Efficiency and Effectiveness in Relation to Pay Systems - Essay Example

Efficiency and Effectiveness in Relation to Pay Systems of The Meaning and Inter-Relatedness of the Concepts of Efficiency and Effectiveness In Relation to Pay Systems The concepts of efficiency and effectiveness are used in nearly if not all aspects of life in a bid to facilitate productivity and achieve different goals of human life and in organizations as well. Generally, efficiency describes the degree to which effort or time is used well for the certain intended purpose or task. On the other hand, effectiveness refers to the capability of an individual or group of individuals to produce a desired result or effect. Therefore, what is the meaning of the concepts of efficiency and effectiveness in relation to pay systems? According to Akerlof and Yellen (1996), efficiency in relation to pay systems implies that incentives that are paid out by the organizations to their employees should be higher than the market- clearing wage in order to enhance and improve their productivity (p.12). In this case, the incentives are not so much determined by the demand and supply but rather by the desire to boost the productivity of the employees. Therefore, this increased productivity of labor pays for the more wages. In regard to effectiveness of pay system, the notion of the effective pay implies that the pay system should be able to appropriately compensate personal effort and time in the process of production in the light of money cost incurred therein (Ito, 1999, p. 6). Effectiveness reflected in relation to high employment levels. Employment is chosen only when a particular market wage exceeds or equals the reservation wage. Effective pay system provides incentives to employees based on how effectively they perform their jobs. It is therefore important to examine how these concepts operate in the labor market individually and how they interrelate concerning pay systems. The objectives of efficiency in pay system are to link a part of wages to individual or group performance, applications of skills, and acquisition of skills. In classical labor market, theory pay acts as an indicator to the supply and demand of labor. A perfect equilibrium is achieved when demand equals supply thus implying that everyone who is willing and able to work is working at that level of pay. If there are more people looking for employment, the pay will go down. This is because employers’ demand more people as wages goes down hence reducing unemployment. Therefore, this theory argues that if the pay is allowed to move up and down, it is an effective signal to the market and it will contribute to economic stability. According to Mankiw and Taylor (2008), efficiency in pay systems often means that organizations pay their employees more wages than the market- clearing wage with an intention of boosting their productivity. Therefore, since workers are paid more wages than the equilibrium wage, unemployment rate is going to increase (p. 37). They thus argue that efficiency in the labor market is considered as an explanation of market failure in relation to unemployment. Despite this argument, economists are of the view that organizations that have efficiency wages, that is, wages above the market-clearing rate, do not act out of a vacuum but rather there are some factors/ theories that influence them (Akerlof and Yellen, 996, p. 28). These factors include the following: one, adverse selection; if performance of a job depends on the ability of the worker and workers differ in abilities, organizations with higher pay rates will be in a better position to attract more able and competent job- seekers. An efficiency wage system gives employers the ability to choose and pick among numerous applicants in order to get the best ones possible. The second factor that prompts managers to adopt efficiency pay system is intention to avoid shirking. Firms may frequently find it difficult to measure the quality and quantity of efforts of a particular worker because the systems of commissions or piece rates may prove impossible and therefore there is a possibility of the employee to do less work than agreed (shirking). As a result, the firm may decide to pay an efficiency wage with an aim of increasing or creating the cost of job loss thereby giving a sting to job firing threat. Threat such as this can be used to avoid moral hazard or shirking. Thirdly, sociological factors have been cited in relation to efficiency wages; these wages may be because of the firm’s traditions. Akerlof and Yellen argue that the firm may have been using this system to enhance high morale among employees thus raising productivity (p.40). Fourthly, most firms have efficiency wage system in order to minimize turnover. Paying more wages minimizes the incentive of employees to quit job and seek employment somewhere else. This factor is informed by the argument that training replacement workers is in most cases expensive. Lastly, Mankiw and Taylor (2008), point out that some firms pay their employees higher wages than the market’s in order to allow them to afford health living thus avoiding illness which eventually enables them to work more productively and harder (p.22). As has been noted, effective pay system provides incentives to employees based on how effectively they perform their jobs. Evaluation of effectiveness of pay systems in organizations may often prove problematic. In most organizations now, the pay system equals the performance. It is worth noting that it is important for the organization to evaluate the effectiveness of its pay system accurately and skillfully to ensure that the decisions made regarding pay systems bear positive results to the organization. Essentially, the concept of effectiveness of pay systems in an organization refers to what contribution the system of remuneration has to the strategy of the organization (Ito, 1999, p. 12). Just like efficiency of pay system, a number of factors in organization determine effective pay system. There are two major factors and they include first, the need to match the strategy of the organization and the pay system. Economists and business strategists have argued that it is important to match the pay system and the strategy of the organization. Bratton and Gold (2007) explain that most organizations use different pay system to bring about a desirable change to the performance of the organization (p.17). Studies have shown that effective pay system increases organization’s profitability because it enhances the proportion of floating salary. There is a great relationship between organizational environment, characteristic, and the pay system. The second major factor that influences organizations to incorporate effectiveness in their pay system is in order to meet the special preference of their staff. It is a fact that different staffs have different preferences. Therefore, it follows that staff would have different payment preferences. This is because different staffs have different sense or level of return. The working return of an individual could be measured by the following factors: working guarantee, salaries, short working hours, promotion opportunities, and working. In addition, employees usually have their preferred returns depending on their different level such as pension, superior’s attitude, promotion opportunity, additional stock, and bonus among others (Hume, 1995, p. 40). It is useful for an organization to plan the pay plan of different staff based on their preferences. Therefore, what are the reasons for high effective pay system? Firstly, high effective pay system is useful as it improves the labor and employment relations that eventually results to increased effectiveness thus enabling the organization achieve its goals and objectives in the end. In addition, high effective pay system is vital as it results to enhanced working motivations of the workers thus boosting their productivity and satisfaction with their jobs. Effectiveness of pay system greatly influences the organizations’ employing ability. Effective pay system attracts employees of high quality in addition to motivating employees to put extra efforts to their jobs. However, effective pay system faces the biggest risk; the system’s incentive effects may have negative impact on some risk- averse employees because they may fear to fail under this plan (Hume, 1995, p. 43). In the light of the above discussion, it is evident that efficiency and effectiveness in relation to pay systems are very critical to the performance of any given organizations in addition to determining whether an organization would be able to attain its set goals and objectives. Despite being inherently different, these two concepts are related in numerous ways. Their differences are based on where the impact is directly related to and manner in which they contribute to the attainment of the organization’s goals. For instance, efficiency is more focused on whether the wages are higher than the market- clearing wages and how this affects the productivity of the employees and the ability of the organization to attract more employees or not. It can thus be deduced that efficiency is more based on the pay system vis- a- vis the external environment and how that affects the productivity of the employees. On the other hand, effectiveness is focused more on how the pay system influences the performance of the employees. It is internal- based, as it does not mostly compare wages with the external factors such as the market- clearing wage. Therefore, how do the concepts of efficiency and effectiveness in relation to the pay system relate? According to Bratton and Gold (2007), efficiency and effectiveness of pay systems are generally intended to ensure that the employees are rewarded accordingly (p. 20). Therefore, the first way in which these two concepts relate is on their objectives. Through rewards, they aim to achieve the following: one, they seek to attract suitable employees and retain them as well. Efficiency wages and effective pay systems ensure that an organization attract the best employees and minimize their chances of quitting the job and look for a better one (Bratton and Gold p.23). They also aim at maintaining and strengthening the commitment of the employees. Efficient and effective pay systems indicate the kind of behavior the organization values and rewards accordingly. For instance, if an organization values results its systems will be structured in a way that it rewards results (p. 26). The final objective of both the concepts is to boost performance. Rewards are intended to constantly improve performance. Both efficiency and effectiveness of pay systems intend to motivate the employees so that they can reap the rewards (31- 32). In addition, efficiency and effectiveness concepts relate through organizational strategy. Organizations have developed strategies that serve as a guide towards achieving their goals and objectives. The strategies contain numerous elements; the most crucial element is that of rewards (Ito, p. 46). In a bid for organizations to achieve their set goals and objectives, they put up measures to ensure that the employees contribute appropriately towards achieving them. This is based on the realization by most organizations that employees are their most valuable assets. Bratton and Gold (2007) note, various organizations attempt to motivate their employees through various ways such as pension, providing promotion opportunities, bonus, and vacations among other ways of motivation (p.19). Therefore, efficiency and effectiveness of pay systems in the organizations are structured in such a way that they match the organizational strategy. They do this matching to ensure that employees are motivated, satisfied with their jobs, and remain productive hence able to contribute towards the achievement of the organization’s goals and objectives. According to Hume (1995), the performance and the motivation of employees to remain in the organization for a longer period are related to the reward they receive in their organizations (p. 46). As such, the reward structure must ensure that the needs of the organization and that of the employees are catered for appropriately, and thus can respond easily and accordingly to both internal and external pressures. Reward structure should be consistent and fair to ensure it achieve its goal (pp. 46- 7). It is important to note that it is not enough to simply have efficiency and effectiveness in the pay systems. Bratton and Gold (2007) advises that there is need to ensure that these systems are implemented appropriately and all the key considerations are taken into account (p. 62). The organizations should first define which employees are eligible for the program. In addition, the organizations should determine the role of the pay system in place from the employer and employee perspectives as well as the costs involved. The organization should take some of the following steps if not all; identify alternative rewards, create communication plan, gather the views of employees regarding the system and possible changes they recommend, and determine the cost. Besides, it should gather external information of the market, constantly review the current purpose and objectives of the system to be in tandem with the organizational strategy, and developing a plan of how the program’s effectiveness will be measured (pp. 72- 5). The organization should continue monitoring and managing the reactions of the employees about the pay system and the changes taking place therein. In conclusion, from the above discussion it is evident that the concept of efficiency and effectiveness in relation to the pay systems play critical role to organizations especially on how they achieve their goals and objectives. These two concepts are at the centre of the organizations reward systems thereby influencing how organizations attract and retain their employees. Organizations whose efficiency and effectiveness of their pay systems are poor and undesirable often find it difficult to attract high- quality employees and retaining them as well. That explains the reason why most organizations usually go to greater extents to have efficiency and effectiveness in their pay systems. Highly effective and efficient pay systems enhance the ability of an organization to attract and retain high-quality employees. Because of this, these organizations are able to achieve their goals and objectives. As it can be noted, despite small variation, these two concepts are greatly related especially on organizational strategy and their role towards attainment of organizational goals. Bibliography Akerlof, G., and Yellen, J, 1996, Efficiency Wage Models of the Labor Market, Cambridge University Press, 12- 40. Bratton, J., & Gold, J, 2007, Human Resource Management: Theory and Practice, Hampshire: Palgrave Macmillan, p. 17- 80 Hume, D, 1995, Reward Management: Employee Performance, Motivation and Pay, Oxford: Blackwell Publishers, p. 30- 47. Ito, H, 1999, The Effective Wage Rate, Labor Force Participation and the Rate of Return to Investment in Human Capital, South Economic Journal, Vol. 65, No. 4, p. 2- 12 Mankiw, G., and Taylor, M, 2008, Macroeconomics European Edition, Worth Publishers, p. 22, 37. Read More