Human Resource Pay Systems - Term Paper Example

 Human Resource Pay Systems: Problems and Solutions You Academic Organisation Abstract This work examines some of the more problematic aspects of human resource pay systems and measures the appropriate conditions available for successes relating to compensation. In traditional organisations, the HRM pay systems are structured with consideration around base wages, variable pay, and generalised performance-based rewards. However, multitudes of circumstances arise in such a traditional system and contemporary companies are considering enhancing pay systems to reflect individualised compensation tactics designed to satisfy both the employee and the organisation. Establishing a workable pay system directly affects staff motivation and the performance-related goal-achievement within a business entity. This project will address the difficulties behind negative aspects of pay systems and highlight situations that can effectively address and enhance such issues. Pay Systems 3 Human Resource Pay Systems: Problems and Solutions Introduction Establishing a workable pay system in the role of a human resources department is a complex task, riddled with a certain level of uncertainty. Effective methods with which to compensate business staff must focus around compliance to any appropriate legalities, but on an even greater level, must establish a pay structure that is conducive to satisfying the overall nature of an employee's position. It may be proposed that the more difficult a job task becomes, the greater the compensation and benefits that HRM managers should attach to the employee role. However, continuous monitoring of evolving business systems makes the process of establishing continuous pay system enhancements substantially difficult. An organisation must weigh its strategic goals and profitability expectations when establishing appropriate pay systems while also recognising the necessity to attract and retain quality employees. In an attempt to reward valuable employees, a reasonable pay structure must be established to facilitate employee achievement and motivational levels. At the same time, compensation systems that adequately reflect the nature of the employee's role must be considered and compared to organisational objectives. Linking pay and performance has always been a problem in business, and the linkage currently is more difficult to make than ever (Sikula 2001, p.419), offering an extensive challenge to the HR manager whose role in monitoring pay systems is growing more and more complex. The problem is not only in establishing adequate Pay Systems 4 systems, but in ensuring that these developed structures are properly managed, monitored, and enhanced based on feedback mechanisms within the organisation. Some of the most common difficulties facing an HR manager are margins of error in managing pay systems, raising the question about how far pay systems are effective sources of competitive advantage (Cox 2005, p.1475). To elaborate, a business must design its compensation structure that is within strategic budgeting guidelines and the design must be geared towards motivating expected employee levels of outstanding performance. If an organisation's current system of compensation is perceived as inequitable or out of range of the employee's job description, the ability to retain quality, loyal employees can be dramatically affected. Budget constraints, product market competition, tight labour markets for recruiting employees, and the need to predict the cost of merit increases before the next performance period combine to complicate the administration and motivational impact of merit pay (Arnold 1999, p.19). It is clear, with the vast variety of tasks facing the HR manager in establishing pay systems, that the role of HR is growing increasingly demanding. The human resources manager must also take into consideration the impact that merit increases and job-related compensation will have on inter-employee competition. With today's emphasis on team development within modern organisations, employee animosity resulting from an unbalanced pay system can drive the organisation into a position of company-wide underperformance that can be difficult to undo without intensive, continuous restructuring of the compensation design. The link between effective compensatory methods and the overall Pay Systems 5 performance of an organisation is significantly strong and the HR manager must balance between the needs of the employee and the organisation. In building a balanced pay structure, both in compensation and base wages, many managers have relied heavily on informal or anecdotal feedback and appeared to have little psychological incentive to evaluate employees (Corby et al 2005, p.4). This suggests that the departmental leadership within organisations are often supplied with inadequate methods to drive appropriate performance-related appraisals of employees' performance and lack the ambition to carry out an intensive and adequate assessment of their staff. In this situation, incomplete or inaccurate assessments of employees would be distributed to the HR manager as continuing feedback that is incapable of establishing an effective pay system for future compensation. Despite the assortment of problems with building efficient pay systems, the task of compensation structuring is ever-present within the HRM function and the organisation must focus its efforts in establishing industry-specific methods to combat these problems and emerge victorious in satisfying that aspect of the business. There are some proven methods to enhance the pay system-building process that maintain the potential to drive back some of the uncertainty and negative employee opinions regarding compensation, and many of them begin with the initial HRM assessment of base wages. From that point, building forward is accomplished through continuous improvement initiatives designed to enhance compensation processes. Pay Systems 6 Recognizing the Issues and Adapting for Success When establishing an adequate base pay that is directly in line with an employee's job function, traditionally salaried and hourly workers are categorised accordingly; with two distinct pay systems designs. These establish the method of pay distribution and establish the parameters for job function. This is an easier method in the HR pay system design as it sets the most basic framework for compensation. The issue arises, more so common in modern organisations, where development of work teams (that often include management as well as employees) where expectations for additional compensation based on performance come to be anticipated and expected. Equity as a motivational tool, in the work team scenario, becomes a role of the HR manager as the outcomes for pay that are directly related to individual role effectiveness must be weighed with employee skills and their indications of higher organisational ambitions. In a work team situation, it is sometimes feasible that the subordinate, rather than the managerial staff member, exhibits higher levels of motivation than that of the superior. In this case, the HR manager must clearly define the expectations of each work team member and the assessment criteria for bonus-style incentives. If competition arises between manager and employee, within the work team, in regards to compensation, it is not unreasonable to assume that the manager will restrict the employee's activities to stifle the subordinate's receipt of higher rewards. Few managers would want to appear outperformed by their employee so the HR manager must take an proactive approach to additional compensation based on work level performance. If there arises a level of perceived inequity in the appraisal assessment of the work team Pay Systems 7 project, any further performance incentives can lead to significant negative relationships within the team. Many human resources experts argue that performance-based pay is exactly the wrong way to go because of the competition that results from performance-based systems (Zeller 2004, p.48). Based on the organisation's individual experiences with similar, negative competitive situations, the HR manager must adopt workable compensation packages that are uniquely designed around specific employee functions. First, the HR manager must have a clear indication of the nature of the team project and each individual's role within the team. Once the business' expectations of performance levels have been defined, only then can the HR manager determine equitable processes to add value to the reward. The incentive is still performance-based in this situation, however the potential rewards are clearly indicated prior to establishing the work team. This pre-assessment of the upcoming project creates the condition for pay system success as everyone within the organisation are aligned to the rewards condition and fully understand their role in receipt of extra compensation. In order to promote work team unity, and ultimately satisfy the organisational demand for increased productivity, the HR manager has virtually eliminated any perceptions of inequity and can handle any inquiries regarding performance compensation individually as they may arise. By taking a proactive approach to incentive structures, the HR manager does not have to act as a dispute mediator and can focus on priority pay system issues. From an informal aspect, the psychological contract allows the HR manager to discuss individual employees' relationships with the organisation. Traditional Pay Systems 8 psychological contracts, built on an exchange of loyalty and effort for job security, career development and predictable pay systems, are said to be giving way to relationships where reciprocal obligations are less certain and expectations of mutual benefit are less likely to be realized (Deery 2005, p.36). What this suggests is that employees often feel that their psychological contracts have been broken when HR managers do not clearly indicate employee expectations and the human resources obligation to effectively assess employee job function. For example, the HR department must be integral in allowing employees to strive for higher compensatory levels, but also maintain the perception that they are offering methods for continued employee skill development to assist in helping them reach the goal of increased incentives. An organisation can assuredly define limitless guidelines for employee monetary reward, but unless HRM invests the time and energy into supplying the tools to achieve additional compensation, employee loyalty will likely be undermined. Under the appropriate conditions for pay system success, in relation to skills development and promotional advancement, the HR manager must create a logical career path plan that specifically indicates all of the criteria involved in bonus and additional compensation structures. What this accomplishes is to allow the employee to know, ahead of time, the advanced learning and levels of performance required for "outstanding" organisation appraisal of the staff member. This allows the employee to stay in continuous developmental contact with HR so that the employee never feels restricted by unattainable goals and, at the same time, gives HR a primary perspective into the employee's job and how it functions. Establishing such Pay Systems 9 a relationship can effectively work out any lack of HR knowledge of that job function early to establish a fair compensation structure for the future. Having an understanding of specific job functions falls directly into establishing an effective pay system based on job design. Today's companies seek to demand the most of their people, stretching their skills at every turn (Hansen 2001, p.12) which is directly related to the necessity to design the job role tightly in order to determine an effective compensation related to the role. In many situations, problem employees who are underperforming have some of their job responsibilities "dumped" on proven performers in order to satisfy productivity. This is certainly an unfair management tactic, but the effect of such a measure is directly related to employee motivation. Further, without an adequate system in place for management to fairly appraise each employee, it is quite possible that the proven performer's willingness to absorb his co-workers responsibilities will be neglected for receipt of incentive pay. Such a situation would be a tremendous challenge for an HR manager to continuously monitor, as oftentimes the HR manager relies on the departmental manager to perform appraisals. To alleviate such a problem, each employee job design must be clearly established, even on printed organisational literature, that indicates increased compensation for workload increases beyond the job design. Again, this is a proactive approach for a busy HRM department as it can give the employee who may be somewhat overworked a chance to ask for his job function to be analysed accordingly; rather than during a once-yearly performance appraisal. If the employee offers a legitimate argument about the nature of his changing workload, Pay Systems 10 the HR manager can execute an immediate assessment and offer increased compensation based on substantiating the employee request. Without such a system in place, disgruntled employees who do not feel adequately monitored or compensated for over-performance will likely fall into diminished productivity or the cost of developing new employees to fill that role (due to dissatisfaction) will far outweigh the compensation measure. Another significant issue around the pay system process is in the physical distribution of payroll and being able to effectively keep up with continuous changes to the payroll system. Especially in larger companies that house substantial amounts of employees all operating under differing employment terms and conditions, having a singular database available to store information and make immediate corrections can be vital. A problematic situation with some traditional companies who have HR managers manually checking and cross-referencing employee pay systems is in the ability to instantly respond to compensation issues. The Tarmac company, a leading supplier of building materials in the UK, maintains such a vast employee populace and began to recognise unrealistic, overwhelming HR changes to payroll updates due to fluctuating job descriptions, promotions, and work force role diversity. To address all of the payroll update challenges, Tarmac introduced a single SAP computer system across the company, which allowed payroll managers to enter a large number of terms and conditions that could automatically be applied to individual payroll calculations (Flood 2005, p.34). The SAP system integrates the entire organisation and allows the HR manager to Pay Systems 11 respond virtually instantaneously to input overtime, benefits changes, performance appraisal merit-increases and other methods associated with compensation. The results of having an integrated pay system database is certainly a contemporary approach to enhancing pay systems, and any organisation that has experienced an overwhelming volume of changes can consider a similar tool; both as a cost-savings initiative for payroll reduction in HR and for job classification changes at the touch of a button. Some companies, in similar respect, are experiencing problems with rapid response to HR inquiries such as requests to reassess job description, benefits allocation or other HR functions. To combat these issues, a growing number of organisations are hiring compensation specialists, or remuneration professionals, who maintain the responsibility of calculating employee compensation, maintaining payroll databases, developing job descriptions, and work to provide unbiased employee appraisals (Tyler 2004, p.116). In an organisation that is having significant problems with aligning its managerial staff to their HR responsibilities, a compensation specialist can ensure that everyone is geared towards organisational HR goals by absorbing the overwhelming responsibility of an HR manager so as to remain in continuous contact with departmental leadership. With such a position in place, it also affords the employees an opportunity to speak candidly with the specialist about their individual concerns regarding compensatory issues without fear of retribution from adversarial relationships with "slighted" managers. Many companies are coming to recognise the strategic advantage to a remuneration specialist as they allow the HR manager to become more actively Pay Systems 12 involved in the administrative portion of HR management and less crucial to non-value-added work such as continuous dispute resolution or reassessment of adequate compensation for individual job roles. In another problematic scenario, HR managers often find themselves having limited mechanisms in place for appropriate feedback about departmental job functions, leading to growing employee dissatisfaction regarding pay systems. To drive adequate feedback, some HR managers are distributing pay surveys to similar organisations' staff for data collection in order to build competitive pay systems. These surveys are designed with confidentiality in mind and focus around salaried and non-salaried workers as well to give the organisation a comparison point when establishing adequate wages (Mathis & Jackson 2003, p.395). These are not traditional methods for gaining feedback, but can serve as a good indicator to ensure that the company's pay scales are aligned with industry norms. To discover that salaries within the organisation are well below competitive standards will likely lead to excessive turnover, driving up the costs for continuous training and development initiatives. Understanding the competitive edge as related to compensation can attract quality employees that are skilled and motivated to keep strategic organisational goals concurrent to productivity. As another feedback indicator, especially for companies who have experienced problematic pay system issues, HR might generate feedback within their own organisation using employee surveys. In such a survey, an employee can highlight their impressions of HR strengths while offering suggestions for Pay Systems 13 improvement measures beneficial to equitable compensation. One such individual from Macmillan Cancer Relief in the UK attempted to tackle lowered feedback levels using this approach. During her HR investigations, which were extensively thorough, she spoke to every employee within the organisation, held focus groups and established HR workshops to effectively deal with compensation issues and perceptions around receipt of non-biased appraisals. Under ideal conditions, such a massive attempt at feedback generation should produce substantial data that can be used to determine adequate pay systems. The HR head of Macmillan Cancer Relief who had conducted the entire project, Tracey Huckfield, stated, "The report had uncovered cultural and leadership problems. There was a lot of perceived unfairness in the system. But the board didn't really want to hear it. They thought reward was just a simple question of pay…and the project derailed as a result" (Huckfield 2005, p.8). In such a situation, Ms. Huckfield had gathered substantial information through an intensive project that could have, potentially, restructured and geared HR for a complete rework of its current practices that might have allowed for correction of all of the pay system weaknesses; including bias and ineffective management appraisal procedures. There is little doubt that her investigation was thorough, and it is a tactic that many HR managers may wish to undertake to highlight weaknesses. However, before undertaking such a project, it is a worthwhile investment to ensure that all of senior leadership is onboard with the study and that the results will be analysed impartially in order to combat any negative compensatory issues. In turn, Pay Systems 14 the appropriate levels of partnership between employees and employers as well as managerial and non-managerial staff will be possibly enhanced. As mentioned, aligning the goals of pay systems with that of the organisational strategic goals is vital, especially if budgeting issues can directly affect the effectiveness of pay structures. Few could argue that budgetary restraints can directly impact an organisation's ability to distribute sizeable incentive rewards and the HR manager might well have these restrictions when determining different pay structures as well. In this situation, the organisation should not lose focus of the performance-based compensation programmes, but restructure them according to resource allocation allotments. When organisational profitability is down, it is a likely assumption that employees will still be directed to outperform competition and the focus on performance may be even greater than when resources were more substantial. To overcome this, many organisations establish higher-level rewards than usual, but set much stricter standards for the employee to achieve the bonus. What this does is give the employee a substantial reward to target, but still keeps the strategic goals of the organisation in mind. Those who are able to outperform company standards will be heralded, while those who did not achieve the incentive compensation will have understood the guidelines ahead of time; reducing potential dissatisfaction with remuneration. In terms of establishing effective pay structures, relevant to job design, the organisation must establish workable pay grades that clearly establish similar jobs as having the same monetary worth. Pay systems have traditionally been predicated on Pay Systems 15 the "size" of the job with the main task in HR to equitably determine a level of pay for any given job in the organisation (Bunning 2004, p.648). Further, the Equal Opportunities Commission is pushing for a new approach to close the equal pay gap that would force employers to carry out an equality check on pay, followed by a full-blown Equal Pay Review if disparities are identified (Taylor 2005, p.20). Establishing the assuredness of equitable pay structures while also satisfying legalities is a common function of the HR manager and must be approached with extensive knowledge of the process. With intensive pressure both internally (from employees) and externally (when satisfying legalities), the HRM department leaders face difficult challenges that involve intensive research, monitoring and continuously developing knowledge of the business' processes. To counteract internal pressures for an adequate pay structure, a federal public sector agency in Australia implemented a very specific pay classification which added a solidified set of parameters for expected compensation. It defined its career positions with an elevating set of levels from 1-9, each indicating exacting standards for the entry pay for each level (Brown 2001, p.42). This type of structure promoted a vertical movement incentive among its staff by structuring promotional incentives based on a levels scale. At the end of a 12 month cycle, the subordinates superior views employee performance and rates the employee (such as moving from a 1 to a 3), based on the point scale. This concretely supports the company's position on pay scales, alleviates employee animosity for unfair wages amongst co-workers and reduces the need to continuously change and monitor job descriptions as they are clearly established. Pay Systems 16 Conclusion In order to determine HR compensation best practice, the Association of Healthcare Human Resource Management implemented an annual conference that discussed the Agenda for Change pay systems. This effort at recognising the growing difficulties surrounding pay systems highlights the extensive HR challenge to streamline compensation and such conferences allow HR professionals to stand up and be counted (Berry 2004, p.4) to offer suggestions regarding best practice. Though it is not only the health care industry that faces these substantial challenges regarding pay systems, organisations who create forums with which to establish meaningful feedback show a marked effort at enhancing and improving an already problematic portion of HR functions. This indicates that establishing meaningful and workable pay systems is a problem that plagues many an industry and management professionals are taking a second look at compensatory processes. A last tactic that could reduce a significant amount of the pay problems, including employee animosity, negative competition, or in satisfying the psychological contract expectations might be in a generalised level of secrecy regarding individual compensation methods. This level of reducing "pay openness" can establish an organisation's previously communicated rewards systems and transform them into compensation relationships where the employee feels that the HRM department is more tightly focused around the individual. Such a practice might allow the employee to feel segregated from co-workers, adopting a feeling that his or her compensation levels are not under continuous scrutiny; which may in turn promote further productivity (or security) in knowing that compensation levels Pay Systems 17 regarding that particular job function will not be facing dramatic comparison reductions or that there is a marked limitation based on said comparison. To illustrate, if a proven performer exhibits to the organisation that he or she is a vital contributor, establishing an implied level of compensation that is unique to the "average" employee could keep these employer compensation relationships a one-on-one secret. This could potentially build a higher level of confidence that the employee is on the "right track" for vertical advancement within the company and that HR provides superior job-related or performance pay for those individuals. Of course, as has been pointed out, equitable pay systems must be reflective both of the job position, the job's workload and the overall performance of the employee. For an HR manager to focus on one specific issue while omitting another is not an effective way to manage the compensation portion of HRM responsibilities. Rather, the manager should rely on a pay adjustment matrix or a salary guide chart that measures every contributing factor related to the employee in regards to determining adequate compensation. These systems allow the HR manager to have a focal point of reference for historical information regarding the employee and serve to generate, from the HR perspective, an equitable assessment for increased compensation. Under ideal conditions, the HRM department will work dependently with all areas of business, requiring ongoing support and feedback. In the same respect, since the HR division of a company is often the dispute-resolution medium for employees, HR managers must maintain a constant visibility within the organisation to satisfy both the business need and to discuss the monetary aspects of employment. Pay Systems 18 Contributing literature also suggests that some HR professionals still rely on seniority-based compensation, which measures the time an employee has spent employed in an organisation. It would seem, though, that many entities are moving away from seniority-based compensation because it denies the maturity curve in evaluating pay systems, or the process of measuring experience and acceptable pay rates. Within problematic pay system environments, seniority-based pay has the theoretical possibility of negating experience or ambition and replacing it with the assumption of "time served". In some organisations, this may be an effective measure at compensation as the expectation is that longer-serving employees have more knowledge, skills, and abilities regarding the business. However, such an approach could lead to little motivation for the employee to excel as they become complacent in realising pay enhancements incrementally without measure for accomplishment. In similar regard to employee compensation, executive pay scales should also be reflective of the nature of the specific job description and be measured on performance impact to strategic goal attainment. Where the difference lies is in the HR manager's ability to effectively gauge this information without direct support from senior leadership. Being aware of the higher-level job function, while still ensuring that sufficient financial resources are available relevant to pay structure, the HR manager has an even more difficult task in determining adequate base salaries or in variable compensation. Whatever approach an HRM professional takes to satisfying employee and business obligations regarding compensation, it is abundantly clear that there are Pay Systems 19 well-established methods to combat pay system problems. Whether the issues lie in biased employee appraisals, or inadequate job design, inferior payroll systems or any other aforementioned compensatory problem, there are potential systems in place to offer pay system analysis, enhancement, or complete redesign leading to increased organisational and employee performance. An entity that seeks to become an organisation worthy of benchmarking for its compensation processes should explore its strengths and weaknesses and improve its knowledge of these available pay system options. In as much as employees are continuously monitored for pay-enhancement opportunities, so should an HRM department be monitored for its efforts in researching and establishing adequate pay systems that are in line with organisational needs. Employee compensation, whether base salary or enhanced bonus/performance incentives, is a form of extrinsic reward and cannot be accomplished without a knowledgeable HRM division and the proper distribution of compensation packages. Pay Systems 20 References Arnold, Edwin W. 1999. "Pay System Management Dilemmas". Southern Business Review. Statesboro. Vol. 25, Iss. 1, p.19. Berry, Mike. Oct 5 2004. "Embrace Tidal Changes with Good HR Practices". Personnel Today. p.4. Brown, Michelle. 2001. "Merit Pay Preferences Among Public Sector Employees". 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