit cost to the employer. It will be better, if the system has the approval of the trade union.

(c) Incentive to work: The system should provide a sufficient incentive to workers to work hard and with great care. It should enable an efficient worker to earn more.

(d) Guaranteed minimum wage: The system should guarantee a minimum wage to every worker.

(e) Certainty: It should not have any element of ambiguity or uncertainty.

(f) Quality output: The system encourage the worker not only to increase quantum of output but also to improve the quality of output.

(g) Flexibility: The system must be adoptable to necessary changes.

(h) Common: The system adopted should be common in the same locality or industry.

(i) Economical: It should be economical in operation and should increase the overall efficiency of workers.

(j) Distinction between skilled and unskilled worker: The system should distinguish between skilled and unskilled workers and skilled workers should be rewarded for the efforts made by them for acquiring skill.

(k) Practicability: The system adopted by the organization should be practical one. Some premium or bonus plan are theoretically quite the attractive but they are not fit for practical use.

The different methods of wage payment are:

(a) Time wage system: This is the oldest method of wage payment. Wages are paid to the employees on the basis of time element and not on units performed. The workers under this method are paid a definite amount of money for a specific period of work which may be a day, week or a month. This system is simple and can be understood by the employees. It assures a guaranteed wage to the employee. Trade union and employees prefer this system.

Wages are calculated in this method as follows:

E = T x R.

Where T = Amount of time spent.

R = Rate of pay.

(b) Piece wage system: Under piece wage system, the wages are paid to the employees not on the basis of time element but on basis of output. A fixed rate is paid for each unit produced and job performed.

The wages are calculated as:

Output x Piece Rate = Earnings

The chief characteristic of this method is that workers income vary according to the changes in his output. Piece wages are preferred where larger production is needed.

Piece rate system is of three different types-

(i) Straight piece rate system.

(ii) Increasing piece rate

(iii) Decreasing piece rate.

When one piece rate is fixed and whole production is paid on this basis it is called straight piece rate system. When different rates are fixed for different level of production it is called increasing piece rate. Higher rates are given when production increases beyond a certain level. Whereas when the rate per unit decreases with increases in output it is called decreasing piece rate.

(c) Balance or debt Method: It is a combination of time wage system and piece rate system. If the wages calculated at piece rate is more than the wages calculated according to time wage system the workers get credit. While in case of vice versa the worker is paid time wage and the deficit is carried forward as debt to be conserved in future.

44. Give a description on performance linked compensation.

Ans: Performance-based compensation is an incentive-based form of compensation that can be paid to portfolio managers of investment funds. Regulated mutual funds with performance-based compensation may add approximately 0.20% to their management fees for performance-based incentives. Within the investment industry, hedge fund managers are most well known for receiving high levels of performance-based compensation.

Performance-based compensation also refers to additional compensation paid out to employees that have performed above and beyond their job requirements at an extremely high quality.

Performance-based compensation rewards an investment manager or an employee for meeting certain performance targets or for high-quality work. For investment managers, it provides incentives to make smart and risk-appropriate investment choices that result in an appreciation of invested assets. This allows them a percentage of the returns in addition to the managerial fees they charge.

For employees, performance-based compensation is a reward for their hard work and acts as an acknowledgment of their contribution to the firm as well as functioning as an incentive to stay with the company. Most employee bonuses are performance-based compensation.

(i) Investment Company Performance-Based Compensation: The Investment Company Act of 1940 governs the mutual fund industry and sets certain requirements that have helped to shape the compensation standards for portfolio managers. Investment companies must have a board of directors that approves the compensation schedule of managers.

Companies must also file a registration statement including a prospectus and statement of additional information, clearly and transparently outlining all the information on the fund including compensation.

Standards and documentation for publicly traded funds are generally expected to be consistent across the industry for easy comparison by investors. This consistency has also generally led to standardized fees charged by mutual fund managers as part of the fund’s total annual operating expenses.

Mutual fund portfolio management fees can range from 0.50% to 2.50% with active fund managers requiring higher compensation. Portfolio management fees typically comprise the majority of a mutual fund’s total annual operating expenses. Across the industry, mutual fund managers can also receive performance-based fees. These fees are detailed in their registration statement documentation and approved by the board of directors.

(ii) Hedge Fund Manager Performance-Based Compensation: Across the investment industry, hedge fund managers are more broadly known for their performance-based fees. Hedge funds are much less regulated than traditional mutual funds and therefore have greater latitude for fee schedule structuring.

They also typically employ more complex strategies that they develop, with the goal of offering higher returns than mutual funds, which they justify as a reason for higher performance-based compensation.

Hedge fund managers will typically charge a “two and twenty” fee schedule requiring higher management fees than mutual funds from their investors. The two and twenty hedge fund fee structure indicates a flat 2% fee as well as a 20% performance fee.

The 2% fee is based on the fund’s assets under management (AUM). The 20% fee is performance-based compensation that is typically triggered when performance outperforms a benchmark by a specified amount. The 20% fee is paid to the hedge fund manager from the fund’s profits.

(iii) Employee Performance-Based Compensation: Employees earn a traditional salary but performance-based compensation seeks to reward them for their high performance above their job requirements. Performance-based compensation is most often awarded as a year-end bonus, though bonuses throughout the year are possible.

Another common performance-based compensation is the awarding of stock options. An employee is given the option to purchase a company’s stock at a discount when the price of the stock is above the exercise price. For example, shares of the company could be trading at $100 and the employee is given the option to buy at $90.

Performance-based compensation at companies is meant to motivate employees to work harder as they will reap the rewards of its success.

45. Distinguish between performance appraisal and potential appraisal.

Ans:

Basis	Performance appraisal	Potential appraisal
Definition	Evaluates an employee’s current performance.	Assesses an employee’s future potential.
Limitations	Reflects past performance and may not predict future success.	Subjective assessments may introduce bias or be less reliable.
Purpose	Determine rewards, promotions, and bonuses.	Identify high-potential employees for future roles.
Scope	Emphasizes how well an employee has performed in their current role.	Assesses an employee’s capacity to take on more complex and challenging roles in the future.
Criteria	Evaluates job-related skills, competencies, and accomplishments.	Assesses attributes like adaptability, leadership potential, learning agility, and interpersonal skills.
Time Frame	Evaluates past performance over a specific period, often annually or semi-annually.	Look at an employee’s long-term potential for assuming higher-level responsibilities and leadership roles.

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