HRM

3. It benefits the both-employer and employees: The negotiation arrived at is acceptable to
both parties—the employer and the employees.

4. It is adjustable to the changing conditions: A dynamic environment leads to changes in
employment conditions. This requires changes in organisatonal processes to match with the
changed conditions. Among other alternatives available, collective bargaining is found as a
better approach to bring changes more amicably.

5. It facilitates the speedy implementation of decisions arrived at collective negotiation:
The direct participation of both parties—the employer and the employees—in collective
decision-making process provides an in-built mechanism for speedy implementation of
decisions arrived at collective bargaining.

BARGAINING STRATEGIES

The actual bargaining process, discussed later, and the events that take place during
negotiation depend, to a great degree, upon the relationship between management and the
union. Depending on the strength of the employer and the union and also on the degree of
cooperation that characterizes their relationship, Walton and McKersie4 have identified the
following four types of bargaining strategies that may be employed to arrive at an agreement:

1. Distributive Bargaining

2. Integrative Bargaining

3. Attitudinal Bargaining

4. Intraorganisational Bargaining

Now, these are discussed one by one.

• Distributive Bargaining

Distributive bargaining, perhaps the most common form of bargaining, takes place
when labour and management are in disagreement over the issues in the proposed contract,
such as wages, bonus, benefits, work rules, and so on. It involves haggling over the distribution
of surplus. In it, the gains of one party are achieved at the expense of the other. So to say, a
wage increase won by labour may be considered a loss suffered by management as reduction
is profits. Therefore, this form of bargaining is sometimes referred to as win-lose bargaining.
Under it, each party is preoccupied with narrow sectoral gain of grabbing the bigger share of
the cake. It, thus, lacks holistic approach.

• Integrative Bargaining

The purpose of integrative bargaining is to create a cooperative negotiating relationship
that benefits both parties. In such bargaining, both labour and management win or gain or
atleast neither party loses. The issues of bargaining involved in such strategy may be such as
better job evaluation process, better training programmes, better working conditions, etc. Such
negotiations result in increase in the size of cake and, in turn, larger share for each party. This
is considered the best bargaining strategy. Although integrative bargaining is not nearly as
common as the distributive process, signs seem to indicate a steadily growing trend toward this
cooperative form of bargaining.

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• Attitudinal Structuring

Such a bargaining involves shaping and reshaping of attitudes to positive and
cooperative. Examples of attitudinal structuring and shaping may be from hostile to friendly,
from non-cooperative to cooperative, from untrust to trust, and so on. The need for attitudinal
structuring or shaping is understood by the fact that any backlog of bitterness between the
parties leads to bargaining impasse by erupting and destroying negotiations. Therefore,
attitudinal structuring is required to maintain smooth and harmonious industrial relations. The
attitudinal structuring helps achieve ‘good-faith bargaining’.
• Intraorganisational Bargaining

In practice, there are different groups in an organisation by department-wise and level
-wise. At times, different groups may perceive the outcomes of collective bargaining process
differently. For example, the unskilled workers may feel that they are neglected or women
workers may feel that their interests are not taken into consideration. Not only that, there may
be differences even within the management. While personnel manager may support increase in
wages, the finance manager may oppose the same on the ground that it will disturb the
company’s financial position. Given such situation, intraorganisational consensus is required
for the smooth acceptance of the agreements arrived at collective bargaining. Thus,
intraorganisational bargaining involves manoeuvring to achieve consensus with the workers
and management.

BARGAINING PROCESS

The actual bargaining goes through a process consisting of certain stages. However, the
number of stages and sequencing of these may vary from organisation to organisation
depending on the nature of parties involved in bargaining process. According to Mondy and
Noe5, the following four types of structures decide the nature of parties involved in bargaining
process.

1. One company dealing with a single union.

2. Several companies dealing with a single union.

3. Several unions dealing with a single company.

4. Several companies dealing with several unions.

Generally, a bargaining process consists of the following five stages:

1. Prenegotiation

2. Negotiators

3. Negotiation

4. Agreement or Contract

5. Implementation of Agreement.

Now, these are discussed one by one.

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• Prenegotiation

This is the first stage involved in a bargaining process is also known as ‘preparation for
negotiation’. In other words, it refers to homework for negotiation. That the prenegotiation
stage of the bargaining process is vital is duly confirmed by the fact that “up to 83 per cent of
the outcomes of the negotiations are greatly influenced by prenegotiation stage”6. Both parties,
i.e., the management and the workers need to make preparation for bargaining. This is
discussed separately as follows:

• Preparation by Management: It is very important for the management to study very
carefully the labour organisation, or say, labour union with which they are to negotiate or
bargain. This may include studying the strength of the union, their contracts with other
industries, the background and personality characteristics of the union negotiators, etc. The
management should also know what similar organisations are doing in the particular matter,
and what is expected from the economy in the near future. What can it expect the union to
ask for? What is management prepared to acquiesce on? The management should
understand the bargaining power of the union and should devise its bargaining strategy
accordingly. For example, if the demand for the company’s product or service has been
high, management will be reluctant to absorb a strike, even one of short duration. On the
other hand, if the business is passing through slackness, management will be least willing
to concede to union demands and may be prepared to accept a lengthy strike. Finally, the
likely decisions should be chalked out, their impact be analysed, and the drafts for the likely
decisions be prepared in advance to facilitate the immediate preparation of final agreement
draft as soon as the negotiation comes to an end.

• Preparation by the Labour Union: The labour union also needs to collect data on relevant
aspects of organisation to facilitate its negotiating power and tactics. It should be aware of
its contracts with other companies, the practices followed by other companies in the same
region, and so on. Employees expectations over various issues should also be assessed in
order to avoid their resistance to the agreement arrived at with the management. Due care
should also be taken in selecting negotiator representatives of the Union.

• Negotiators

On the company side, the particular negotiator may be any one of a number of persons.
It may be the industrial relations officer, the head of the particular area such as production
area, an office bearer like executive vice-president, or even the company lawyer. In order
to broaden the base of participation, the practice of allowing all major divisional heads to
participate and a few supervisors to observe on a rotating basis has great advantages in
bargaining process8.

On the union side, the team approach is customarily used. The team may consist of
business agents, some shop stewards, the president of the local union, and when the
negotiation is vital, the president of the national union.

• Negotiation

Once the first two stages are completed, both the parties come to the negotiation table
at a time and place for this purpose. Customarily, negotiation process starts by the union
representatives delivering an extravagant and long list of demands. Expectedly, the initial

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response from the management is usually as extreme as that of the union. The management
counters the union demands by offering little more than what was agreed in the previous
contract. This tug of war goes on from both the sides. In the process, each party assesses
the relative priorities of the other’s demands. This takes them in a situation when attempt
is made to get management’s highest offer to approximate the lowest demands that the
union is willing to accept. Thus, each group compromises by giving up some of its demands
so that an agreement can be arrived at when they actually arrive at an agreement, this is
converted into a written contract. In case, both parties do not reach to any agreement, then
it is called deadlock or breakdown or bargaining impasse. This is discussed, in some more
detail, later in this chapter.

• Agreement or Contract

After both parties have arrived at an informal agreement either in the normal/initial
process or through overcoming bargaining impasse, it is written. The written form of the
agreement usually consists of the terms and conditions of agreement, the date from which
it comes into effect, the duration for which it will remain in operation and the names of the
signatories of the agreement.

The agreement so prepared is then sent to the labourers and management for its
ratification and approval. The representatives of both the parties may not have ultimate
authority to decide some issues referred to collective bargaining and included in the
agreement. These need to be ratified by both the parties. The agreement needs to be duly
ratified because of legal provisions. According to the Section 18 (1) of the Industrial
Disputes Act, 1947, “an agreement shall be binding only on the parties to the agreement.”
This implies that any collective bargaining agreement does not apply automatically to all
workers of an organisation. The agreement becomes official once approved, ratified, and
signed by labour and management representatives.

The collective agreement is variously known as “labour contract”, “union contract”, or
“labour management agreement”. Union members and members of management all receive
copies of the agreement or contract. The agreement stipulates in formal terms the nature of
the relationship between labour and management for the ensuing period of time as agreed
in negotiation.

• Implementation of Agreement

Once an agreement is ratified and approved, what next remains left is its
implementation. The way it will be implemented is indicated in the agreement itself. The
agreement must be implemented with full magnanimity in terms of its letter and spirit by
both the parties from the date of its operation as mentioned in the agreement. This is the
duty of the Human Resource Department to ensure the proper and full implementation of
all provisions given in the agreement.

One of the most important element involved in agreement implementation is spelling
out of a procedure for handling grievances arisen out of collective agreement. In practice,
almost all collective bargaining agreements contain formal procedures to be used in
resolving grievances over the interpretation and application of the agreement. Hence, the
grievances, if any, need to be resolved accordingly.

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EFFECTIVE COLLECTIVE BARGAINING
As has been seen, collective bargaining is one of the important means to settle the

industrial disputes. However, its effectiveness depends much on the environment in which
collective bargaining takes place. The following conditions make environment conducive for
collective bargaining:
1. Favourable Political and Social Climate: That existence of a favourable political and
social climate is a necessary condition for effective collective bargaining, is well confirmed by
the history of collective bargaining worldwide. Collective bargaining has made headways in
settling industrial disputes in the countries where it has been duly supported by the government
and favoured by the public. From this point of view, the political climate has not been much
favourable for collective bargaining in India. The reason is not far to seek. There has been a
multiplicity of trade unions in the countries sponsored by different political parties. These trade
unions favor employees not based on the merit of issues involved in disputes but based on their
differing political considerations. Added to these is a plethora of legal laws also creating
unfavourable climate for collective bargaining in the country.
2. Trade Unions: Like in a democratic country like ours, employees should have fundamental
rights to form trade unions for protecting their interests. More the stronger the trade union is,
the more the effective collective bargaining and vice versa. The employer should also recognize
a trade union and its representatives.
3. Problem Solving Attitude: Both the parties while negotiating should adopt a problem
solving, or say, compromising attitude to reach an agreement. Neither party should adopt an
adamant or fighting attitude. The negotiating teams should follow give and take approach. It
means that one party may win concessions over the other depending upon their relative
strengths.
4. Availability of Data: Data and information serve as inputs for decision-making. Hence, the
availability of required data serves as a pre-requisite for successful collective bargaining. While
the employer must make available data required for collective discussion, the union
representatives also must accept and trust on data supplied by the employer.
5. Continuous Dialogue: Collective bargaining sometimes may not reach to an agreement.
Instead, there may be deadlock, or say, bargaining impasse. In such case, dialogue must not
end but continue with problem solving approach. Keeping the controversial issues aside for the
time being may help narrow down disagreement and continue the dialogue. Possibility for
agreement may increase with continuation of dialogue.

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CHAPTER – 20
PERFORMANCE APPRAISAL

Meaning
Performance appraisal is a systematic and objective way of judging the relative worth

or ability of an employee in performing his/her task.
Definition

According to Flippo, “performance appraisal is the systematic, periodic and an
impartial rating of an employee’s excellence in matters pertaining to his present job and his
potential for a better job”.

Table 28.1: Trends in Performance Appraisal
PURPOSE OF PERFORMANCE APPRAISAL

A cross-examination of organisational practices reveals that performance appraisal is
undertaken for variety of purposes. Performance appraisal is broadly used for meeting the
following purposes:
1. To identify employees for salary increases, promotion, transfer and lay-off or termination of
services.
2. To determine training and development needs of the employees.
3. To motivate employees by providing feedback on their performance levels.
4. To establish a basis for research and reference for personnel decisions in future.

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The above purposes of performance appraisal can be divided into two broad categories:
evaluative and developmental, as illustrated in Figure 28.1

That the purpose of performance appraisal may vary from country to country and from
organisation to organisation within a country is reported by the two research studies8,9. Table
28-3 gives a summary of these two research studies in India.

1. Inasmuch as some of the firms use a formal performance appraisal programme for more than
one purpose, the totals do not match with number of samples in each study.

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2. Brackets give percentage.
It highlights that the American companies use performance appraisal mainly to

determine wage increases, promotion and transfers. In contrast, the Indian companies use
performance appraisal for training and development, providing feedback to the employees, and
personnel research besides using it for determining wages, promotions and transfers as do their
American counterparts. Also pointed out by it is wide variations in the practice of performance
appraisal between the private and public companies in India.

APPROACHES TO PERFORMANCE APPRAISAL
In our social life, we appraise or evaluate, in our own ways, the worth of others. We select a
tailor, hairdresser, doctor or architect through our evaluation of their worth. So, do the
organisations as well. All employees are appraised on their job performance in some manner
or another. In general, industries make performance appraisal of their employees using three
possible approaches:
1. A casual, unsystematic, and often haphazard appraisal.
2. A traditional and highly systematic appraisal
3. Appraisal through mutual goal setting, i.e. Management by Objectives (MBO)
A brief description of these follows:
• The Casual Approach: The casual approach of performance appraisal was perhaps the

most commonly used one in the past. It, however, lost its popularity with the need for
quantitative and qualitative measurement of output for the rank-and-file personnel.

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• The Traditional Approach: This approach is used to evaluate (a) employee
characteristics, (b) employee contributions, or (c) both. All employees are appraised in the
same manner using the same approach. As such, employees’ ratings so obtained become
comparable. That the use of traditional and highly systematic approach is on increase is
revealed by a survey of 426 firms resulting in 67 percent reporting a formal rather than
casual attempt to evaluate employees. It also highlighted that the size of the firm and extent
of formal evaluation of employees are positively related, as 87 per cent of the firms having
more than 5,000 employees were using a systematic approach to performance appraisal.

• The Mutual Goal Setting Approach: This is also called “the behavioural approach”. This
is an improvement over the traditional approach in which the supervisor was placed in the
position of “all in all”. As such, his evaluation becomes subjective and biased11. Therefore,
to overcome this problem, a new approach giving emphasis on mutual goal setting and
appraisal of progress by both the appraiser and the appraisee is evolved. This is popularly
known as ‘Management by Objectives’ (MBO). The use of the MBO as an appraisal
approach is gaining popularity in the organisation. The MBO is discussed in detail later in
this chapter under the ‘methods of performance appraisal’.

PROCESS OF PERFORMANCE APPRAISAL

Though the specific steps that an organisation will follow in developing an appraisal
system may vary somewhat from organisation to organisation, yet the following are the
common steps usually followed by organisations while developing an appraisal system for
them:

1. Establish Performance Standards

2. Communicate Performance Expectation to Employee

3. Measure Actual Performance

4. Compare Actual Performance with Standards

5. Discuss the Appraisal with the Employee

6. Initiate Corrective Actions

Their discussion follows in turn.

• Establish Performance Standards: The appraisal process begins with the establishment
of performance standards. The managers must determine what outputs, accomplishments
and skills will be evaluated. These standards should have evolved out of job analysis and
job descriptions. These performance standards should also be clear and objective to be
understood and measured. Standards should not be expressed in an articulated or vague
manner such as “a good job” or “a full day’s work” as vague phrases tell nothing.

• Communicate Performance Expectations to Employees: Once the performance
standards are established, these need to be communicated to the respective employees so
that they come to know what is expected of them. Past experience indicates that not
communicating standards to the employees compounds the appraisal problem. Here, it must
be noted that mere transference of information (relating to performance standards, for
example) from the manager to the employees is not communication. It becomes

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communication only when the transference of information has taken place and has been
received and understood by the employees. The feedback from the employees on the
standards communicated to them must be obtained. If required, the standards may be
modified or revised in the light of feedback obtained from the employees. It is important to
note that communication is a two-way street.
• Measure Actual Performance: This is the third step involved in the appraisal process. In
this stage, the actual performance of the employee is measured on the basis of information
available from various sources such as personal observation, statistical reports, oral reports,
and written reports. Needless to mention, the evaluator’s feelings should not influence the
performance measurement of the employee. Measurement must be objective based on facts
and findings. This is because what we measure is more critical and important to the
evaluation process than how we measure.
• Compare Actual Performance with Standards: In this stage, the actual performance is
compared with the predetermined standards. Such a comparison may reveal the deviation
between standard performance and actual performance and will enable the evaluator to
proceed to the fifth step in the process, i.e., the discussion of the appraisal with the
concerned employees.
• Discuss the Appraisal with the Employee: The fifth step in the appraisal process is to
communicate to and discuss with the employees the results of the appraisal. This is, in fact,
one of the most challenging tasks the managers face to present an accurate appraisal to the
employees and then make them accept the appraisal in a constructive manner. A discussion
on appraisal enables employees to know their strengths and weaknesses. This has, in turn,
impact on their future performance. Yes, the impact may be positive or negative depending
upon how the appraisal is presented and discussed with the employees.
• Initiate Corrective Action: The final step in the appraisal process is the initiation of
corrective action when it is necessary. The areas needing improvement are identified and
then, the measures to correct or improve the performance are identified and initiated. The
corrective action can be of two types. One is immediate and deals predominantly with
symptoms. This action is often called as “putting out fires.” The other is basic and delves
into causes of deviations and seeks to adjust the difference permanently. This type of action
involves time to analyse deviations. Hence, managers often opt for the immediate action,
or say, “put out fires”. Training, coaching, counselling, etc. are the common examples of
corrective actions that managers initiate to improve the employee performance.

METHODS OF PERFORMANCE APPRAISAL

In the previous section, we described appraisal process in general terms. In this section,
we now want to describe in specific terms how management can devise instruments, i.e.,
methods that can be used to measure and appraise employees’ performance. By now, a number
of performance appraisal methods are available. In fact, each organisation has its own. Each
method with its strengths and weaknesses may be suitable for one organisation and non-suitable
for another one. As such, there is no single appraisal method accepted and used by all
organisations to measure their employees’ performance. All the methods of appraisal devised
so far have been classified differently by different authors. While DeCenzo and Robbins13
have classified appraisal methods into three categories: absolute methods, relative methods and
objective methods; Aswathappa14 has classified these into two categories: past-oriented and
future-oriented. Michael R Carrell15 et. al. has classified all appraisal methods into as many as

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six categories: rating scales, comparative methods, critical incidents, essay, MBO and
combination methods. Rock and Levis16 have classified the methods into two broad categories:
narrow interpretation and broad interpretation. Beatty and Schneier17 have categorised various
methods of appraisal into four groups: comparative methods, absolute methods, goal setting,
and direct indices.

A more widely used classification of appraisal methods into two categories, viz.,
traditional methods and modern methods, is given by Strauss and Sayles18. While traditional
methods lay emphasis on the rating of the individual’s personality traits, such as initiative,
dependability, drive, creativity, integrity, intelligence, leadership potential, etc.; the modern
method, on the other hand, place more emphasis on the evaluation of work results, i.e., job
achievements than the personal traits. Modern methods tend to be more objective and
worthwhile. The various methods included in each of the two categories are given in Table
28.4.

In the discussion that follows, each method under both categories will be described briefly.
➢ Traditional Methods
• Ranking Method: It is the oldest and simplest formal systematic method of performance

appraisal in which one employee is compared with all others for the purpose of placing
them in a simple rank order of worth. The employees are ranked from the highest to the
lowest or from the best to the worst. In doing this, the employee who is the highest on the
characteristic being measured and also the one who is the lowest, are indicated. Then, the
next highest and the next lowest are chosen, alternating between next highest and lowest
until all the employees to be rated have been ranked. Thus, if there are ten employees to be
appraised, there will be ten ranks from 1 to 10.
However, the greatest limitations of this appraisal method are that (i) it does not tell that
how much better or worse one is than another, (ii) the task of ranking individuals is difficult
when a large number of employees are rated, and (iii) it is very difficult to compare one
individual with others having varying behavioural traits. To remedy these defects, the
paired comparison method of performance appraisal has been evolved.

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• Paired Comparison: In this method, each employee is compared with other employees on
one- on- one basis, usually based on one trait only. The rater is provided with a bunch of
slips each containing a pair of names, the rater puts a tick mark against the employee whom
he considers the better of the two. The number of times this employee is compared as better
with others determines his or her final ranking. The number of possible pairs for a given
number of employees is ascertained by the following formula:

N(N-1)/2

Where N = the total number of employees to be evaluated. Let this be exemplified with an
imaginary example.

If the following five teachers have to be evaluated by the Vice Chancellor of a University:

Khanka (K), Mohapatra (M), Raul (R), Venkat (V), and Barman (B), the above formula
gives 5 (5 – 1) / 2 or 10 pairs. These are:

K with M

K with R M with R

K with V M with V R with V

K with B M with B R with B V with B

Thus, the pairs so ascertained give the maximum possible permutations and combinations.
The number of times a worker is considered better, makes his/her score. Such scores are
determined for each worker and he/she is ranked according to his/her score.

One obvious disadvantage of this method is that the method can become unwieldy when
large numbers of employees are being compared.

• Grading Method: In this method, certain categories of worth are established in advance
and carefully defined. There can be three categories established for employees: outstanding,
satisfactory, and unsatisfactory. There can be more than three grades. Employee
performance is compared with grade definitions. The employee is, then, allocated to the
grade that best describes his or her performance. Such type of grading is done is Semester
pattern of examinations and in the selection of a candidate in the public service sector. One
of the major drawback of this method is that the rater may rate most of the employees on
the higher side of their performance.

• Forced Distribution Method. This method was evolved by Tiffin 18 to eliminate the
central tendency of rating most of the employees at a higher end of the scale. The method
assumes that employees performance level confirms to a normal statistical distribution i.
e., 10, 20, 40, 20, and 10 percent. This is useful for rating a large number of employees’
job performance and promotability. It tends to eliminate or reduce bias. It is also highly
simple to understand and easy to apply in appraising, performance of employees in
organisations. It suffers from the drawback that if all distribution grades improve similarly,
no single grade would rise in ratings.

• Check-List Method. The basic purpose of utilizing check-list method is to ease the

evaluation burden upon the rater. In this method, a series of statements, i.e., questions with
their answers in ‘yes’ or ‘no’ are prepared by the HR department (see Figure 27-2). The

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check-list is, then, presented to the rater to tick appropriate answers relevant to the
appraisee. Each question carries a weightage in relationship to their importance. When the
check-list is completed, it is sent to the HR department to prepare the final scores for all
appraisees based on all questions. While preparing questions, an attempt is made to
determine the degree of consistency of the rater by asking the same question twice, but in
a different manner (see, numbers 3 and 6 in Figure 28-2).
• However, one of the disadvantages of the check-list method is that it is difficult to assemble,
analyse and weigh a number of statements about employee characteristics and contributions
20. From a cost stand point also, this method may be inefficient particularly if there are a
number of job categories in the organisation, because a check-list of questions must be
prepared for each category of job. It will involve a lot of money, time and efforts.

• Critical Incidents Method: In this method, the rater focuses his or her attention on those
key or critical behaviours that make the difference between performing a job in a
noteworthy manner (effectively or ineffectively). There are three steps involved in
appraising employees using this method. First, a list of noteworthy (good or bad) on-the-
job behaviour of specific incidents is prepared. Second, a group of experts then assigns
weightage or score to these incidents, depending upon their degree of desirability to
perform a job. Third, finally a check-list indicating incidents that describe workers as
“good” or “bad” is constructed. Then, the check-list is given to the rater for evaluating the
workers.
The basic idea behind this rating is to appraise the workers who can perform their jobs
effectively in critical situations. This is so because most people work alike in normal
situation. The strength of critical incidents method is that it focuses on behaviours and,
thus, judges performance rather than personalities.
Its drawbacks are to regularly write down the critical incidents which become time-
consuming and burdensome for evaluators, i.e., managers. Generally, negative incidents

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are more noticeable than positive ones. It is rater’s inference that determines which
incidents are critical to job performance. Hence, the method is subject to all the limitations
relating to subjective judgements.
• Graphic Rating Scale Method: The graphic rating scale is one of the most popular and
simplest technique for appraising performance. It is also known as linear rating scale. In
this method, the printed appraisal form is used to appraise each employee. The form lists
traits (such as quality and reliability) and a range of job performance characteristics (from
unsatisfactory to outstanding) for each trait. The rating is done on the basis of points on the
continuum. The common practice is to follow five-point scale. The rater rates each
appraisee by checking the score that best describes his or her performance for each trait. At
last, all assigned values for the traits are then totaled. Figure 28-3 shows a typical graphic
rating scale.

This method is good for measuring various job behaviours of an employee. However, it is
also subjected to rater’s bias while rating employee’s behaviour at job. Occurrence of
ambiguity in designing the graphic scale results in bias in appraising employee’s
performance21.
• Essay Method. Essay method is the simplest one among various appraisal methods
available. In this method, the rater writes a narrative description on an employee’s
strengths, weaknesses, past performance, potential and suggestions for improvement. Its
positive point is that it is simple in use. It does not require complex formats and
extensive/specific training to complete it.
• However, essay method, like other methods, is not free from drawbacks. In the absence of
any prescribed structure, the essays are likely to vary widely in terms of length and content.
And, of course, the quality of appraisal depends more upon rater’s writing skill than the
appraisee’s actual level of performance. Moreover, because the essays are descriptive, the
method provides only qualitative information about the employee. In the absence of
quantitative data, the evaluation suffers from subjectivity problem. Nonetheless, the essay

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method is a good start and is beneficial also if used in conjunction with other appraisal
methods.

• Field Review Method. When there is a reason to suspect rater’s biasedness or his or her
rating appears to be quite higher than others, these are neutralised with the help of a review
process. The review process is usually conducted by the personnel officer in the HR
department. The review process involves the following activities:

(a) Identify areas of inter-rater disagreement.
(b) Help the group arrive at a consensus.
(c) Ensure that each rater conceives of the standard similarity.

However, the process is a time-consuming one. The supervisors generally resent what
they consider the staff interference. Hence, the method is not widely used.
• Confidential Report. It is the traditional way of appraising employees mainly in the
Government Departments. Evaluation is made by the immediate boss or supervisor for
giving effect to promotion and transfer. Usually a structured format is devised to collect
information on employee’s strength, weakness, intelligence, attitude, character,
attendance, discipline, etc.
• Its drawbacks include it is a subjective evaluation based on evaluation's impression
about the appraisee rather than on facts and figures. As the feedback is not given to the
appraisee, the appraisal remains confined to evaluation than development. Feedback, if
any, is given only in case of adverse report.
➢ Modern Methods
• Management by Objectives (MBO): Most of the traditional methods of performance
appraisal are subject to the antagonistic judgements of the raters. It was to overcome
this problem, Peter F. Drucker22 propounded a new concept, namely, management by

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objectives (MBO) way back in 1954 in his book. The Practice of Management. The
concept of MBO as was conceived by Drucker, can be described as a “process whereby
the superior and subordinate managers of an organisation jointly identify its common
goals, define each individual’s major areas of responsibility in terms of results expected
of him and use these measures as guides for operating the unit and assessing the
contributions of each of its members”. In other words, stripped to its essentials, MBO
requires the manager to get specific measurable goals with each employee and then
periodically discuss his or her progress toward these goals.

In fact, MBO is not only a method of performance evaluation. It is viewed by the
practicing managers and pedagogues as a philosophy of managerial practice because it
is a method by which managers and subordinates plan, organise, communicate, control
and debate.

An MBO programme consists of four main steps: goal setting, performance standard,
comparison, and periodic review.

In goal-setting, goals are set which each individual is to attain. The superior and
subordinate jointly establish these goals. The goals refer to the desired outcome to be
achieved by each individual employee.

In performance standards, the standards are set for the employees as per the previously
arranged time period. When the employees start performing their jobs, they come to
know what is to be done, what has been done, and what remains to be done.

In the third step, the actual level of goals attained are compared with the goals agreed
upon. This enables the evaluator to find out the reasons for variation between the actual
and standard performance of the employees. Such a comparison helps devise training
needs for increasing employees’ performance. So, it can also explore the conditions
having their bearings on employees’ performance but over which the employees have
no control.

Finally, in the periodic review step, corrective measure is initiated when actual
performance deviates from the standards established in the first step-goal-setting stage.
Consistent with the MBO philosophy, periodic progress reviews are conducted in a
constructive rather than punitive manner. The purpose of conducting reviews is not to
degrade the performer but to aid in his/her future performance. From a motivational
point of view, this would be representative of McGregor’s theories23 as discussed
earlier.

Figure 28.4 present the MBO method of performance appraisal presently used by an
engineering giant i.e., Larsen and Turbro Limited.

• Limitation of MBO: MBO is not a panacea, cure for all organisational problems. As
with other methods, it also suffers from some limitations as catalogued below:

(i) Setting Unmeasurable Objectives: One of the problems MBO suffers from is
unclear and unmeasurable objectives set for attainment. An objective such as “will do
a better job of training” is useless as it is unmeasurable. Instead, “well have four
subordinates promoted during the year” is a clear and measurable objective.

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(ii) Time-Consuming: The activities involved in an MBO programme such as setting
goals, measuring progress, and providing feedback can take a great deal of time.

(iii) Tug of War: Setting objectives with the subordinates sometimes turns into a tug of
war in the sense that the manager pushes for higher quotas and the subordinates push for
lower ones. As such, goals so set are likely to be unrealistic.
(iv) Lack of Trust: MBO is likely to be ineffective in an environment where management
has little trust in its employees. Or say, management makes decisions autocratically and
relies heavily on external controls.
• Behaviourally Anchored Rating Scales (BARS): The problem of judgemental
performance evaluation inherent in the traditional methods of performance evaluation led
to some organisations to go for objective evaluation by developing a technique known as
“Behaviourally Anchored Rating Scales (BARS)” around 1960s. BARS are descriptions of
various degrees of behaviour with regard to a specific performance dimension. It combines
the benefits of narratives, critical incidents, and quantified ratings by anchoring a quantified
scale with specific behavioural examples of good or poor performance. The proponents of
BARS claim that it offers better and more equitable appraisals than do the other techniques
of performance appraisal we discussed so far24. Developing a BARS typically involves
five steps25:

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1. Generating Critical Incidents: Critical incidents (or say, behaviours) are those which are
essential for the performance of the job effectively. Persons who are knowledgeable of the job
in question (jobholders and/or supervisors) are asked to describe specific critical incidents of
effective and ineffective performance. These critical incidents may be described in a few short
sentences or phrases using the terminology.

2. Developing Performance Dimensions: The critical incidents are then clustered into a
smaller set of performance dimensions, usually five to ten. Each cluster, or say, dimension is
then defined.

3. Reallocating Incidents: Various critical incidents are reallocated dimensions by another
group of people who also know the job in question. Various critical incidents so reallocated to
original dimensions are clustered into various categories, with each cluster showing similar
critical incidents. Those critical incidents are retained which meet 50 to 80% of agreement with
the cluster as classified in step 2.

4. Scaling Incidents: The same second group as in step 3 rates the behaviour described in each
incident in terms of effectiveness or ineffectiveness on the appropriate dimension by using
seven to nine points scale. Then, average effectiveness ratings for each incident are determined
to decide which incidents will be included in the final anchored scales.

5. Developing Final BARS Instrument: A subset of the incidents (usually six or seven per
cluster) is used as a behavioural anchor for the final performance dimensions. Finally, a BARS
instrument with vertical scales is drawn to be used for performance appraisal, as in Figure 27-
5.

• How BARS is developed can be exemplified with an example of grocery checkout clerks
working in a large grocery chain. A number of critical incidents involved in checking out
of grocery can be clustered into seven performance dimensions:

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• Knowledge and Judgement

• Conscientiousness

• Skill in Human Relations

• Skill in Operation of Register

• Skill in Bagging

• Organisational Ability of Check Stand Work

• Skill in Monetary Transactions

• Observational Ability

• Now, a BARS for one of these performance dimensions, namely, “knowledge and
judgement” can be developed, as in Figure 28-5. Notice how the typical BARS is
behaviourally anchored with specific critical incidents.

• BARS method of performance appraisal is considered better than the traditional ones
because it provides advantages like a more accurate gauge, clearer standards, better
feedback, and consistency in evaluation. However, BARS is not free from limitations. The
research on BARS indicates that it too suffers from distortions inherent in most rating
scales. The research study concluded that “it is clear that research on BARS to date does
not support the high promise regarding scale independence.... In short, while BARS may
outperform conventional rating techniques, it is clear that they are not a panacea for
obtaining high interrater reliability”

• Assessment Centres: The introduction of the concept of assessment centres as a method
of performance method is traced back in 1930s in the Germany used to appraise its army
officers. The concept gradually spread to the US and the UK in 1940s, and to the Britain in
1960s. The concept, then, traversed from the army to business arena during 1960s. The
concept of assessment centre is, of course, of a recent origin in India. In India, Crompton
Greaves, Eicher, Hindustan Lever and Modi Xerox have adopted this technique of
performance evaluation.

➢ In business field, assessment centres are mainly used for evaluating executive or
supervisory potential. By definition, an assessment centre is a central location where
managers come together to participate in well-designed simulated exercises. They are
assessed by senior managers supplemented by the psychologists and the HR specialists for
2-3 days. Assessee are asked to participate in in-basket exercises, work groups, simulations,
and role playing which are essential for successful performance of actual job. Having
recorded the assessee’s behaviour the raters meet to discuss their pooled information and
observations and, based on it, they give their assessment about the assesee. At the end of
the process, feedback in terms of strengths and weaknesses, is also provided to the assesees.

➢ The distinct advantages the assessment centres provide include more accurate evaluation,
minimum biasedness, right selection and promotion of executives, and so on.

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➢ Nonetheless, the technique of assessment centres is also plagued by certain limitations and
problems. The technique is relatively costly and time consuming, causes suffocation to the
solid performers, discourages to the poor performers (rejected), breeds unhealthy
competition among the assessees, and bears adverse effects on those not selected for
assessment.

• 360 - Degree Appraisal: Yet another method used to appraise the employee’s performance
is 360 - degree appraisal. This method was first developed and formally used by General
Electric Company of USA in 1992. Then, it travelled to other countries including India. In
India, companies like Reliance Industries, Wipro Corporation, Infosys Technologies,
Thermax, Thomas Cook etc., have been using this method for appraising the performance
of their employees. This feedback based method is generally used for ascertaining training
and development requirements, rather than for pay increases.

Under 360 - degree appraisal, performance information such as employee’s skills, abilities
and behaviours, is collected “all around” an employee, i.e., from his/her supervisors,

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subordinates, peers and even customers and clients27. In other worlds, in 360-degree
feedback appraisal system, an employee is appraised by his supervisor, subordinates, peers,
and customers with whom he interacts in the course of his job performance. All these
appraisers provide information or feedback on an employee by completing survey
questionnaires designed for this purpose. All information so gathered is then complied
through the computerised system to prepare individualized reports. These reports are
presented to the employees being rated. They then meet the appraiser—be it one’s superior,
subordinates or peers—and share the information they feel as pertinent and useful for
developing a self-improvement plan.
In 360 - degree feedback, performance appraisal being based on feedback “all around”, an
employee is likely to be more correct and realistic. Nonetheless, like other traditional
methods, this method is also subject to suffer from the subjectivity on the part of the
appraiser. For example, while supervisor may penalise the employee by providing negative
feedback, a peer, being influenced by ‘give and take feeling’ may give a rave review on
his/her colleague.
• Cost Accounting Method: This method evaluates an employee’s performance from the
monetary benefits the employee yields to his/her organisation. This is ascertained by
establishing a relationship between the cost involved in retaining the employee, and the
benefits an organisation derives from him/her. While evaluating an employee’s
performance under this method, the following factors are also taken into consideration:

1. Unit wise average value of production or service.
2. Quality of product produced or service rendered.
3. Overhead cost incurred.
4. Accidents, damages, errors, spoilage, wastage, caused through unusual wear and tear.
5. Human relationship with others.
6. Cost of the time supervisor spent in appraising the employee.

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CHAPTER - 21
POTENTIAL APPRAISAL
So far, we have read the actual performance performed by an employee but not what
he/she can perform. Evaluating what a person can perform or do is called ‘potential appraisal
or evaluation.’ Potential refers to the abilities present but not currently utilized. It is the latent
capacity in a person to discharge a responsibility. Here, the views of K Ramachandran, Director
and Senior Vice-President (Human Resource and Operational Policy), Philips India Limited,
where potential appraisal is under taken in a very systematic way seem worth citing. K
Ramachandran observes:
“People are like icebergs. What you see above the surface (performance) is only a small
part. A large part of the attributes needed to perform excellently in a future job, which I call
potential, is not immediately visible. It is hidden below surface”.
Potential represents latent capacities and qualities in a person which manifests while
performing the job.

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CHAPTER - 22

(HRA) & (HRIS)

HUMAN RESOURCE ACCOUNTING (HRA)

Meaning

HRA is a sophisticated way to measure the effectiveness of personnel management
activities and the use of people in an organisation. Let us consider some important definitions
of HRA.

Definition
According to the American Association of Accountants (AAA), “HRA is a process of

identifying and measuring data about human resources and communicating this information to
interested parties”.

ADVANTAGES OF HRA

HRA is useful to organisations in more than one respects. It is clear from the following
advantages that it offers to organisations:

1. HRA provides useful information about the human capital in the organisation. Such
information enables the manager to take right decision, e.g. choice between new recruitment
and promotions, transfer and retention, and retrenchment and retention.

2. It throws light on the strengths and weaknesses of the employees working in the organisation.
It facilitates management in recruitment planning, i.e., whether to hire/recruit people or not.

3. HRA also facilitates management to evaluate the effectiveness of HR policies and practices.
For example, high costs in training may warrant to look at the returns over a period of time,
expenses incurred in the additional recruitment in respect of a particular category of employees
may indicate the need for a better compensation plan for them. Besides, HRA also provides
feedback to a manager even on his/her own performance.

4. It also provides valuable information for present as well as potential investors to judge a
company better on the value/strengths of the human resources/assets utilized therein. If two
companies are offering the same rate of return on capital employed, for example, HRA by
providing information on their human resources can help the potential investors decide which
one company be picked up to make investment. This is because HRA is considered as more
accurate accounting method of ascertaining true and fair return on the total resources employed
in a firm.

5. Finally, the information provided by HRA enables management to control various types of
human resource costs and, in turn, help improve profitability of the organisation.

LIMITATIONS OF HRA

However, HRA is not an unmixed blessing. It also suffers from certain limitations as listed
below:

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1. So far, there are no clear-cut guidelines how to differentiate the ‘cost’ and ‘value’ of human
resources. Added to it is the uncertainty about human life itself. Like physical assets, human
assets cannot be owned, retained and utilized at the sweet will and pleasure of an organisation.
Not only that, the so-called ‘asset’ after getting enriched within an organisation may simply
disappear attracted by green pastures and, thus, causing loss and inconvenience to the
organisation almost suddenly. Given such conditions, it is not easy to value human assets in an
organisation.

2. HRA also suffers from measurement problems. There is no consensus as yet among the
accountants and finance professionals regarding in what form and manner the human assets are
to be valued and then shown in Balance Sheet. This problem gets compounded by the question
of recovery /amortising rate. Whether the HR costs should be amortised at decreasing, constant
or increasing rate? Whether the amortisation rate should remain same or different for different
categories of human capital, i.e., employees?

3. There is also a fear that the employees and trade unions may not accept the idea. The reasons
are not difficult to seek. Valuing employees at different levels may lead to division among them
on, the one hand, and may discourage those valued at lower levels, on the other. Trade unions
may dislike the idea mainly because they will have to seek rewards/compensation for
employees as per their levels of valuation in the organisation.

4. However, there is no sufficient empirical evidence available so far to support the contention
that HRA as a managerial tool facilitates managers in better and effective management of
human resources in an organisation.

APPROACHES OR METHODS OF HUMAN RESOURCE VALUATION

The accountants and finance professionals have suggested various methods for
measuring the value of human resources utilized in an organisation. These, for the convenience
of readers, may be broadly classified into two categories: Monetary Methods, and Non-
Monetary Methods: We shall discuss these separately one by one.

● Monetary Methods

These methods are based on cost or economic value of human resources Under these
methods, human resources of an organisation are translated into a common denominator, i.e.,
money on which organisational decisions are taken. Following are the important monetary
methods used for measuring human values in an organisation.

1. Historical Cost Method: This method is developed by Rensis Likerst. Under this method,
all actual costs incurred on recruitment, training, familiarisation, etc., are capitalized. Then, the
capitalized cost is amortised, or say, written off over the period an employee serves in the
organisation. In case the employee leaves the organisation before his expected service period,
the remaining amount is written off completely in that particular year of his/ her leaving the
organisation. The advantage of this method is that the value of human asset can be shown on
conventional Balance Sheet and Profit and Loss Account. However, its drawback, if at all, is
that human resource is equated resulting in undervaluation.

2. Replacement Cost Method: As the title itself indicates, under this method, replacement
cost refers to the cost of replacing an existing employee. In other words, replacing cost is the
cost that would cost to replace the existing human resources with human resources capable of

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rendering equivalent services. Here, the underlying costs included in replacement cost are the
cost of recruitment, training and development, opportunity cost for the intervening period till
the new recruit attains the efficiency level equal to that of the old (to be replaced) employee.
In this way, this method helps the management in the process of human resource planning for
the organisation by making the information available on costs to be involved in the acquisition
of people in future. In a sense, this method is inconsistent with the ‘historical cost method’.
That there may not be similar replacement cost for a certain asset and management may not be
willing to replace the present human asset because of its greater value than that of scrap value
are some of the drawbacks of this method.

3. Opportunity Cost Method: This method is used to value employees possessing certain
skills and, thus, are rare in availability. Managers willing to acquire such scarce employees
offer bid prices. One who finally acquires the scarce employees puts the bid price as his
investment in such employees. The bid price is arrived at calculating actual or expected rate
for capitalisation of the supposed earnings to be earned by such employees. Obviously, if an
employee can be hired easily, there will be no opportunity cost for him/her. The main drawback
of this method is the absence of a well justified criterion to decide the amount of the bid, or
say, offer.

4. Asset Multiplier Method: This method is based on the assumption that there is no direct
relationship between cost incurred on an employee and his value for the organisation. This is
because the value of an employee depends on factors like motivation, working conditions and
their attitude toward work and organisation. In this method, all employees working in an
organisation are broadly classified into four categories; viz., top management, middle
management, supervisory management and operative and clerical staff. The salary bill of each
category is multiplied with appropriate multiplier to ascertain the total value of each category
for the organisation at a given point of time. Here, multiplier is an instrument that relates the
personal worth of employees with the total asset values of the organisation. As per principle,
the value of human asset should match with the value of goodwill. Inconsistency in the value
of human assets in comparison to goodwill is indicative of inaccuracy in multiplier that should
be adjusted accordingly.

5. Economic Value Method: Under this method, human asset is valued on the basis of the
contribution they are likely to make to the organisation till their retirement from the jobs. The
payments made to them in the form of pay, allowances, benefits, etc., are estimated and then
discounted appropriately to arrive at the present economic value of the individuals. This model
can be expressed in the following formula:

Where,
Vr = the human capital value of an individual r years old.

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E (t) = the individual’s annual earnings upto retirement, represented by the earnings profile.

r = discount rate i.e., cost of capital.

T = retirement age.

The drawback of this method is that the under or over-fixation of salary may affect equating
the total earnings to the human capital.
● Non-Monetary Methods

Taking note of the changes in the effectiveness of individuals, groups and the
organisation from time to time, the behavioural scientists have developed some non-monetary
methods in HRA. The important ones are discussed here:

1. Expected Realisable Value Method: Under this method, the elements of expected
realisable value of employee are measured through behavioural measures. For example, the
productivity of an employee can be measured by using objective indices and managerial
assessment. Psychometric tests and subjective evaluations can be used to measure the
promotability and transferability of employees. Similarly, attitude surveys can be used to
measure employee satisfaction, motivation, etc.

2. Discounted Net Present Value of Future Earnings: This method is propounded by Rensis
Likert. The method is based on three variables— casual, intermediate and output. According
to Likert, the effectiveness of human capital/resources can be measured by using these three
variables. Casual variables such as leadership style and behaviour affect intermediate variables
such as morale, motivation, commitment to work, etc., which, in turn, affect output variables
such as production, sales, profit, etc.

HUMAN RESOURCE INFORMATION SYSTEM (HRIS)

Meaning

HRIS is a systematic way of storing data and information for each individual employee
to aid planning, decision making and submitting of returns and reports to the external agencies.

NEED FOR HRIS

Venkata Ratnam and Srivastava have stated three purposes as the need for HRIS:

1. To store data and information for each individual employee for ready reference.

2. To provide a basis for decision making in day-to-day personnel issues, (e.g. grant of leave)
as also for planning, budgeting, implementing and monitoring a host of human resources
functions.

3. To supply data/returns to government and other public.

Hemendra Verma, a software consultant, conducted a survey and highlighted the need for HRIS
for the following purposes:

1. It was found that there is very little time allotted in handling information in respect of the
HR function, may be because of time required to handle the abundant information.

2. There is a lack of information about human resources in the industry at all levels.

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3. HRIS would help achieve “equality” in areas like promotion, transfer, nomination, etc.
4. HRIS helps settle employees’ dues in time, in respect of provident fund, retirement, gratuity,
L.T.C. and earned leave compensation, etc.

5. Once the profile of a person is entered in the computer, retrieving the information becomes
easier and also involves less costs and lessens chances of errors.

ADVANTAGES OF HRIS

A well developed HRIS offers the following advantages:
• Reduction in the cost of stored data in human resource.
• Higher speed of retrieval and processing of data.
• Reduction in duplication of efforts leading to reduction in cost.
• Availability of accurate and timely data about human resources.
• Better analysis leading to more effective decision making.
• More meaningful career planning and counselling at all levels.
• Improved quality of reports.
• Better ability to respond to environmental changes.
• More transparency in the system.

USES OF HRIS

As stated earlier, the main purpose of maintaining HRIS system is to gather, classify,
process, record and disseminate the information required for efficient and effective
management of human resources in the organisation. The various uses of HRIS in an
organisation can be listed as follows:
● Personnel Administration: It encompasses personal information of an employee. These

may include name, address, date of birth, marital status, and the date of joining the
organisation. It also contains the name and address of next kin of the employee concern.
This information describes the employee.
● Salary Administration: One of the functions of HRIS is to provide a report containing
information like present salary, benefits, last pay increase and proposed increase in future
of employees.
● Leave/Absence Increase: HRIS is also used to control leave/absence of employees. This
is done by maintaining a leave history of each employee. Every employee can be issued an
identity card writing every employee’s token number coded on it. Employee’s entry and
exit from the organisation should be recorded on the identity card. This reduces chances
for malpractice or oversight in calculating wages for each employee.
● Skill Inventory: Recording employee skills and monitoring a skill database is yet another
use of the HRIS. Such a skill record helps identify employees with the necessary skill for
certain positions or jobs in an organisation.

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● Medical History: The HRIS is also used to maintain occupational health data required for
industrial safety purposes, accident monitoring, and so on.

● Performance Appraisal: In order to form a comprehensive overview about an employee,
HRIS maintains performance appraisal data such as the due date of the appraisal, potential
for promotion, scores of each performance criteria and alike. The textual information can
be combined with the factual data obtained from the HRIS and the combination of
information can be used for imparting training and affecting employee mobility in the form
of transfer and promotion.

● Manpower Planning: HRIS is used for manpower planning also. It keeps information of
organisational requirements in terms of positions. HRIS connects employees to the required
positions in the organisation. It is also used to identify vacancies and establish employees
thereon. HRIS can also help identify a logical progression path and the steps to be taken
for employee progress/ advancement.

● Recruitment: Recruitment forms the most essential function of HRM. HRIS helps in the
recruitment process in a big way by recording the details of activities involved in employee
recruitment. These may include cost and method of recruitment and time taken to fill the
positions level wise, for example.

● Career Planning: By providing necessary information such as which employees have been
earmarked for which positions, HRIS facilitates positional advancement of employees. In
other words, HRIS helps in planning for succession.

● Collective Bargaining: HRIS through a computer terminal can provide up-to-date relevant
and required information, facts and figures and, thus, can facilitate collective bargaining. It
can help collective bargaining as “what if analysis” rather as feelings and fictions. In the
same manner, HRIS can also help maintain better human relations in the organisation.

● Now, the various uses or applications of HRIS can be juxtaposed as follows:

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DESIGNING OF HRIS

The realization that there cannot be good plan without good data and there cannot be
good data without a good plan to collect it, underlines the need for designing a good HRIS in
the organisation. The following steps are involved in designing a sound HRIS:

1. Determination of Information Needs: Data and information are basic inputs for decision
making activity. Managers at different levels may need different types of information. Hence,
identification of information needed by the managers becomes the first step in designing HRIS.
This involves a perspicacious study of the activities carried out in the organisation. Work
patterns, their relationship and constraints affecting the HRIS also need to be analysed. Yes,
these factors may differ from organisation to organisation and from industry to industry and
even from time to time in case of the same organisation and industry.

2. Designing the System: At this stage, the flow of information is structured in such a manner
that it is economical and matches with the information needs of managers. It is important to
mention that HRIS as a sub-system of Management Information System (MIS) does not require
a separate design. However, designing HRIS may require developing preferred processing
techniques for desired data set by managers at different levels.

3. Implementation: This is the stage when the HRIS is actually set up. In order to handle the
system effectively, employees are imparted the necessary skill through orientation and training
programmes. Besides, facilities are increased and upgraded, procedures are properly
streamlined with an objective to integrate the HRIS with various organisational components in
existence at the time.

4. Monitoring and Evaluation: It involves measuring the performance, or say, contribution
of the system to the overall human resource management of the organisation. By doing so, gaps
are identified and corrective steps are taken to ensure its smooth operation. The system is
evaluated on a regular basis so that it is evaluated in the light of changes taking place from time
to time within and outside the organisation.

LIMITATIONS OF HRIS

Computerized HRIS is not an unmixed blessing. While it offers some benefits, as described
earlier, it also suffers from problems which need to be addressed to make the HRIS more
effective. The major problems of HRIS are described below:

1. It can be expensive in terms of money and manpower requirements.

2. Its effective application needs large-scale computer literacy among the employees
responsible for maintaining HRIS.

3. If the personnel designing HRIS are not competent enough in their works, there is, then,
mismatch between data provided by the HRIS and data required by the managers.

4. Computers cannot replace human being because human interventions will always be there
to improve the existing situation. The “Garbage-in Garbage Out (GIGO)” is the key expression
in any computerized system and, hence, in HRIS also.

5. Absence of continuous updating of HRIS makes the information stale which is considered
as good as no information.

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CHAPTER – 23
EMPLOYEE GRIEVANCES

Meaning
In a broader perspective, any discontent or dissatisfaction, real or imaginary,

experienced, by an employee about his or her employment constitutes a grievance.
Definition

Dale S. Beach has defined grievance as “any dissatisfaction or feeling of injustice in
connection with one’s employment situation that is brought to the notice of the management”.

[OR]
According to J.M. Jucius, “A grievance is any discontent or dissatisfaction whether
expressed or not, whether valid or not, arising out of anything connected with the company
which an employee thinks, believes or even feels to be unfair, unjust or inequitable”.
CAUSES OR SOURCES OF GRIEVANCES
As it can be seen from the definitions of grievance, it arises out of something that causes
dissatisfaction or discontent to one’s employment. As such, there cannot be a precise set of the
causes of grievances applicable to all organisations. In fact, the causes of grievances are likely
to differ from organisation to organisation. Chandra6 in his study found the following areas as
the causes of employee grievances.
• Promotions
• Amenities
• Continuity of service
• Compensation
• Disciplinary action
• Fines
• Increments
• Leave
• Medical benefits
• Nature of job
• Payment
• Recovery of dues
• Safety appliances
• Superannuation

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• Supersession
• Transfer
• Victimization
• Condition of work
However, whatever be the causes of grievances, they tend to fall under the following
categories:
1. Concerning Working Conditions:
(i) Unsafe and unpleasant working conditions.
(ii) Inadequate toilet facilities, dirty toilets, etc.
(iii) Non- availability of necessary raw material, tools and machines.
(iv) Misfit between worker’s ability and job
2. Concerning Management Policy and Practices:
(i) Wage rate and its payment
(ii) Incentive
(iii) Seniority
(iv) Promotion
(v) Transfer
(vi) Fines, punishments and penalties.
3. Concerning Violation of Rules and Regulations:
(i) Organisational rules and regulations
(ii) Civic laws
(iii) Past Practices
(iv) Procedure of collective bargaining
4. Concerning Personality Traits:
(i) Fault-finding attitude
(ii) Over-ambitious
(iii) Mental tension
(iv) Negative approach to life
(v) Excessive ego feelings
The two American experts have classified the causes of grievances into the following three
categories:

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1. Management Policy and Practices

2. Trade Union Practices

3. Personality Traits

A brief description of these follows:

• Management Policy and Practices

At times, the particular style of management also gives rise to grievances. The
autocratic or bureaucratic style of management, for example, is hardly liked by the educated
workers. They favour the participative style of management. So, to say, the management styles
need to be adapted in accordance to the composition of workforce forming a specific situational
context.

Closely related to management styles is management practices also leading to
grievances. It is often found that if the implementation falls short of the intended policy, it also
gives rise to grievances.

Added to this may be the managerial ambiguities in personnel policies which may also
lead to employee grievances. Matters such as employee compensation, seniority, overtime,
transfer, etc., are the common instances of ambiguities that lead to employee grievances.

Much also depends on the supervisory practices experimented in an organisation. For
example, if the supervisory style is inconsistent in the implementation of personnel policies,
biased in application of organisational rules, regulations and decisions, indifferent in attitude
toward employees union, etc., all these boils down to build pressure on employees. Such
pressure ultimately results in employee grievances.

• Union Practices It is found that where there are multiple of unions with different political
affiliation work in an organisation, they remain engaged in constant jostling and lobbying
the workers for gaining strengths in numerical terms. In practice, workers join a union
which, in their opinion, has concern for their welfare. It is with this consideration; the
unions take grievance machinery as an important vehicle to show their real concern for
workers welfare. Expectedly, the unions are then found sometimes inclined to encourage
workers for filing of grievances with an objective to demonstrate the advantage of joining
the particular union. The workers are, therefore, found tempted to express their grievances,
may not be real grievances.

• Personality Traits

Sometimes, an individual worker’s personality traits also have a bearing on the
emergence of grievances. Traits such as over ambition, excessive self-esteem, grumbling and
fault-finding attitude, mental tension, etc., are illustrations of personality traits leading to
employee grievances.

Besides, the atmosphere at a time prevalent may also contribute to grievances. For
example, when an antagonistic atmosphere prevails in and around, it may result in even a trivial
matter being blown out of proportion. But the same in a cooperative and congenial atmosphere
would not even have been noticed at all.

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GRIEVANCE PROCEDURE

1. Timely Action: The first and foremost requisite in grievance handling is to settle them
immediately as and when they arise. Or say, grievances need to be nipped in the bud. Sooner
the grievance is settled, lesser will be its effects on employees’ performance. This requires the
first line supervisors be trained in recognizing and handling a grievance properly and promptly.

2. Accepting the Grievance: The supervisor should try to recognize and accept the employee
grievance as and when it is expressed. It must be noted that acceptance does not necessarily
mean agreeing with the grievance, it simply shows the willingness of the supervisor to look
into the complaint objectively and dispassionately to deal with the grievance. Evidences
suggest that more the supervisor shows his on her concern for the employees, lesser is the
number of grievances raised by the employees.

3. Identifying the Problem: As stated earlier, the grievance expressed by the employee may
be at times simply emotionally, overtones, imaginary or vague. The supervisor, therefore, needs
to identify or diagnose the problem stated by the employee.

4. Collecting the Facts: Once the problem is identified as a real problem, the supervisor
should, then, collect all the relevant facts and proofs relating to the grievance. The facts so
collected need to be separated from the opinions and feeling to avoid distortions the facts. It is
useful to maintain the facts for future uses as and when these are required.

5. Analysing the cause of the Grievance: Having collected all the facts and figures relating
to the grievance, the next step involved in the grievance procedure is to establish and analyse
the cause that led to grievance. The analysis of the cause will involve studying various aspects
of the grievance such as the employees past history, frequency of the occurrence, management
practices, union practices, etc. Identification of the cause of the grievance helps the
management take corrective measures to settle the grievance and also to prevent its recurrence.

6. Taking Decision: In order to take the best decision to handle the grievance, alternative
courses of actions are worked out. These are, then, evaluated in view of their consequences on
the aggrieved employee, the union and the management. Finally, a decision is taken which is
best suited to the given situation in the organisation. Such decision should serve as a precedent
both within the department and the organisation.

7. Implementing the Decision: The decision whatsoever taken must be immediately
communicated to the employee and also implemented by the competent authority. McGregor’s
“Hot stove Rule’’11 should be strictly followed while implementing the decision. The decision,
thus, implemented should also be reviewed to know whether the grievance has been
satisfactorily resolved or not. In case, it is not resolved, the supervisor once again needs to go
back to the whole procedure step by step to find out an appropriate decision or solution to
resolve the grievance.

LEGISLATIVE ASPECTS OF THE GRIEVANCE PROCEDURE IN INDIA

During the pre-Independence period, not much attention was given to the settlement of
the employees’ grievances. It was later only some legislative attention was paid to the employee
grievances. Following are the legislative enactments that deal with the redressal of the
employees grievances:

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1. The Industrial Employment (Standing Orders) Act, 1946. As per the clause 15 of the
model standing orders in schedule I of this Act, in every establishment with 100 or more
workers, all complaints arising out of employment shall be submitted to the officer designated
in this behalf, with the right of appeal to the employer.
2. The Factories Act, 1948. Under the Factories Act of 1948, there is a provision for the
appointment of Labour Welfare Officers in the factories employing 500 or more workers. The

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rules of the Act enjoin upon these officers to ensure the settlement of the employee grievance;
However, these provisions could not become helpful inter alia because of the dual role
entrusted to them to play.
3. The Industrial Disputes Act, 1947. This act provides for the following provisions in order
in regard to grievance settlement:
1. A Grievance Settlement Authority will be set up in every industrial establishment wherein
50 or more workers are ordinarily employed.
2. As and when an industrial dispute will arise in such establishments, the worker may refer
his or her dispute to the Grievance Settlement Authority for its settlement.
3. The Grievance Settlement Authority will process the matter within a specified period
prescribed for this purpose.
4. A grievance can be referred to Boards, Courts or Tribunals only after it is already referred
to the Grievance Settlement Authority or the decision taken by the authority is not acceptable
to the either of the parties.

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CHAPTER - 24

SOCIAL SECURITY

Meaning

Social security refers to protection provided by the society to its members against
providential mishaps over which a person has no control.

Definition
According to a definition given in the ILO publication, “Social security is the security

that society furnishes through appropriate organisation against certain risks to which its
members are exposed. These risks are essentially contingencies of life which the individual of
small means cannot effectively provide by his own ability, or foresight alone or even in private
combination with his fellows”.

[OR]
William Beveridge has defined social security as “a means of securing an income to
take the place of earnings when they are interrupted by unemployment, sickness or accident to
provide for the retirement through old age, to provide against loss of support by death of
another person or to meet exceptional expenditure connected with birth, death, or marriage.
The purpose of social security is to provide an income upto a minimum and also medical
treatment to bring the interruption of earnings to an end as soon as possible.”

OBJECTIVES OF SOCIAL SECURITY

The objectives of social security can be sub-summed under three, categories:
1. Compensation

2. Restoration

3. Prevention

A brief description of these is given as under.:
• Compensation: Compensation ensures security of income. It is based on this consideration

that during the period of contingency of risks, the individual and his/her family should not
be subjected to a double calamity, i.e., destitution and loss of health, limb, life or work.
• Restoration: It connotes cure of one’s sickness, reemployment so as to restore him/her to
earlier condition. In a sense, it is an extension of compensation.
• Prevention: These measures imply to avoid the loss of productive capacity due to sickness,
unemployment or invalidity to earn income. In other words, these measures are designed
with an objective to increase the material, intellectual and moral well-being of the
community by rendering available resources which are used up by avoidable disease and
idleness.

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SCOPE OF SOCIAL SECURITY

The term ‘social security’ is all embracing. The scope of social security is, therefore
very wide. It covers the aspects relating to social and economic justice. All social security
schemes furnished by the government are broadly classified into two types: (i) Social
Assistance, and (ii) Social Insurance. These are separately discussed subsequently in the
chapter.

According to the Social Security (Minimum Standards) Convention (No.102) adopted
by the ILO in 1952, the following are the nine components of social security that configure its
scope.:

(i) Medical care,

(ii) Sickness benefit,

(iii) Unemployment benefit.

(iv) Old age benefit,

(v) Employment injury benefit,

(vi) Family benefit,

(vii) Maternity benefit,

(viii) Invalidity benefit, and

(ix) Survivor’s benefit

NEED FOR SOCIAL SECURITY

One moot question to be answered is why there is a need for social security especially
in India. As has already been mentioned, the underlying philosophy of social security is to
ensure a minimum level of material living to the needy or helpless ones of the society by the
State. Our accumulated experience reveals that in an industrial economy, the workers have
been subjected to periodic unemployment due to cyclical fluctuations in business, sickness,
industrial accidents and old age. In fact, there is nothing more disconcerting to worker and
his/her family than unemployment. Similarly, while sickness suspends earning capacity of a
worker temporarily, industrial accidents may disable him/her partially or even permanently,
and old age may put a stop to his/her ability to earn and support himself/herself and the family.
The capitalist having sufficient resources has no problem in facing such risks of life. But, the
worker does not have resources required to face the risks caused by sickness, accidents,
unemployment and old age. Nor has he/she alternative sources of livelihood or accumulated
property to overcome the period of adversity. Such a situation underlines the need for social
security to be provided to such needy workers/people. Naturally, the Government has, then,
the obligation to help the needy and helpless workers and provide them security to pass through
in period of adversity.

That the need for social security is realized not only to afford the needy workers’
protection against the adversities of life, but also for the overall development of the State is
well elucidated by a former veteran trade union leader the President of India, Mr.V.V. Giri. He
opines that, “Social security measures have two-fold significance for every developing country.

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They constitute an important step toward the goal of a Welfare State, by improving living and
working conditions and affording the people protection against the uncertainties of the future.
These measures are also important for every industrialisation programme, for not only to enable
workers to become more efficient but they also reduce the wastage arising from industrial
disputes. The man-days lost on account of sickness and disability also constitute a heavy drain
on the slender resources of the worker and on the industrial output of the country. Lack of
social security impedes production and prevents the formation of a stable and efficient labour
force. Social security is, therefore, not a burden, but a wise investment in the long run.”

Thus, the need for a comprehensive programme of social security in India is so strong
that it need no more proof or evidence. It is must to ensure a minimum level of living for those
who are helpless on various counts.

TYPES OF SOCIAL SECURITY

Social security is a comprehensive term. All social security measures provided by the
Government are of two types:

• Social Assistance
• Social Insurance

These are discussed one by one.
• Social Assistance

Social assistance refers to the assistance rendered by the Government to the needy
persons without asking them to make contributions to be entitled to get such assistance. In other
words, social assistance includes those benefits which are provided by the Government without
any contribution from workers and employers. Workmen’s compensation, maternity benefits,
old age pensions, etc. are the examples of social assistance.
• Social Insurance

Social insurance refers to a scheme of maintaining fund from the contributions made
by the employees and employer, with or without a subsidy from the Government. In other
words, social insurance can be defined as a device to provide benefits as of right for persons of
small earnings, in amounts which combine the contributive efforts of the insured with subsidies
from the employer and the Government4. Examples of social insurance are provident fund and
group insurance.

Strictly speaking, these two types of social security measures may be said to be the two
faces of the same coin. As a matter of fact, both of them are integral parts of a social security
system.

Here, it seems pertinent to make distinction between social insurance and commercial
insurance. Following Table 21.1 bears out how social insurance differs from commercial
insurance.

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137

CHAPTER - 25

HUMAN RESOURCE MANAGEMENT (HRM) IN A CHANGING ENVIRONMENT

CHANGING ENVIRONMENT OF HRM

Business environment is changing environment and so is HR environment. The
changing environment of HRM includes.

▪ Work force Diversity
▪ Economic and Technological Change
▪ Globalization
▪ Organisational Restructuring
▪ Changing Nature of Work

WORK FORCE DIVERSITY

Diversity has been defined as any attribute that humans are likely to use to tell
themselves, that person is different from me and, thus, includes such factors as race, sex, age
values, and cultural norms1. The Indian work force is characterized by such diversity that is
deepening and spreading day by day. It is likely to be more diverse as women, minority- group
members, and older workers flood the work force. With the increasing number of women
entering the work force due to a combination of factors like women’s emancipation, economic
needs, greater equality of sexes, education and so on, additional pressures of managing a
different set of problems at the work place have arisen. As such, the number of women is on
increase in all walks of life i.e., teachers, lawyers, doctors, engineers, accountants, pilots,
parliamentarians and so on.

ECONOMIC AND TECHNOLOGICAL CHANGE

Along with time, several economic and technological changes have occurred that have
altered employment and occupational pattern. In India too, there is a perceptible shift in
occupational structure from agriculture to industry to services. The New Economic Policy,
1991 has led to liberalization and globalization giving genesis to multinational organisations
with their multicultural dimensions having certain implications for HRM. The implications of
globalization for HRM are discussed subsequently. The Indian economy has already become
an open economy but it will be more so from April 2003 with the complete lifting of
quantitative restrictions (QRs) on imports in India.

GLOBALIZATION

The New Economic Policy, 1991 has, among other things, globalised the Indian
economy. There has been a growing tendency among business firms to extend their sales or
manufacturing to new markets aboard. The rate of globalization in the past few years in India
has been nothing short of phenomenal. Globalization increases competition in the international
business. Firms that formerly competed only with local firms, now have to compete with

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foreign firms/competitors. Thus, the world has become a global market where competition is a
two-way street.

ORGANISATIONAL RESTRUCTURING

Organisational restructuring is used to make the organisation competitive. From this
point of view, mergers and acquisitions of firms have become common forms of restructuring
to ensure organisational competitiveness. The mega-mergers in the banking,
telecommunications and petroleum companies have been very visible in our country.
Downsizing is yet another form of organisational restructuring. As a part of the organisational
changes, many organisations have “right sized” themselves by various ways like eliminating
layers of managers, closing facilities, merging with other organisations, or outplacing workers.
There has been a practice to flatten organisations by removing several layers of management
and to improve productivity, quality, and service while also reducing costs. Whatever be the
form of restructuring, jobs are redesigned and people affected. One of the challenges that HRM
faces with organisational restructuring is dealing with the human consequences of change. For
example, the human cost associated with downsizing has been much debated and discussed in
the popular press. As such, HRM needs to focus on the changed scenario uniquely and that is
not so simple. Thus, management of HR activities has become crucial for HR managers.

CHANGING NATURE OF WORK

Along with changes in technology and globalization, the nature of jobs and work has
also changed. For example, technological changes like introduction of fax machines,
information technology, and personal computers have allowed companies to relocate
operations to locations with lower wages. There is also a trend toward increased use of
temporary or part-time workers in organisations.

CHANGING ROLE OF HRM

The HR environment is changing and so is the role of HRM, to adapt the changing
trends. The human resource managers of today may find themselves obsolete tomorrow in the
changed business environment if they do not adapt HR practices suiting to the environment.
As such, new role or practices have emerged to successfully respond to the changes. Some of
the important HR practices are discussed here:

1. Flatter Organisations. Pyramidal organisation was the norm of yesterday. The pyramidal
shape of organisations is converted into flat organisations reducing the ten-twelve levels to
five-seven levels. The increasing number of flat organisation abound in the country. One main
feature of flat organisation, among other things, is that there are more people to report to the
managers, they will be less able to meddle in the work of their subordinates.

2. Employee Empowerment: Gone are days when managers were exercising formal power
over employees to get work done from them. The changes occurred in attitude and awareness
of employees over the period have rendered this mode of managing employees as obsolete.
Under the changed conditions when employee has become, what is popularly termed as a
‘knowledge worker’, the employees need to be provided with greater autonomy through
information sharing and provision of control over factors that affect performance. This is,
experts say, turning the typical organisation upside down. Granting sanction to the employees
to make decisions in their work matters is called ‘employee empowerment’.

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3. Team work: The concept of division of labour i.e., specialized function introduced by Adam
Smith remained in practice for a long period till the twentieth century. But, given the process-
oriented work nature of modern organizations, single-function concept has ceased to its
relevance. Modern organisations, or say, MNCs rely more on multi-function of workers so that
workers do not remain confined to a single function but can do more than one function. This is
particularly so in case of increasing concern for downsizing by the organizations. As such, a
worker’s contribution to organization becomes more as a member of the team. The managerial
implications are that these workers need to be managed accordingly as a team, not an individual
in isolation. In other words, managers need to follow a holistic approach of management for
managing such workers. 360-Degree Appraisal may be such an example

4. Ethical Management: As the issues faced by the HR managers have increased in number
and complexity, so have the pressures and challenges of working ethically. Ethical issues pose
fundamental questions about fairness, justice, truthfulness, and social responsibility. Concerns
have been raised about the ethical standards used by managers and employees, particularly
those in business organisations. The most common unethical incidents exhibited by employees
have been cheating on expense account, paying or accepting bribes and kickbacks, forging
signature, lying to supervisors, employees alcohol or drug abuse, and falsification of records.

Ethics means doing just or right. In this sense, ethics deals with what “ought” to be
done. For the HR manager, there are ethical ways in which the manager ought to act relative to
a given human resource issue. However, determining specific (ethical) actions is not always
easy. Ethical issues in HRM often have dimensions such as extended consequences, multiple
alternatives, mixed outcomes, uncertain consequences, and personnel effects8. Then, the real
problem of HR managers is how to deal with these ethical dimensions? Researchers9 have
suggested some guidelines that can help HR managers respond to the ethical elements:

Does the behaviour or result achieved comply with all applicable laws, regulations, and
government codes?
Does the behaviour or result achieved comply with all organisational standards of
ethical behaviour?
Does the behaviour or result achieved comply with professional standards of ethical
behaviour?

It is clear from the above three points that just complying with the laws and regulations
cannot guarantee ethical behaviour. Instead, organisational members need to be guided by
values and codes of behaviour. One way to induce ethical behaviour in organisations is to
conduct training of employees and HR managers. Training of employees and HR managers in
ethics compliance has been found to reduce the incidence of ethical problems. It is with this
realisation that the ‘Ethics in Business’ as a paper is prescribed in the course curriculum of the
management programmes by most of the Institutes and Management Departments in
Universities in India and elsewhere as well.

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CHAPTER - 26

INTERNATIONAL HUMAN RESOURCE MANAGEMENT (IHRM)

Meaning

An international business is any firm that engages in international trade or investment.
International trade refers to export or import of goods or services to customers/consumers in
another country. On the other hand, international investment refers to the investment of
resources in business activities outside a firm’s home country.

Definition
Here the opinion of Duerr seems worth quoting: “virtually any type of international

problem, is either created by people or must be solved by people. Hence, having the right
people in the right place at the right time emerges as the key to company’s international
growth.”

TYPES OF INTERNATIONAL BUSINESS

There are many alternatives available to companies to extend their operations abroad. To begin
with, international operations usually start with either exporting, licensing, or franchising2. A
brief mention of these follows:
• Exporting: Exporting is often the first choice when manufacturers decide to expand

abroad. Simply stating, exporting means selling abroad, either directly to target customers
or indirectly by retaining foreign sales agents or/and distributors. Either case, going abroad
through exporting has minimal impact on the firm’s human resource management because
only a few, if at all, of its employees are expected to be posted abroad.
• Licensing: Licensing is another way to expand one’s operations internationally. In case of
international licensing, there is an agreement whereby a firm, called licensor, grants a
foreign firm the right to use intangible (intellectual) property for a specific period of time,
usually in return for a royalty3. Licensing of intellectual property such as patents,
copyrights, manufacturing processes, or trade names abound across the nations. The Indian
basmati (rice) is one such example.
• Franchising: Closely related to licensing is franchising. Franchising is an option in which
a parent company grants another company/firm the right to do business in a prescribed
manner. Franchising differs from licensing in the sense that it usually requires the
franchisee to follow much stricter guidelines in running the business than does licensing.
Further, licensing tends to be confined to manufacturers, whereas franchising is more
popular with service firms such as restaurants, hotels, and rental services.

One does not have to look very far to see how important franchising business is to companies
here and abroad. At present, the prominent examples of the franchise agreements in India are
Pepsi Food Ltd., Coca-Cola, Wimpy’s Damino, McDonald, and Nirula4. In USA, one in 12
business establishments is a franchise.

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However, exporting, licensing and franchising make companies get them only so far in
international business. Companies aspiring to take full advantage of opportunities offered by
foreign markets decide to make a substantial, direct investment of their own funds in another
country. This is popularly known as Foreign Direct Investment (FDI). Here, by international
business means foreign direct investment mainly. Let us discuss some more about foreign
direct investment.

• Foreign Direct Investment (FDI): Foreign direct investment refers to operations in one
country that are controlled by entities in a foreign country. In a sense, this FDI means
building new facilities in other country. In India, a foreign direct investment means
acquiring control by more than 74% of the operation. This limit was 50% till the financial
year 2001-2002.

There are two forms of direct foreign investment: joint ventures and wholly-owned
subsidiaries. A joint venture is defined as “the participation of two or more companies jointly
in an enterprise in which each party contributes assets, owns the entity to some degree, and
shares risk”. In contrast, a wholly-owned subsidiary is owned 100% by the foreign firm.

An international business is any firm that engages in international trade or investment.
International trade refers to export or import of goods or services to customers/consumers in
another country. On the other hand, international investment refers to the investment of
resources in business activities outside a firm’s home country.

PERSPECTIVE OF INTERNATIONAL HRM

Perspective influences practices. That the perspective of international HRM will differ
from the indigenous one, the delineation of the former seems in the fitness of the context. The
major factors that form perspective for international HRM and, in turn, influence HRM
practices are scanned as cultural, economic, political, labour cost and to industrial relations.
These are discussed in seriatim.

• Cultural Factors: Culture means shared beliefs, values, norms, and moral by the people.
Organisational culture means a pervasive underlying set of beliefs, assumptions, values,
shared feelings and perceptions, which influence the behaviour of people in the
organisation. The same distinguishes one organisation from another. Similarly, at macro
level too, wide ranging cultural differences exist across the nations/countries. For example,
the eastern culture widely varies from the western one. Just to quote, the incentive plans in
Asia (Japan) tend to focus on the work group, while in the west the more usual prescription
is still to focus on individual worker incentives6.

The research work of Geert Hofstede undertaken into IBM using the responses of managers
from 66 different countries produced some interesting evidences on cultural differences. In
his study, Hofstede found that societies differ on four primary dimensions which he called:
power distance (PDI), uncertainty avoidance (UAI), individuality (INV) and masculinity
(MASC). A brief discussion of these follows:

• Power Distance (PDI): By power distance Hofstede means the extent to which members
of a society accept that power in institutions and organisations is and should be distributed
equally. Accordingly, the distance between the government and the governed is narrower
in democratic societies like India than in dictatorial ones like Philippines. This means,

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Hofstede concludes, the workers in India will have far more chances of influencing
decisions of the government than would the workers in Philippines. According to him, the
same applies to organisations also.

• Uncertainty Avoidance (UAI): In simple terms, uncertainty avoidance means the creation
of set of rules and structures to eliminate ambiguity in organisations and support those
beliefs that are promising for certainty and conformity. Differences abound among
countries from this point of view also. For example, while at work place, the Indians,
Germans and the French feel a much greater need for rules and regulations than do the
Swedes and the British. The attitude of uncertainty avoidance is much frowned on in high
PDI countries like Philippines and Germany.

• Individualism (INV): In simple terms, individualism means the degree of preference of
individuals expected to look after themselves and their immediate families8. Just reverse is
collectivist. From this stand point, USA and Britain score high on the individual index and
Indonesia and Pakistan score low. What these mean is the preference for living and working
in individual and collectivist ways respectively.

• Masculinity (MASC): By masculinity, Hofstede means the extent to which the society
values assertiveness (masculinity) and caring (femininity). In simple terms, masculinity
pertains to those societies in which social gender roles are clearly distinct, that is, men are
supposed to be assertive, tough and focused on material success. Femininity pertains to
societies in which women are supposed to be more modest, tender and caring for the quality
of life. As per this index, Japan and Austria ranked high in masculinity, while Denmark
and Sweden ranked low. It is also important to note that in Japan, the most masculine
country, women seem to retain their feminine values. However, in Sweden, the least
masculine country as per the index, feminine values apply also to men.

• Economic Conditions

Like cultural differences, there abound economic differences among nations/countries.
Difference in economic conditions or systems cause inter-country differences in HR practices.
For example, I case of a country with free enterprise systems, the need for efficiency tends to
favour HR practices and policies that encourage productivity, efficient workers, etc. On the
other side, when one moves along the scale toward more socialist systems, HR practices tend
to shift toward different direction like preventing unemployment. It may do so even at the
expense of sacrificing efficiency.

• Labour Cost Factors

HR practices are also influenced by differences in labour costs existed in different countries. If
the labour cost is high, it can require more focus on labour efficiency which, in turn, can
influence HR practice to shift toward improving labour performance. Labour may get
remuneration as per performance i.e., pay-for-performance. Evidences are available to mention
the inter-country differences in labour costs. Labour cost is quite more in U.K. than in India,
for example. Wide gaps in hours worked also exist among the countries which also needs to be
considered while studying HR practices in a particular country. So much so, intra-country
differences in hours worked exist across organisations. For example, in India, there is 5 days
week (work) in the central government departments, while it’s 6 days week in the state

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government departments. This affects HR practices such as vacations between the two types of
organisations in the same country.
• Labour Relations Factors
Labour relations or industrial relations i.e., relationship between employees, employers and the
government that vary from country to country and have an enormous bearing on affecting HR
practices. For instance, in Germany, codetermination is the rule. Here, the employees enjoy
legal right to have their voice in the matters of their company. On the other hand, in India and
many countries, the State has its role to play in the relations between employees and employers.
In India, for instance, HR policies on most matters such as compensation (wages/salary) and
retirement benefits are set by the government. The government does so by enactment of the
various Acts such as the Minimum Wages Act, 1948. The Payment of Gratuity Act, 1972, the
payment of Bonus Act, 1965, etc. The HR policies are determined accordingly.
As seen above, wide inter-country differences in culture, economic systems, labour costs, and
industrial relations systems affect HR practices. Hecke, HR managers need to consider these
impacts and evolve HR practices for business operations conducted globally. The subsequent
section deals with the same.

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CHAPTER - 27
MANAGING HUMAN RESOURCES (HR) IN VIRTUAL ORGANISATION (VO)

Meaning
This new form of organisation, i. e., ‘virtual organisation’ emerged in 1990 and is also

known as digital organisation, network organisation or modular organisation. Simply speaking,
a virtual organisation is a network of cooperation made possible by, what is called ICT, i. e.,
Information and Communication Technology, which is flexible and comes to meet the
dynamics of the market.
CHARACTERISTICS
A virtual organisation has the following characteristics:

• Flat organisation
• Dynamic
• Informal communication
• Power flexibility
• Multi-disciplinary (virtual) teams
• Vague organisational boundaries
• Goal orientation
• Customer orientation
• Home-work
• Absence of apparent structure
• Sharing of information
• Staffed by knowledge workers.
In fact, this list of the characteristics of virtual organisation is not an exhaustive one but
illustrative only. One can add more characteristics to this list.
TYPES OF VIRTUAL ORGANISATIONS
Depending on the degree or spectrum of virtuality, virtual organisations can be classified into
three broad types as follows:
1. Telecommuters
2. Outsourcing employees/competencies
3. Completely virtual
A brief description of these follows in turn.

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• Telecommuters
These companies have employees who work from their homes. They interact with the
workplace via personal computers connected with a modem to the phone lines. Examples of
companies using some form of telecommuting are Dow Chemicals, Xerox, Coherent
Technologies Inc., etc.
• Outsourcing Employees/Competencies
These companies are characterised by the outsourcing of all/most core competencies. Areas for
outsourcing include marketing and sales, human resources, finance, research and development,
engineering, manufacturing, information system, etc. In such case, virtual organisation does its
own on one or two core areas of competence but with excellence. For example, Nike performs
in product design and marketing very well and relies on outsources for information technology
as a means for maintaining inter-organisational coordination.
• Completely Virtual
These companies metaphorically described as companies without walls that are tightly linked
to a large network of suppliers, distributors, retailers and customers as well as to strategic and
joint venture partners. Atlanta Committee for the Olympic Games (ACOG) in 1996 and the
development efforts of the PC by the IBM are the examples of completely virtual organisations.
Now, these above types of virtual organisations are summarized in the following Table 34.1.

Table 34.1: Spectrum of Virtuality

DIFFERENCE BETWEEN TRADITIONAL/FACE-TO-FACE AND VIRTUAL
ORGANISATION
The driving force in a virtual organisation basically is the virtual teams. In a virtual team,
member’s primary interaction is through some combination of electronic communication
system to tie up with dispersed members who never or rarely come face-to-face. Members
communicate online using links like WAN (Wide Area Network), video conferencing and e-
mail.
Following are the three primary factors that differentiate virtual organisations from traditional/
face-to-face organisations:

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1. Absence of para-verbal and non-verbal cues (such as voice, eye movement, facial
expressions, body language, etc.).

2. Limited social contacts.

3. Ability to overcome time and space constraints.

Today, virtual team working has become the need of the time for global organisations. But, the
very foundation of virtual teams and for that matter virtual organisations is based on trust
relationship. Then, how to develop trust relationship? Research findings3 report that
personalized interaction help develop trust relationship which is essential for continuous
working of virtual teams/organisations. Here, the ICT that is considered the backbone of virtual
organisations, appears to be inadequate for establishing trust relationship between the members
owing to its inability to provide access to the basic stage of participants activities.

ADVANTAGES AND DISADVANTAGES

Virtual organisations offer the following advantages:

1. It saves time, travel expenses and eliminates lack of access to experts.

2. Virtual teams can be organised whether or not members are in reasonable proximity to each
other.

3. Use of outside experts without incurring expenses for travel, logging and downtime.

4. Dynamic team membership allows people to move from one project to another.

5. Employee can be assigned to multiple, concurrent teams.
6. Teams’ communication and work reports are available online to facilitate swift responses to
the demands of the (global) market.

7. Employees can accommodate both personal and professional lives.

8. Virtual teams allow firms to expand their potential labour markets enabling them to hire and
retain the best people regardless of their physical locations.

In spite of these advantages, virtual organisations suffer from the following disadvantages also:

1. The lack of physical interactions with its associated verbal and non-verbal cues and also the
synergies that often accompany face-to-face interaction.

2. Non-availability of paraverbal and non-verbal cues such as voice, eye movement, facial
expression, and body language which help in better communication.

3. Ability to work even if the virtual teams are miles apart and the members have never or
rarely met each other face-to-face.

But the fact remains that despite these drawbacks, virtual organisations have become a reality
and are growing in popularity. By now, several successful cases of virtual organisations abound
in our country. It is the explicitly designed ‘Group Ware’, computer based system to support
virtual groups, enables the virtual organisations to work in order to achieve a common goal.

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