July 22, 2021

Remuneration Package SPECIFIC OBJECTIVES At the end of this topic, the trainee will be able to: – State the meaning of remuneration Identify the components of a remuneration package Discuss factors affecting remuneration Introduction Compensation and pay are not synonymous terms. Compensation or remuneration refers to all the extrinsic rewards employees receive in exchange for their work. Pay refers only to the actual shilling, dollar, pound that employees receive in exchange for their work. Usually compensation is seen as consisting of the base wage or salary, any incentives or bonuses and any benefits. Incentives are rewards offered in addition to the base wage or salary and are usually directly related to performance. Benefits are rewards employees receive as a result of their employment and position with the organization. A reward system consists of financial rewards (fixed and variable pay) and employee benefits, which together comprise total remuneration. Total remuneration is the value of all cash payments (total earnings) and benefits received by employees. A compensation package consists of two kinds of payments, during employment and after employment. The during employment package consists of; the basic salary, cash allowances, bonus and non-cash perquisites. After employment compensation is in the form of pension, gratuity, limited medical facilities and purchases from cooperative society. Theoretical considerations A number of economists have propounded theories, which assert the following: – That, the natural price of labour is the subsistence – level wage. Higher wages increase labour supply while low wages below subsistence level may make people to die of disease and malnutrition. That there is a predetermined fund (surplus income) which decides the wages That workers will never receive full compensation, and that wages constitute an inadequate payment for the surplus value created by the workers to the employer That state has to manipulate the allocation of income to wage earners to restore full employment That cheap labour will be a basis for comparative cost advantage in international trade COMPONENTS OF A REMUNERATION PACKAGE A remuneration package consists of the following: – Base pay/basic salary Allowances Bonuses Incentives Commission benefits Perquisites Basic Salary This is the major component of employment compensation package. Basic salary is worked out on the basis of job evaluation, and is adjusted either because of reclassification or changes in the cost of living index. Basic salary is a range with top and base clearly defined. Basic salary is the fixed salary or wage, which constitutes the rate for the job. For manual workers it may be referred to as time or day rate. It may provide the platform for determining additional payments related to performance, competence or skill. It may also govern pension entitlements and life insurance when they are related to pay. The base rate for a job is regarded as the rate for a competent or skilled person in a job. The basic levels of pay for jobs reflect both internal and external relativities Internal relativities may be measured by some form of job evaluation, which places jobs in a hierarchy. External relativities are assessed by tracking down market rates.  Pay levels may also be agreed upon via negotiations i.e. CBA’s or by individual agreements. In many organizations pay rates are fixed by managerial judgment of what is required to recruit and retain people. The rates may get adjusted due to individual or collective pressures for increases or upgrading. The base pay may be expressed as an annual, weekly or hourly rates and may be adjusted to reflect increases in the cost of living, market rates, agreement with unions or unilaterally by the management. Allowances Some of the well-known allowances include; house rent, travel allowance, daily allowance, hardship allowance, shift allowance, and so on. The concept of allowance is based on the cost of living index and are meant to compensate for the extra efforts needed for one to perform normal duties. Allowances can be added to the basic pay depending upon the contingencies of the job. The exact quantum of most allowances is usually linked to the basic salary as they present a percentage of the basic. Bonus This is a reward for good performance, which is paid in lump sum related to the results obtained by individuals, teams or the organization. Bonus is seen as profit sharing and focuses on improving productivity for both employer and employee. Perquisites Perks are those benefits that do not usually come in the form of cash but are provided to maintain certain needs and status of the employee, and image of the organization. These may include perks such as stock options, club membership, car or housing loans, reimbursement of the cost of children’s education, paid holidays, generous medical benefits, furnishing of residence and many others. Incentives These are payments linked to the achievement of previously set targets, which are designed to motivate people to achieve higher levels of performance.  Targets are usually quantified as output, sales and so on. Commission A special form of incentive in which payments to sales staff are made on the basis of a percentage of the sales value they generate

MULTI-RATER ASSESSMENT / MULTI-SOURCE ASSESSMENT This is currently a very popular method of performance appraisal. It is also known as 360-degree feedback. 360-degree feedback is “The systematic collection and feedback of performance data on an individual or group derived from a number of the stakeholders.  With this method, managers, peers, customers, suppliers or colleagues are asked to complete questionnaires on the employee being assessed. The person being assessed also completes a questionnaire. Data on ones performance is analysed and the result shared with the employee appraised, who in turn compares the results with his assessment. USE OF 360-DEGREE FEEDBACK It forms part of a self-development or management development. supports learning and development, Supports appraisal, resourcing and succession planning.   The system is NOT used for formal performance evaluation or to support pay decisions.  The system is not to be used as a basis for reward. To develop and implement 360-degree feedback, the following steps need to be taken. Define objectives Decide on recipients of the feedback Decide on who will give the feedback Decide on the areas of work and behaviour Decide on the method of collecting the data Decide on data analysis and presentation Plan initial implementation programme Analyse outcome of pilot scheme Plan and implement full programme Monitor and evaluate Advantages and disadvantages Employees get a broader perspective of how they are perceived by others than before Increased awareness of and relevance of competences Increased awareness by senior management that they too have development needs More reliable feedback to senior managers about their performance Gaining acceptance of the principle of multiple stakeholders as a measure of performance Encouraging more open feedback It is supporting a climate of continuous improvement Perception of feedback as valid and objective, leading to acceptance of results and actions required But there may be problems. People not giving frank or honest feedback People being put under stress in receiving or giving feedback Lack of action following feedback Over-reliance on technology Too much bureaucracy CRITERIA FOR SUCCESS Active support of top management Commitment everywhere on the process –briefing, training Determination by all to implement the system as a basis for development RANKING METHODS. The core element of the use of rankings is that employees are compared to each other, and given some number that supposedly indicates whether they are better than, about the same or less effective than their colleagues.  It is used to determine who will get a pay rise from a limited resource pool, or for other decision-making processes. In ranking methods, especially the simplest form, the supervisor lists all subordinates in order, from the highest to the lowest in performance. The following methods are used in ranking: – Straight ranking Alternation ranking Paired comparison. STRAIGHT RANKING. Here the supervisor simply ranks all members of a group from best to worst, based on some dimension of performance e.g. Best quality, most researched, sales etc.  The method is appropriate for small companies.  As the number of employees increases, it becomes gradually more difficult to discern differences between individuals performance.  The method has other drawbacks; first, the size of differences between individuals is not well defined. E.g. the differences between the individuals 2 and 3 may be little, but between 3 and 4 very huge.  This can be overcome by assigning points to indicate the size of the gaps existing among employees.  The method offers little or no feedback for improving performance.  The method assumes a normal distribution of performance. ALTERNATION RANKING. Since it is easier to distinguish between the best and the worst employees, than just rank them, this method is more popular.  First, list all the subordinates to be rated and then cross out the names of any not known well enough to rank.  Then one piece of paper, indicate the employee who is the highest on the characteristics being measured and also who is the lowest.  Then choose the next highest and the next lowest, alternating between highest and lowest until all employees to be rated have been ranked.  The method suffers from the same disadvantages as straight ranking, but initially may be easier to complete. PAIRED COMPARISON This helps make the ranking method more precise.  For every trait (quality of work, quantity of work etc), every subordinate is paired with and compared to every other subordinate. Suppose there are 5 employees to be rated.  A chart of all possible pairs of employees for each trait is made.  Then for each trait, indicate with a (+ or -) who is the better employee of the pair.  Next add the number of times an employee is rated better and add then up.

PERFORMANCE APPRAISAL Performance appraisal is a process concerned with determining how well employees are doing their jobs, communicating that information to the employees and establishing a plan for performance improvement. Appraisal is the judgment of an employee’s performance in a job, based on consideration other than productivity atone.  What is being assessed in appraisal is the employee’s performance in carrying out the general duties of his/her role, together with any specific targets that have been set. Performance appraisal is the process of determining and communicating to an employee how he is performing on the job and establishing a plan of improvement.  They tell an employee how well he is performing and the future level of effort and took direction. Reasons for Performance Appraisal For making administrative decisions relating to promotions, firings, layoffs and merit pay increases. It helps a manager decide what increases of pay shall be given on grounds of merit. For determining the future use of an employee. Appraisal can provide needed input for determining both individual and organizational training and development needs, through identifying strengths and weaknesses. Appraisal encourages performance improvement. They may motivate the employee to do better in his current job due to knowledge of results, recognition of merit and the opportunity to discuss work with his manager. Appraisals help to identify an individual’s current level of performance. Information generated by appraisal can be used as an input to the validation of selection procedures. Appraisal information is an important input to human resource planning and succession planning, career planning and so on. By making effective use of the performance appraisal system, an organization may seek to: – Improve productivity Promote internal control through timely detection and feedback on actual performance Create a positive work environment Stimulate, recognize and reward achievements Provide objective measures of performance Furnish information for other HR sub-systems. Frequency of Performance Appraisal Despite the many potential benefits of appraisal, many organizations do not make effective use of the system.  When appraisal is infrequently used, employees voice concern about the possible abuse.  There seems to be no real consensus on how frequently performance appraisals should be done, but it is good to have them as often as in necessary to let employees know what kind of job they are doing, and measures to be taken for improvement. An annual appraisal is not enough.  For most employees informal performance appraisals can be conducted two or three times a year in addition to an annual formal performance appraisal. Key Principles in the design of Appraisal Schemes. Create motivation to change or improve behaviour. Provide recognition for successful performance. Provide valid and reliable information for pay decisions. Provide guidance on what skills, competences and behaviour are needed to meet expectations. Need to be simple, clear and written in accessible language. Must make realistic demands on employees and managers time and other resources. Must be perceived to be fair. PERFORMANCE APPRAISAL METHODS Selection of a Performance Appraisal Method Whatever method of appraisal an organizational uses, it must be job related.  Therefore before selection of a method, an organization must conduct job analyses and develop job descriptions. Methods of Performance Appraisal Goal setting or Management by Objectives (MBO). Multi-rater (360 – degree feedback). Ranking methods. Rating methods. Work standards approach. Essay appraisal. Critical – incident appraisal. Checklist. Assessment centre. Open –ended method.   GOAL – SETTING OR MANAGEMENT BY OBJECTIVES This is more commonly used with professional and managerial employees.  Other terminologies used for this include; management by results, performance management, results management and work planning and review programmes. The MBO process consists of the following steps:- Establishing clear and precisely defined statements of objectives for the work to be done by an employee. Developing an action plan indicating how these objectives are to be achieved. Allowing the employee to implementing the action plan Measuring objective achievement Taking corrective action when necessary Establishing objectives for the future.  For MBO to be successful; Objectives should be quantifiable and measurable Objectives should be challenging yet achievable Objectives should be expressed in writing and in clear, concise, unambiguous language Employees should participate in the objective-setting process The objectives and action plan must serve as a basis for regular discussions between manager and employee Advantages MBO is intended to encourage employee participation and increase job satisfaction by giving the employee a sense of achievement and involvement with his or her sense of achievement and involvement with his or her work. Training needs may also emerge during the discussion at the beginning and end of the review period Employees are forced to think hard about their roles and objectives, about why task are necessary and how best to get things done Targets are clarified and the crucial elements in each job identified Superiors and subordinates are obligated to communicate with each other, and there is forced co-ordination of activities between various levels of management, departments and between short and long term goals. Disadvantages Many managers and employees find the joint objective setting and performance review interviews difficult and sometimes inconsistent with the general management style of the company. The system may then generate into a routine in which the manager simply instructs the employee which objectives to pursue. Quite often, it is difficult to find new objectives, which offer a challenge, and the system may encourage individual, selfish effort to the detriment of the working group. Attempts to quantify performance in activities that are not really quantifiable. (E.g. advisory duties or the work of a receptionist) Concentration on short term measurable goals while neglecting important but less precise long term objectives Difficulties arising from subordinates being given objectives but not the resources, information and authority needed to achieve them. Takes a great deal of time, energy and form. Some executives find it hard to even think of their own work habits. Some areas of management are difficult to measure in terms of performance e.g. Employee development. Possibility of a tug of war with supervisors setting high targets and the subordinates setting very

PERFORMANCE MANAGEMENT Definition This means the integration of employee development with results based assessment. It encompasses performance appraisal, objective setting for individuals and departments, appropriate training programmes and performance related pay. Performance management emphasis development and the initiation of self-managed learning plans as well as the integration of individual and corporate objectives. Performance management is a strategic and integrated approach to delivering sustained success to organizations by improving the performance of the people who work in them and by developing the capabilities of teams and individual contributors. Performance is a record of outcomes achieved. Performance management is a means of getting better results from the organization, teams and individuals by understanding and managing performance within an agreed framework of planned goals, standards and competence requirements. It is a process of establishing shared understanding about what is to be achieved, and an approach to managing and developing people in a way that increases the probability that it will be achieved in the short and longer term. Performance management is a broad process that requires managers to define, facilitate and encourage performance by providing timely feedback and constantly focusing everyone’s attention on the ultimate objectives. Principles Of Performance Management It translates corporate goals into individual, team, department and divisional goals It helps to clarify corporate goals It is a continuous and evolutionary process in which performances improves over time It relies on consensus and cooperation rather than control or coercion It encourages self-management of individual performance It requires management style that is open and honest and encourages two-way communication between superiors and subordinates It requires continuous feedback Feed back loops enable the experience and knowledge gained on the job and individuals to modify corporate objectives It measures and assess all performance against jointly agreed goals It should apply to all staff; and it is not primarily concerned with linking performance to financial rewards. Concerns of Performance Performance management is concerned with performance improvement in order to achieve organizational, team and individual effectiveness Performance management is concerned with employee development. Performance improvement is not achievable unless there are effectiveness process of continuous development Performance management is concerned with satisfying the needs and expectations of all the organizations stakes holders –owners, management, employees, customers, suppliers and the general public Performance management is concerned with communication and involvement. It may contribute to the development of a high-involvement organization by getting teams and individuals to participate in defining their objectives and the means to achieve them. Aims of Performance Management. Improve organizational effectiveness Motivate employees Improve training and development. Set objectives and targets of work Provide feedback on performance. Change the organizational culture. At a general level, the broad process of performance management requires managers to do three things well: Define performance Facilitate performance Encourage performance. Define Performance: Ensure that individual employees or teams know what is expected of them, and that they stay focused on effective performance.  The manager does this by staying focused to goals, measures and assessment (performance appraisal).  Facilitate performance Managers must facilitate performance – eliminate roadblocks to successful performance, provide adequate resources to get a job done right and on time, and pay careful attention to selecting employees.  Obstacles that can inhibit performance include; poorly-maintained equipment, delays in receiving supplies, inefficient design of work spaces and ineffective work methods Encourage Performance. To encourage, especially repeated good performance, it is important to do the following well; a) provide a sufficient amount of rewards that employees really value, b) in a timely and c) fair manner. Performance Management Process Performance management is concerned with improving individual and team performance. Performance management is a continuous self-renewing cycle. Its main activities are:- Role definition – in which the key result areas and competence requirements are agreed. The role definition provides the framework for P.M. It sets out: – The purpose of the role, which summarizes its overall aim-what the job holder, is expected to do. The key result areas or principal accountabilities – which define the main output areas of the role. The key competencies, which indicate what the role holder has to be able to do and the behaviour, required performing the role effectively. They provide the basis for drawing up personal development plans. The performance agreement / contract – this defines expectations (what is to be achieved, how will performance be measured, the competencies needed to deliver the required results. This is the performance planning stage.

HUMAN RESOURCE MANAGEMENT REWARD POLICY AREAS The main areas in which reward policies need to be formulated are: The relationship between rewards and business performances Flexibility The level of the rewards Market rates Equity Performance related rewards Pay structures Delegation and control Balancing financial and non financial rewards Reward mix and total remuneration Communicating the benefits   The relationship between reward policies and business performance A reward policy needs to be formulated on how the pay levels should respond to fluctuations in the business performances. The business success can be shared with the employees through a profit sharing scheme or bonus payments which do not have a cost element in the future years. Flexibility Reward policies should allow for flexibility in operating the reward system, in response to business fluctuations and the rapidly changing pressures to which the organization and its employees are likely to be subjected to; the demand for different type of skills and variations in the market rates for the different categories of staff. Flexibility can be achieved by: Increasing the proportion of variable performance related pay to the total pay package. Avoiding the use of rigid and hierarchical pay structures by such means as pay curves in where progression is dependent on competence and performance. Not having a mechanistic system of relating rewards to performance. Relating the pay rewards to merit and increases in the market rates thus avoiding a separate and explicit link with increases in the cost of living and giving scope to reward the good performers more and the poor performers less. Allowing a greater choice in the range of benefits employees receive. Recognizing that the organisation must respond quickly by the problems created by needs shortages, market rate pressures and flexing the pay arrangements accordingly.   Levels of reward The policy on the reward levels should determine whether or not the company needs to be a high payer, sometimes called its pay posture, the policy on where rates of pay and the fringe benefits should lie in relation to what comparable companies offer for similar jobs. This policy links to the one on market rates. Fast moving profitable companies want top people and are prepared to offer top pay in order to stay a head of the competition. Other organisations are content paying closer to the median to keep pace with the market rates. Performance related rewards. The extent to which performance governs rewards and how the two are linked together depends on the core values of the organization. Thriving and growing companies may encourage an entrepreneurial spirit. Entrepreneurship within an organization should flourish if people believe that potential rewards justify the efforts and the risks that have to be faced into achieving them. They must expect that the value of their contributions will be rewarded appropriately. Market rates policy Market rate pressures cannot be ignored completely when designing a salary structure. It might be decided that the salaries of certain jobs have to keep pace with the market rates. The salaries of other jobs will primarily be fixed by internal comparisons. The main factor to consider in assessing internal factors influencing salaries is the degree to which theirs open market competition for staff. One has to consider that the company is operating in the local, national and international market. Therefore, market rate policies have to be flexible and continuously under review to suit the needs of the organisation and changes in the labour market. Equity It is the perceived sense that pay policies are just and fair, because the pay matches individual contribution capacity and level of work carried out. Absolute pay equity is an unattainable ideal. It is therefore difficult to reconcile the two aims of being equitable and competitive at the same time. To be able to attract the right quality staff, market forces have to be allowed to prevail. Pay structures Some companies operate without pay structures quite successfully, but there are dangers: salaries will be dealt with inconsistently and inequitably unless there is strict central control. By its name, a salary structure implies some form of rigidity. However, a structure can and should be no more than a framework within which salary policies are implemented. Control It can be partly determined by the choice of the salary progression system and salary structure, but it is also the amount of flexibility that is allowed to managers to fix and change the salaries of their staff. This depends on the management style of the company i.e. the degree to which decisions are centralised and autocratic or decentralised and independent. Some degree of control is necessary, but the aim is to delegate control to managers (line managers). The reward management procedures must therefore balance the extremes of rigidity and anarchy. Balancing financial and non financial rewards Rewards have to be a balance between the mix of intrinsic and extrinsic rewards. Neither should be neglected since; Financial rewards attract and retain staff and achieve short-term motivation while the non financial rewards achieve longer-term motivation and commitment. Total remuneration The best mix of the various elements of remuneration (basic salary, profit sharing pensions, life insurance, cars and other fringe benefits) may vary at different levels. For the junior staff, concentrate on the salary, with progression based on merit; life insurance provisions; subsidized canteens or lunch vouchers. For senior management level, the aim is to concentrate on paying a competitive salary at a rate high enough to allow the individual to purchase the benefits they need. This is preferable than imposing benefits on individuals who do not want them. Communicating the benefits Communication of whatever is considered to be reward e.g. money, the fairness of the system should be communicated. Pay systems can de-motivate more than they motivate because they always seem to be unfair. Therefore, it is important to motivate people by telling them what they have is worth having; tell them what they expect (expectancy theory) It is what people expect which motivates them more effectively and not what they