3.1 PERFORMANCE APPRAISAL / EVALUATION 3.1.

1 Introduction
Performance Appraisal
Performance appraisal and merit rating are used synonymously. But they both
differ. Performance appraisal is a border concept• and focuses on performance and
future potential of the employee whereas, merit rating focuses on judging the caliber of an
employee so as to decide salary increment, merit rating measure the person i.e., traits,
whereas performance appraisal measures individual actions i.e., performance.
Definition of Performance Appraisal
Performance appraisal as the system of evaluation of the individual with regard to
his/her performance on the job and his/her potential for development.
— Dale S. Beach
Performance appraisal is a systematic, periodic and an impartial rating of
employee's excellence in matter pertaining to his/her present job and his/her potential for
a better job.
— Edwin B. Flippo
3:1.2 Characteristics of Performance Appraisal
The main characteristics of performance appraisal are,
a) Performance appraisal is the systematic evaluation of employee performance.
b) It consists of sequentially organized steps.
c) It is a continuous performance where evaluations are arranged periodically according
to a define plan.
d) It is a systematic examination of employees strengths and weaknesses in terms of
the job.
e) Performance appraisal is a scientific approach.
3.1.3 'Objectives of Performance Appraisal
Performance Appraisal can be done with following objectives in mind :
1) To maintain records in order to determine compensation packages, wage structure,
salaries raises, etc.
2) 2 To identify the strengths and weaknesses of employees to place right men on right
job.
3) To maintain and assess the potential present in a person for further growth and
development.
4) To provide a feedback to employees regarding their performance and related status.
5) It serves as a baSis for influencing working habits of the employees.
6) To review and retain the promotional and other training programmes.

3.1.4 Significance / Importance of Performance Appraisal Importance of

performance .appraisal is as follows:
1. Performance Improvement
Performance appraisal is used as a developmental tool by organisations. It helps in
improving the performance of employees through work. planning, skill identification and
potential development.
2. Compensation Adjustment
Performance appraisal's most popular outcome is its linkage to compensation
adjustment. Employees exhibiting superior performance are rewarded through increase in
their compensation. To motivate them to further excel in their jobs. Employees showing weaker
performance are given lesser compensation.
3. Determining Informational Inaccuracies
Performance appraisal provides opportunity to employees' and their managers to share
information, ideas, requirements, expectations, and feedback to remove any misconception

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and/or misunderstanding between the manager and the employee. This fosters greater bondage
between the employees and managers and results in increased employee commitment to
organisational mission and objectives
4. Making Placement Decisions
Performance appraisal is used as a tool for making decision on emplos ee
placements such as promotion. Demotion, transfer, relocation, reassignment, etc. so.
performance appraisal is considered to be the most valid and reliable basis for placement
decisions.
4. Career Planning and Development
Performance appraisal provides reliable data and information on the current
performance level, potentialities and developmental needs of employees. Based on it,
career planning and developmental needs are identified.
5. Identifying Staffing Process Deficiencies
Since performance appraisal helps in identifying present performance and
potentialities for future development of employees, therefore the accuracy and reliability of
recruitment and selection process can be judged. It helps in finding whether right man for
the right job has been adhered to or not? Organisations can take appropriate decision for
rehabilitation or separation of wrongly selected and posted employees so that operational
inefficiencies can be eliminated.
6. Training and Development Needs.
Poor performance may indicate the need for retraining. Likewise, good
performance may indicate untapped potential that should be developed.
7. Diagnose Job Design Errors
Poor performance may be a symptom of ill-conceived job designs. Appraisals help
diagnose these errors.
8. Identifying Factors Affecting Performance
Sometimes performance is influenced by factors inside and outside the work place,
such as matters related to family, health, working conditions, etc. If uncovered through
appraisals, the human resource department may be able to provide assistance.
10 Equal Employment Opportunity
Accurate performance appraisals that actually measure job-related performance ensure that
internal placement decisions are not discriminatory
3.1.5 Process of Performance Appraisal
The process of performance appraisal consists of the following sequentially carried out
steps. The following figure gives a clear description of steps in performance appraisal process.
1) 1.. Creating the Performance Standards. The performance appraisal process
begins with creating the performance standards. The management should determine
the degree of output, skills and accomplishments to be evaluated. Management must
make use of job analysis and job description statements to set out the performance
standards. The performance standards thus framed should be clear, objective.
understandable and measurable.
2) Communicating the Performance Standards with Employees. The
performance standards established in the first step are, communicated and explained
to the employees to know what is expected from them. The standards are obtained
from both employees and employers and necessary modifications are to be made.
3) Measuring Employees Actual Performance. As the performance
standards are specified and accepted, next is measuring employees' actual job
performance. Measuring the performance includes identifying the right technique for
measuring performance, identifying factors (internal and external) influencing the
performance, and collecting the data on performance The data can be collected by

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 personal observation, written reports, interviews etc. The data thus collected from
different employees should be measured and compared.
4) Comparing the Actual Performance with Standards. In this step employees
actual performance is compared with the standards. By comparing so deviations in
employee performance can be known.
5) Communicating the Appraisal with Employees.. The results of the appraisal
are communicated with the employees. This makes an employee to know his strengths
and weaknesses and has a great impact on his/her performance.
6) Taking Corrective Actions. After communicating the appraisal to the employee,
steps required to improved by providing training, coaching, counselling etc.
3.1.6 Methods of Performance Appraisal
• The different appraisal methods used by the organizations in India and abroad
are discussed in this section. The most commonly used methods are :
A) Traditional Methods
1) Graphic Rating Method
This method of appraisal requires the rater to rate the employee on factors like
quantity and quality of work, job knowledge, dependability, punctuality, attendance etc.
Graphic rating scale includes numerical ranges as well as written descriptions. There
are two disadvantages to the graphic rating scale method. One is regarding the
'choice of employee behavior categories- the important ones might get missed out and
the irrelevant ones may get included. The second disadvantage is that different people
may interpret the written descriptions in different ways. This might lead to confusion
and loss of reliability.
2) Work Standards Approach
This method of appraisal is more suitable, in a manufacturing scenario, where the goals
are pre-determined work standards. These work standards can be set based on the
average output of a typical employee in the organization or by benchmarking against
the work standards of a competitor in a similar business. The advantage of this
approach is that the goals to be measured are very objective and also quantifiable.
The disadvantage however is that the work standards for different job categories
cannot be compared.
3) Essay Appraisal
In the Essay Appraisal method, the appraiser prepares a document describing the,
performance of the employee. Questions or guidelines are provided to the appraiser,
based on which he analyses and describes the employee's performance. The
advantage of this system is that the, appraiser can express all his views on the
employee's performance, without any constraints imposed by the system.
4) Critical Incident Method
In this method of performance appraisal, the appraiser makes a note of all 'critical
incidents that reflect the performance or behavior of the employee during the
appraisal period. These are recorded as and when they : occur and can demonstrate
either positive or negative traits or performance. At the end of the appraisal period,
this record forms the basis for evaluation of the performance of the employee. This
method of appraisal is rarely used because of the ambiguity involved and the effort
required in recording the incidents. The employees might also be not happy with the
manager 'tracking' and 'recording' their performance in this manner.
5) Forced Choice Rating Method
In this method. the appraiser is required to assign ranks to different attributes of the
employee. These attributes are all seemingly positive, but have different weights which
are unknown to the appraiser. Once the employee attributes are ranked, the human

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 resource department applies the weights and• arrives at a score which is the final
appraisal score. The element of subjectivity in this method is minimized as the
appraiser has to assign a unique rank of each of the attributes.
6) Point Allocation Method
In this method of appraisal, the appraiser has to allocate points to different members in
his team. He has at his disposal, a specific number of points which he has to
distribute among his team members, based on their performance during the
appraisal period. The best performer gets the highest
7) Team Appraisals
In the new economy era, where teamwork is essential for any venture to succeed,
team appraisals have emerged as one of the best tools for performance
management. In the team appraisal method, the individual team members evaluate
their colleagues in the team and provide feedback. This helps in synergizing individual
efforts and taking the group performance to higher levels. Digital Equipment
Corporation uses this kind of a participatory performance appraisal system.
8) Balanced Scorecard
The balanced scorecard as a method of measuring performance channelizes the efforts
of people to achieve organizational goals. The implementation of balanced scorecard
involves formulating a strategy, and deciding what each employee needs to do to
achieve the objectives based on the strategy. The HR Scorecard is a part of the
balanced scorecard. Individual responsibilities are assigned based on the strategy.
This assigning of responsibilities to individuals and tracking for achievement of
objectives is called HR scorecard. Each individual in his role will be assigned a set of
initiatives and activities, which are his responsibility. These activities if done well,
will contribute to the successful implementation of the company's strategy. The HR
scorecard seeks to give online feedback to the employees as to how they are faring. In
some cases, their salaries could be linked to their performance. The balanced
scorecard can be used. to evaluate the alignment of compensation and benefit
plans with the strategic needs of employers and employees. Many top Indian companies
like Infosys, i2 Technologies, Godrej Consumer Products, GTL, ITC Ltd. and
Mahindra & Mahindra are using this method of performance management.
COMPENSATION
3.5.1 Introduction to Compensation
Compensation is defined as the money received in performance of work plus many kinds
of services and benefits that organizations provide to their employees. Administration
of employee Compensation is called wage and salary administration.
According to D.S.Beach, "Wage and salary administration refers to the
establishment and implementation of sound policies and practices of employee
compensation. It includes such areas as job evaluation, surveys of wage and salaries, analysis
of relevant organizational problems, development and maintenance of wage structure,
establishing rules for administrating wages, incentives, profit sharing, wage changes and
adjustments, supplementary payments, control of compensation costs and other related
items. The goals of compensation administration are to design a cost-effective pay
structure that will attract, motivate and retain employees
3.5.2 Concept of Compensation
Compensation emphasizes on 'fair days pay' for fair days work. Generally, time is
the basis for the payment. It is hourly, weekly, monthly, or yearly. If an employee works
for more than the stipulated time, he gets overtime, and if he works less than the stipulated
time, he is marked under time. In other words, the employer buys the time of the
employees. It is simple and measurable.

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 Compensation is purely extrinsic - a 'quid-pro-quo' arrange merit. It contains all
forms of financial incomes and tangible services and benefits that an employee receives as
part of the employment relationship.
There are direct types of compensation & indirect types of compensation. It
connotes cash compensation - base pay, dearness allowance, short-term incentives,
long-term incentives (equity incentives) benefits and services, allowances, income tax
production and devices meant for work-life protection.
Compensation refers to all forms of financial returns and tangible service and
benefits employees receive as part of an employment relationships.
The term 'compensation' is used to mean employees' gross earnings in the form of
financial rewards and benefits as part of employment relationship.
' Compensation may also be viewed as (a) a system of rewards that motivates
employees to perform, (b) a tool used by organisation to foster the values, culture and the
behavior they require, and (c) an instrument that enables organisation to achieve their
business objectives.
Compensation is typically divided into direct and indirect components. The term
'direct compensation' is used to describe financial remuneration usually cash and
includes such elements as basic pay, dearness allowance, overtime pay, shift allowance,
incentive, bonus, profit-sharing bonus and commissions, etc. Indirect compensation or
wage supplements or fringe benefits refer to such benefits as provident fund, pension
scheme, medical and health insurance and sick leave and various other benefits and
perks.
3.5.3 Objectives of Compensation
a)To establish a fair and suitable compensation similar pay for similar work.
b)To attract competent and qualified personal.
c)To retain the present employees by keeping the wage levels in tune with
competitive units.
d) To keep the wage costs with in the capability of organization.
e) To improve moral and motivation of employees.
f) To comply with all legal provisions and regulations.
g) To enhance performance of the organization.
3.5.5 Principles of Compensation
Compensation is built upon following sound principles:
1. Pay Capacity
Organisations should pay their employees as per their financial capacity and
capability. If an organisation pays more than its ability, then the organisation may get
bankrupt. On the other hand, if the organisation pays much below its ability to pay, then
such organisations are unlikely to attract and/or retain competent employees, which will
ultimately adversely affect the effectiveness of the organisation.
2 . Equity Considerations
Organisations must compensate their employees according to their qualification,
experience, skills knowledge, job responsibilities, and performance. If employees are not
paid according to their qualification, experience, skills, knowledge, and performance, it will
adversely affect their morale, commitment, and competence. Such organisations are likely
to witness low employee productivity, poor quality, high turnover, poor corporate image,
etc. Therefore, maintaining a proper and fair difference in employee's compensation levels in
terms of their position, competence, knowledge, and performance is necessary for effective
business performance.
3. Performance Orientation Compensation should be in•
commensuration with individual and organisational performance. Employees exhibiting better

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 performance should be compensated at higher level to maintain enhanced performance or
output and encourage them to attain excellence.
4. Non-Discriminatory
Organisations must pay their employees without any discrimination on the ground of
race, religion, gender, nationality, and ethnicity. For example, often female employees in India
are paid far less than their male, counterparts.
5. Legal Compliance
Organisations must pay as per the relevant laws of the land. For example, in India
the Minimum. Wages Act, 1948 stipulates that workers in the unskilled, semiskilled, and
skilled jobs must be paid a minimum wage. This is essential character of any welfare state
committed towards the goals of social justice and securing the rights of the employees to at
least minimum standard of living. Therefore, an organisation that does not have the ability
to pay even minimum wages to its employees has no right to exist.
6. Simplicity and Flexibility
Compensation system should be simple to design, understand, and administer.
Compensation plans and policies must be flexible to adapt with ease to the changing profile
of the workforce, needs of the individual employees, organisational goals, and objectives and
labour market conditions. In other words, compensation management must be strategically
aligned.
7. Fosters Employee Development
Compensation should be such so as to motivate employees to acquire, sharpen, and
develop their skills and competencies in conjunction with changing technology, innovations,
and organisational requirements. Increased differentiation on account of gaps in employee's
skill and competencies acts as a motivator.
3.5.6 Factors Affecting the Compensation The various factors affecting compensation are
A. External Factors
B. Internal Factors
A. External Factors
1. Labour Market
Demand for and supply of labour influence compensation. A low wage may be fixed when
the supply of labour exceeds demand for it. Going rate of pay is another labour oriented
factor. Going rate system involves fixing wage/salary rate in tune with what is paid by
different units of an industry in a locality. Productivity increase if it is linked to wages.
2. Cost of Living
The justification for cost of living as a criterion for wage fixation is that the real wages of
workers should not be allowed to be reduced by'price increases. A rise on cost of living is to
be compensated by payment of dearness allowance.
3. Labor Unions
The presence or absence of labour organizations often determine the quantum of wages
paid to employees.
4. Legislation / Labor Laws
We have large number of labor laws at central as well as state level. E.g. Payment of
minimum wage Act 1948, Payment of Bonus Act 195 Equal Remuneration At 1976,
Payment of Gratuity Act 197.
In addition to the above acts, there are wage Boards, tribunals and fair wages committees
which aim at providing decent standard of living to workers.
5. Society
Remuneration paid to employee is reflected in the prices fixed by an organization for its
goods and services.. That is how society plays a role in remuneration decisions.
6. Economy

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Economy also has its impact on wage and salary fixation. A depend economy probably
increases the labour supply this lowers the going wage rate.
7. Technological Development
With the rapid growth of industries there is a shortage of skilled resources. The wages of
skilled employees constantly change and an organization has to keep its level up the mark to
suit the market needs.
B. Internal Factors
1. Firms Ability to Pay
The ability to pay off a firm will influence wage rates to be paid. A loosing concern pays
lower wages where as profitable concern pays higher wages.
The overall strategy which a company pursues should determine the remuneration to its
employees. When the strategy of the company is to achieve rapid growth, remuneration
should be higher than what competitors pay.
4. Employee
Some of the employee related factors are:
Performance: Productivity increase is always reward with a pay increase.
Seniority: Unions view seniority as most objective criteria for pay increase, where as
management considers performance as criterion.
Experience: Makes an employee gain Valuable insights and is generally rewarded.
Potential: Some organizations pay based on the potential. Eg: Young manager, are
'paid more because their potential is expected to be high.
Luck: Some time luck plays its role.
3.6 CURRENT TRENDS IN COMPENSATION
In today's day and age, compensation packages have evolved to include perks and
benefits that were unheard of a generation ago. Gone are the days of meeting with
employees once a year to give them a pat on the back and the standard four percent merit
increase. With the world progressing and people's wants and needs shifting, in order to
stay competitive, an organization's compensation programme must continually change.
Merely updating the way a company pays employees may not be enough to
2. Job Requirements
Basic wages depend largely on the difficulty level, and physical and mutual effort required
in a particular job. The relative worth of a job can be estimated through job evaluation.
Complex. Challenging tasks can be done by few people with high skills levels and they get
high pay. keep pace. Because the current marketplace is so competitive, in order to attract
retain and motivate the kind of people who are committed to the success of an organisation.
it may necessitate a complete compensation system overhaul. From corporate practices. one
can highlight the following trends of employee compensation in India:
1. Gross Compensation
There is a substantial difference in gross compensation for managers and their
immediate subordinates. Differences in- gross compensation and sometimes
compensation structure are practiced between the project and support functions.
Companies design personalized salaries out of a basket of options for individuals at senior
levels. There has been a significant increase in basic salary and hence in deferred benefits.
Companies have restricted non-tax perks in the form of reimbursement under various
heads to certain top levels of management. Companies provide higher annual increments,
average increments varying from 50 to 100 per cent to different levels of management. A soft
furnishing allowance is being provided towards the purchase of curtains, carpets, cutlery,'
and crockery and this is usually paid as an annual, nontaxable allowance.
Most companies have abolished components such as servants' wages and utilities
allowances, as they are not non-taxable any longer. Conveyance is an area which provides a

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lot of scope for variations. Practices with regard to provision of car, driver, and
reimbursement of expenses on car, parking, cleaning, petrol, and maintenance are covered
under this category.
2. Employee Benefits
The practice of providing company-owned cars to employees is on the decline. Instead
the company encourages employees to buy the cars themselves through hire-purchase
schemes and the installments are then paid by the company. This is to combat the problem of
accumulation of used cars by companies with a high employee turnover. Loans to buy two-
and four-wheelers are common practice. Interest rates may vary with the repayment period
varying from three to five years.
Medical benefits are common with tie-ups with insurance companies and hospitals
in many cases. Companies organize annual medical check-ups' for all employees. In
some companies, though rare, hospital expenses are also entirely reimbursed by the
company, based on grade or age-level slabs. Some companies assist employees in their
higher education by sponsoring evening classes or providing sabbaticals at company
cost.
Companies reimburse books, periodicals, newspapers, journals, etc., against a
predetermined limit. Subscriptions to professional bodies are also reimbursed. Club
memberships in the form of reimbursement of the one-time joining fee for one club, plus the
monthly/annual subscription to one or more clubs, is an attractive perk for senior
management. Alternatively, companies also go for bulk corporate club memberships. Soft
loans for purchase of furniture, appliances, and computers are also extended to employees by
some organisation. Housing loan or interest subsidy is also provided. Companies reimburse
travel expenses for holidays including accommodation in guesthouses and transit flats.
Increasingly, this is being extended to cover holidays abroad for senior employees and their
families. In most cases, this is used as a discretionary reward for exemplary performances
rather than as a perk.
3. Pre-Employment Benefits
There is a trend of providing pre-employment benefits for attracting talent including coverage of all
relocation expenses for the family, transport of personal goods, assistance in locating housing,
schooling, etc. The trend has shifted to making components direct and taxable.. There is a
distinct shift towards schemes for asset creation.
5.Team-Based Pay
Today many companies reward a group of people instead of one- individual. As people
often act after how they are compensated this type of reward will encourage people to work
in group instead of trying to achieve things as a single person which the individualized reward
system encourages. Team rewards focus individual team members' attention on teamwork,
thereby stimulating cooperation among team members, which might go at the expense of a
focus on individual tasks. Team-based pay has shown to be effective for organisations with
many employees performing the same or similar tasks. These groups of employees seldom
have individual goals to strive for. Instead they are working for the same goals as their co-
workers. These reward programmes are also easier to measure and therefore also easier to
evaluate, obviously of high importance for the organisation.
As some organisations have shifted to using work teams, they have faced the logical
concern of how to develop cbmpensation programmes that build On the team concept. At
issue is how to compensate the individuals whose performance may also be evaluated on
team achievements. For base pay, employers often compensate individuals on the basis of
competencies, experience, and other job factors. Then many organisations use team incentive
rewards on top of base pay. Variable pay rewards for teams are most frequently distributed
annually.

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5. Pay for Knowledge
As industrial organisations seek ways to improve competitiveness; their attention has
increasingly turned to innovative employee involvement and compensation strategies.
One emerging strategy involves reliance on Knowledge-Based Pay (KBP) also known as
skill-based pay to promote workforce flexibility. These systems typically reward individual
employees for what they know - the skills they possess - rather than for what they do at any
given time.
3.7 METHODS OF PAYMENT OF COMPENSATION
Compensation is the price of labour hence it has to be harmony with other price systems
in the economy.
You may compensate your employees on the basis of time rate system, payment by
results or measured day work. Let us look at each of these systems.
1. Time Rate System
Under-this system the employees are simply paid a predetermined rate per week, or hour
for the actual time they have worked. The basic rate for the job can be fixed negotiation, by
reference to local rates, or by job evaluation. This system is prevalent in the engineering and
processing industries and among clerical, supervisory and managerial personnel where
there is no rigid standardization of work, and a certain amount of skill is involved. Within the
time paid for, a minimum standard of performance is expected.
From the point of view of employees, the advantages of time rates are that earnings are
predictable and steady. Moreover, they need not argue with supervision and rate-fixers about
price rate or time allowances. The disadvantage of time rates is that they do not provide the
motivation of a direct incentive relating the reward to the effort. You can overcome this
problem of incentive by adopting a system of measured day work. Alternatively, you may also
use some form of merit award. Merit awards may be in the form of additions to the base rate
of so much per hour, usually with an upper limit., They may be awarded on the basis of the
purely subjective judgment of a superior, or determined by reference to systematic merit
assessment procedures which will review the worker's performance in terms of output, skill,
versatility of organisation time keeping.
2. Payment by Results System
Under this system, the pay or part of the pay is related to the number of items a worker
produces or the time he 'takes to do a certain amount of work. It is applicable tc simple manual
operations, where the effort of an individual can be measured in terms of quantity or quality.
This may be through a straight piece-work or a differential piecework i9stem.
Straight Piece-work is payment of a uniform price per unit of production This is
most appropriate where production is repetitive in character and can easily be divided into
similar units. In this system, you can pay a worker a flat money price fo7 each piece or
operation completed (money piece-work), or you can pay him for the time allowed to
complete .a task (time piece-work) In the latter case, if the worker completes the job in less
than the allowed time he gains the advantage of time saved
Differential Piece-work: ‘ Systems allow you to adjust wage cost per unit in relation
to output. In this system, the wages cost per unit of production falls as output increases. As the
same time the hourly rate of workers' earnings still increases, although not in proportion to the
increased output. This system is possible where it is early to relate effort to production and
the work is standardized, repetitive and measurable. You should keep quality in mind while
adopting the piece rate system.
3.8 COMPENSATION MECHANISMS AT INTERNATIONAL LEVEL
International compensation deals with the compensation and benefits structure for
employees of the MNE in various locations/subsidiaries around the world. It can also be
defined as the provision of monetary and non-monetary rewards include base salary,

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 benefits, and perquisites, long- and short-term incentives, valued by employees in
accordance with their relative contributions to MNCs performance. Its broad HRM purpose
is to attract, retain, and motivate those personnel required throughout the MNC currently
and in the future.
International compensation is more complex than domestic compensation because
salary levels and benefit. provisions invariably differ significantly among the various countries
in which an MNE operates. Employees performing essentially similar jobs in different
countries may have different titles and will receive varying amounts and forms of
compensation. This is due to differing costs of living and pay levels throughout these
economies and varying traditions and values for particular jobs. Mechanisms or approaches
to international compensation are as follows:
1. Going Rate Approach
When the compensation packages of the expatriates are determined on the basis of the
salary structure prevailing in the host nation, it is called the going rate approach or market
rate approach. Typically, the salary in this method is decided on the basis of the survey
undertaken in the host country where the business is located. However, international
companies usually grant additional pay and benefits to expatriates if they happen to work in
nations where their pay is low. It ensures equity in pay scale for employees performing
similar jobs, irrespective of their Rationalities. It is simple and easy to administer. It keeps
the morale of the host-country employees high as they suffer no discrimination.
2. Balance Sheet Approach
It is also known as the build-up approach. The balance sheet approach is arguably the
dominant compensation system used in multinational companies. The approach has been
used for more than 20 years, yet nearly two of every three companies still use
a form of this approach to compensation. The basic objective of the balance sheet
approach is to ensure that employees can maintain a standard of living in the country of
assignment similar to that which they enjoy in their home country. This keeps the shock from
changes in standard of living relatively, small: The basic premise of the balance sheet
approach is that companies use a set of allowances or differentials to maintain employees'
purchasing power while on international assignments. Fundamentally, assignees should
neither benefit nor be hurt economically as a result Of relocating.
3. Other. Approaches
There are other methods of international compensation too, but they are not in popular
usage. They are as follows:
i) Region-Based Approach: In this approach, expatriates are paid working in their local
regions, for example, Germans working in South East Asia, at relatively lower levels than those
working in other geographical regions. This approach can reduce compensation costs, while
providing equitable compensation to all employees. However, an assumption of small
economic and cultural differences within regions may prove to be false in many cases.
ii) Hybrid Approach: This approach is blending elements from both the home-country and
host-country approaches. These systems are highly complex and difficult to administer.
They are used with the purpose of creating a workforce where all international expatriates
are paid as they were from the same nationality. Nevertheless, this type of approach does
not involve local markets and therefore. these systems are considered unfair for local staff.
iii) Citizen's Approach: In this approach, an international basket of goods is used for all
expatriates, regardless of country of origin. The basket of goods includes food, clothing, housing,
and so forth. However, expatriates are not provided salary adjustments that would allow them to
purchase exactly the same items in the host country as in the home country. Rather, they receive
adjustments that would allow them to purchase a comparable local product home country),
they would buy a local luxury car.

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 Alternatively called the global salary systems, the international citizen's
approach is appropriate when an MNC has a team of dedicated international managers -
Europeans, Americans or Asians - who are ready to move to any part of the globe easily and
effectively. Global salary systems seek to 'provide worldwide equity in rewards and allow
managers to move between countries with minimal effects on lifestyle.
iv) Lump Sum Approach: This involves giving the expatriate a predetermined salary and
letting the individual decide about how to spend it. Finally, there is the regional system,
under which the MNC sets a compensation system for all expatriates who are assigned to a
particular, region. Thus, everyone going to Europe falls under one particular system and those
going to South Africa come under a different system

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