Factors Affecting the Pay Levels in Tesco - Case Study Example

Number SS2 Introduction The reward managers in Tesco UK Limited, in making decisions about the levels of pay should consider several factors. The reward managers should consider those factors before making the decisions concerning the pay levels. These factors can be broadly categorized into internal and external factors. External factors The external factors influencing the pay levels are explained through economic theories and concepts. The content of labour is the determinant of the price of labour. This is according to the labour theory of labour value. This factor is heavily criticized by mainstream economists who argue with demand and supply theory. Demand and supply theory primarily asserts that the price of labour is influenced by demand and supply forces (Armstrong, 2007). The labour market applies the same theory as goods and services markets. When there are too many buyers then the labour price goes up the same way goods and services reacts. The efforts of the employers and employees to develop a working relationship constitute the labour market. Due to the existence of internal labour markets within Tesco limited the pay levels differs with other firms. This pay levels in the internal labour markets are defined by the worth of the individual to the firm .According to Armstrong (2007) the pay level is also influenced by the intrinsic value of the job. The economic competitive theory states that the pay levels in Tesco limited is influenced by demand and supply consideration. Other factors help constant a surplus in supply of labour results in decrease in play levels. The inverse of that is true (deficit in supply of labour results in high pay levels) if all other factors are held constant. Pay levels stabilizes when the demand is equal to supply that is, when the market is at equilibrium. Limitation to this factor is the assumption of perfect labour markets and holding of all other factors constant. In the real world, there exist no perfect labour markets and other factors cannot be constant (Schuster, 1992). Market imperfection influences the decrease or increase of pay levels in any organizations such as Tesco limited. Efficient wage theory illustrates those firms like Tesco pays more than the market rates for improved performance. These firms believe that paying high levels of pay increases the productivity of the organization. The high wages increases motivation and reduces labour turnover because unreasonable pay levels. This factor is used by firms as a way of showing appreciation of employees’ input in relations to the output. Expected returns from human capital investments. The expectation of the theory of human capital is high wages in relation to skills and knowledge of the employees. The return of investment on the perspective of the employer is first, improved performance and efficiency. Secondly increase in productivity, flexibility and innovation from the employees (Armstrong, 2007). The agency theory can be extended to fit the context of employers (principal) and employees (agent) relationship. Payment levels are used by the principal to motivate the agents to perform satisfactory in the firm (Armstrong, 2007). The agency theory indicates that the existence of a reward and incentive systems are crucial for its success. The reward system should be considerably fair for satisfactory performance. The effort bargain is another external factor affecting the levels payment. The aim of the effort bargaining is to make a bargain on payment levels for the employees. The employees, through their representatives strike a bargain with the employers in relation to the pay levels. The unions help in maintaining a reasonable pay levels by the employees to avoid exploitation (Lawler, 1990). Internal factors Within organizations, there are pay structures which determine the pay levels of employees in different job groups. Lawler (1990) asserts that the structures in the organization are the standards that are used in the determination of pay levels within the organization. However some firms have flexible pay levels which are highly unstructured. The pay levels are determined by the type of task assigned to them. Job evaluation is also another determinant of pay levels within the organization. Job valuation is only applicable on firms that have formal structures and clearly defined job descriptions. The pay levels are influenced by the internal worth of the jobs in the organization such as Tesco. The levels reflect the worth of the job to the entire company. Individual pay levels are governed by the structure which might take the form of fixed rates in the firm. The pay levels may also be influenced by the movement of the fixed rate up the scale. This may be influenced by the minima and maxima of a particular job grade. The pay levels to individuals is influenced by their worth to the organization and the contribution (Armstrong, 2007) The value of the individual in the firm is another important factor in setting the pay levels. This value is gauged on first, contribution to the firms’ success and the output. Secondly the level of competence and skills .Finally the experiences the employee have on the job. Those factors are put into consideration when setting the pay levels. Financial situation of the firm also influences the pay levels. The firm should have pay levels that are sustainable by the business. The pay levels should not outweigh the profits of the firm. The pay system should be manageable and affordable. Before the formulation of pay levels the financial capability is analysed for the organization. The organization’s pay stance influences the pay levels in the organization. Pay levels are made in consideration with the competitive labour market rates. The pay stance influences where the pay levels should feature, whether high, low or medium (Armstrong, 2007). Pressure from trade unions also influences the pay levels. Trade unions through collective bargaining influence the pay levels by the firm to employees. The unions bargain for levels which are fair in consideration with the market rates and the living standards. The bargaining strength of the trade union reflects in the negotiated pay levels to the employees. The minimum wage also influences the pay levels. Organizations like Tesco are influenced by the minimum wage as set by the state legislation. The limit set by the legislation is used by firms while setting their own pay levels (Armstrong, 2007). Tesco Company being a UK based company is influenced by the minimum pay legislations. Total rewards These are all the types of rewards whether direct, indirect, intrinsic or extrinsic. Every aspect of the reward in terms of financial and non-financial benefits are linked together and integrated as one. Total rewards combine the collision of two main categories of reward: 1) transactional rewards which include all tangible rewards arising from transactions between employees and employers. 2) Relational reward which includes all intangible reward which may include training employees. Total reward approach is not influenced by a single or two mechanisms operating in isolation. This approach is holistic and combines many mechanisms (Armstrong, 2007). The main aim of the total reward is combining the impact of many categories of rewards to a single impact. Tesco limited Company during the 1990s had a total reward strategy which was based on job evaluation. This strategy failed to provide the important link between performance and pay and had to be changed. The job evaluation strategy, being ineffective, had to be replaced. Tesco Company is now operating under a new system which is flexible and provides an important link between pay and contribution. The company is now under a broadband structure. This structure excludes non-managerial staffs that are paid according to fairness and consistency rather than contribution. This new strategy has move the organization from 22 grades to a single grading system including six levels of work. The pay levels of the old system in Tesco were influenced by maximum and minimum markets rates. The new strategy offers additional flexibility to manage pay inconsideration to contribution. The market data available provides the referencing point for the new strategy. The total reward strategy in Tesco use reasonable and transparent methods of payment. These methods include continued payments, stretch payments and clear guidelines on promotions. Choices of benefits available to employees have increased with the new strategy. This has provided employees with a variety of benefits to choose from. Benefits of a total reward strategy The benefits accruing from total reward are many and range from one organization to another. Total reward strategy by Tesco UK company has the following benefits: 1. Huge impact. The combined effects of wide variety of rewards have deeper and long lasting effects. This impact serves as motivation to employees which in turn results into better performance. 2. Enhancement of the employment relationship. The employment relationship created through the total reward strategies maximizes the use of transactional and relational rewards. 3. Flexibility in satisfying individual needs. The firm through the relational rewards should be able to meet the employee’s needs. The strategy helps the firm adapt to the changing business environment. 4. Talent management is another benefit of total reward strategy. Relational rewards aims to make an employer or a firm the best place to operate in through career advancements. This is done by the firm in efforts of retaining talented people in the firm and reduces staff turnovers. 5. Flexibility in managing career advancements and pay levels to staff. The strategy employed increases the flexibility when it comes to advancement of careers. 6. Motivation to the staff. Better pay levels are a source of motivation to employees. If Tesco Company does not pursue a total reward strategy the benefits accruing to the strategy are numerous. The broad brush strategy when applied in Tesco, the reward managers are able to balance between financial and non-financial rewards. A minor benefit of using this strategy is development of the best employment relationship. Tesco through broad brush strategy can develop a more integrated reward system for the employees. Other benefits include the following. Increasing retention rates in the firm. The total reward employed in the Tesco reduces the number of staff leaving the company. This is through motivation and fair rewards. Non-financial benefits offered for career advancements are important factors considered by staff before quitting. Tesco Company employs fair rewards to its employees to reduce labour turnovers. Saving on costs. Total reward strategy employed builds a strategy of payment structure which reduces and saves unnecessary costs. Costs are cut by providing non-financial benefits to the employees instead of financial rewards. Costs for job evaluations are saved by Tesco Company. Increased performance from the employees. When the pay structure is proportional to the contribution of the employee then increased performance is the outcome. The employees are motivated to contribute more because of the monetary compensation being offered in return. Building the company’s image. Having a satisfied workforce is the most important determinants of the image of the company. Staff satisfactory is gained through fair rewards both financial and non-financial for contribution earned. Offering the staff a good working environment is another source of building the company’s image. Conclusion Factors affecting the pay levels in any organization are influenced by factors within and out of the firm. Both the internal and external factors are incorporated by the reward managers of Tesco Company in determining the levels of pay. The reward managers have control of the factors within the organization affecting the pay levels. Total reward strategies are employed for motivation of the employees and job satisfaction. These strategies are also important in the recruitment and retention of the employees in the organization. Reward strategies help organizations meet the work experience expectation of the staff. Lastly total rewards strategies are used by reward managers to motivate staff for better performance. References Armstrong, M., & Murlis, H. (2007). Reward Management a Handbook of Remuneration Strategy and Practice. (5th Ed.). London: Kogan. pp730-760 Brown, D. (2001). Reward strategies: from intent to impact. London: Chartered Institute of Personnel and Development. Pp 120-150 Lawler, E. E. (1990). Strategic pay: aligning organizational strategies and pay systems. San Francisco: Jossey-Bass Publishers. pp 120-150 Shields, J. (2007). Managing employee performance and reward: concepts, practices, strategies. Cambridge: Cambridge University Press.pp150-160 The WorldatWork handbook of compensation, benefits & total rewards: a comprehensive guide for HR professionals. (2007). Hoboken, N.J.: John Wiley & Sons. pp 200-250 Roberts, S. (1997). Team pay case studies: whats working in companies today.. New York: American Management Association. pp 180-200 Read More