unit - ii pay. definition of pay pay is a fixed compensation periodically paid to person for regular...

UNIT - II

PAY

DEFINITION OF PAY

Pay is a fixed compensation periodically paid to person for regular work. Pay is a regular payment usually monthly made to employees as their contributions to the service of the organization. It is an important element in directing efforts and performance towards organizational goals. It is a motivator to the organizational goals.

FACTORS DETERMINING PAY:Factors determining pay are as follows:

EXTERNAL FACTORS: The external factors influencing pay are as follows:

1) Demand and Supply of Labour : A price of any commodity is determined by its demand and supply. The wage and salary rates are also determined by the demand and supply position of the labour in the labour market.

A low wage may be fixed when the supply of labour exceeds the demand for it. A higher wage will have to be paid when demand exceeds supply, as in the case of skilled labour

FACTORS DETERMINING PAY:

2)Cost of Living : The employees must get sufficient amount of pay in order to satisfy their wants and maintain a certain standard of living. The cost of living pay criterian

is usually regarded as an automatic minimum equity pay criterian. This criterian calls for adjustments in payment of wages and salaries based increases or decreased in an acceptable cost of living

3) Trade Unions Bargaining:

Employers of non-unionized factories enjoy the freedom to fix wages and salaries as they please. An individual non-unionised company may be willing to pay more to its employees if only to discourage them from forming union, but will buckle under the combine pressure from the other non-unionised organizations

The employees of strongly unionized companies too, have no freedom in wage and, salary fixation. They are forced to yield to pressure of labour representatives in determining and revising pay scales.

4) The Economy:

The state of economy also influences the wage and salary-fixation. Wage rates will he different in a stable economy than in a depressed economy. In case of depressed economy there may be increase in supply of labour and this results in the fixation of lower wage rates.


5) Government Legislations: To improve the working conditions of workers Government may pass legislation:

Laws and regulations impact the remuneration of employees in many

areas, such as: Work hours and compulsory time-off (paid and unpaid) Minimum wage Overtime Compulsory bonuses Employment at will

6)Technological changesTechnological changes also influence the fixation of wage levels. Due to the advancements in the technology there may be shortage of skilled manpower in that area. So, the organisation will provide high wages for skilled personnel. For example, information technology (IT) industry in India and abroad is suffering from the shortage of IT experts.


7) Psychological and Social Factors:

The level of compensation is perceived as a measure of success in life. Management should take in to consideration the psychological needs of the employees , while fixing the wage rates so that the employees take pride at their work. Sociologically and ethically, the employees want that the wage system should be equitable and fair. These factors should also be taken into consideration while devising the wage programme.

8) Prevailing Market rates:

The wage rates paid in the industry of other concerns at the same place will form a base for fixing wage rates. If an industry pay low rates then workers leave their jobs whenever they get the job somewhere else. It will not be possible for retaining good workers for a long time.


INTERNAL FACTORS:

These factors include the following:

1)Ability to pay:This is one of the most significant factor influencing employee compensation. Generally, a firm, which is prosperous and successful, has the ability to pay more than the competitive rate. This way it can attract a superior caliber of personnel. Often the labour unions also demand an increase in compensation on the grounds that the organisation is prosperous and is able to pay more.

2)EmployeeNumerous employees related factors also influence his or her compensation. These include rhe following:a)Performance—It is always rewarded wirh pay increase and as a result it motivates the workers to do better in future.

b)Experience—This makes a person perfect by providing valuable insights and thus rewarded also. Today companies are demanding for 10 to 20 years experience candidates especially for the executive positions. The companies presume that experience candidate posses leadership skills which influence the other behavior and performance. Generally experience candidate perform the job without need of training which is time consuming and deals with matter of cost to company. Hence the experience candidates demand more pay than an unexperienced candidate.


INTERNAL FACTORS: c)Seniority—In today's environment seniority of employee making difference

in payment of compensation compared to Jr employees. Naturally senior employees demands for more salary than fresher because of their hold on related job and its functions. Today many companies are demanding senior employees for key positions by offering fat pay and even sometimes retired employees are offered with handsome salary for key positions which deals with multitasking in organisation. Trade unions always prefer this objective criterion for pay rises.

d)Potential—Firms also pay their employees, especially young ones on the basis of their potential. software companies are very good example for this, IT graduate just who completed his education having potential in the subject can gain a good job with high payment anywhere in the world. Good example, student of Indian Information Technology (IIT) from Delhi had bagged job of payment 7 million (70 lakhs) Indian rupees per year in Twitter Inc famous social networking website

3) Job requirementsWages arc also influenced by the requirements of a job such as physical and mental requirement. Jobs, which demand more skill, responsibility, efforts and are of hazardous in nature, will carry high wage tag with them.

4) Organisation's strategyThe organization's strategy regarding wages also influences employee compensation. For example, an organisation, which wants rapid growth, will set higher wages than competitors. On the other hand, organisations that want smooth going and just maintain the current earning will pay average or below average.

TYPES OF PAY STRUCTURE Pay Structure:

If a grade structure is defined by pay ranges or grades are attached to a „pay spine‟, it is called “pay Structure”.• There may be a single pay structure covering the whole organization or there may be one structure for staff and another for manual workers.

Most common types of pay structure are as follows:

1) NARROW-GRADED STRUCTURES

2) BROADBANDED PAY STRUCTURES

3) CAREER FAMILY STRUCUTRES

4)JOB FAMILY STRUCTURES

5) PAY SPINES

6) SEPARATE PAY STRUCTURE

7) SPOT RATES

8) RATE FOR AGE

9) INDIVIDUAL JOB RANGES

10) INTEGRATED PAY STRUCTURE

11)PROGRESSIVE/MATURITYCURVES

TYPES OF PAY STRUCTURE

1)NARROW-GRADED STRUCTURES:

• single-graded‟ structure • Universal type of structure in private sector • Pay range is attached to each grade (Between 20%-50% above minimum) • „Reference Point‟ or „Target Salary‟ is referred to the fully competent individual • Provide Scope for Pay Progression Example: Scale/Grade 1: Rs 8,000-10,000 • Scale/Grade 1: Rs 8,000-15,000• Scale/Grade 2: Rs 9,500-11,500 • Scale/Grade 3: Rs 11,000- 14,000 • Scale/Grade 4: Rs 12,500-15,500 etc

TYPES OF PAY STRUCTURE2) Broad banded Pay Structures• „Broad banding‟ means that the number of

grades is compressed into a relatively small number of much wider „bands

‟.• Managed more flexibly• Attention is paid to market relativities.• There are four or six bands in such structures.• Jobs may be placed in the bands purely by

reference to market rates or by a combination of job evaluation and market rate analysis

EG: Scale/Grade 1: Rs 8,000-15,000 Scale/Grade 2: Rs 14,000-24,000 Scale/Grade 3: Rs 22,000-30,000•

TYPES OF PAY STRUCTURE3) CAREER FAMILY STRUCTURES• Consist of jobs in a function or occupation (Ex.

marketing, operations, finance, IT)• Jobs are related through the activities carried out

and the basic knowledge and skills required.• But the levels are differentiated through

responsibility, knowledge, skill or competence needed.

• In effect, a career structure is a single – graded structure in which each grade has been divided into families.

• Job evaluation indicates the same range of scores. Similarly, the pay ranges in corresponding levels across the career families are the same.

TYPES OF PAY STRUCTURE4) JOB FAMILY STRUCTURES• Based on common processes (ex. IT, finance, HR)•

Divided into 3-5 families and again sub-divided into levels (5-7)

• Levels are defined in terms of accountability, skills and knowledge

• No commonality (each job family has its own grade and pay structure)

5) PAY SPINES• Pay spines consist of a hierarchy of pay or spinal

column points between which there are pay increments and to which are attached grades.

• Public sector, agencies and charities (adopts public sector approach)

• Consist of a series of incremental „pay points‟ (lowest to highest)• Increments are between 2.5-3 %

TYPES OF PAY STRUCTURE6) SEPARATE PAY STRUCTURE:

These are for manual workers relate to the rates paid to employees who work on the shop floor, in distribution, transport and anywhere else where the work primarily involves manual skills and tasks. It incorporates pay differentials between jobs which reflect real and assumed differences in skills and responsibility.

7) SPOT RATES:

It is specific rate for the job. Spot rates are often to be found among lower skilled occupations where there is need for a simple rate for the job

Conversely spot salaries often occur at the other end for senior positions, such as senior managers or directors, where the remuneration package may need to be designed to attract or retain a specific individual.

8) RATE FOR AGE:

It provides a specific rate of pay which is linked with the age for staff in certain jobs.

9) INDIVIDUAL JOB RANGES:

They are used where the content and size of jobs is widely different. For eg;

TYPES OF PAY STRUCTUREAt senior level an individual job grade structure may be preferable to

a conventionally banded structure. This approach avoids the problem of grouping number of jobs with widely different job sizes in to a grade

10) INTEGRATED PAY STRUCTURE:

They cover groups of employees who have traditionally been paid under separate arrangements. There may be one grading system which includes all employees excluding senior management.

11)PROGRESSIVE/MATURITY CURVES:

They are a development of job family structures. A pay curve system recognizes that different methods of handling pay determination and progression may have to be used in some job families, especially those containing knowledge workers.

CONTINGENT PAY Contingent pay: Individual contingent pay relates

financial rewards to the individual performance, organisation or team performance, competence, service, contribution or skill of individual employees.Contigency pay:Individual contingent pay is a good motivator (but to what extent?) for those who receive it.

It attracts and retains better workers. It makes labour related expenditures more flexible. It can demotivate those who don’t receive it (depends on

performance measurement) Can act against quality and teamwork

Types of contingency pay Performance-related: increases basic pay or

bonuses related to assessment of performance

Competence related: Pay increases related to the level of competence

Contribution-related: pay is related both to inputs and outputs

Skill-based: pay is related to acquisition of skills

Service-related: pay is related to service-time

Types of contingency pay1)Performance-related pay:

Pay increases are related to the achievement of agreed results defined as targets or outcomes.

Scope is provided for consolidated pay progression within pay brackets attached to grades levels in a graded or career family structure, or zones in a broad-banded structure. Such

increases are permanent high levels of performance or special achievements

may be rewarded by cash bonuses that are not consolidated and have to be re-earned.

The rate of pay for someone who reaches the required level of competence can be aligned to market rates accord-ing to the organization’s pay policy.

Types of contingency pay2) Competency-related pay:

People receive financial rewards in the shape of increases to their base pay by reference to the level of competence they demonstrate in carrying out their roles.

It is a method of paying people for the ability to perform now and in the future.

3) Contribution related pay: It is a process for making pay decisions based on

assessments of both the outcomes of the work carried out by individuals

and the inputs in terms of levels of competency that have influenced these outcomes. In other words, it pays not only for what they do but how they do it

Types of contingency pay Contribution-related pay focuses on what people in

organizations are there to do, that is, to contribute by their skill and efforts to the achievement of the purpose of their organization or team

4) Skill-based pay: Skill-based pay provides employees with a direct link

between their pay progression and the skills they have acquired and can use effectively.

It focuses on what skills the business wants to pay for and what employees must do to demonstrate them. It is therefore a people-based rather than a job-based approach to pay.

Rewards are related to the employee’s ability to apply a wider range or a higher level of skills to different jobs or tasks. It is not linked simply with the scope of a defined job or a prescribed set of tasks

Types of contingency payTYPE OF SCHEME

MAIN FEATURES

ADVANTAGES

DISADVANTAGES

WHEN APPROPRIATE

Performance-related pay

Increases to basic pay or bonuses are related to assessment of performance

Supports Organisations Personnel Philosophy

Motivates employees to perform better

Ensure consistency in pay Distribution

Increase Organisational and Individual performance

May not motivate

Relies on performance Management

Prejudicial to Teamwork

Focuses on outputs, not quality

Proper training is required

Disputes about performance measurement

For people who are likely to be motivated by money

in organizations with a performance-oriented culture

When performance can be measured objectively


MAIN FEATURES

ADVANTAGES

DISADVANTAGES

WHEN APPROPRIATE

Competency related pay

Pay increases are related to the level of competence

Focuses attention on need to achieve higher levels of competence

Boost Cooperation and teamwork

Increase employee satisfaction through provision of development opportunities

Provide a framework for salary progressions where promotion opportunities are limited

Time consuming and Expensive

Difficult to make complex Assessment

Reduces Motivation

Risk of pay Drift

Unplanned resource burdens

As part of an integrated approach to HRM where competencies are used across a number of activities

Where competence is a key factor, where it may be inappropriate or hard to measure Outputs

Where well-established competency frameworks exist


MAIN FEATURES

ADVANTAGES

DISADVANTAGES

WHEN APPROPRIATE

Contributionrelated pay

Increases in pay or bonuses are related both to inputs (competence) and Outputs (performance)

Provides Higher Financial Remuneration

Leads to Organizational Improvement

Motivates Employees

Communicates the strategic Vision

Limited Evidence Effectiveness

Complexity-b,cos of continuous assessing inputs and outputs

Reduced co operation and Teamwork

Leads to Continual pay out

When it is believed that a well-rounded approach covering both inputs and outputs is appropriate


MAIN FEATURES

ADVANTAGES

DISADVANTAGES

WHEN APPROPRIATE

Skill-based pay

Increments related to the acquisition of skills

Flexible Rewards Employees for range, depth and skillsDevelop a more highly skilled workforceFits best with Organizational culture

Costly Time Consuming

Complex Administration

Higher Pay rates

On the shop floor or in retail organizations

Service-related pay

Increments related to service in grade

No scope for bias, easy to manage

Fails to reward those who contribute more

Where this is a traditional approach and trade unions oppose alternatives