Answer Posted / mudasser

Introduction
Pay is a key factor affecting relationships at work. The
level and distribution of pay and benefits can have a
considerable effect on the efficiency of any organization,
and on the morale and productivity of the workforce. It is
therefore vital that organizations develop pay systems that
are appropriate for them, that provide value for money, and
that reward workers fairly for the work they perform. Pay
systems are methods of rewarding people for their
contribution to the organization. Ideally, systems should
be clear and simple to follow so that workers can easily
know how they are affected. In considering rewards it
should be borne in mind that pay and financial benefits are
not the only motivator for worker performance. Other
important motivators for individuals may include job
security, the intrinsic satisfaction in the job itself,
recognition that they are doing their job well, and
suitable training to enable them to develop potential.

What are pay systems?
Key Points: -
 Pay systems provide the foundation for financial
reward systems
 There are basic rate systems, where the worker
receives a fixed rate per hour/week/month with no
additional payment
 There are systems related in whole or part to
individual or group performance or profit
 There are systems based in part on the worker
gaining and using additional skills or competencies
Pay systems provide the bases on which an organization
rewards workers for their individual contribution, skill
and performance.

Pay structures
Pay structures are different - they are used to determine
specific pay rates for particular jobs, usually based on
the nature of the job, its content and requirements. A pay
structure provides the framework within which the
organization places the pay rates for its various jobs or
groups of jobs.
Pay systems fall into two main categories:
 Those where pay does not vary in relation to
achievements or performance, (basic rate systems), and
 Those where pay, or part pay, does vary in relation
to results/profits/performance (including the acquisition
of skills).

There are also systems where pay, and any enhancement, is
related to the gaining of extra skills or competencies that
can allow a worker to carry out a wider range of work, or
work at a higher level, and provide opportunities for
greater job satisfaction.

The selection of an organization’s pay system is often
determined by negotiations between management and worker
representatives. In theory these negotiations can be kept
quite separate from negotiations over payment structures
and levels or amounts of pay; but in practice negotiations
often embrace all pay-related issues.

Selecting and installing a pay system
Key Points: -
 Accept that there will inevitably be a cost
involved.
 Avoid most potential problems with a systematic,
well-timed and carefully planned approach.
 Involve the workforce, or its representatives, as
much as possible, perhaps through a joint working party.
 Re-examine the reasons for change and take advice
both inside and outside the organization. Obtain expert
help if needed.
 Don't just discard the existing system - take stock
through discussions to enable the organization to keep the
good and change the less good.
 Identify what the new system is required to do -
how does it relate to the organization’s overall objectives?
 Look at the possible new systems and consider which
might best suit the particular organization, with or
without alteration.
 Changes to pay make people anxious, and so the new
system should be kept simple and agreed with the workforce
and their representatives.
 Prepare the way carefully with briefings to the
workforce and management. Look out for any changes to
differentials and relativities. Document the system and if
possible run it for a trial period.
 Build in as much time as possible for proper
discussion and consultation.
 Make arrangements for maintenance, monitoring and
evaluation. Review the system regularly to ensure it is
performing as required.
 Be careful the system does not directly or
indirectly discriminate between men and women.

Performance-related pay
Performance pay schemes cover the various methods of
linking pay to a measure of individual, group or
organizational performance. They all share the idea that
where a worker can vary output according to effort the
prospect of increased pay will lead to greater performance.

What are the most common types of performance pay?
It is difficult to clearly distinguish one type of
performance related pay. They can be defined as:
Piecework:
A price is paid for each unit of output. This is the oldest
form of performance pay and is still used in some local
government direct service organizations (DSOs)
Payment by results:
Bonus earnings depend on measured qualities or values of
output for individuals or groups, usually based on work
studied time units; this covers a range of bonus schemes
and still forms the main method of performance pay for
manual workers
Organization-wide incentives:
Bonus earnings or pay levels based on measured quantities
or values for the whole establishment; this is frequently
the basis of contract price or tender-led schemes in local
government DSOs
Merit pay:
Bonus earnings or pay levels usually based on general
assessment of an employee's contributions to performance;
this is an earlier, less structured form of IPRP (see
below)
Individual performance related pay (IPRP):
Bonus earnings or pay levels based on the assessment or
appraisal of an employee's (or team's) performance against
previously set objectives, usually part of a performance
management system. This is a fairly recent development,
particularly in the public sector and has grown sharply in
use since the 1980s
What are the main steps in creating performance related pay
systems?
 Setting objectives.
 Appraising results.
 Linking achievements to pay.

Where output cannot be measured, the sensible solution
seems not to pay any bonus; however just because some jobs
are difficult to measure, doesn't mean that good
performance shouldn't be rewarded. This problem has
generally been tackled by providing a lieu bonus based on
average bonus earnings to those employees - very often
skilled maintenance staff and supervisors - whose work is
difficult to measure.

In most systems for manual workers the pay packet is in
fact made up of a number of components, usually including a
fixed basic payment, a variable bonus paid on output of
acceptable quality and a fall back provision. Bonus
payments are usually paid weekly or monthly.

In IPRP systems for white-collar workers the pay packet
includes a fixed salary element, where progress through a
range may be according to performance, and/or a variable
bonus paid out for achieving set objectives. Variable bonus
payments are usually unconsolidated and may be paid
monthly, half yearly or yearly.

Advantages:
 It provides a direct incentive for employees to
achieve defined work targets.
 The contribution an employee makes is recognized
with a tangible reward.
 A performance culture can be developed with its
introduction.
 Line managers can derive assistance from a
corporate framework for setting goals. It should improve
individual productivity and performance.
 Employees are more likely to focus on what they
need to do to improve if this is directly linked to pay.
 A good PRP system will reward the best performers.
 It is an effective way of dealing with poor
performance.
 Establishing a means of rewarding high performance
can assist in retaining the most industrious staff.

Disadvantages:
 It reduces pay equity and can make an authority
liable to costly equal pay challenges if not operated
fairly.
 The appraisal process can be affected detrimentally
because of the focus on financial reward rather than
developmental needs.
 Employees can be de-motivated if the goals set are
too hard to achieve.
 Too much of the process relies on the quality of
judgment made by a line manager.
 Co-operation and teamwork can be hindered.
 As reward made for short-term quantifiable goal it
can be too narrowly focused.
 There is a danger that employees can expect an
additional payout year on year. In a low inflation climate
the rewards might not appear to be that great.

Competency-based pay:
Competencies are the knowledge-skills and the attitude
needed by any individual employee to carry out their job
effectively. These can be incorporated into a pay system to
reward individuals who positively contribute to the overall
values and objectives of an organization. This is
competency based pay: rewarding the way people work, not
just recognizing what they can deliver.

How can the right competencies be defined?
Most competency based pay systems are determined by
performance indicators. Typically, the competencies needed
to drive progression are quantified by senior managers
through employee interviews, surveys and job analysis. The
following competencies are relevant here:

 core competencies that apply to any job within the
organization and reflect the organization’s core values
 the technical skills and expertise that are
necessary to carry out the job
 competencies relating to a specific job category
e.g. ‘leadership' for senior managers
 competencies that define the contribution an
employee makes to their role including:
 communication
 teamwork and motivation
 coaching
 knowledge and experience
 service delivery
 liaison and networking
 investigation analysis
 initiative and problem solving
 planning and organizing resources
 decision making process and outcomes
 teamwork and motivation
 knowledge and experience
 liaison and networking
 initiative and problem solving
 decision making process and outcomes

Advantage:
 Employees can develop their careers horizontally on
the basis of their experience and competence. Pay
progression and career development can be achieved without
the need for individual promotion

Disadvantage:
 It can be difficult to manage the expectations of
employees, particularly new recruits, who may be under the
delusion that they can automatically move to a much higher
salary simply by doing their job satisfactorily. In fact,
they actually need to develop their competencies. In
managing the process, effective communication between line
managers and staff needs to be put into place

Contribution pay:
Contribution pay is a relatively new concept. It combines
elements of both performance and competency based pay
schemes by recognizing employee achievements and
competencies.

How does it differ from performance pay?
Contribution pay is not a direct incentive for achieving a
defined set of targets. Instead it is similar to a
competence based pay reward system, emphasizing what type
of development is needed by employees to enhance corporate
success.



Advantages:
 It positively recognizes a commonly held assumption
that individuals who apply higher levels of skill and
contribute more should receive higher financial
remuneration than those that do not.
 Organizational improvement can be achieved through
constructively motivating people by encouraging them to
achieve higher levels of performance and skill.
 Employees are motivated through the recognition of
their achievements, not by the attainment of a few narrowly
focused set targets.
 An appraisal system that is based on agreeing
expectations based on results and competence combined with
an agreed joint plan for achievement is a powerful
motivating factor in its own right, irrespective of the pay
aspect.
 It is a good method for communicating the strategic
vision of an authority through the definition of expected
performance, competence, priorities and values expected.
This will be especially effective if individual objectives
and competencies are aligned to corporate objectives and
core competencies.

Disadvantages:
 Contribution pay is a relatively new concept that
has been developed principally by the pay experts Duncan
Brown and Michael Armstrong. As a relatively small number
of organizations have put this into practice, there is only
limited empirical evidence of its effectiveness.
 It is likely to be far more complex to manage a
contribution pay system than either IPRP or competency pays
because of because mangers have to simultaneously assess
both outputs and inputs.
 The process is more likely to look at the
contribution being made on an individual basis, which can
in turn undermine co-operation and teamwork.
 It raises the expectation amongst individuals that
if they achieve a set of targets and improve their skills
and competencies each year there will be a continual pay
out. This might be difficult to guarantee in a climate of
sustained low inflation.
 As contribution pay is based on individual
assessment it is prone to the capability of all line
managers to perform this task objectively and effectively.
Market-based pay:
Market-based pay links salary levels, and progression
through the scales, to those available in the market. It is
often used in conjunction with a performance pay matrix,
which allows faster progression from the bottom of the
scale to the market rate, which will be the mid-point.
Progression then slows, regardless of the performance of
the worker, as they are deemed to be earning above the
market rate for their job. It is rarely used as a scheme in
isolation, but may be part of a reward strategy
incorporating several performance elements.

Team-based pay:
While team-based pay has been around for some time in the
shape of departmental or group bonus systems it has taken
on more importance with the increased interest in team
working.

In team-based pay systems the payments reflect the
measurable goals of the team. Team working may be most
effective in situations involving high task interdependence
and creativity, although it can be difficult to define the
team, the goals, and the appropriate reward. Schemes can be
divisive if they are not open and transparent. Goals should
not be shifted once agreed - they need to be achievable.

The aim of team-based pay is to strengthen the team through
incentives - building a coherent, mutually supportive group
of people with a high level of involvement. The team
achievements are recognized and rewarded. Peer group
pressure can also be helpful in raising the performance of
the whole team.

As with any other pay system, involvement of the workers
who will be affected is crucial in the design of the
scheme. They must be involved particularly in the way
objectives are set, how performance is measured, and the
basis on which team rewards are distributed.

Advantages:
 It positively encourages team working and co-
operative behavior.
 It constructively motivates people to achieve
higher levels of performance and skill on a team basis.
 It is an effective way to clarify goals and
priorities within a team.
 It is an effective way of cascading objectives
defined by senior management throughout the subordinate
teams.
 It can be usefully deployed in a period of intense
organizational change as it can emphasize the necessity for
effective team dynamics in flatter organizational
structures.
 It can help to bring about a change in cultural
attitude particularly with the introduction of customer
focused working practices.
 It encourages flexible working and multi-skilling.
 It provides a good incentive for a team of
employees to improve their performance.
 It encourages individual team members to tackle
poor performers.
 It is an effective way of enabling employees to
work collectively in self directed teams.

Disadvantages:
 Although some organizations extol its virtues, it
is sometimes difficult to define the scope and boundaries
of the team, and to identify clear and meaningful targets
that genuinely reflect group effort.
 As it does not differentiate between high and low
performers this could cause resentment within the teams.
 It will only be effective if the team is well
managed and positively committed to organizational
improvement. A team, for example, might not need the
incentive of extra financial inducement anyway.
 It is difficult to objectively discuss with
individual employees what impact their behavior is having
on other employees.
 There is a danger that peer pressure will intensify
causing an oppressive and de-motivating atmosphere.
 It is difficult to satisfy the development of
methods to measure performance and a fair means of
measuring team performance.
 There could be an organizational problem of
uncooperative behavior being shifted from individuals in
teams to the relationship between teams.
 Organizational flexibility could be inhibited
because people in cohesive, high performing and well-
rewarded teams might be unwilling to move when needed. This
could lead to difficulties in reassigning work between
teams or breaking up of teams in response to future
organizational requirements.
 There is a danger that the team can get into a
downward spiral with output being maintained at the level
of the lowest common denominator. This will lead to members
of a less successful team getting less money and the
increased possibility of the team being unable to retain
its best staff.
Modernizing pay and rewards strategies:
Pay structures can speak volumes – not only in their
implications of values, equality and worth to employees and
the community they serve, but to the performance of the
authority itself. Getting a structure to reflect this is a
challenge local authorities face on an ongoing basis. It
requires commitment from senior managers, members and human
resources.

What are the benefits?
A modern and strategic pay and rewards system can:

 Lift motivation and drive service improvement if
people are rewarded properly for their contributions.
 Increase the efficiency of the day to day running
of your pay and rewards system.
 Prevent discrimination and ensure that all staff is
paid fairly, thereby eliminating any liability to big equal
pay claims.
 Become a powerful method of innovating change and
improvement when pay systems are no longer used solely as
an administrative tool.
 Help cost/performance calculations to be accurately
estimated thereby enabling authorities to inform residents
and central government of the actual efficiency of the
council’s operations - and also provide the chance to
identify and act on specific under-performing areas.

Making it work:
Effective pay and rewards systems need commitment and
action from senior managers, members and human resources.
Councils need to recognize that this is a potentially
costly process, especially given the need to deal with
equal pay. Changes can be introduced in a step-by-step
approach to help control costs.

The following checklists are designed to help establish who
exactly should be doing what.

Senior managers and members should:
 Commit to pay equality and ensure that the council
develops and promotes an equal pay policy.
 Commit to developing an effective performance
management system that integrates individual, team and
organizational performance objectives.
 Ensure that pay data is fully integrated into the
council’s performance management system so that the
council’s efficiency can be properly assessed through
cost/performance calculations.
 Staff needs to see a link between their pay and
rewards and their efforts towards service improvement –
this culture change should become a strategic corporate
objective.

Human resources teams should:
 Demonstrate the strategic impact of new pay systems
to senior management.
 Develop proposals for a new pay structure.
 Assess the adequacy of personnel and payroll data.
 Carry out a risk assessment and ensure that they
can manage the whole project.
 Carry out an equality impact assessment of the
proposals.
 Complete the process of the local pay review.
 Implement the new structure.
 Organize regular equal pay audits after
implementation.
 Ensure that training is available for all staff on
equality and diversity issues.
 Ensure special training is available for line
managers who have been given new performance management
responsibilities.
 Communicate pay change and their importance to
staff, and encourage their feedback.
 Develop their performance management skills so they
can handle appraisals, manage underperformance and give
staff work-life balance and development opportunities.
 Manage their teams well so that employees remain
motivated and always want to give their best.

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