The Fair Payment System - Essay Example

FAIR PAYMENT SYSTEM Fair pay or sound remuneration strategies play a pivotal role in employee retention, motivation and overall performance. For thisreason, organizations today seek to strike a balance between flexibility and equity when trying to develop strategies of fair remuneration. Flexibility is needed because of increasing concern that payment system may sometimes not match performance, and equity is important because employees need to find the system fair when compared with pay package offered to other employees doing the same or similar jobs. A rapidly growing body of literature and research indicates that flexibility and equity have now come to occupy a vital place in remuneration schemes and the inability of strike a balance might results in breach of psychological contract. This brings us to some relevant concepts in the discussion of fair pay system today. First we need to understand that when an employee starts working for an organization, it establishes a relationship between the employer and the employee. We call these exchange relationships since employee promises to offer something for the payment he hopes to receive. His services include loyalty, dedication, commitment and good performance. In return he hopes to be paid in a way that would match his talents and his input. One very important concept in this regard is that of equity theory that helps us to see why we need flexibility and fairness while creating a remuneration strategy. Equity theory studies the psychological acknowledgment of being treated equally. This is a very relevant concept and one that is being used increasing in developing fair pay system. Equity theory states that employees must feel that they are being treated fairly when they compare their pay with those of their counterparts at the same position. This is where inputs and rewards are closely studied. Employees would want to make sure that their input, if it is equal, must follow equal rewards. Adams (1965) explained that equity theory studies the ingrained mental process that allows a person to see how are efforts being rewarded and whether or not same efforts are being rewarded with similar returns. Equity theory further states that if people experience inequity, they will change their behavior in order to attain the feeling of equity or remove the tension that arises from the feeling of inequity. If they feel that their ratios are lower when compared to those of their colleagues in the same position, they will start behaving in a negative fashion to bring their ratios at par with their efforts. Some will start coming late to work, or decrease their inputs or not meet deadlines etc. Psychological contract is another important concept which has been helpful in developing fair pay systems. Argyris (1960) who coined this term describes it as a ‘set of practical and emotional expectations of benefits that employees and employers can reasonably have of each other.’ Since that time, the term has been defined and redefined a number of times with Rousseau’s definition becoming most influential: ‘An individual’s belief regarding the terms and conditions of a reciprocal exchange agreement between the focal person and another party… A psychological contract emerges when one party believes that a promise of future returns has been made, a contribution has been given and thus, an obligation has been created to provide future benefits’. (Rousseau 1989) Pay is generally the most important part of the contents of a psychological contract. In a UK study conducted by Herriot et al. (1996), it was found that employees used fairness and pay most frequently when work environment was discussed. It was the two things that topped the list of things that employees paid attention to when discussion of work environment came up. Pay for performance is the third most commonly discussed concept in development of fair pay system. Recent developments in the field of management and performance-based evaluation systems provide conclusive evidence of the fact that the understanding of the urgent need to motivate and reward employees based on their performance is augmenting over time. That is why “analysts are predicting that performance-based deals will become increasingly prevalent, with some estimates showing pay-for-performance rising to 30 percent of all online ad revenues by 2006” (Riolo, 2002) However, another research-based analytical article by some of the best experts in the related field, read the following thereby highlighting both the negative and the positive recent development in the thought process regarding the pay for performance process: “Real pay for performance is the biggest trend coming down the tracks, and its going to hit the workforce like a freight train. In todays tight labor market, employers are paying what potential employees demand. But at the same time, theyre finding that theyve already realized the easy productivity gains from technology advances. So as the economy slows, the light at the end of the tunnel is sure to be an oncoming train. Employers will be locked into hefty payrolls with no way to increase productivity to compensate for their high fixed costs” (Tulgan, 2001, p. 19) What makes the impact of the measurement and paying for performance systems more strong than ever in today’s cutthroat market milieu, is the realization of the significance of the employee participation. On the same account, this emerging system is largely reliant on the “intelligence, common sense, creativity, and personal values of participants” (Nourayi & Daroca, 1996, p.206 (12)). Moreover, “the decentralized nature of operations in the new system requires internal controls that augment the integrity of the organization. A sound incentive arrangement, based on a relevant, meaningful, consistent, and reliable measuring system, is essential for a successful operation” (Nourayi & Daroca, 1996, p.206 (12)) Thus, one of the most pivotal elements in any true performance-based system is that “rewards must actually be tied to actions within the direct control of individuals” (Tulgan, 2001, p. 19)). One of the most common examples projecting and proving this model includes organizations wherein employees are paid a specific amount that has been agreed upon before for each defined unit of work these workers manage to manufacture. But pay for performance may not always be the best strategy in every organization. When it comes to designing a fair system, many employees would want the organization to consider such things as labor shortage and clear dearth of qualified people in a certain field. Smith (1993) recognizes the possible damaging effects of using Pay for performance and appraisals too casually in all types of organizations: ‘the use of appraisal systems to determine white collar pay has devalued the acceptability of what was a useful management tool; the rearrangement of pay structures to reflect labour shortages and provide short term impacts on motivation have created a long-term problem of complexity linked to high costs and unjustifiable differentials’ (Smith 1993) The research thus indicates that while some practices are common, they may not always be suitable for every organization. It is more important thus to clearly understand the concepts that guides and triggers an employee’s perception of fairness and equity. References Adams, J.S. (1965). ‘Inequality in social exchange.’ In L. Berkowitz (ed.) Advances in Experimental Social Psychology, Vol. 2. New York: Academic Press. Herriot, P., Manning, W.E.G. and Kidd, J.M. (1996). ‘ The content of the psychological contract’, Working paper: Department of Organisational Psychology, Birbeck College. Nourayi, Mahmoud M.; Daroca, Frank P., Performance evaluation and measurement issues.. Vol. 8, Journal of Managerial Issues, 06-22-1996, pp 206(12) Riolo (2002). Argue for pay for performance. Commentary. Rousseau, D.M. and Parks, J.M. (1993). ‘The contracts of individuals and organisations’. In: Cummings, L.L. and Schein, E.H. (1980). ‘Organisational psychology’, Prentice-Hall, Englewood Cliffs, NJ. Smith, I. (1993). ‘Reward management: A retrospective assessment’, Employee Relations, Vol. 15, No.3 p 45-49. Tulgan B. (2001). Real pay for performance. Journal of business strategy, 2001 page 19 Read More