The Theory of Pay Effectiveness - Assignment Example

Running Head: Pay structures (Student’s Name) (Student’s number) (Institution) (Grade/Course) (Module number) (Instructor’s name) 18th Nov 2009 Pay or compensation is a very sensitive issue in organizational management. The manner in which employees are rewarded according to rank, roles and responsibilities, qualifications and other considerations determine how an organization is perceived by the public and stakeholders while this also impacts on the overall organizational performance. Some organizations are accused of underpaying some of their top executives while others are alleged to over pay them judging from the profit margins of some companies. For instance, J.P. Morgan an American investor with many investments across the globe is argues that he cannot invest in an organization where the CEO earns more than 50% above the immediate executives (Compensation standards, 2009). This basically borders on internal issues while external issues usually involve pay levels offered by competitors or prevailing economic conditions in a specific country or region. In most cases, external and internal pay equity determinants are at logger heads thereby placing organization at difficult position in setting up fair and acceptable pay, rewards and compensation levels for their employees. In analyzing the possible difficulties arising in such situations, this paper will in the first part consider a number of theories and models developed in relation to pay and compensation matters, then look at the organization which is a government funded hospital in the UAE, Dubai and then give the findings and make conclusions. The hospital is facing stiff competition in employee compensation and pay issues from overseas markets and the domestic private health care sector. Due to privacy issues, the name of the organization has been withheld and takes up the name organization X for the purposes of this paper only. However, the issues discussed herewith are real and currently pose a challenge in pay matters to the organization. Internal pay equity is the primary methodology used by many organizations in setting up compensation levels for all employees. A ratio is established whereby the topmost ranking employee, in the case the CEO is paid a fixed percentage of the next level employee, a figure that is discussed and set by the board of directors. This figure when adjusted therefore requires that all employees are affected by the changes in order to maintain the equity across all the layers. However, this type of model faces a challenge due diversity in organizational structures. Originally the model was developed to suit a vertical structure where employee ranking is precise and very obvious. With the model being adopted to suit other structures, managers face the problem of layering employees where there is no direct flow of authority and power in the organization to warrant a mathematical ordering of pay levels (Armstrong, 2002). In organization X, there is a hybrid organizational structure bordering on horizontal and vertical. It is horizontal in the fact that members are ranked according to job groups and qualifications. Qualified doctors are grouped together and receive same basic pay. Nurses across all the departments also form a different level in the vertical structure where they receive same pay. The horizontal structure seems to encourage formation of work teams where team performance determines individual level of compensation and mostly applies in the non medical staff. Given that this is a government agency, ordering of employees in levels is often hard and the adopted structure rigid plus that employee levels have to be in harmony with government policy and not market forces (Jackson & Schuler, 2004). In government bodies, salaries and pay are mostly handles through career banding (Doc web). Each band conceived has a minimum rate and a maximum rate of pay. This is because though the qualifications might be the same, there are differences in jobs and responsibilities allocated to each and everyone. On the other hand, reward and appraisals systems are incorporated in the pay framework making it hard to maintain a uniform pay package for employees on the same level. In the case of assigning all nurses and doctors the same package level, organization X might be forced to overlook the expertise, dedication and commitment levels of individual employee. This is an avenue for allowing demotivation in the workplace to set in given that financial rewards have proved to be, though highly debated, more effective than other forms of compensation and employee reward system (Armstrong, Cummins, & Hastings, 2005) Armstrong (2002) says that internal pay equity is most useful in ensuring employee satisfaction within the organization but not in the labor market. While the labor market might be calling for increase in the wage levels, internal pay equity considerations might be calling for the pay to be reduced and vice versa. In internal pay equity models, banding as a preferred method where there is a wide range of pay for a certain group of employees is faced with many difficulties. In organization X the idea of banding employee wages would be met with a lot of resistance by employees of the some group when they realize the slight difference in the wages among colleagues of the same band. The theory of allocation equity argues that an individual employee is not only concerned about the pay levels that he earns and feels that he deserves but also tends to compares his output and earnings to that of his workmates. By judging one’s output and pay as compared to others is used to generate opinion and judgment that shows the level of satisfaction and indicates the chances of arising demands for wage increment. Research also shows that the influence of high payment inequality is not significant as employees are not aware of the compensation criteria of top executives but are more informed on the roles and responsibilities of their colleagues in the same band and those immediately above their band. In short, lower rank employees are less likely to protest inequality in paper as compared to top executives than relatively low level seniors. For organization X therefore, low level employees gunning for internal pay equity should be more concerned about what immediate seniors are earning more than what the top executives are earning (Y. Li, Liu & H. Li, 2008). The allocation equality theory lays emphasis on the result of salary allocation thereby disregarding the process involved. The Referential Cognitive Theory (RCT) was developed to advance this theory by adding that process involved in formulating the compensation also contributes in bringing about equity or inequality hence dissatisfaction. In organization X for instance, there is a lot of dissatisfaction among employees on several levels. Given that it is in the health sector, majority of the low level employees are sourced from third world countries. The idea of outsourcing labor from low level per-capita income countries implies that such organizations are tempted to offer lower wages than are acceptable in the local market. According to the government findings, labor importing countries or organizations tend to set compensation levels of foreign employees depending on their country of origin’s per capita income (Y. Li, Liu& H. Li, 2008). To gain better understanding of the wage and salary issue in the organization, this research study opted to conduct some interviews with a number of employees. Given that this s not a fully fledged research, the project planed to conduct three interviews with employees from departments of the state funded hospital. Weight was given to immigrant employees on their views of the current pay and the remunerations system used by the organization. The interviewees were granted anonymity as a matter of observing privacy issues. Below follows the highlights of the interviews. Interview I- male foreign nurse Q: what is you nationality? Do you feel that your nationality is an issue in the current employment terms? A: Am originally from Philippines and only came to work in Dubai five years ago on the prospects of a better life. I graduated from a nursing college and after two years without work, the opportunity to work in Dubai, though far away from home was irresistible given that the compensation was way higher than that at home. In my new workplace I realized that I had a number people from my country working there and it made me feel better. So I received a lot of assistance in absorbing the cultural shock. In fact almost all the five of us from Philippines were placed in the same shift something that seemed to be more than mere coincidence. Q: Did wage levels between the locals and immigrant workers differ? A: At first, I was not interested in the amount of pay that the locals in the same job level were earning but I was soon to realize that there was a huge difference. Apart from being exposed to higher indirect taxes, foreign workers such as me are denied some crucial benefits and tax incentives that come in handy in offsetting the high cost of living here. Q: What are the main components of you salary and do you feel that they are reasonable and adequate? A: The basic salary for nurses in organization X comprises around 90% of total earnings with bonuses and allowances covering the rest. Given that most of us foreign workers rely on rented accommodation, the amount of housing allowance offered by our employer merely covers 50% of the actual housing cost on a monthly basis. However, the organization has introduced a housing program for its employees by providing houses but it is not effective. To cut costs, the company houses lack some basic utilities such garbage collection and poor drainage as a way of cutting down on the cost of housing their employees. Unfortunately, majority of foreign workers are forced to take up such houses rather than be exposed to the high market prices of housing. Q: Are there differences in wages based on nationality? If yes how wide is it? A: Apart from paying higher taxes, immigrant workers such as me also receive a relatively lower basic pay as compared to local employees. This is seemingly unfair as I consider the fact that higher taxes we pay actually benefit their government and hence we should be receiving the same level of pay given that our job descriptions are similar. Additionally, immigrant workers tend to be placed in unfavorable working hours that attract no additionally compensation. This makes it hard for immigrant workers to pursue other aspects such as vocational training. For instance, I would have preferred to work in the morning shift so that I can pursue some evening classes. However, despite presenting my case to my seniors, I have received no support from them as the shift keeps on moving making it impossible for me to allocate specific time for specific activities. Q: Do you feel that it is possible to work in the same position in a different organization and receive better pay? A: Yes. Dubai is quickly becoming a health tourism hotspot facilitated by the high level of technology in the country. As such, private hospitals have sprung up thereby expanding the healthcare industry. To gain a foothold in the labor market, such organizations are offering higher wages and salaries but have relatively low job security. For instance a friend of mine is a nurse in a private hospital just across the road, though working under a two year contract, earns 25% more than I do in total earnings. Interview II- female foreign non-medical staff Q: what is your position in the company and what is you nationality? A: I am a receptionist at organization X and am from South Africa. Q: what is your take on the level of compensation in the organization? Is it fair and justified? A: When I joined this organization, I had quit another job in South Africa as this organization offered better pay and very encouraging allowances and benefits with strong opportunities for career development. However, in recent times, the case has not been the same. Going by the rising cost of living especially in housing, most of us are not able to live as we used two years back. The pay system has not been up to date with the high cost of living thereby making our actual earnings lesser by the day. Q: What is your take on job position, nationality and pay? A: given that the level of literacy and level of skills in the local population is relatively high, relatively low skilled immigrant workers are left fending on blue and low paying jobs that require relatively low skill level. Consequently, the pay is low. However, given that in m home country I receive better recognition and social appreciation as a trained receptionist does not earn me the financial freedom I get here though viewed as a low level employee. Q: Do you feel that it is possible to work in the same position in a different organization and receive better pay? A: That is something that I have been keen to observe in recent times. However, given the prevailing economic downfall in Dubai, it is the most inappropriate time to switch jobs. However, I have promised myself that if things return to normal, I will be switching jobs to the private sector an if not so move to another industry such as the telecommunications industry which has better chances for career development and offers better pay. Interview III- male local doctor Q: what is your take of the inflow of foreign doctors in the country especially the specialized ones? A: One thing we have to appreciate is that the medical and health field is changing dramatically more so in the cosmetic health. Dubai has not been quick in laying the necessary infrastructure for the industry in terms of skilled doctors in such as category. However, Dubai is a very big market for cosmetic surgery given the high income elves that tend to attract such services. Therefore, I have no issues with such expatriates that are meant to fill positions that the local workforce cannot adequately fill. What I am against are the general doctors in fluxing the market from other countries. Ideally, they are increasing the supply and from an economic sense driving down wage levels. Q: How do you think the government and health institutions in Dubai are handling the problem? A: first and foremost, the government has fared well by imposing higher taxation levels for all immigrant workers. This prevents them from flooding the job market. Q: Given the opportunity, how would you handle the problem of doctors’ influx especially from Asia? A: While we cannot deny the effects of globalization, we must be keen to protect nations and national issues. By allowing excessive inflow of doctors from foreign lands, not only will we doctors, locally trained by our institutions be without work but will also be a wasted investment. In the long run, our medical training institutions will be out of business as employers will be tempted to fetch cheap foreign doctors thereby failing the education system. On the other hand, the influx of foreigners in general is diluting the culture and religious values. Findings and conclusions Organization X is not alone in following a common trend among many organizations relying on imported labor more in the developed world. These organization tend to take advantages of the dire economic situations in the under developed and developing countries to import cheap labor. This idea is bad and good at the same time depending on the perspective. On one hand, importing skilled labor from under developing nations provide a ready market for their education systems outputs. When employed, such persons invest back in their home country thereby spurring economic growth. From another perspective, importing skilled labor form such countries denies them the skill and expertise to help them develop. Many nations in Africa and Asia that have high rates of exporting labor do actually suffer shortages in the respective field. For instance, South Africa and Philippines are major exporters of nurses to Dubai among other countries such as Australia while the same countries suffer shortages leading to poor health in such nations. However, would have these governments been able to employ the other wise exported skilled labor and provide the same level of pay as offered by other countries and organizations such as X? Definitely no. Immigrant workers feel that by working in foreign lands, they are offered well paying opportunities that are not available back home. Standards of living in many of the labor exporting countries are low and the economies cannot be able to fully absorb the output from the education and training system. Therefore, exporting help create a balance and provides a life line of the education system in those countries. It also creates hope for the youth and encourages them to take up training in order to increase their chances of getting a job. On the other hand, once at the designated place of work in the foreign land, in this case Dubai, immigrant employees realize that they are actually being offered less pay than the resident workmates with whom they have the same qualifications and same job descriptions. The pay system used by organization X is perceived differently by employees depending on level of satisfaction. Going by the views from the respondent in the second interview, the working conditions at organization X are not appealing at all. The respondent is just waiting for the right opportunity to move out. He is of the opinion that the amount of pay he is receiving in his current position does not with his lifestyle. He feels that the pay is not fair given that it does not reflect the rising cost of living. Ideally, the process used in setting the pay is not efficient. According to the Referential Cognitive Theory, the process used in developing a pay system contributes highly to the level of satisfaction among employees and not the actual pay itself. In the case of organization X, the first and the second respondents are of the opinion that the current pay structure does not recognize the high cost of living and especially housing costs. For instance, if the pay system could only allow an increase in the house allowance, there is a chance that the employees will more satisfied as the pay process is sensitive to their needs even if the increment is not equivalent to the increase in cost of housing. The perception of unfair pay by employees leads to low levels of motivation and often poor performance. As a government agency, organization X faces stiff competition from the private sector which according to the first and the second respondent offers better compensation. Therefore, in the long run, organization X will suffer high employee turnover, loose on human resource investments and perform poorly due to low satisfaction and motivation levels among employees. References Armstrong, M. (2002). Employee reward Ed 3. (New York: CIPD Publishing) Armstrong, M., Cummins, A., & Hastings, S. (2005). 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