BBPB2103_BI

TOPIC 6 PERFORMANCE EVALUATION 135

EXERCISE 6.6

Multiple Choice Questions

1. All the following are administrative roles in evaluating
performance EXCEPT:
A. Compensation
B. Termination
C. Career planning
D. Promotion

2. An appraiser will give an average rating for all dimensions that
are being evaluated so that all employees will not be
dissatisfied. By this, the appraiser has committed the mistake of
__________________.
A. Attribution
B. Leniency error
C. Recency error
D. Central tendency

3. Which one of the following are steps in the performance
evaluation process?
A. Job analysis, set standards, evaluate performance,
reassessment performance.
B. Set objectives and standards, monitor performance,
evaluate performance, performance discussion
C. Set standards, job analysis, performance evaluation,
reassessment evaluation.
D. Performance evaluation, set objectives, job analysis, set
standards, reassessment performance.

4. The criteria that must be present in an effective performance
evaluation system are as follows EXCEPT:
A. A clear objective
B. Monitor performance
C. Performance interview
D. End-of-the-year checking system

5. The performance evaluation method which lists descriptive
statements on a particular work behaviour is
__________________.
A. Rating scale
B. Checklist
C. Forced choice
D. Critical incident

Copyright © Open University Malaysia (OUM)

136 TOPIC 6 PERFORMANCE EVALUATION

Essay Questions

1. Discuss the six roles played by performance evaluation.

2. Explain these terms:
(a) Strategic relevance
(b) Criteria contamination
(c) Criteria deficiency

3. Explain the preparations needed to be made by supervisors
BEFORE the performance interview process.

Performance evaluation is a critical activity in human resource management
as it is important in increasing organisationÊs competitiveness.

In short, performance evaluation is a process to evaluate work performance
at a particular duration, in order to determine that the level of achievement is
based on the organisationÊs strategic objectives.

What is important here is that the developed performance evaluation system
is able to motivate employees to improve their performance, thus increasing
the organisationÊs productivity.

By this, an effective performance evaluation system is able to ensure that all
parties, be it management or employees, are able to be benefited from it.

At the same time, this will help to strengthen the position of and ease human
resource management. Furthermore, it helps to achieve objectives and
organisational goals.

Behaviour Observation Scale (BOS) Performance evaluation
Result
Behaviourally Archored Raring Scale Trait
(BARS)

Management by Objectives (MBO)

Copyright © Open University Malaysia (OUM)

Topic Compensation

7 Administration

LEARNING OUTCOMES

By the end of this topic, you should be able to:
1. Explain the types of rewards which exist in the compensation

administration system;
2. Describe the compensation administration objectives;
3. Discuss the factors which influence wage setting; and
4. Assess the issues related to compensation administration.

INTRODUCTION

Compensation administration is one of the most important functions in human
resource management. Even though it is the most difficult and challenging
activity, it helps strengthen the culture and the important values of an
organisation. Policies and practices in an organisation which emphasise on
rewards based on results are able to strengthen employeesÊ behaviour so that
they are more dedicated to increasing their productivity (Stone, 1998). Indirectly,
compensation administration is an important tool to increase employee
motivation in improving work performance so that the organisationÊs strategic
objectives are achieved. Compensation administration policies should not only be
able to motivate employees, but they should also attract and retain competitive
employees. Therefore, employees expect that the compensation system of an
organisation is just and fair in providing a reward system that is at par with the
skills and performance demonstrated.

Copyright © Open University Malaysia (OUM)

138 TOPIC 7 COMPENSATION ADMINISTRATION

7.1 DEFINITION OF COMPENSATION

Compensation is the total of all rewards provided to employees in return for
their services (Mondy, 1999). Ivancevich (2001) defines compensation as all forms
of financial rewards and benefits as well as clear and apparent services which are
accepted by employees as part of work relations. There are two components in
compensation administration, which are fixed component and variable
component. A fixed component is in the form of basic salary whereas a variable
component is the payment based on performance such as bonus or profit sharing
and benefits such as health insurance and annual leave.

7.2 TYPES OF COMPENSATION

Nankervis (1999) stated that employees will focus on a few compensation factors
such as those shown below:

(a) Is my salary equivalent to the performance I demonstrate?

(b) How is my wage compared to other employees in this organisation?

(c) How is my wage rate compared to the market fee rate?

(d) How can I increase my wage rate?

(e) What are the incentives and benefits which I will be able to receive?

Based on the employee expectations listed above, compensation administration
programmes not only motivate employees, but at the same time save labour cost
effectively. Even though wages is the main factor why an individual works, non-
monetary rewards are also important as a source to motivate employees to work
with more dedication in order to increase their performance. Indirectly, two
types of rewards need to be included in an organisationÊs compensation
administration programme, as shown in Figure 7.1.

Rewards offered to employees can be in the form of monetary or non-monetary
rewards.

Copyright © Open University Malaysia (OUM)

TOPIC 7 COMPENSATION ADMINISTRATION 139

Figure 7.1: Types of rewards
Source: Adapted from Stone, R.S. (1998). Human resource management (3rd ed.).

Brisbane: John Wiley, Sons Australia.

Monetary rewards can be in the form of cash such as wages, salary, commission
and bonus; or benefits such as insurance, annual leave, medical leave and flexible
working hours.

Non-monetary rewards, on the other hand, can be the satisfaction the employee feels
as a result of his or her position or from the work environment mentioned (Mondy,
1999).

Direct monetary rewards are in the form of cash, such as wages, salary,
commission and bonus, whereas indirect monetary rewards are in the form of
benefits and others.

Non-monetary rewards from the work aspects are interesting jobs, challenging
job responsibilities, acknowledgement and career development.

Non-monetary rewards from the work environment aspects are good policies
and practices, competent supervisors, congenial colleagues and a safe and
healthy work environment.

Visit http://www.hr-guide.com/compensation.htm for additional information
on compensation administration.

Copyright © Open University Malaysia (OUM)

140 TOPIC 7 COMPENSATION ADMINISTRATION

7.3 STRATEGIC COMPENSATION PLANNING

Strategic compensation administration is one way of offering a compensation
package to employees to increase their motivation and at the same time align
their efforts so that they are in line with the organisationÊs objectives,
philosophies and culture. A compensation administration policy is one way of
supporting strategic compensation administration. The compensation
administration policy designed has to:
(a) Focus on business objectives and strategies;
(b) Attract and retain competent, motivated and qualified employees;
(c) Encompass organisational reward principles and philosophies;
(d) Prepare wage allocation outline;
(e) Strengthen work values and culture desired by the organisation; and
(f) Relate to all employees.

Each compensation administration policy formed has to benefit both the
organisation and its employees. According to Stone (1998), compensation
administration objectives are as follows:

(a) Organisation
(i) Attract and retain quality and the desired employee participation.
(ii) Motivate employees to improve their work performance in the effort
to achieve the organisationÊs strategic objectives.
(iii) Strengthen the main values and culture desired by the organisation.
(iv) Encourage and strengthen work behaviour as desired by the
organisation.
(v) Ensure that compensation is maintained at a competitive level.
(vi) Control compensational cost.
(vii) Ensure optimum returns on each ringgit spent.
(viii) Abide by legal requirements.

(b) Employee
(i) Prepare fair and just rewards.
(ii) Give out rewards equivalent to the performance as demonstrated.

Copyright © Open University Malaysia (OUM)

TOPIC 7 COMPENSATION ADMINISTRATION 141

(iii) Prepare a flexible wage structure based on performance, promotion,
transfer and changes in the environment.

(iv) Reassessing compensation structure by taking into account the effect
of equity.

The development of compensation policy has to be consistent with the
organisationÊs strategic objectives and it involves four phases as shown in Figure
7.2 which are:

(a) Corporate mission;

(b) Business strategies;

(c) Human resource strategies; and

(d) Compensation administration strategies.

The compensation administration strategy explains the organisationÊs
compensation goals and states rewards which will be given by the organisation
based on human resource strategies, business strategies and corporate mission.
Corporate mission, business strategies and the compensation administration
strategy are directed to the formation of the compensation administration strategy.

Figure 7.2: The relationship between organisation objectives and compensation
administration strategies

Source: Adapted from Nankervis, Compton & McCarthy. (1999). Strategic human
resource management (7th ed.). New Jersey: Prentice Hall International.

Copyright © Open University Malaysia (OUM)

142 TOPIC 7 COMPENSATION ADMINISTRATION

ACTIVITY 7.1

State your view on whether you agree or disagree on the following
issues and give a valid reason for your answer.
1. All employees are eligible for annual salary increment

without taking into account their performance.
(a) Agree
(b) Disagree
2. An unattractive salary and benefit package decreases
employee motivation to excel in their work.
(a) Agree
(b) Disagree

EXERCISE 7.1

Explain two types of compensation which can be offered by an
organisation to its employees.

7.4 FACTORS THAT INFLUENCE WAGE RATE

Nankervis (1999) stated that external and internal factors influence the wage rate
developed by an organisation. These factors are as shown in Figure 7.3, which
include the legal environment, market surveys, work values, compensation
administration strategies and personal factors.

Figure 7.3: Factors which influence payment rate

Copyright © Open University Malaysia (OUM)

TOPIC 7 COMPENSATION ADMINISTRATION 143

(a) Legal Environment
The compensation policy in every organisation has to be aligned with the legal
labour requirements in a country. Among the issues related to wage rate are:

(i) Minimum wage rate;

(ii) Fixed wage component; and

(iii) Variable wage component.

For example, in Malaysia, a Salary Reformation System Guideline has been
designed to increase efficiency and productivity which in turn will assure
the nationÊs competitiveness and increase employeesÊ quality of life
(Ministry of Human Resources, 2002).

(b) Market Survey
Organisations have to conduct environmental scanning in the labour
market to review the relationship between demand and qualified
manpower supply. Besides, organisations have to take note of other
information before a certain salary policy is set. The information includes:

(i) The differences between local wage rate and city and suburban wage rate;

(ii) The different wage rates for works from the same work groups;

(iii) The different wage rates in the same industry; and

(iv) The economic environment including inflation, unemployment,
manpower participation level, increase in education status, lack of
specific skills and others.

(c) Work Values
Each organisation has its own benchmark in recognising and rewarding
employee's performance. Incentives can be in various forms which act as
motivation factor.

In this competitive environment, work values or sometomes known as job
worth are mostly grounded on market value or job evaluation programme.
However, using total value basis is more objective for the organisation.
Among the work values that need to be focused on by an organisation are
as follows:

(i) The latest knowledge and experience;

(ii) Complex tasks can be solved easily;

(iii) Problem solving is a path towards excellent work performance;

Copyright © Open University Malaysia (OUM)

144 TOPIC 7 COMPENSATION ADMINISTRATION

(iv) Responsibilities in managing resources are important so that all
employees are equipped with sufficient sources to carry out their
work effectively;

(v) Use people skills to interact effectively; and

(vi) Working effects towards organisation.

(d) Compensation Administration Strategies
Compensation administration strategies are formed as a way to achieve
organisational strategic objectives. The development of these strategies has
to be focused on a few questions such as:

(i) The purpose of giving the rewards to employees the relationship
between rewards and results achieved by the organisation;

(ii) The employerÊs ability to give rewards to employees;

(iii) The types of employee desired by employers;

(iv) A combination of rewards that employers want to offer to employees
fixed cost such as basic salary and variable cost such as incentive

programmes and bonuses;

(v) The frequency of salary structure revision; and

(vi) Wage management has to be scattered or centralised.

(e) Individual Factors
Other factors that need to be considered are factors involving individual
performance which are as important in creating more motivated employees
to carry out work exceptionally. A few factors that have to be thought of are:

(i) Individual contribution towards the organisation;

(ii) Real performance compared to forecasted performance;

(iii) Skill development or competency; and

(iv) Individual power or collective negotiation in looking out for
employee welfare.

ACTIVITY 7.2

How can legal factors influence wage rate in our country?

Copyright © Open University Malaysia (OUM)

TOPIC 7 COMPENSATION ADMINISTRATION 145

7.5 COMPENSATION ADMINISTRATION
COMPONENTS

There are three important components in setting the salary system as follows:
(a) Internal equity;
(b) External equity; and
(c) Individual equity.

Figure 7.4 shows the steps in setting the salary system. The steps in each level are
related to one another.

Figure 7.4: Steps in setting a salary system
Source: Adapted from Gomez-Mejia, Balkin & Cardy. (2001). Managing human resources

(3rd ed.). New Jersey: Prentice Hall.

Copyright © Open University Malaysia (OUM)

146 TOPIC 7 COMPENSATION ADMINISTRATION

7.5.1 Achieving Internal Equity: Job Evaluation

The element in this first process is job evaluation to determine the relative value
of a certain job. The goal of job evaluation is to achieve internal equity during the
salary system formation. Job evaluation is a systematic method to determine the
relative value of a certain job compared to other jobs to ensure different jobs are
given a different wage rate (Stone, 1998). Job evaluation focuses on the „high‰ or
„low‰ of a certain job based on a few pre-determined work factors. Information
on job evaluation is set as a basis for the formation of a fair salary system.

Theoretically, job evaluation utilises information in job analysis to categorise jobs
according to a relative value hierarchy of a specific job compared to other jobs
(DeCenzo, 1999). For example, the post of an account manager needs more skills
and responsibilities as compared to an account trainee post. By this, the account
managerÊs salary will be higher than the account traineeÊs salary. Job evaluation
conducted focuses on three main questions, which are:

(a) What does the employee know?

(b) What can the employee do?

(c) What are the results shown by the employee?

There are four steps involved in determining internal equity, which are:

(a) Step 1: Carrying Out Job Analysis
The purpose of a job analysis is to gather information about tasks,
obligations and responsibilities of a particular job. Through the information
obtained, job descriptions and specifications are formed to identify the
activities that need to be carried out by the person holding the post.

(b) Step 2: Relative Value of a Specific Job
The next step is to determine the relative value of a specific job before
arranging it according to its importance. In evaluating a specific job, a few
basic elements are utilised to determine its relative value, as follows:

(i) Skills;

(ii) Responsibilities;

(iii) Efforts; and

(iv) Work environment

(c) Step 3: Arranging Jobs According to Hierarchy
After determining the relative value of a specific job, the next step is to
prepare a list of jobs according to their importance to the organisation,

Copyright © Open University Malaysia (OUM)

TOPIC 7 COMPENSATION ADMINISTRATION 147

starting from high to low. The job hierarchy is arranged according to types
of task in the same group. For example, the position of a secretary, senior
clerk, clerk, typist, receptionist and computer operator can be categorised
into one group, which is clerical position.

(d) Step 4: Classifying Jobs According to Grades
The final step in the job evaluation component is categorising jobs
according to pre-determined grades. Table 7.1 illustrates four basic
methods of categorising jobs and determining the relative value of a
specific job. The four methods used to evaluate jobs are as follows:

Job arrangement;

Job classification;

Score system; and

Factor comparison.

Table 7.1: Job Evaluation Method

Comparison Basis Comparison Scope
Qualitative Method Quantitative Method

Job vs Job Job Arrangement Factor Comparison
Method Method

Job vs Scale Job Classification Score System
Method

Source: Nankervis, Compton & McCarthy (1999). Strategic human resources management
(3rd ed.). Australia: Nelsom-Thompson Learning.

(i) Job Arrangement Method
This is a simple qualitative method to evaluate jobs by listing tasks
and responsibilities of a particular job according to the importance of
the job, from high to low (DeCenzo, 1999). A job comparison will be
evaluated based on importance or difficulty of performing a particular
job. Even though this method is easy, one of the restrictions faced is
difficulty in accurately arranging jobs if there are many types of jobs
in a particular organisation.

Furthermore, there is no standard and consistent evaluation to explain
the importance of a particular job compared to another job whose
duties and responsibilities are similar. An example of the job
arrangement method is shown in Table 7.2.

Copyright © Open University Malaysia (OUM)

148 TOPIC 7 COMPENSATION ADMINISTRATION

Table 7.2: Example of Job Arrangement

Order Job

1 General Manager
2 Marketing Manager
3 Operations Manager
4 Accounts Manager
5 Engineer
6 Accountant
7 Sales representative
8 Supervisor

Source: Adapted from Stone, R. S. (1998). Human resources management (3rd ed.).
Brisbane: John Wiley & Sons Australia.

(ii) Job Classification Method
This is a simple method where each job is categorised into a particular
group or grade. The first step is the formation of the group or grade
which is determined by job factors such as knowledge, experience,
responsibilities, skills and abilities. The next step is to create a job
description that can be benchmarked for each grade or group. After
that, the relative value of a particular job will be determined by
comparing the job with the benchmark description to determine
whether they are categorised under the same grade or group.

The most prominent restriction for this method is the difficulty to
write an accurate grade classification description and to categorise a
particular job which can be included in many grades which have been
created (DeCenzo, 1999).

(iii) Score System Method
This quantitative method involves evaluation based on main job
factors such as education level, skills, knowledge, efforts and
responsibilities, and the scores which are allocated for each mentioned
factor. The next step is to divide the main factors into sub factors.
Each sub factor will be given a specific score to determine the relative
value of a particular job. For example, the education level factor such
as the one shown in Figure 7.5 has been graded with identified scores.

Copyright © Open University Malaysia (OUM)

TOPIC 7 COMPENSATION ADMINISTRATION 149

Figure 7.5: Score system method
Source: Adapted from Stone, R. S. (1998). Human resources management (3rd ed.).

Brisbane: John Wiley & Sons Australia.

(iv) Factor Comparison Method
This is a quantitative method where a few jobs that are already well-
known in the market are benchmarked or set as a standard when
compared to other jobs which will be evaluated (DeCenzo, 1999). Jobs
which are benchmarked have to have these characteristics:
The importance of a particular job to employees and the
organisation;
The job requirements differ from other jobs;
The job chosen has a relatively stable work content; and
Utilised in salary research to determine the wage rate.

A few criteria for comparison will be pre-determined such as mental
requirements, skills, physical abilities, responsibilities and work environment.
For example, Table 7.3 shows that an electricianÊs post is benchmarked against
other jobs which are categorised under the same group.

Copyright © Open University Malaysia (OUM)

150 TOPIC 7 COMPENSATION ADMINISTRATION

Table 7.3: Factor Comparison Method

The restriction in the factor comparison method is the difficulty in using the pre-
determined criteria to compare all jobs against the chosen benchmark.

Selection Method
Each job evaluation method has its strengths and weaknesses. According to Stone
(1998), since there is no one method that can be said as being the best, human
resource managers have to evaluate a few factors prior to selecting. These factors are:

(a) OrganisationÊs strategic objectives
The method chosen has to be in line with the organisationÊs strategic
objectives.

(b) Organisation size
A small organisation will utilise a simple method such as job classification
whereas a large organisation will utilise an expensive method such as factor
comparison or score system.

(c) Organisation resources
Organisations need to consider cost and time to carry out a job evaluation.
Organisations are able to request their own employees or use the services of
a consultant to conduct a job evaluation.

(d) Information on the use of specific methods
Information obtained about a specific method utilised by an organisation.

(e) Corporate culture
The selection of job evaluation has to be in line with the existing corporate
culture so that it is conducted effectively. For example, a small organisation
need not choose a complex method utilised by most large organisations.

Copyright © Open University Malaysia (OUM)

TOPIC 7 COMPENSATION ADMINISTRATION 151

(f) Employee behaviour
A job evaluation method chosen has to be informed to all employees so that
it can be accepted by them and the chosen method is perceived as just and
fair.

Visit http://www.hr-guide.com/ for the definition of job evaluation and the four
importance of the job evaluation process. Next, visit http://www.job-
analysis.net/ for the four steps involved in the job analysis process.

7.5.2 Achieving External Equity: Market Survey

The purpose of a market survey is to identify the wage range for each grade
formed. The steps involved in a market survey are benchmarking and the
establishment of wage policy.

(a) Step 1: Benchmark or Key Job
Benchmark or key job is utilised to connect job evaluation which has been
conducted to market wage. Basically, the comparison of identified key jobs
in a payment grade is done inter-organisationally to determine the relative
job value according to other employeesÊ opinions. Next, the organisation
determines the wage rate of other jobs in the same grade and categorises
the jobs in the same wage range with key jobs of the same grade.

For example, an account clerkÊs post such as in Figure 7.6 is identified as a
key job. Posts such as general clerk, assistant secretary and senior data
process operator are categorised under the same grade as the account clerk.
Next, the wage range for other posts in the same grade will be determined
based on the relative position value as compared to the account clerkÊs
position. Indirectly, this step is similar to the factor comparison method as
stated in the job evaluation.

Copyright © Open University Malaysia (OUM)

152 TOPIC 7 COMPENSATION ADMINISTRATION

Figure 7.6: Benchmark rate structure

(b) Step 2: Establishment of Payment Structure
Information from the market survey will show the wage differences which
are apparent from one to another. Therefore, organisations have to
determine the wage structure for a particular job based on the internal and
external information present.

Job evaluation prepares an internal equity that can be used as a basis to
establish wage rate. A wage structure must be developed by creating
different wage levels and this wage structure takes into account the
following components:

(i) Jobs with similar relative values will be categorised under the same
grade; and

(ii) The wage range for each grade is formed by considering market
survey information and compensation administration strategies.

The methods that can be utilised to obtain information from outside are
wage survey, wage curve and salary grade range.

(i) Wage Survey
Wage survey is a set of facts related to practices in wage structure
which are obtained from other organisations in the same labour

Copyright © Open University Malaysia (OUM)

TOPIC 7 COMPENSATION ADMINISTRATION 153

market. For example, organisations which are categorised in the
electronic industry cannot compare their wage structure with the one
in the education industry. A wage survey is done when an
organisation has identified the jobs which will be evaluated. Next, the
organisationÊs competitors in the same labour market will be
identified to perform the survey. Aside from information on wage
rate, the organisation can also obtain information on minimum and
maximum wage rate, overtime payment practices, holiday
allowances, work day duration and work weeks.

(ii) Wage Curve
After an organisation has obtained information on wage rate from
other organisations, it will connect the information with the result
from a specific job relative value. Information on wage rate and job
size is based on score marks and is plotted to obtain a wage curve.
The plotted graph as shown in Figure 7.7 is a wage rate survey
distribution graph. A straight line will be formed to obtain the desired
wage curve.

Figure 7.7: Wage curve
Source: Adapted from Bohlander, Snell and Sherman. (2004). Managing human resources

(13th ed.). Ohio: South-western College Publishing.

(iii) Salary Grade Range
The same job based on class, grade or score marks will be categorised
in the same group. Payment rate range will be segregated in one series
that determines the lowest and highest salary for each salary grade as
shown in Figure 7.8. Employees receive payment up to the maximum
level based on merit or service seniority.

Copyright © Open University Malaysia (OUM)

154 TOPIC 7 COMPENSATION ADMINISTRATION

Figure 7.8: Salary grade range
Source: Adapted from Bohlander, Snell and Sherman. (2009). Managing human resources

(15th ed.). Ohio: South-western College Publishing.

7.5.3 Achieving Individual Equity

After an organisation has structured its wage policy, the organisation has to
determine the wage rate that will be received by a particular employee based on
the salary grade range according to the position held. Normally, an employeeÊs
salary rate is determined by taking into account issues such as experience related
to his or her service and performance. For example, a clerk with no work
experience in other organisations will receive a starting pay of RM520 whereas a
clerk who has work experience in another organisation will be offered RM720.
The main objective of this step is to achieve individual equity. Individual equity
refers to the fairness in determining wage payment for employees in the same
position.

ACTIVITY 7.3

Elaborate on the components involved in the formation of a salary
system.

Copyright © Open University Malaysia (OUM)

TOPIC 7 COMPENSATION ADMINISTRATION 155

EXERCISE 7.2

What is meant by job evaluation? State the methods which can be
used to evaluate a particular job.

7.6 COMPENSATION ADMINISTRATION
ISSUES

An organisationÊs compensation administrative system has to consider flexible
characteristics towards developing a compensation administrative strategy
which is able to retain employees for a longer period. Payment based on
flexibility will ensure that the compensation administration system connects
employee performance and reacts to economic environment in the organisationÊs
external environment. A few issues on compensation administration which
should be highlighted to the human resource manager are as follows:

(a) The Influence of Equity on Wage Rate
According to Dessler (2000), equity factors whether internal or external are
critical factors in determining wage rate. External factors take into account
the similarities between an established wage rate and other organisationsÊ
wage rate to attract and retain capable employees. On the other hand,
internal factors stress on fair wage where an employee compares his or her
wage with the wage rate of a colleague in the organisation. In general, an
established salary grade must take into account both issues in creating
equity on the wage rate developed.

(b) Salary Acceptance Culture
The main challenge for human resource managers is to change employeesÊ
perception on salary acceptance. Basically, the rights mentality to „accept
salary as a result of being present in the workplace‰ has to shift to the
contribution mentality, which is „payment based on contribution
demonstrated‰. This paradigm shift requires human resource managers,
together with other managers and the top management, to show
commitment to change in increasing employee productivity.

(c) Wage Assurance
A strategic compensation administration is able to motivate employees to
increase their performance. Various compensation plans have to be
developed to create wage payment assurance including basic salary
assurance, service allowance or living expenses, and other financial benefits

Copyright © Open University Malaysia (OUM)

156 TOPIC 7 COMPENSATION ADMINISTRATION

that need to be increased from time to time such as housing allowance. The
wage rate developed also has to be revised so that an increase in basic
salary follows the increase in living costs.

ACTIVITY 7.4

Do you agree or disagree with the following statements? Give a valid
reason for your choice.

1. Do you agree that a top executive be given a high salary compared
to lower position employees and does this show a fair
organisation compensation administration system?
(a) Agree
(b) Disagree

2. Has the government enforced the minimum wage?
(a) No
(b) Yes

3. Payment based on performance is only a fantasy in an
organisation.
(a) Agree
(b) Disagree

4. Annual increment has to be based on performance demonstrated.
(a) Agree
(b) Disagree

Copyright © Open University Malaysia (OUM)

TOPIC 7 COMPENSATION ADMINISTRATION 157

EXERCISE 7.3

Multiple Choice Questions

1. Which one of the following is a direct monetary reward?
A. Flexible work timetable
B. Bonus
C. Insurance
D. Annual leave

2. The compensation administration policy developed has to
consider the following elements EXCEPT:
A. Focuses on organisational objectives.
B. Retains employees.
C. Connected to all employees.
D. Wage structure which does not change.

3. The steps in determining the salary system according to order
are _________________.
A. Job analysis, job evaluation, determining the basic salary,
market survey on payment practices, producing a salary
system
B. Job analysis, job relative value, job arrangement, job
grade, market survey, establishing a wage structure,
determining individual equity
C. Job evaluation, job analysis, determining individual
equity, job arrangement, market survey on payment
practices, producing a salary system
D. Job evaluation, job analysis, market survey on payment
practices, determining basic salary, producing a salary
system

4. Which one of the following is a qualitative method to evaluate
jobs?
A. Job Arrangement
B. Factor Comparison
C. Score System
D. Job Hierarchy

Essay Questions

1. Explain two key challenges faced by human resource managers
in developing an effective salary structure.

2. What is meant by compensation?

Copyright © Open University Malaysia (OUM)

158 TOPIC 7 COMPENSATION ADMINISTRATION

3. List examples of indirect monetary reward.

4. List the factors which need to be considered when developing
compensation administration policies.

5. State the two steps which can be used to obtain market
information before developing a wage structure.

6. What is meant by individual equity? State factors which need
to be considered in individual equity.

Compensation administration is a critical activity in managing human
resources and has to be more focused on giving consistent rewards to
encourage employee behaviour consolidation.

This will then increase employee performance and employee loyalty so that
they will remain in the company for a long time.

Therefore, the compensation administration strategy has to be flexible to
ensure a rapid response towards change and compensation administration
trends in the labour market.

Basically, the purpose of compensation administration is to gain high returns
from the investment made by the organisation for its employees, in the form
of salary.

The rewards offered have to ensure that organisation as well as employees
benefit from it.

An effective compensation administration system impact is when employees
practise a work culture that emphasises on contribution compared to
payment acceptance for being present in the workplace.

Compensation Individual equity
External equity Internal equity

Copyright © Open University Malaysia (OUM)

Topic Incentives and

8 Benefits

LEARNING OUTCOMES

By the end of this topic, you should be able to:
1. Discuss the advantages of the incentive payment programme;
2. Compare between the individual, group and industrial incentive

programmes;
3. Explain the characteristics of an effective benefit programme; and
4. Differentiate between mandated benefits and non-mandated

benefits.

INTRODUCTION

The major factors that determine the reward payment rate of a certain job are
workload and job importance. However, wage payment that is only based on
these factors often fails to motivate employees to reach their full potential. In
other words, an equitable salary is not an assurance that employees will produce
high productivity. In this case, incentives and benefits are believed to be a major
influence that can help increase productivity, encourage employees to fully
utilise their skills and knowledge in carrying out their jobs, as well as encourage
them to work as a team.

Therefore, awarding incentives and benefits to employees is another very critical
aspect that needs to be planned and managed by the management, especially the
human resource management unit. In this topic, we will discuss both incentives
and benefits.

Copyright © Open University Malaysia (OUM)

160 TOPIC 8 INCENTIVES AND BENEFITS

8.1 INCENTIVES

ACTIVITY 8.1

In your opinion, should employers give incentives to their
employees? Imagine what would happen if employers did not
award any incentives to their employees.

An incentive programme is also known as a variable pay plan. The incentive
payment to employees is often seen as an additional dimension to the salary
structure or compensation as discussed in Topic 7. Let us look at the current
situation whereby salary increase in salary scheme often cannot compete with
increase in living costs. Without an interesting incentive plan, what will happen
to our employees and their overall organisation performance? We will now
explore the incentive plans offered by organisations.

8.1.1 Importance and Relevance of an Incentive Plan

Global competition and the restructure of the global economy require a business
to be more productive. Payment strategies and payment systems used previously
are already outdated, causing organisations to be unable to compete at the
international level. In addition, the traditional payment system often fails to
connect payment to performance or productivity effectively. Therefore, more and
more organisations are beginning to offer incentive plans to their employees, in
addition to the existing basic salary structure.

Among the main reasons an organisation carries out an incentive plan is so that it
focuses on „payment for performance‰ and is able to connect rewards to the
organisationÊs goals. Therefore, an employee will be more loyal and faithful to
his or her job and thus able to increase his or her overall effort and job
performance.

Apart from that, it is said that incentives can also encourage employees to work
harder in completing their tasks. Therefore, monetary incentives are offered to
employees with the hope that productivity and quality can be sustained or
improved, thus enabling an organisation to compete globally.

In addition, a competitive labour market also forces the organisation to compete
and offer various interesting incentive plans to attract and retain quality
employees in the organisation.

Copyright © Open University Malaysia (OUM)

TOPIC 8 INCENTIVES AND BENEFITS 161

EXERCISE 8.1

Give two reasons why the management carries out incentive plans.

8.1.2 Advantages of an Incentive Payment
Programme

Among the advantages of an incentive programme are as follows:
(a) Incentives enable an employee to focus on his or her specific job

performance target. It provides motivation to the employee, thus producing
a satisfactory result.
(b) Incentives are variable costs that can be related to result achievement,
which is encouraging the increase in output.
(c) Incentives can also be directly related to operationÊs achievement whereby
if the performance objective is met, incentives will be given. On the other
hand, if employees fail to fulfil the performance objective, no incentives will
be given.
(d) Incentives encourage employees to work as a team and increase
dependency as payment for individuals depends on a groupÊs achievement.
(e) Incentives also encourage success sharing among those involved in
achieving the performance.

8.1.3 Characteristics of an Effective Incentive Plan

To carry out a successful incentive plan, the organisation has to develop an
attractive incentive plan and convince the employees about its advantages.
Among the characteristics of an effective incentive plan are as follows:
(a) It involves employees in the development and administration of the

incentive plan, which can then increase employeesÊ acceptance;
(b) Employees can clearly notice the relationship between the incentive

payment they received with their work performance;
(c) It emphasises that incentives are received through employeesÊ efforts and

not due to rewards which all employees are eligible to enjoy;
(d) Incentive programmes are fair to all employees;

Copyright © Open University Malaysia (OUM)

162 TOPIC 8 INCENTIVES AND BENEFITS

(e) The standard quality or productivity used as a benchmark in awarding
incentives has to be challenging but achievable for employees; and

(f) The incentive payment formula introduced has to be simple and easily
understood by employees.

8.1.4 Incentive Plan Administration

Usually, an effective incentive plan is able to decrease direct labour cost, but for
an organisation that wants to enjoy the full benefit of the incentive plan, it needs
to be thoroughly planned and carried out carefully. An effective incentive plan
administration has to take into account these following issues:

(a) The manager is willing to give incentives based on the difference in the
performance of individuals, teams and the overall workforce.

(b) The annual budget has to be sufficient in giving rewards as well as
validating excellent performance.

(c) Indirect cost which is related to administration and the execution of the
incentive plan has to be identified. This includes the cost to develop
performance standards and additional cost for records purposes. Aside
from that, the time used in conveying the incentive plan to employees,
answering questions that arise as well as handling related complaints have
to be considered in the calculation of cost.

8.1.5 Types of Incentive Plans

There are many types of incentive plans that can be practised by an organisation
and each organisation usually has their own incentive plan. Generally, an
incentive plan can be divided into three categories:

Individual incentive plan;

Group incentive plan; and

Industrial incentive plan.

(a) Individual Incentive Plan
There are a few incentive plans that can be developed as a reward for
individual employees as a result their excellent work performance. These
include:

(i) Unit of Work
Unit of work is one of the earlier forms of incentive plans introduced.
There are two types of unit of work incentives, which are:

Copyright © Open University Malaysia (OUM)

TOPIC 8 INCENTIVES AND BENEFITS 163

Straight piece work
Through straight piece work, employees are given incentives
based on a certain fixed rate for each unit produced in a particular
time period besides their basic salary.

Example:

Say that an employee is being paid RM500 for making hats.
Besides, the employee is also offered an incentive of RM0.20 for
each unit produced. If the employee is able to produce 100 units of
hats in a monthÊs time, what is the reward the employee should
receive for that particular month?

Basic salary RM500
Incentive (RM0.20 x 100) 20
Total reward
520

Differential piece-rate
Through this, employees are given a higher incentive payment
rate for their overall work if their production surpasses the
standard production level which has been set by the management
as compared to the rate paid to them when they do not surpass the
standard level.

Example:
Say the standard level which has been set by the company is 1,000
units per month. The incentive payment rate for production which
surpasses the standard level is RM0.30 per unit. On the other
hand, the incentive rate for production that does not surpass the
standard level is RM0.10 per unit. If Ali and Chandra both manage
to produce 1,200 and 900 units in a particular month, how much is
the incentive that they will receive?

Incentive for Ali RM0.30 1,200 = RM360
Incentive for Chandra RM0.10 900 = RM90

(ii) Standard Hour Plan
Through this plan, the incentive rate pay is based on the standard
time set by the organisation to complete a certain task without taking
into account the actual time taken by the employee to complete the
task. If the employee is able to complete the task less than the
standard time, the employee is still paid an incentive based on the
standard time. This plan is suitable for jobs or operations that take
time or need a lot of time to be completed.

Copyright © Open University Malaysia (OUM)

164 TOPIC 8 INCENTIVES AND BENEFITS

Example:
The standard time set to finish a painting job is 10 hours with the
incentive payment rate of RM10.00 per-hour. If worker A used 9 hours
to complete the work, then the incentive payment that the worker will
receive is:

Standard hour (10 hours) x Incentive rate (RM10.00) = RM100

On the other hand, if worker A has used more time to complete the
task, say 20 hours, worker A will be paid an incentive of RM100 only.

(iii) Bonus
Bonus is one of the payment incentives given to the employee as an
addition to their basic salary. Bonus can be awarded based on cost
saving, increase in performance quality or criteria that are identified
by the organisation. Besides, organisations can utilise „spot bonus‰
which is bonus given „on the spot‰ in acknowledging employeesÊ
efforts or contributions which are indirectly related to the standard
performance set. For example, an employee is given „spot bonus‰ for
his or her effort in working extra hours to entertain a lot of customers.

(iv) Merit Payment
Merit payment is a salary increment programme that is based on
employeesÊ performance achievement in carrying out tasks through
the performance evaluation process. To ensure the effectiveness of the
merit payment plan, evaluation on the employee has to be done
objectively and employee performance is measured based on objective
and fair criteria.

(v) Sales Incentive
Monetary incentives are usually used by organisations to motivate
sales personnel and encourage the increase in sales in the competitive
market. The salespersonÊs salary scheme usually contains two parts
which are basic salary and commission. Commission is the total of
sales incentive which is calculated based on the percentage of total
sales garnered by a salesperson at a certain period.

Example:

Syarikat Vena offers sales commission of 2% to its salespeople based
on total sales each month. If Samy is able to achieve RM10,000 sales in
March, how much is the sales commission he will receive?

Commission: 2% RM10,000 = RM 200

Copyright © Open University Malaysia (OUM)

TOPIC 8 INCENTIVES AND BENEFITS 165

(vi) Maturity Curve
Maturity curve is also known as career curve. It is often used as a
basis in salary increment to professional employees. As shown in
Figure 8.1, the curves illustrate the annual salary rate, which is based
on experience and employeesÊ work performance.

A different curve is formed to illustrate the different performance
level and information on related annual salary increment. The curve
that shows a higher salary increment rate depicts a higher job
performance and is able to obtain a higher annual salary compared to
the curve which depicts a poor job performance.

Figure 8.1: Maturity curve

(b) Group Incentive Plan
Various group incentive plans starting to get the attention of management
as a result of total quality management practised and cost saving in
achieving competitiveness. Besides, group incentive plans are also done
when an employeeÊs individual effort is difficult to identify or when
management wants to encourage cooperation in the overall organisation.

The group incentive plan is able to encourage cooperation, teamwork
among employees and give rewards to employees for their collective
contribution towards the organisation. Among the group incentive plans are:

(i) Team Incentive Plan
The incentive plan is to award to each team member through bonus
incentive payment when the teams successfully achieve the set
performance standards. Since there are various types of teams which
can be formed such as cross functional team, process improvement
team and others, it is difficult to form one method of payment or a
standard calculation formula for team incentives. Therefore,

Copyright © Open University Malaysia (OUM)

166 TOPIC 8 INCENTIVES AND BENEFITS

organisations need to take the following steps in developing team
incentive schemes:

Determine team performance evaluation criteria such as the
increase in production, capabilities, quality or decrease in material
and labour cost.

Set the maximum level of total incentive that can be given. For
example, the total incentive cannot exceed 10% of the basic salary.

Set an incentive calculation formula as well as giving a clear
explanation to employees.

(ii) Profit Sharing Incentive Plan
Profit sharing incentive plan is a plan developed by organisations to
increase productivity or decrease labour cost, and to share profits
with employees. Incentives are paid according to a formula that
compares a set performance with the actual productivity of a certain
period. This incentive plan is designed to increase productivity
through the effective use of organisationsÊ resources. There are four
types of profit sharing incentive plans, which are:

Scanlon plan
This plan combines employee and management efforts to further
reduce production cost. The philosophy behind this plan is that
employees need to give opinions and suggestions to increase
productivity, and incentives will be given to the employees as a
reward for their efforts. Monetary incentives which are offered
under this plan are based on a formula which is derived from the
increase of employee productivity which is related to labour cost
saving.

Rucker plan
The Rucker plan is usually utilised for employees in the
operations section. Incentives are paid based on the relationship
between the total wage per hour which is obtained by employees
with the production value they produce. For example, an
employee will receive 1% bonus from his or her salary for each 1%
increase in the production value that he or she achieves.

Improshare
Improshare is the short form for „improved productivity through
sharing‰ which is the increase in productivity through sharing.
Bonus is paid based on overall productivity achieved by work
teams which is the number of products produced by work teams
in a certain period.

Copyright © Open University Malaysia (OUM)

TOPIC 8 INCENTIVES AND BENEFITS 167

Earning-at-risk
Earning-at-risk is an incentive plan which places risk on part of an
employeeÊs basic salary. Nevertheless, employees are given the
opportunity to obtain a higher pay if they are able to achieve the
goals set by management. The purpose of this programme is to
make the employees realise that they are facing a risk due to their
poor performance, while at the same time expecting a generous
reward.

Example:
Say the basic salary of worker A is RM1,200. RM200 from the basic
salary is being held back and put as a risk wage. If worker A is
unable to achieve the set goals, then he or she is not eligible to
receive a salary of RM1,000; but if worker A is able to achieve the
goal, he or she may be paid an additional incentive aside from his
or her basic salary of RM1,200.

(c) Organisational Incentive Plan
An organisational incentive plan is different from individual and group
incentive plan, whereby it involves all employees in the organisation. In
other words, industrial incentives give rewards to all employees based on
the organisationÊs profit in a certain period of time. The purpose of this plan
is to create a culture that encourages cooperation and teamwork among the
employees in the organisation. Among the industrial incentive plans are:

(i) Profit Sharing
Each employee in an organisation enjoys profit sharing by receiving a
certain additional sum aside from his or her basic salary, whether in
the form of cash or backdated payment. The purpose of this plan is to
give an opportunity for employees to enjoy additional income
through their contributions or efforts in helping the organisation
achieve profit growth. Among these contributions are increase in
product quality, decrease in operation cost and improvement in work
methods.

(ii) Share Ownership
Share ownership programme is one of the incentives that offer an
organisationÊs shares to its employees at a certain offered price in a
certain period. It is believed that by allowing employees to purchase
and own organisationÊs share, employeesÊ productivity can be
increased.

Copyright © Open University Malaysia (OUM)

168 TOPIC 8 INCENTIVES AND BENEFITS

SELF-CHECK 8.1

Try to think of the factors that may influence the development of
an incentive plan offered by an organisation.

ACTIVITY 8.2

We have discussed the three types of incentive plan, which are
individual, group incentive and industrial incentives that can be
offered by an organisation to its employees. What are the
differences between the three incentive plans?

EXERCISE 8.2

1. State the type of individual incentive plan which is used by
an organisation to give salary increment to its professional
employees based on their experience and performance.

2. Explain briefly the standard hour incentive plan.

8.2 BENEFITS

In general, most organisations provide various benefits to their employees as an
addition to their salary or as wages paid to the employees. An employee benefit
programme is a form of indirect reward with the purpose of improving work
quality and employeesÊ personal lifestyle. By this, the management hopes that
employees will be more productive and loyal to the organisation.

Copyright © Open University Malaysia (OUM)

TOPIC 8 INCENTIVES AND BENEFITS 169

8.2.1 Characteristics of an Effective Benefit
Programme

Usually, various benefits are offered by employers to their employees due to
pressure and demands from workersÊ union, or according to current trends. How
ever, how far benefits can contribute to the human resource management
programme depends on the attention given to the following matters:

(a) Forming a Specific Objective
Employee benefit programmes have to be based on a specific objective. The
objective formed by an organisation depends on many factors such as size
of the firm, location and the degree of workersÊ union involvement.
However, the specific objective of the benefit programme has to be in line
with the organisationÊs compensation management strategic plan.

Among the main objectives of a benefit programme are to:

(i) Increase employee satisfaction;

(ii) Fulfil employeesÊ safety and health needs;

(iii) Attract and motivate employees; and

(iv) Retain the organisationÊs competitiveness.

Aside from that, the objective of the benefit programme is to consider the
issue of cost restrictions.

(b) Allowing Input from Employees
Before introducing a new benefit programme, an organisation has to
identify the need for the benefit programme through negotiations or
discussions with employees, and carry out a survey on employeesÊ opinions.

(c) Redesigning Employee Benefits
In line with the purpose of offering this programme, employee benefit
programmes have to be updated constantly so that it is suitable for the
changes that occur in society and the environment, especially changes in
composition and employeesÊ lifestyles. These changes force the
management to offer new benefits which are able to fulfil these needs. For
example, due to the increase in the number of women employees, the type
of benefit package offered must be family-friendly to enable women
employees to play their role well in the organisation.

Copyright © Open University Malaysia (OUM)

170 TOPIC 8 INCENTIVES AND BENEFITS

(d) Flexible Planning
In order to fulfil the needs of different individuals, the management has to
offer more flexible benefit packages such as providing a cafeteria plan. A
cafeteria plan is a benefit programme which allows individuals to choose
the benefit which is most suited to his or her needs from a number of
benefits offered by the organisation. This prevents wastage from occurring
in the benefit package due to unsuitability of employee needs.

However, basic or main benefits are provided by the management to all of
its employees such as health insurance, medical leave, day offs and others.
Aside from the basic benefits package, employees are allowed to choose a
number of extra benefits provided by the management with a specific pre-
determined cost limit, say RM500 for each employee.

(e) Conveying Information about Benefits to Employees
Information on benefits must be spread and conveyed to employees to
ensure that they understand and are clear about each benefit provided, thus
avoiding misunderstandings and confusion about the package offered by
the employer. There are many ways to effectively convey information about
benefits to employees. Among them are:

(i) Print distribution;

(ii) Employee handbook; and

(iii) Organisation bulletin and others.

Besides, the human resource management can use this opportunity to
answer any uncertainty about benefit programmes which arise during the
orientation programme, training programme and others.

ACTIVITY 8.3

Explain why an organisation chooses to offer the cafeteria benefit
plan to its employees.

EXERCISE 8.3

List five characteristics of an effective benefit programme.

Copyright © Open University Malaysia (OUM)

TOPIC 8 INCENTIVES AND BENEFITS 171

8.2.2 Types of Benefit Programme

Most organisations offer various benefit packages to their employees. Part of the
benefit package provided by an employer is based on the voluntary concept
rather than force. However, there are also benefits which are compulsory or need
to be provided by the management due to legal requirements. In other words,
there are two types of benefit programmes, which are:

Mandated benefits programme; and

Non-mandated benefits programme.

(a) Mandated Benefits Programme
Mandated benefits programme is a benefit set by the labour system. It is the
most minimum allotment on employee rights and has to be provided by
employers. Among the mandated benefits include:

(i) Payment for Time Off

Weekend time off
Employees have the right to enjoy one day leave each week as
allocated under section 59(1) Employment Act, 1955.

Public holiday
According to section 60D(1) Employment Act, 1955, employees are
eligible for 10 days of public holiday in a year and will still be paid
the basic salary rate. The 10 days allocated need to include the
following four days:

Independence day

Birthday of the Yang di-Pertuan Agong

Birthdays of Sultans or Yang di-Pertua Negeri or Federal
Territory day

Labour day

Annual Leave
Under Section 60E of the Employment Act (1955), an employee is
eligible to enjoy a number of minimum annual leave according to
his or her service period as shown in Table 8.1:

Copyright © Open University Malaysia (OUM)

172 TOPIC 8 INCENTIVES AND BENEFITS

Table 8.1: Annual Leave Based on Service Period

Service Period Annual Leave
Less than 2 years 8 days
2 years or more, but less than 5 years 12 days
5 years or more 16 days

Sick Leave
Under Section 60F of Employment Act (1955), an employee is
eligible to enjoy a number of minimum medical leave according to
his or her service period as shown in Table 8.2:

Table 8.2: Sick Leave Based on Service Period

Service Period Sick Leave
Less than 2 years 14 days
2 years or more, but less than 5 years 18 days
5 years or more 22 days

(ii) Maternity Leave Protection
Under Section 37 of Employment Act (1955), every female employee is
entitled to at least 60 days of maternity leave each time she gives birth.
Moreover, she will also enjoy maternity allowance for five living off
springs.

(iii) Contribution to the Employee Provident Fund (EPF)
As allocated under the EPF Act, 1991, both the employee and the
employer have to contribute to the employeeÊs account in the EPF.
This is to encourage employee saving for their retirement.

(iv) Social Safety Scheme (SOCSO)
This scheme is allocated under the EmployeesÊ Social Safety Act, 1969
and is managed by the Social Safety Scheme (SOCSO). The purpose of
this scheme is to provide protection to employees in case of any
disasters, injuries and death during work. There are two types of
protection scheme which are Work Disaster Insurance Scheme and
Accidents Pension Scheme. Both employer and employee are charged
a certain contribution based on the employeeÊs salary as shown in
Table 8.3.

Copyright © Open University Malaysia (OUM)

TOPIC 8 INCENTIVES AND BENEFITS 173

Table 8.3: Social Safety Scheme Contribution Rate

Contribution based on EmployeeÊs
Salary

Employer Worker

Work Disaster Insurance Scheme 1.25% -
Accidents Pension Scheme
0.5% 0.5%

(b) Non-mandated Benefits Programme
Non-mandated benefits are benefits offered by employers to employees
voluntarily and without force. Usually, non-mandated benefits are offered
for the purpose of attracting new employees with potential and talent from
outside the organisation as well as to increase employeesÊ satisfaction and
motivate them. Among the non-mandated benefits that are usually
provided by employers to the employees are:

(i) Insurance Scheme
A collective insurance scheme for employees is one of the benefits
which are usually provided by employers. It usually includes life
insurance, which assures benefit payment on death to the employeeÊs
next of kin, or protects employees in the event of accidents or injuries.
Premium insurance cost is borne by employers and employees are
usually allowed to make additional purchase at their own expense.

(ii) Healthcare
This is a benefit package that has gained serious attention from
employers since healthcare cost is becoming very high. In addition,
employees nowadays emphasise more on healthcare as compared to
employees before. The benefit package usually consists of medical
expenses, surgery and oral expenses.

(iii) Employee Aid Programme
This programme is designed to help employees handle various
problems that might affect their work performance. Among the
services offered under this programme include advice, treatment
related to drug and alcohol as well as emotional disorder.

(iv) Children Day Care Centre
The increase of female employees as well as dual income families has
forced employers to provide another amenity in the workplace that is
more family-friendly which is the child day care centre. The
preparation cost for this centre is either borne entirely by the

Copyright © Open University Malaysia (OUM)

174 TOPIC 8 INCENTIVES AND BENEFITS

employers or employers only provide the amenity and employees
utilising the amenity have to pay for the operation cost.

(v) Food Service
Food service is provided for employeesÊ convenience as well as to
encourage employees to always be in the workplace vicinity. The food
provided is either sold at cost price or lower than cost, which is due to
employer subsidy.

(vi) Transportation Service
Transportation to and from the workplace is provided by the
employer. This not only lessens traffic in the firmÊs parking space, but
is also said to decrease fatigue and absenteeism.

(vii) Education Amenities
Most organisations offer scholarships or study loans to employees
who are interested to further their studies in specific fields. This is in
line with the organisationÊs effort to create knowledgeable employees
and to encourage a continuous learning culture.

(viii) Loan Amenities
There are also organisations which offer financial loan amenities to
their employees without charging any interest or by charging a much
lower interest rate compared to financial institutions outside of the
organisation. The financial loan is for the purpose of purchasing
houses and vehicles.

SELF-CHECK 8.2

What is the importance of benefits to an employee? What are the
forms of benefits that are usually given by employers to their
employees?

ACTIVITY 8.4

What are the differences between mandated benefits and non-
mandated benefits?

Copyright © Open University Malaysia (OUM)

TOPIC 8 INCENTIVES AND BENEFITS 175

EXERCISE 8.4

TRUE (T) or FALSE (F) Statements

1. The Rucker Plan is a type of incentive plan which gives
rewards to employees for useful ideas or suggestions given
by employees to improve productivity.

2. To ensure the effectiveness of an incentive plan, an employee
has to see the relationship between the incentive payment
which they receive with their work performance.

3. Employees are given a fixed rate for each unit produced
under the fixed rate work unit.

4. Incentive payment under the Scanlon Plan is based on the
increase in an organisationÊs total product sales.

Multiple Choice Questions
1. An effective incentive system is when ___________________.

A. The standard performance is not stated clearly
B. Employees see incentives as a must
C. The manager evaluates incentives based on differences

in performance
D. Cost related to the incentive plan is difficult to

determine

2. The following are examples of individual incentive plans
EXCEPT:
A. Sales incentive
B. Bonus
C. Merit payment
D. Share ownership

3. The following are the characteristics of an effective benefit
programme EXCEPT:
A. A flexible benefit programme plan.
B. The distribution of benefits information to employees.
C. The development of a general benefit programme
objective.
D. Allowing input from employees.

Copyright © Open University Malaysia (OUM)

176 TOPIC 8 INCENTIVES AND BENEFITS

4. What is the type of incentive plan offered if an employee is
given a high incentive rate for all jobs produced which surpass
the standard output level?
A. Differential piece rate
B. Fixed rate unit
C. Merit payment
D. Bonus

5. The following are profit sharing incentive plans EXCEPT:
A. Earning-at-profit plan
B. Rucker plan
C. Improshare plan
D. Scanlon plan

Essay Questions

1. If an employeeÊs salary is RM500 a month, how much is the total
employer and employee contribution to SOCSO?

2. Explain the meaning of mandated benefits and provide two
examples.

3. Explain the meaning of non-mandated benefit programme.
Discuss any of the three programmes.

4. State three issues that needs to be considered in ensuring an
effective administration plan.

Incentive plan and benefits management nowadays are extremely
challenging, complex and require thorough planning to ensure the
effectiveness of both types of rewards.
A human resource manager especially needs to ensure that both incentives
and benefits are designed and implemented well in order to achieve both
rewardsÊ original goals.

Copyright © Open University Malaysia (OUM)

TOPIC 8 INCENTIVES AND BENEFITS 177

Group insentive plan Mandated benefits programme
Individual incentive plan Non-mandated benefits programme
Industrial incentive plan

Copyright © Open University Malaysia (OUM)

Topic Employee
Rights and
9 Discipline

LEARNING OUTCOMES

By the end of this topic, you should be able to:

1. Explain the rights of employees and employers;

2. Discuss categories of problematic employees;

3. Compare between the hot-stove, progressive disciplinary and
positive disciplinary; and

4. Evaluate the steps that should be taken into consideration when
carrying out disciplinary action.

INTRODUCTION

If we look at the job scenario these days, we will find many employers who have
taken the steps to terminate the services of their employees as a way to reduce
the operation cost. Through mergers and restructuring, many organisations offer
voluntary separation scheme (VSS) as a means to reduce the number of
employees they already have. Nevertheless, there are also employees who have
been terminated without receiving any compensation and valid reasons. Apart
from using the economic crisis as an excuse, employers also use excuses like
indiscipline and work performance to sack employees. There are employees who
are given hard punishment for a small mistake and there are some who are not
given the chance to defend themselves after they have been accused. However,
not many are brave enough to come forward and lodge a report for they do not
know their rights as employees.

Copyright © Open University Malaysia (OUM)

TOPIC 9 EMPLOYEE RIGHTS AND DISCIPLINE 179

Thus, in this topic, we will discuss two main issues which are rights and
discipline. Both issues relate to one another especially in increasing the quality
relationship between an employer and a worker.

9.1 UNDERSTANDING THE RIGHTS OF
EMPLOYEES AND EMPLOYER

Bohlander, Snell and Sherman (2004) defined employeesÊ rights as a guarantee
that employees will get a fair treatment from the employer throughout their
service. On the other hand, Gomez-Mejia, Balkin and Cardy (2001) classified
employeesÊ rights into three, which are employeesÊ rights as what have been
outlined by „statutes‰, the rights that are gained through the contract or
agreement and other rights as stated in Table 9.1.

Table 9.1: The Categories of EmployeesÊ Rights

Rights that are Governed by Rights Gained from a Other Rights
„Statute‰ Contract/Agreement
Receive ethical
Protected from Contract of service treatment
discrimination Trade union Privacy (limited)
Implied contracts/ Freedom of speech
A safe work employment policies (limited)
environment

The right to form trade
unions

In Malaysia, there are many rights of employees that have been listed out in
various Acts such as WorkmenÊs Compensation Act 1952, Employment Act 1955,
Employees Provident Fund Act 1991, Human Resource Development Act 2001
and Occupational Safety and Health Act 1994. It is proposed that employees need
to study a little bit about the Acts related to them so that they are not easily
oppressed by employers. All of these Acts have been discussed in Topic 2.

From the aspect of the management or employer, they have the right to handle
business and to maintain the profits gained. Shareholders and the company
owner usually control their company by giving out power to the company
managers.

Copyright © Open University Malaysia (OUM)

180 TOPIC 9 EMPLOYEE RIGHTS AND DISCIPLINE

According to Gomez-Mejia, Balkin and Cardy (2001), some of the management
rights are:
(a) Managing the workforce;
(b) Recruiting employees;
(c) Promotion;
(d) Placement for employees;
(e) Discipline; and
(f) Terminating employees.

However, the rights that are directly related to the employees will usually be
aligned according to the employeesÊ rights. The employerÊs rights are usually
influenced by the rights of the important teams with vested interests in making
decision at the workplace. For example, an employer has the right to decide on
the employeesÊ salary scale, but with the presence of the trade union, the
employer must pay according to what have been agreed in the contract between
the employer and the trade unions.

SELF-CHECK 9.1

List out the rights of workers and employers.

9.2 EMPLOYEES’ DISCIPLINE

Even though discipline is very important to an organisation, it is a very
challenging field in the human resource management function. The main
objective of discipline is to motivate employees to obey the standard performance
that has been set by the organisation. Discipline is also used to develop or
maintain the respect and trust between the employer and the employees.
However, if it is not well managed, it can lead to problems like decreasing
employeesÊ motivation, provoking employeesÊ anger and also creating animosity
between the employer and the employees.

Effective discipline management will not only increase the job performance of the
employees but also reduce the number of disciplinary problems in the future.
Nonetheless, any disciplinary action cannot be carried out simply. For those
employees who are undergoing the process of training or learning how to do
work, it is not reasonable for them to be suggested for disciplinary action.
Disciplinary actions also cannot be carried out on the problems which are out of

Copyright © Open University Malaysia (OUM)

TOPIC 9 EMPLOYEE RIGHTS AND DISCIPLINE 181

the employeesÊ control like punishing the employees for not doing their work
because of lack of raw materials or shortage of electricity. In brief, discipline can
only be taken if the manager can prove that the problem which arises has been
caused by the employee himself/herself.

9.2.1 Problematic Employees and Misconduct in an
Organisation

Problematic employees are always related to their bad work performance or they
usually create a lot of problems at the workplace. According to Ivancevich (2001),
problematic employees can be classified into four main categories which are:

(a) An employee whose work is not satisfactory in terms of quality and
quantity due to lack of training, motivation and ability.

(b) An employee who has personal problems which affect the productivity and
the focus of his work. For example, family problem, alcohol and drug
addiction.

(c) An employee who breaks the laws at the workplace such as stealing the
companyÊs property and attempting to attack other employees like fighting.

(d) An employee who keeps breaking the rules and regulations of the company
and disobeying the managerÊs instruction.

The above classification makes it easier for the employer to take suitable actions
or list appropriate training programmes that can help the employees to improve
their work performance.

Due to unknown causes with problematic employees, many take the easy route
of sacking those deemed problematic.

In reality, there are many factors that can cause misconduct among the
employees such as the attitude of the employee or the interaction between the
two parties. Miner (Ivancevich, 2001) had devised a method to analyse the
deficient behaviours of employees by way of producing a checklist of suspected
causes of the problems. Among the causes are:

(a) Problems relating to the employeeÊs knowledge of the occupation

(b) Emotional problems

(c) Motivational problems

(d) Physical problems

(e) Family problems

Copyright © Open University Malaysia (OUM)

182 TOPIC 9 EMPLOYEE RIGHTS AND DISCIPLINE

(f) Problems with colleagues

(g) Problems caused by the companyÊs policy

(h) Problems relating to the societyÊs value

(i) Problems in terms of occupational context (such as economic pressure)

Within an organisation, misconduct can be categorised into two, namely minor
and major misconduct. Bohlander, Snell and Sherman (2001) and Gomez-Mejia,
Balkin and Cardy (2001) state that those considered as minor misdemeanour are
incompetence, frequent tardiness, violation of rules and dress code, misuse of
company property, chitchatting during work hours and not following safety
procedures in handling working equipment.

Major misconduct meanwhile are those along the lines of intentionally violating
company codes, aggressive behaviour, sleeping during work hours, consumption
of alcohol, gambling or disturbing others, possession of drugs, sabotaging
company operations and absent with no valid reasons.

9.2.2 Procedures and Discipline

Each organisation should construct a procedure and platforms of discipline for it
would help the relevant authorities to take disciplinary actions and guarding the
rights of employees. Employers are within rights to determine the regulations in
relation to employeesÊ actions during work hours but cannot go beyond Act 1955.

This Act is the base in maintaining the efficiency of the disciplinary system and is
used to control the actions of the employees in accordance to company
regulations. Failure of the employer to penalise employees will result in frequent
misconduct in future. It would paint an image of employeesÊ misdemeanours as
being tolerable. Among the causes identified as reasons for supervisors not
punishing employeesÊ misconduct are:
(a) Supervisors not making any records on employeesÊ misconduct.
(b) Supervisors believing that their actions will not have the backing of the

upper management.
(c) Supervisors being unsure of whether the misconduct needs to be punished.
(d) Supervisors wanting to maintain consistency because employees were not

punished previously.
(e) Supervisors wanting to main a good relationship with their subordinates.

Copyright © Open University Malaysia (OUM)

TOPIC 9 EMPLOYEE RIGHTS AND DISCIPLINE 183

Therefore, an effective regulation requires planning and application within an
organisation. A few aspects that need attending when making regulations
relating to discipline are:
(a) Clearly distributed to all employees and not to be taken for granted that all

of them had been informed.
(b) Need to be revised from time to time.
(c) Provide explanations on each regulation.
(d) In written form.
(e) Reasonable.
(f) Be implemented and reminded.
(g) Had been acknowledged by employees that they understood the

regulations.

ACTIVITY 9.1

In your opinion, what attributes to the rising of offences within
organisations nowadays?

EXERCISE 9.1

True (T) or False (F) Statements

1. If employees are found to have not been doing their work due
to insufficient funds, disciplinary action can be taken against
them.

2. Ahmad is frequently found out to be making mistakes when
asked to submit financial reports. Hence, it is justified to
categorise him as a problematic employee.

3. Offences can be caused by physical problems.
4. Violation of regulations and dress code can be deemed as

major offences.
5. When devising regulations relating to discipline, employers

are not advised to refer to the Employment Act 1955.

Copyright © Open University Malaysia (OUM)

184 TOPIC 9 EMPLOYEE RIGHTS AND DISCIPLINE

9.2.3 Disciplinary Approaches

Employers are actually able to use any disciplinary approaches which were
considered appropriate when discovering that employees committing an offence.
For this topic, the following are the normal three approaches used by
organisations. Furthermore, we can also notice the mistakes committed by
supervisors and those who are responsible to maintain discipline.

(a) Hot Stove Approach
Certain quarters believe that the hot stove approach is more effective than
the others for it applies the concept of taking necessary precautions. This
approach has the characteristics of warning, is instant in nature, consistent
and is not personal. If analysed closely, it is similar to the Positive
Discipline Approach.

The following are explanations on the hot stove approach as stated in
Ivancevich (2001) and Carrell, Elbert and Hatfield (1995).

(i) Applies the Warning System
An effective supervisor would usually inform all employees
regarding the warning system be it in written or oral form. Since the
supervisor is closest to the employees, it is thus his or her
responsibility to remind the employees from time to time.

(ii) Instant in Nature
Immediate disciplinary action is taken as soon as an investigation is
concluded. With this, the employees will immediately understand the
correlation between the effects of their offences through the penalties
meted out upon them.

(iii) Consistency
Consistency in discipline means that each employee will be punished
if they commit an offence, and the same type of punishment will be
applied to the same type of offences for all the employees.
Implementing a consistant disciplinary action is not an easy task
because it involves personal issues. It cannot be denied that supervisors
can fail to notice offences made by favoured employees.

(iv) Non Personal Manner
Disciplinary actions should not be taken in a personal manner but
more in the form of correcting certain inappropriate behaviour of
employees. This can be done by way of corrective discipline whereby
with this approach, supervisors will address employee misconduct in
a mature manner by providing a conducive environment for

Copyright © Open University Malaysia (OUM)