Introduction
Pay is a key factor affecting relationships at work. The level and distribution of pay and benefits can have a
considerable effect on the efficiency of any organization, and on the morale and productivity of the workforce. It is therefore vital that organizations develop pay systems that are appropriate for them, that provide value for money, and that reward workers fairly for the work they perform. Pay systems are methods of rewarding people for their contribution to the organization. Ideally, systems should be clear and simple to follow so that workers can easily know how they are affected. In considering rewards it should be borne in mind that pay and financial benefits are not the only motivator for worker performance. Other important motivators for individuals may include job security, the intrinsic satisfaction in the job itself, recognition that they are doing their job well, and suitable training to enable them to develop potential.
What are pay systems?
Key Points: -
 Pay systems provide the foundation for financial reward systems
 There are basic rate systems, where the worker receives a fixed rate per hour/week/month with no
additional payment
 There are systems related in whole or part to individual or group performance or profit
 There are systems based in part on the worker gaining and using additional skills or competencies
Pay systems provide the bases on which an organization rewards workers for their individual
contribution, skill and performance.
Pay structures
Pay structures are different - they are used to determine specific pay rates for particular jobs, usually based on the nature of the job, its content and requirements. A pay structure provides the framework within which the
organization places the pay rates for its various jobs or groups of jobs.
Pay systems fall into two main categories:
 Those where pay does not vary in relation to achievements or performance, (basic rate systems), and  Those where pay, or part pay, does vary in relation to results/profits/performance (including the acquisition of skills).
There are also systems where pay, and any enhancement, is related to the gaining of extra skills or competencies that can allow a worker to carry out a wider range of work, or work at a higher level, and provide opportunities for greater job satisfaction.
The selection of an organization's pay system is often determined by negotiations between management and worker representatives. In theory these negotiations can be kept quite separate from negotiations over payment structures and levels or amounts of pay; but in practice negotiations often embrace all pay-related issues.
Selecting and installing a pay system
Key Points: -
 Accept that there will inevitably be a cost involved.
 Avoid most potential problems with a systematic, well-timed and carefully planned approach.
 Involve the workforce, or its representatives, as much as possible, perhaps through a joint working party.
 Re-examine the reasons for change and take advice both inside and outside the organization. Obtain expert help if needed.
 Don't just discard the existing system - take stock through discussions to enable the organization to keep the good and change the less good.
 Identify what the new system is required to do - how does it relate to the organization's overall objectives?
 Look at the possible new systems and consider which might best suit the particular organization, with or without alteration.
 Changes to pay make people anxious, and so the new system should be kept simple and agreed with the workforce and their representatives.
 Prepare the way carefully with briefings to the workforce and management. Look out for any changes to differentials and relativities. Document the system and if possible run it for a trial period.
 Build in as much time as possible for proper discussion and consultation.
 Make arrangements for maintenance, monitoring and evaluation. Review the system regularly to ensure it is performing as required.
 Be careful the system does not directly or indirectly discriminate between men and women.
Performance-related pay
Performance pay schemes cover the various methods of linking pay to a measure of individual, group or
organizational performance. They all share the idea that where a worker can vary output according to effort the prospect of increased pay will lead to greater performance.
What are the most common types of performance pay?
It is difficult to clearly distinguish one type of performance related pay. They can be defined as:
Piecework:
A price is paid for each unit of output. This is the oldest form of performance pay and is still used in some local government direct service organizations (DSOs)
Payment by results:
Bonus earnings depend on measured qualities or values of output for individuals or groups, usually based on work studied time units; this covers a range of bonus schemes and still forms the main method of performance pay for manual workers
Organization-wide incentives:
Bonus earnings or pay levels based on measured quantities or values for the whole establishment; this is frequently the basis of contract price or tender-led schemes in local government DSOs
Merit pay:
Bonus earnings or pay levels usually based on general assessment of an employee's contributions to performance; this is an earlier, less structured form of IPRP (see below)
Individual performance related pay (IPRP):
Bonus earnings or pay levels based on the assessment or appraisal of an employee's (or team's) performance against previously set objectives, usually part of a performance management system. This is a fairly recent development,
particularly in the public sector and has grown sharply in use since the 1980s
What are the main steps in creating performance related pay systems?
 Setting objectives.
 Appraising results.
 Linking achievements to pay.
Where output cannot be measured, the sensible solution seems not to pay any bonus; however just because some jobs are difficult to measure, doesn't mean that good performance shouldn't be rewarded. This problem has generally been tackled by providing a lieu bonus based on average bonus earnings to those employees - very often skilled maintenance staff and supervisors - whose work is difficult to measure.
In most systems for manual workers the pay packet is in fact made up of a number of components, usually including a fixed basic payment, a variable bonus paid on output of acceptable quality and a fall back provision. Bonus payments are usually paid weekly or monthly.
In IPRP systems for white-collar workers the pay packet includes a fixed salary element, where progress through a range may be according to performance, and/or a variable bonus paid out for achieving set objectives. Variable bonus payments are usually unconsolidated and may be paid monthly, half yearly or yearly.
Advantages:
 It provides a direct incentive for employees to achieve defined work targets.
 The contribution an employee makes is recognized with a tangible reward.
 A performance culture can be developed with its introduction.
 Line managers can derive assistance from a corporate framework for setting goals. It should improve individual productivity and performance.
 Employees are more likely to focus on what they need to do to improve if this is directly linked to pay.
 A good PRP system will reward the best performers.
 It is an effective way of dealing with poor performance.
 Establishing a means of rewarding high performance can assist in retaining the most industrious staff.
Disadvantages:
 It reduces pay equity and can make an authority liable to costly equal pay challenges if not operated fairly.
 The appraisal process can be affected detrimentally because of the focus on financial reward rather than developmental needs.
 Employees can be de-motivated if the goals set are too hard to achieve.
 Too much of the process relies on the quality of judgment made by a line manager.
 Co-operation and teamwork can be hindered.
 As reward made for short-term quantifiable goal it can be too narrowly focused.
 There is a danger that employees can expect an additional payout year on year. In a low inflation climate the rewards might not appear to be that great.
Competency-based pay:
Competencies are the knowledge-skills and the attitude needed by any individual employee to carry out their job effectively. These can be incorporated into a pay system to reward individuals who positively contribute to the overall values and objectives of an organization. This is competency based pay: rewarding the way people work, not just recognizing what they can deliver.
How can the right competencies be defined?
Most competency based pay systems are determined by performance indicators. Typically, the competencies needed to drive progression are quantified by senior managers through employee interviews, surveys and job analysis. The following competencies are relevant here:
 core competencies that apply to any job within the organization and reflect the organization's core values
 the technical skills and expertise that are necessary to carry out the job
 competencies relating to a specific job category e.g. 'leadership' for senior managers
 competencies that define the contribution an employee makes to their role including:
 communication
 teamwork and motivation
 coaching
 knowledge and experience
 service delivery
 liaison and networking
 investigation analysis
 initiative and problem solving
 planning and organizing resources
 decision making process and outcomes
 teamwork and motivation
 knowledge and experience
 liaison and networking
 initiative and problem solving
 decision making process and outcomes
Advantage:
 Employees can develop their careers horizontally on the basis of their experience and competence. Pay progression and career development can be achieved without the need for individual promotion
Disadvantage:
 It can be difficult to manage the expectations of employees, particularly new recruits, who may be under the delusion that they can automatically move to a much higher salary simply by doing their job satisfactorily. In fact, they actually need to develop their competencies. In managing the process, effective communication between line managers and staff needs to be put into place
Contribution pay:
Contribution pay is a relatively new concept. It combines elements of both performance and competency based pay schemes by recognizing employee achievements and competencies.
How does it differ from performance pay?
Contribution pay is not a direct incentive for achieving a defined set of targets. Instead it is similar to a
competence based pay reward system, emphasizing what type of development is needed by employees to enhance corporate success.
Advantages:
 It positively recognizes a commonly held assumption that individuals who apply higher levels of skill and contribute more should receive higher financial remuneration than those that do not.
 Organizational improvement can be achieved through constructively motivating people by encouraging them to achieve higher levels of performance and skill.
 Employees are motivated through the recognition of their achievements, not by the attainment of a few narrowly focused set targets.
 An appraisal system that is based on agreeing expectations based on results and competence combined with an agreed joint plan for achievement is a powerful motivating factor in its own right, irrespective of the pay aspect.
 It is a good method for communicating the strategic vision of an authority through the definition of expected performance, competence, priorities and values expected. This will be especially effective if individual objectives and competencies are aligned to corporate objectives and core competencies.
Disadvantages:
 Contribution pay is a relatively new concept that has been developed principally by the pay experts Duncan Brown and Michael Armstrong. As a relatively small number of organizations have put this into practice, there is only limited empirical evidence of its effectiveness.
 It is likely to be far more complex to manage a contribution pay system than either IPRP or competency pays because of because mangers have to simultaneously assess both outputs and inputs.
 The process is more likely to look at the contribution being made on an individual basis, which can
in turn undermine co-operation and teamwork.
 It raises the expectation amongst individuals that if they achieve a set of targets and improve their skills and competencies each year there will be a continual pay out. This might be difficult to guarantee in a climate of sustained low inflation.
 As contribution pay is based on individual assessment it is prone to the capability of all line
managers to perform this task objectively and effectively.
Market-based pay:
Market-based pay links salary levels, and progression through the scales, to those available in the market. It is often used in conjunction with a performance pay matrix, which allows faster progression from the bottom of the scale to the market rate, which will be the mid-point. Progression then slows, regardless of the performance of the worker, as they are deemed to be earning above the market rate for their job. It is rarely used as a scheme in isolation, but may be part of a reward strategy incorporating several performance elements.
Team-based pay:
While team-based pay has been around for some time in the shape of departmental or group bonus systems it has taken on more importance with the increased interest in team working.
In team-based pay systems the payments reflect the measurable goals of the team. Team working may be most effective in situations involving high task interdependence and creativity, although it can be difficult to define the team, the goals, and the appropriate reward. Schemes can be divisive if they are not open and transparent. Goals should not be shifted once agreed - they need to be achievable.
The aim of team-based pay is to strengthen the team through incentives - building a coherent, mutually supportive group of people with a high level of involvement. The team achievements are recognized and rewarded. Peer group pressure can also be helpful in raising the performance of the whole team.
As with any other pay system, involvement of the workers who will be affected is crucial in the design of the
scheme. They must be involved particularly in the way objectives are set, how performance is measured, and the basis on which team rewards are distributed.
Advantages:
 It positively encourages team working and co-operative behavior.
 It constructively motivates people to achieve higher levels of performance and skill on a team basis.
 It is an effective way to clarify goals and priorities within a team.
 It is an effective way of cascading objectives defined by senior management throughout the subordinate teams.
 It can be usefully deployed in a period of intense organizational change as it can emphasize the necessity for effective team dynamics in flatter organizational structures.
 It can help to bring about a change in cultural attitude particularly with the introduction of customer
focused working practices.
 It encourages flexible working and multi-skilling.
 It provides a good incentive for a team of employees to improve their performance.
 It encourages individual team members to tackle poor performers.
 It is an effective way of enabling employees to work collectively in self directed teams.
Disadvantages:
 Although some organizations extol its virtues, it is sometimes difficult to define the scope and boundaries of the team, and to identify clear and meaningful targets that genuinely reflect group effort.
 As it does not differentiate between high and low performers this could cause resentment within the teams.
 It will only be effective if the team is well managed and positively committed to organizational
improvement. A team, for example, might not need the incentive of extra financial inducement anyway.
 It is difficult to objectively discuss with individual employees what impact their behavior is having
on other employees.
 There is a danger that peer pressure will intensify causing an oppressive and de-motivating atmosphere.
 It is difficult to satisfy the development of methods to measure performance and a fair means of
measuring team performance.
 There could be an organizational problem of uncooperative behavior being shifted from individuals in teams to the relationship between teams.
 Organizational flexibility could be inhibited because people in cohesive, high performing and well-
rewarded teams might be unwilling to move when needed. This could lead to difficulties in reassigning work between teams or breaking up of teams in response to future organizational requirements.
 There is a danger that the team can get into a downward spiral with output being maintained at the level of the lowest common denominator. This will lead to members of a less successful team getting less money and the increased possibility of the team being unable to retain its best staff.
Modernizing pay and rewards strategies:
Pay structures can speak volumes - not only in their implications of values, equality and worth to employees and the community they serve, but to the performance of the authority itself. Getting a structure to reflect this is a challenge local authorities face on an ongoing basis. It requires commitment from senior managers, members and human resources.
What are the benefits?
A modern and strategic pay and rewards system can:
 Lift motivation and drive service improvement if people are rewarded properly for their contributions.
 Increase the efficiency of the day to day running of your pay and rewards system.
 Prevent discrimination and ensure that all staff is paid fairly, thereby eliminating any liability to big equal pay claims.
 Become a powerful method of innovating change and improvement when pay systems are no longer used solely as an administrative tool.
 Help cost/performance calculations to be accurately estimated thereby enabling authorities to inform residents and central government of the actual efficiency of the council's operations - and also provide the chance to identify and act on specific under-performing areas.
Making it work:
Effective pay and rewards systems need commitment and action from senior managers, members and human resources. Councils need to recognize that this is a potentially costly process, especially given the need to deal with equal pay. Changes can be introduced in a step-by-step approach to help control costs.
The following checklists are designed to help establish who exactly should be doing what.
Senior managers and members should:
 Commit to pay equality and ensure that the council develops and promotes an equal pay policy.
 Commit to developing an effective performance management system that integrates individual, team and organizational performance objectives.
 Ensure that pay data is fully integrated into the council's performance management system so that the council's efficiency can be properly assessed through cost/performance calculations.
 Staff needs to see a link between their pay and rewards and their efforts towards service improvement - this culture change should become a strategic corporate objective.
Human resources teams should:
 Demonstrate the strategic impact of new pay systems to senior management.
 Develop proposals for a new pay structure.
 Assess the adequacy of personnel and payroll data.
 Carry out a risk assessment and ensure that they can manage the whole project.
 Carry out an equality impact assessment of the proposals.
 Complete the process of the local pay review.
 Implement the new structure.
 Organize regular equal pay audits after implementation.
 Ensure that training is available for all staff on equality and diversity issues.
 Ensure special training is available for line managers who have been given new performance management responsibilities.
 Communicate pay change and their importance to staff, and encourage their feedback.
 Develop their performance management skills so they can handle appraisals, manage underperformance and give staff work-life balance and development opportunities.
 Manage their teams well so that employees remain motivated and always want to give their best.
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Monday, March 17, 2008
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