A Case study of Performance Management and

Compensation Structure of PEL

Dated: December 16, 2019

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 Abstract

This study finds the linkage of compensation and performance appraisals practices existing in
PEL. Pay for Performance is a combination of multiple HRM methodologies to catalyze an
atmosphere conducive to management and employees, in order to achieve the organizational
goals and reward competitively (best employee is paid more than others). A linchpin of a
productive workforce, Compensation, on the other hand, is the reward given to employees in
return for their services rendered. These mechanisms play a decisive role to ensure utmost
productivity of the employees which in turn translates into the organizational success. This study
would further help to enlighten our theoretical knowledge with that of practical knowledge of the
field. This will help us to understand how variable pay outcomes are aligned with business goals
and how pay levels directly contribute to employee’s performance and motivation. A
compensation package can include flexible benefits, medical care but it can be in the monetary
form as well. So, after this study we will be able to understand those benefits being exercised at
PEL. 

Literature Review
Performance management, a component of Human Resource, which is a crucial part of an
organization, has the potential to play a vital role in the success of an organization. The day an
employee walks into an organization, the roles and responsibilities must be clear to that
particular individual. Importance of performance management is highlighted by Qureshi and
Hassan, (2013) in their research. Employees are aware of the fact that their performace will be
analyzed by the supervisor at the end of the year, thus they strive hard to timely accomplish the
assigned tasks. This contributes in the success of an organization. On the other hand,
Perfromance management helps the employees to self evaluate their performance as well.
Performance management also helps to deduce whether an employee needs increment in salary
or not. Padhi and Patnaik, (2012) researched about the impact of compensation structure on the
employee’ performance. Research implies that top-perfomers are encouraged to work harder and
other employees look upto them as a role model. This can build a competetive environment in
the organization.

Problem Statement:

The current Performance and Compensation structure of PEL, Impacts and

Recommendations

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 COMPANY PROFILE

Pak Elektron (PEL) was setup in 1956 as a Public Limited Company with the object of initially
producing transformers, switchgears, and electric motors. Owing to its quality products, the
company started its export to countries like Saudi Arabia, Abu Dhabi, Qatar, Middle East, Far
East and Africa with great success. Since then, PEL has never looked back.
PEL has very vast local customer base in Pakistan. Its role in industry is of a market leader in Air
conditioners. Being the trendsetter, PEL takes the credit for introducing the 3S concept in home
appliances in Pakistan. Major competitors of PEL are LG, Dawlance, Waves and General.

Performance Management System at PEL

The Appraisal Process

Setting work standards or goals (overview)
In PEL, the clear work standards are communicated to employees during their employment. Each
position has its clear standards which are already defined by HR under the supervision of top
management. Detailed job analysis has been performed on each position by the HR department
in which they have determined clear work standards, competencies required for that position,
required attitude and behavior and directions in which goals will be set.
In PEL, management by objective has been implemented which enable employees to set their
goals in January. Each position has its strategic goals which are aligned with the overall strategy
of the organization. For example, one of the strategic goals of PEL for next year is cost cutting in
order to invest more into research and innovative side of the company. PEL is revising its salary
in order to better compensate its engineers especially working on new projects. The chief
executive officer directs the head of departments about certain major strategic goals for the year.
The head of departments set goals with their subordinates and those executives set goals with
their respective teams. Job related goals have 60% weightage and competencies have 40%
weightage. Through job analysis, competencies have been defined for each position.

Assessing employee’s actual performance relative to set standards and goals:

The appraisal process at PEL includes:

 Management by Objective
 Forced Distribution Method
The appraisal of employees is done twice in a year. Once in June as a midyear review and the
second as a final review in December. Each supervisor evaluates their subordinates based on
objectives set in a beginning of the year. Twice in a year, the supervisor rates its employees by

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evaluating their performance as an attainment of certain objectives. The score of that rating is
divided as fifty percent weightage is calculated on midyear review and fifty percent weightage is
calculated on final year review. The calculated score is used in Forced Distribution Method. On
the basis of the score, the Bell Curve is drawn and employees are divided among the A, B and C
categories and they are compensated according to fixed increments predetermined for each
category. Step by Step, PEL is shifting from forced distribution to communication and
coordination where employees will be evaluated based on qualitative data. This shift will take
time because it a gradual process.

Providing Feedback to Employees (Supervisor’s Role)

In Midyear and End year review before scoring employees, each supervisor with his subordinates
discuss their performance in the light of goals. The supervisor provides feedback to the
employees for their performance. Supervisor explains why certain ratings have been assigned to
everyone based on one’s performance.

Detailed Analysis of Appraisal Methods and Tools at PEL

Management by Objective
Management by objective has been very effective in PEL. It has enhanced the motivation of
employees since its implementation. The researchers during the interview were explained how
actively employees are participating in goal setting. It enables employees to share directions
together and communicate goals throughout the company. This technique is useful because it
helps in setting doable and SMART goals at departmental, team and individual level. Employees
keep alignment of their goals to overall organizational goals and establish a positive link which
keep them on track.
MBO also facilitates in ongoing performance monitoring in PEL. The ongoing performance
monitoring is done on the set time. It also serves as an ongoing feedback system which help
supervisor evaluate the performance of teams and individuals. In PEL, it is an excellent tool for
identifying the training needs of employees. The whole team of learning and engagement plans
trainings according to these identified needs. Personal and skill-based development becomes part
of the process as coaching and training is part of feedback of MBO. Rewarding and recognizing
employees due to their goal-oriented performance is part of the appraisal process as it helps in
employees’ compensation process. The scoring data generated in MBO under supervisors is used
in Bell Curve.

Forced Distribution
Methodology of forced distribution lays great emphasis on the role of managers. They have to
understand the principles and develop targeted programs for different groups of employees. They
have the additional responsibility to manage the salary review process. This method identifies
low performers, who are given individual plans to achieve the set standards.
As there are benefits of forced distribution, some of the negative aspects were identified of Bell
Curve by the interviewee. It creates negative competition among the peers. Managers can abuse
Quotas system to meet the distribution curve or to favor some department. This can lead to

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marginalization of employees. This can inhibit creativity and teamwork spirit in the organization,
which can be detrimental to the corporate culture.

Appraisal according to employee classification

There are various classifications which fall under the human resource department for appraisal.
These classifications are as follow:

 Junior Executive Grade (JE Grade)

 Trainee Engineer (TE)
 Engineer Level (E1, E2, E3)
 Lower management level to general manager grade (M1, M2, M3, M4, M5, M6)
Human resource department evaluates all the employees which are part of above mentioned
grades. With the help of Bell Curve, there are fixed categories like A, B, and C in which
employees fall after their appraisal ratings. Each category has a set range of salary increment. As
forced distribution includes assessment of each employee relative to its peers, hence, at each
grade level individuals based on their score lies in the fixed categories of Bell Curve. Each
employee then receives its increment based on the level of grade and the category of Bell Curve.

Appraisal Interview
In the interview, it was highlighted that appraisal interview is conducted based on six months
performance, twice a year. Maximum six goals and minimum four goals are set at the beginning
of a year. In the interview, supervisor discusses the performance of an employee in the light of
these goals. If some goals were not achieved due to genuine reasons then that can be discussed in
the interview. For example, one of the goals of human resource department was to revise the
career portal of PEL which was supposed to be done with the help of I.T team. Due to some
reason, I.T team was not responding which delayed the set objective. Now, human resource
department can justify why certain objective has not been achieved.
Appraisal interviews are one of the important steps in performance management system of PEL.
It provides a proper way of conveying feedback to the employees. It sorts out major obstacles
faced by employee during their performance period and adjust if any solid reason of lagging
behind the desired target.

Major Problems in Appraising Employees at PEL

1. Non-serious or defensive attitude of Employees
Recently, the salaries have been revised in PEL because there were lots of pressure from
employee side. Employees were not satisfied with the performance evaluation and one of the
major reasons was their own non-serious and defensive attitude. There is tons of pressure on
human resource department to achieve the target of evaluation of employee but some head of
departments do not consider this activity important. They have a tendency of showing

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irresponsible behavior towards evaluation process. For example, it was mentioned in the
interview, one department has entered its goals in November in the system which were supposed
to be entered in January. This has affected the midyear review and delayed other performance
evaluation steps.
In order to curb this problem, human resource department is revising the performance
management system. The form of identification of high potential employees is attached with the
system. Performance improvement system of low performers plan is also a part of performance
management system. These plans will keep identifying the low performers and keep providing
them constant reminders of enhancing their performance. The constant reminder will ensure that
each department set their goals within a prescribed time period.
2. Halo Effect
During performance appraisal, when a supervisor’s rating of one trait induces bias in the rating
of other traits, is called halo effect. This error sometimes occurs in evaluating employee under
the supervision of superordinate. This error is minimized by constantly educating evaluators
about their effects. Proper guidelines have been established by human resource department to
refrain from this error.
3. Central Tendency
For this, PEL is gradually shifting from Bell curve to more qualitative analysis of evaluation
data. There are still certain issues in implementing the alternative. Their main focus is now on
Management by objective where they can evaluate employees based on the achievement of
SMART goals.
4. Improper use of PMS
The researchers were informed that a fair evaluation system is available within the organization
but there is no proper usage. Due to organizational politics, human resource department face
challenging situations in implementing the performance management system. This the reason
some changes have been done by the department to fully yield the advantages of the system.

Legal and Ethical Issues in appraising employees

Due to personal grievances, supervisors can sometimes rate their subordinates on the unjust
bases. This happens seldom but such cases do exist within the company. For sorting this issue
out, the rating score can be discussed with higher management and if problems are identified
then they have the authority to revise the assigned score.
In PEL, they have a whole department named legal and compliance department. if there are legal
issues than they are overseen by this department. For example, one employee during his job
hours brought his friend on site without approval. Strict action was taken against such action.
During job hours, employees are not allowed to show any irresponsible behavior.

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 Compensation Structure of PEL

ESTABLISHMENT OF PAY RATES AT PEL

Pay rates are being established through ‘total remuneration survey’ by MERCER software.
The Mercer Total Remuneration Surveys (TRS) provide comprehensive market data on
compensation and benefits around the globe. These TRS results are published every year in more
than 125 countries.
HOW MERCER IS BEING USED AT PEL
This year PEL officially participated in the list of companies, on which company’s equity is
being set according to the data. That help the company to estimate how much it should pay if it
wants to compete in external market. Setting the equity means to check the standards of payrolls
and to determine the differences in pay packages. That further helps to evaluate the company’s
internal and external equities. For example, if PEL is giving 30,000 to a fresh engineer but other
company is giving 32,000-35,00 for the same post so, in order to set our pay structure, this data
can be extremely helpful. It also tells us that on which percentile you’re standing in the market.
This data tells the ‘mean, median and extreme’ of the market.

TRADITIONAL BASES FOR PAY AT PEL

Status of Seniority Pay
Seniority pay isn’t preferable in general. At PEL, somehow it exists. They’re going for a shift in
this regard by using the mercer’s data. This data helps to measure the position, that which
position has how much of the compensation according to market. This shift often leads to salary
cuts and salary cuts. But, its used to encourage and retain those employees that dedicated their
maximum time to the organization.
Seniority pay is payable to some ‘critical positions’. For example, if a position like secretary will
be compensated according to seniority pay, in some year he/she’ll be getting 1 or 2 mil (approx.).
So, to avoid this type of unjust situation, the critical positions at PEL includes sales department
and customer services department. As PEL is a manufacturing company these both
departments are so critical to their productions, so they allow seniority pay packages to these
department especially in order to retain employees of these departments.

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At PEL a ‘proper job analysis’ survey is being conducted to clearly develop the merits according
to the position and to explain the competencies being needed for a position. Company-wide
they’re well established merits on which further hiring and recruiting of employees are being
done.

INCENTIVE/ VARIABLE PAY

Incentives for professional and technical staff
In PEL for professionals, the incentive plans are already been developed under Merser
(International positioning system) as PEL has recently revived their compensation and incentive
plan for the whole company according to the standards of Merser. While technical and labor staff
came under administration and their increments, incentives bonuses are also given by the
standard of Merser
Incentives for executive and managerial staff
In PEL executive and managers lies under the umbrella of human resource department, their
compensation and benefits are designed and allotted by human resource department. There are
various classifications which fall under the human resource department for appraisal. These
classifications are as follow:

 Junior Executive Grade (JE Grade)

 Trainee Engineer (TE)
 Engineer Level (E1, E2, E3)
 Lower management level to general manager grade (M1, M2, M3, M4, M5, M6)
Human resource department evaluates all the employees which are part of above-mentioned
grades.
Fresh engineers get 28000 as new hires and after probation period their salary goes to 32000
after that; their pay and increments get evaluated and increased on the basis of their performance
base evaluation. Now after the implementation of Merser in PEL all these pre-established salary
packages will be revised.

PERSON FOCUSED PAYS

In PEL person focused pay plans does exist if any existing employee gain some extra knowledge
about a certain area related to field or get some certification or diploma, the employee will get
increase in pay. PEL also send their high potential employees for trainings in abroad.

ORGANIZATION-WIDE INCENTIVE PLAN

Organization wide incentive plans leads to those incentives plans that are separately and
specifically designed for all departments and their positions.
In PEL organization wide incentive plan is given and prepared by payroll department under the
given standards. Payroll gave defined pay ranges for different criteria of hiring.

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BENEFITS AT PEL
There is a wide range of benefits provided by PEL to its employees which includes every area
almost for example insurance benefits, retirements benefits, different services to employees,
sponsor for education and trainings etc.

Insurance benefits
PEL provide health and life insurance plans to its customers, it provides retirement plans to it
employees as well

Services to the employees

 There are flexible services provided by PEL to its customers including
 Products on subsidize rates
 Membership for mess
 Education sponsorship
 Day care
 Maternity leaves and expenses etc
PEL provides sponsor to the employees and their children for education, PEL also provide pick
and drop service to the employees. PEL bear all maternity expenses for all employees without
discrimination. PEL also send their high potential employees to the trainings in abroad. PEL also
gave cars to the employees at manager level. In some cases, employees at executive level also
get cars.

Additional Benefits
 PEL provide two extra basic salaries on both EIDs
 Two basic salaries are provided as medical to every employee each year
 If medical for one year is consumed, employee can use next year medical bonus as
advance as well.
 Flexible approvals is given by PEL
 Appliance allowances are also given to the employees
 Encashment of 14 annual leaves after one year of service
 Idaat grant is also given
 EOBI is given while gratuity fund is not provided
 Provident fund is provided (10% of the basic salary + 10% is being added by the
company)

Disability benefits
Disable persons can avail same benefits; those are given to the other persons in the company
No discrimination on any basis exists in PEL

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DEDUCTIONS
In PEL deductions are being made against any damage or loss and house accommodation while
no deductions against land subsidy facility has been made.
No deductions against shares purchased been made by the company. Leaves made during
probation period or without informing the company has been deducted from the salary.

 Leaves
16 casual leaves
14 annual leaves (no carry forward of these leaves are available to the next year, while
encashment of these leaves can be availed by the employee after one year of service)

 Incentive type
No group incentive been given in PEL, all incentives are on individual basis.

RECOMMENDATIONS
 Communication of goals should be formalized. It should be made clear to employees
what is expected of them. Digitization of communication by using emails can be
beneficial in this regard.
 The already developed performance appraisal system should be revived and properly
implemented. Goals should be defined at start of the year.
 Use of SAP and general digitization of HR should be encouraged and employees should
be trained like-wise.
 Continuous evaluation of employee performance should be done so that the year-end
performance review and its results do not come as a surprise to the employee.
 PEL is currently using only one system of evaluation which is MBO. Other systems of
performance evaluation can also be included so as to make the appraisal a more holistic
evaluation of employee’s performance and capability.
 Flexible timings should be provided to employees as it will help improve work-life
balance of employees and have a positive impact on their performance.
 Compensation policies should be made more formal and implementation should be
uniform. So that a culture of equity can be promoted in the organization.
 Provident Fund deduction should be reduced to the usual 8% - 8.33% as a full 10% is
difficult for all employees to contribute this big a portion every month and puts strain on
their pocket.
 Though performance-based incentives and bonuses are given to sales force, they
should also be offered to other employees as this would help increase employee
motivation.

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