Essay About Pay Levels And Organization Lead

Rewarding Individual Employees Through Variable Pay Programs
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In deciding what to pay employees, and how to pay them, management must make some
strategic decisions. Will the organization lead, match, or lag the market in pay? How will
individual contributions be recognized? There are many ways to pay employees. The
process of initially setting pay levels entails balancing internal equity, the worth of the
job to the organization, and external equity, the external competitiveness of an
organizations pay relative to pay elsewhere in its industry. The best pay system pays the
job what it is worth while also paying competitively relative to the labor market. Some
organizations prefer to be pay leaders by paying above the market, while some may lag
the market because they cannot afford to pay market rates, or they are willing to bear the
cost of paying below market. Pay is often the highest single operating cost of an
organization, which means that paying too can make the organizations products or
services too expensive. Its a strategic decision an organization must make, with clear
trade-offs.
A variable pay program is a pay plan that bases a portion of an employees pay on some
individual and/or organizational measure of performance. Earnings therefore fluctuate up
and down with the measure of performance. Variable pay plans have long been used for
compensating salespeople and executives. Recently they have begun to be applied to all
employees. A number of organizations, business firms as well school districts and other
government agencies, are moving away from paying people based solely on credentials
or length of service and toward using variable pay programs. Low performers find over
time, that their pay stagnates, while high performers enjoy pay increases that
commensurate with their contribution. There are several variable pay programs.
Fluctuation of variable pay has made these programs attractive to management. It turns
part of an organizations fixed labor costs into a variable cost, thus reducing expenses
when performance reduces.
Before implementing a variable pay plan, there are several phases to work through which
will assist in plan design and focus. A task team should be appointed to consider variable
pay as an option and to recommend the forms the program should take. The first phase is
the Strategy phase. This phase considers if a variable pay plan will benefit the
organization and focus employee attention on the achievement of the organizations
goals. Once the team feels that variable pay will provide focus, the Planning and Design
phase begins. This phase concerns itself with the overall scope of the plan. The Analysis
phase narrows the scope of the team into actual design and modeling costs of the plan and
develops an actual plan document. The next phase is Documentation. Here the “rules and
regulations” are finalized and administrative processing is considered. The most critical
phase is Communication. An organization can design the best program, but if employees
do not understand how it works, how they will benefit, and what is expected of them, the
plan will fail.
Piece-rate pay plan is a plan in which workers are paid a fixed sum for each unit of
production completed. When an employee gets no base salary and is paid only for what
he or she produces, this is a pure piece-rate plan. Many organizations use a modified
piece-rate plan, in which employees earn a base hourly wage plus a piece-rate
differential.
Merit-based pay plans also pay for individual performance. However, unlike piece-rate
plans, which pay based on objective output, merit-based pay plans are based on
performance appraisal ratings. A main advantage is that they allow employers to
differentiate pay based on performance, so that those people thought to be high
performers are given bigger raises. The plan can be motivating because, if they are
designed correctly, individuals perceive a strong relationship between their performance
and the rewards they receive. Merit pay plans pay for individual performance which
presumably is more directly under the individuals control. Thus, most individuals desire
control over their pay, most individuals desire control over their pay, employees tend to
like merit based pay plans. Merit based pay plans also allow organizations to compensate
for external factors that may have reduced objective performance measures due to no
fault of the employee.