Compensation Programs: Seniority Pay Systems vs Performance Pay Systems - Research Paper Example

? Compensation Programs: Seniority Pay Systems vs. Performance Pay Systems   Table of Contents Table of Contents 2 Introduction 3 Compensation Programs: Seniority Pay Systems vs. Performance Pay Systems Introduction A compensation system is a system used to determine the payments to be given to different individuals within an organization. Germany, Great Britain, and United States are accredited for introducing the worker’s compensation into the world in the late 1800s and the start of 1900s. Chancellor Otto Von Bismarck is recognized for introducing compulsory compensation system in 1884-1886 that was run by the State but financed by both workers employers. This was followed by enactment of workers compensation law in Poland. Eventually, other countries followed suit. This paper focuses on compensation programs use in United States and across the globe, the paper will analyze how seniority pay systems compare to performance pay systems. In the early 1900s, unions became a driving force in labor throughout the United States. They started advocating for payment systems that rewarded the efforts of the employees. The unions comprised of organized workers movements and advocated for organized systems for fair compensation. In United States, different attempts to enact laws regarding workers compensation were evidence even before 1900. Such states included New York in 1898, Maryland in 1902, Montana (1909), and Massachusetts (1908) (Williams, 1991). Later on, federal government with the aim of improving and standardizing the compensation system enacted more regulations (Berger & Berger 2000; United States. Bureau of Labor Statistics, 2011). In Asia, there have been quite a number of reconstructions in the compensation system. The reformations are aimed at changing the system from seniority-based compensation in favor of performance-based compensation. Although the restructuring has taken quite some time, there has been quite a lot of success. In Japan, most organizations that previously favored the seniority-based compensation are gradually adopting incentive based compensation system. In South Korea, the compensation system is still under evaluation. Incentive programs are at the initial stages of implementation. Other countries that are gradually adopting the performance based compensation system include Indonesia, China, Philippines, and Hong Kong. In Asia, it is expected that more countries will continue adopting performance based compensation program to replace seniority systems which are increasingly becoming unpopular (Pierce, 2011).In the west, most countries have already adopted performance based compensation. The compensation-based system is likely to face challenges in the future. This is because some employees may fail to understand the criteria used to structure the workers payments. In seniority compensation program, the time an employee has worked for an organization was viewed as the best measure to be used in compensation. Therefore, became a popular way of levying out annual pay raises. In the recent past, the economics of the United States have expanded into global markets and the industries have shifted from manufacturing to service related industries. This has led to search for new compensation methods by new companies .The performance-based systems are usually determined by the need to promote higher levels of service on the part of the employees. It is important to consider the fact that the level of service delivery on the part of the employees is necessary for the general purpose of achieving higher performance among the working community. In essence, it becomes necessary to investigate the nature of service delivery from the perspective of the employees. Essentially, such systems require frequent appraisals in order to determine the capacity and value that an employee brings into the company. Pay Systems in the United States The payment systems in United States have evolved greatly over time. Employees’ compensation or pay systems are the different systems used by organization in rewarding the employee. There have been different systems that have been used for compensation in the last 100 years. Payment system that has been used in the past is the merit pay is based on measure performance over a given period. The performance is measured using factors such as the employees output or the feedback obtained from the customers. Performance based compensation system rewards employees depending on the quality of their work. The system became popular in the 1980s due to the realization that organization could meet their objectives better by rewarding the employees based on their performance. Such a system would encourage employees to set apposite goals and work towards achieving them. The performance compensation system is based on the Organizational Behavior Modification (OBM), which argues that behaviors determine the consequences. Therefore, giving good compensation for better performing employees is likely to reinforce the employees to perform better (Department of Labor, 2009). Nonetheless, organizations require comprehensive performance appraisal to be able to measure performance and compensate employees appropriately. Additionally, organization requires conducting performance evaluations frequently to ensure that they acknowledge changes in behaviors and performance and reward them accordingly. Performance compensation system requires that employers provide frequent training and career development programs to enhance performance. Incentive pay rewards the employees based on their ability to accomplish predetermined performance goals (Gunderson & Hyatt, 2000) (Thomason, Schmidle, & Burton, 2001). Historical changes in the United States employment systems, the diversity of the job market, and multiple global forces occasioned shifts from the traditional pay systems. A growing preference for horizontal structures at the work place over the traditional vertical systems implies an adjustment in the models of payment due to the abolishment of organizational hierarchies. These changes owe their character to geopolitical pressures, macro-economic influences, and the weakening of unions within the United States labor force. A range of studies suggests that changes in the pay systems derive their origin from the discourses of globalization and liberalization of the global market economy. The abolition of traditional market niches, the weakening of monopolies and oligopolies opened up the markets to global competition such that the survival of organizations became increasingly dependent on the factors of quality and performance (Williams, 1991). These new realities meant that global organizations had to find ways of motivating their employees towards achieving positive attitudes, which essentially transformed into increased profits and quality services. In order to sustain the gains acquired from these transformations, companies and employers devised pay systems that would encourage the demonstration of skills and the growth of talents within the organizations. Salaries and remunerations transformed into systems of rewarding talents and identifying hidden potentials from within the work force. It was now necessary for organizations to renew their payment structures in ways that would motivate skilled workers to exploit their full potential for the benefit of the organizations (Gunderson & Hyatt, 2000). The Seniority Pays Systems and Changes in Employee Pay Systems over the Last 100 Years The seniority system allows older employees to get better salaries. The seniority system assumes that the older employees are more experienced hence perform better. Most organizations preferred the seniority based compensations system since they assumed that promotions motivate employees to put more efforts. Therefore, employees who managed to earn themselves higher positions deserved to be remunerated appropriately. Newly employed workers will thus work hard hoping to get promotions and higher payments (Williams, 1991). Modern compensation programs are quite complex. This is attributable to the many regulations governing the system. The development of the performance-based system developed together with contractual kind of employment, which marked a significant departure from the permanent and pensions systems of employment. Studies have established that contractual employment has more opportunities of yielding better performances as compared to the permanent kind of employment. One reason adduced to back up this claim is that a contract worker is usually directed by certain goals and specifics. Generally, such a worker would seek to please the employer with the objective of securing a renewal of the contract. The pay system for contract workers is usually performance based. This factor usually motivates the worker to strive and achieve higher goals for the purpose of maintain a closer working relationship with the employer. On this matter, it becomes necessary to consider some of the factors that have occasioned a shift in perspectives for contractual employment (Guyton, 1999; Clyton, 2003/2004). The unique characteristics may be based on culture, personality, ethnicity, race, gender, religion, and other factors that define the individuality of a person. In essence, it becomes necessary to examine the impact of these demographics in the context of productivity at the work place. The performance-based system encourages individuals to articulate their interests and concerns in ways that relate closely with their unique nature as defined by the various demographic factors. According to various theorists, a performance-based system of payment works better in an environment that features a diverse range of demographics since it encourages the articulation of individual strengths based on the capacity of individuals. (Pierce, 2011). The performance-based system encouraged the growth of talents and skills. It also allows for the improvement of potentials among the workers. The rise of this kind of system derives from the fact that the work environment witnessed transformations in ways that promoted individual action and individual initiative. The changes that were witnessed during this season could be explained in terms of the awakening to the fact of the necessity of skill development at individual level. The seniority system of pay conforms to the philosophies that support the active engagement of individuals at the core of the production processes. Negotiation of salaries with individuals was based on the realization of the competitive nature of the employment market (Pierce, 2011; Kwon, Kim, Kang, & Kim, 2008). The Emerging Employee Compensation Trends in the United States and Across the Globe In United States, the labor regulations are quite decentralized. This has been a block in the implementation of laws related to workers compensation. The compensation system in United States is governed by several regulations and is closely linked to the original Prussian system (Woeppel, 2008). Employment systems are similar in that they are employer-fully funded. The weakening of unions and collective bargaining agreements contributed to the determined shift from seniority systems of pay to performance-based systems. Comparative analyses between employers that rely on seniority systems of payment and those that rely on performance-based systems have shown that performance-based systems less likely to suffer from the adverse effects of staff turnover as compared to the other group. Structurally, the performance-based systems are designed to generate tailor-made remuneration pay packages in accordance with the level of productivity of the employees. As such, the employees would be motivated to work harder and produce more quality work. On the other hand, the seniority model of pay is structured in ways that promote the interests of workers at the higher levels of the organizational structure. In essence, such strategies are designed in ways that promote a sense of exclusion for employees at the lower levels of the organizational structure. It is important to consider some of the aspects of management within the perspective of change as understood together with employee satisfaction. In many cases, work-related stress and burnout are regarded as pay-related occurrences. Performance-based employees are less likely to experience stress and burnout at the work place as compared to those who operate under seniority systems of payment (Williams, 1991). Studies have recommended that the seniority system should be adopted in tasks that require high levels of practical tasks such as engineering, and other forms of mechanical tasks. Scholars who hold onto this opinion contend that the tasks are significantly dependent on the levels of experience as compared to other tasks that require less technical tasks and duties. On this score, it becomes necessary to consider the fact that all the necessary aspects of culture are necessarily related to issues of general interest. Some of the issues that relate to matters of professionalism are necessarily related to the level of attachment that workers develop in the course of their tenure (Guyton, 1999). Towards the twentieth century, rigid assumptions on professionalism were confronted by realities of the changing work environment as employers came to terms with the reality of highly skilled professionals who demanded flexible types of engagement. The change from the performance-based methods of payment was made possible by the fact that fewer graduates and young trainees were willing to be absorbed in systems that would determine their compensation on a predetermined scale (Clyton, 2003/2004). National Differences in Compensation Today, different countries employ different compensation systems for workers. The differences in the compensation of various countries comes as a result of the cultural differences in the countries, as well as the differences in the institutional set up of these countries. The major characteristics of the compensation systems designed by organizations in different countries in the three most important geographical areas of the world, which are; Europe (Spain and Germany), America (USA), and Asia (Japan and China) are addressed. This is in a bid to present an overview of the similarities and differences in the global sphere, to prove how cultural and institutional factors in a country affect and determine the nature of compensations in the country. The compensation systems of Europe and Asia are addressed so that differences can be noted if comparison is made with the discussed USA compensation system. This discussion will analyze the national context and its influence on basic salary, hierarchy level, external equity, use of variable pay, use of performance measures and benefits. Compensation in Europe Spain In Spain, laws and regulations are highly restrictive. This has made compensation management to be among the most difficult processes of strategic management. When analyzing the procedure used to develop compensation, this high level of intervention has implications. In this country, compensation varies according to category of a profession. Thus, the individualized approach is employed by 74 percent of Spaniard firms, mainly using personal contracts. For technical staff, personal contracts decrease to 47 percent. For operators and administrators, compensation bases on traditional method of collective agreement at national and sectorial level. Additionally, the restrictive laws are reflected in the way the country’s social benefits are developed. The payments that workers and management make are used to address national issues such as health, unemployment, and incapacity for work. Most organizations voluntarily offer free services of health and life insurance to their employees. When establishing the basic salary, the compensation system bases on job category, and not people’s skills. Additionally, salary increment is based on experience and years of working. However, in most companies, the difference between the highest and lowest paid is not big. This is because Spain embraces a hierarchal system, with a fixed wage system. Germany Germans are strict law-abiders. This cultural aspect has resulted in their Human Resources Management to be highly organized and effective. In Germany also, the employees are allowed to participate directly in business operations, through union representation, an aspect named codetermination. The compensation system in Germany is highly conditioned and deeply set in the social relationships, which are maintained by firms, workers, and the government. This led to generous employee compensation and a highly controlled system of compensation because of government regulation and collective negotiation at the sectorial level. Compensation system is based on the job category and not employee skills and capabilities. In addition, the compensation structure has many components, levels, with small differences between each. Compensation structures are therefore egalitarian. Comparison of salaries between companies is based on “tariffs” that are agreed between unions and employers. In addition, the basic salary is fixed, depending on the value of the jobs indicated in the tariffs agreed on by social agents. Incentives are given out in form of annual bonuses and extras for better job performance. The social system of Germany allows for social benefits for employees. This can account up to approximately, a quarter of the compensation. These include social security, unemployment benefits, and health and maternity programs, among others. Voluntary programs include saving plans, pension plans, and insurance, among others. Finally, the administration of compensation in Germany is highly centralized. This is a bureaucratic approach, with fixed policies. Compensation in Asia Japan In Japan, labor relations traditionally rest on three basic pillars. First, there is the issue of job security in particular company. Secondly, compensation and promotion systems are based on the length of service, and finally, the firm’s trade unions, which are decentralized institutions, are a representation of employees of a single community. These influence and shape features of compensation systems. In Japan, the compensation system considers the person more than the job when determining a person’s basic salary. Companies will consider both the length of service and skills of workers. Salary increment is still determined by length of service. Promotions in the job are accompanied with salary increment, and influenced by the assessment by supervisors, who also conduct training of employees. Thus, in most Japanese firms, rise in employee salaries bases on their job classification and years in service. In addition, the compensation comprises various levels with differences between them. This is because the increases based on merit or time period are minimal. Japanese firms also set pay levels at the same level as competition. They fix the levels with the information they get from comparing different series of tables, which relate the basic salary of employee to their age. Generally, the compensation system of Japan is very transparent and open. This therefore has led to the establishment of trust between the organizations and their employees (Gomez-Mejia, Berrone, & Franco-Santos, 2010). China In China, the Confucius ideas of philosophy are still prevalent even today. These emphasize the importance of education, interpersonal harmony, and obedience to authority. This philosophy, together with traditional Chinese cultural aspects such as perseverance and family duty strongly influence the labor relations in China, including those involving compensation. Several socio-economic factors enable easy understanding of the compensation in China. First, there has been high growth of businesses and the wider economy, over the years. Secondly, the state companies still dominate the Chinese markets even after the infiltration of private and foreign companies. Trade union activities are high and all workers participate in them. Finally, there is plenty of excess labor in the market, and Human Resources in organizations are not run well. Companies are just administrative and bureaucratic bodies (Gomez-Mejia, Berrone, & Franco-Santos, 2010). In China, the length of time one has worked for a company, and not the level of performance characterize compensation. This also determines if they get pay increments and promotions or not. Additionally, the company guarantees job security. Performance assessments involve technical qualification of the company and importance of the job to the company. The compensation system is egalitarian in nature as differences in pay are low. In addition, social benefit schemes are common and vital in salary packages. These benefits serve the purpose of covering health, unemployment, and sick leaves. Finally, the compensation system is centralized, but less formalized (Kwon, Kim, Kang, & Kim, 2008). The Emerging Trends in both the United States and Globally In Spain, there is an emerging trend towards the variable, since it assumes a greater weight. A debate was undertaken to decide the criteria of choosing the methods and approach for practice. This trend persists in Spain even as the use of variable pay seems to be on the increase. In 1992, 49 percent of businesses utilized this approach. However, in 2002 this percentage increased to 82 percent. In addition, compensation based on performance is today highly used in Spain. In general, compensation in Spanish companies is not different from that of its neighboring countries (Clyton, 2003/2004). In Germany, some recent aspects have influenced the features of the country’s compensation system. Germany has a high aging population, with a low birth rate. This has led to high pensions, unemployment benefits, and a big number of early retirements, thus increasing the cost incurred by the national health system. In Germany, the market has become inflexible leading to limited jobs and dislocations. The result today is that German companies are demanding for autonomy to develop their own tariff agreement and improve company economic conditions. Hence, Germans today are interested in developing new compensation systems based on individual and overall performance, and are developing new approaches to ensure job security by linking it to business (Gomez-Mejia, Berrone, & Franco-Santos, 2010). Japan has not experienced economic growth for the past 10 years. This together with the fact that Japanese firms attach much importance to length during determining of salary has led to a significant increase in labor cost incurred by Japanese firms. In order to deal with this, Japanese firms try to retain long-term approaches to labor relations instead of the traditional ones. This has led to changes in models of compensation, particularly those for younger and more flexible employees. Initially, these employees had lower earnings, and limited opportunity for improvement; however, they are now finding more compensation that is lucrative in other foreign firms operating in Japan, which offer higher salaries and incentives to employees to boost their motivation and performance. A result of this is that larger Japanese companies such as Toyota and Mitsubishi are leaving the old tradition and increasing their variable payment to be in line with employee performance (Labour, 2009). In China, the shift towards capitalism has increased the number of multi-nationals, which have highly westernized management policies. This changed the former egalitarian compensation system, which tied importance to the length of time of employees in the company service, to an alternative system, which is more individualized, and tied importance on performance. However, it is yet to be seen if this system will transform traditional Chinese values (Williams, 1991). Conclusion Seniority refers to a system, which compensates employees based on the period of time they have worked for an organization or the position they occupy in the organization. Additionally, employees who have worked for longer periods enjoy benefits not provided to newer employees. For many years, companies have rewarded their employees based on their position in a company. However, the last one decade was characterized by demand for changes in the system to make the system capable of meeting the changing work situation. In the seniority system of payment, workers do not feel the motivation to exploit their full potential. Lack of motivation derives from the fact that the payment is standardized within groups and categories. Regardless of the relative levels of competence, employees within the seniority system receive the pay that is commensurate to their job groups without any other benefits that could result from exemplary performance or meeting certain specified targets. Seniority pay systems operate under a system that offer long-serving employees better terms of service as compared to short-serving employees. This method of payment is usually based on the assumption that the long-serving employees are more experienced and valuable as compared to the short-serving employees. By using the example of Europe, America, and Asia, it is clear that compensation systems vary across different geographical locations. The differences are because of the varying institutional and cultural environments of the countries. Anglo Saxon countries such as the USA, utilize exchange compensation systems, with the implications of short-term vision, low job security guarantees, as well as markets with conditioned trends. Countries of oriental culture, such as China or Japan, develop traditional compensation systems, which are commitment and long-term loyalty features. On the other hand, countries of European culture such as Germany and Spain have compensation systems, which are closely regulated and controlled because of the strict laws. Therefore, economic, political, legal, social, and cultural structures influence employee compensation systems. Nonetheless, relationship between compensation systems and efficiency depends on how these fit in with the institutional and cultural components. References Berger, L., Berger, D., & hy. (2000). The Compensation Handbook: A State-Of-The-Art Guide to Compensation Strategy and Design. London: McGraw Hill Professional. Clyton, A. (2003/2004). 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