Regular reading of The HR Coffee Pot will recall from Sheshaya Surtani her previous contribution ‘Making rewards rewarding’, this time Sheshaya has written a fantastic four part article on remuneration. More of Sheshaya’s writings can be found here.
Pay is perhaps the most crucial HR policy. Due to its highly technical nature and non-standardised application in different contexts, it remains a “grey area” for many. This four part blog series aims to provide a detailed overview of the reward and remuneration arena:
- Part 1: Introduction: How much should we pay?
- Part 2: Show should we pay? Option 1: Base pay
- Part 3: Show should we pay? Option 2: Pay related to performance
- Part 4: Conclusion
Part 1: Introduction- How much should we pay?
- How employees are compensated is crucial to how they perform. Pay can be used to incentivise employees to act in ways that are beneficial to the organisation. When analysing the returns that people receive from work, this can be broken down into cash compensation, benefits and relational returns.
- Cash compensation consists of any one or more of the following:
-Base ( i.e. Minimum pay)
-Merit (i.e. additional to base pay with recognition of past work behaviour)
-Short term incentives ( i.e. variable pay to influence future behaviour)
-Long term incentives (i.e. stock ownership, options)
- Benefits consists of any one or more of the following:
-Income protection ( i.e. health insurance, pension)
-Women( i.e. maternity leave,child care,flexible work arrangements)
-Allowances (i.e. housing,transport,mobile phone)
-Paid time off, holidays, family/sick leave
-Insurance (i.e. accident,medical, dental care)
-Retirement (i.e. profit sharing, stock ownership,pension)
- Relational Returns consists of any one or more of the following:
-Recognition and status
-Challenging work environment
- The scientific approach to wage setting involves job analysis and evaluation. This consists of a systematic process to determine the relative value or worth of a job within an organisation, involving an evaluation of “job size”. Job evaluation assesses and grades the job rather than the person, to develop hierarchies of jobs and pay structures and to establish internal relativities.
- It is useful to contrast the Neo Classic Economist against the Modern Economics view of wage setting, in this context.
- The Neo Classic Economist is a very simplistic model whereby, wages are set where supply of labour meets the demand for labour i.e. wage=MPL. It assumes that markets constrain what you can pay for (thus if markets are competitive, workers should be paid equivalently).
- The Modern Economics view on the other hand, suggests that wage setting is a more complex process (as no market is perfectly competitive). In reality, the majority of the firms in the world operate in oligopolistic/ monopolistic conditions i.e. imperfect competition. As such it is no surprise that we find variation in pay within skill categories of the same industry.
- Reasons for variation in pay rates:
- Collective bargaining (i.e. trade union support)
- Efficiency wages
- Internal labour markets
- Gender pay gap
- The full-time gender pay gap between women and men is 14.9 per cent
- The pay gap varies across sectors and regions, rising to up to 55% in the finance sector and up to 33.3% in the City of London.
- Reasons accounting for this: recession, worth undervalued, discrimination, motherhood penalty, greater work in part-time jobs (Fawcett Report)
- Specific factors alluding to the firm:
- Supply and demand of the kind of candidate the firm wishes to attract
- What is our budget? In some industries, particularly labour intensive ones, labour accounts for a significant proportion of a firm’s cost. Thus it is important to ask the question “What are the costs vs. projected productivity of the employee?”
- The extent of information transparency on compensation:
- How much differentiation should exist in pay?
- How much importance is attached to pay vs other non-economic rewards
- How openness is valued in general within the enterprise?
Managers have to decide on points 1-3. Bear in mind here that openness with salary is likely to be sensitive with cultural issues. Employees may not understand how their pay differentials are determined due to lack of information transparency issues in certain contexts.
- Other organisation contingency factors to consider: business strategy, HR strategy, product market, technology, firm size, degree of interdependence (team work), and diversity of the workforce.
The way in which firms chose to pay and incentivise their employees will lead to evident variation in pay rates. This is forms the basis of the rest of this blog series. Read on here:
-Base Pay (Part 2)
-Pay related to performance (Part 3)