Compensation Policies

Certain policies must be formulated before a successful compensation system can be developed and implemented. These policies are strongly influenced by the organizations objectives and its environment.

Compensation policies must deal with the following issues:

  1. Minimum and maximum levels of pay _ taking into consideration the worth of the job to the organization the organization ability to pay, government regulations, union influences and market pressures.
  2. General relationships among levels to pay e.g. both senior management and operating management and between operative employees and the supervisors.
  3. Division of the total compensation i.e. what portion goes into base pay and into benefits.

Organizations in addition make decisions concerning how much money will go into pay increases for the next year, who will recommend them and how raises will be determined.

Government and Union Influence

Government legislation and union contracts can have a significant impact on an organizational compensation. If an organization is unionized, the wage structure is usually largely determined through the collective bargain agreements. Since wages are a primary concern of unions, any union contracts can affect non-unionised organisations e.g. the wage rates and increases paid to employees in non-union organisations.

Importance of fair pay

Employee motivation is closely related to the types of rewards offered and their method of disbursement while debate exists over the motivational aspect of pay, there is little doubt that inadequate pay can have a very negative impact on an organisation. Pay dissatisfaction can influence employees’ feelings about their job in two ways:-

  1. It can increase the desire for more money.
  2. It can lower the attractiveness of a job.

An employee who desires more money is likely to engage in actions that can increase pay e.g. joining a union, looking for another job, going on a strike, looking for other ways of making money etc.

When a job loses its attractiveness, the employee is more likely to be absent, leave the job or remain dissatisfied with the job.

Pay Equity

The equity theory of motivation holds that employees have a strong need to maintain a balance between what they perceive and their inputs to their jobs and what they receive form their jobs in form of rewards.

Employees who perceive inequalities will take action to eliminate or reduce them. E.g. If an employee believes that he/she is underpaid will likely reduce effort by working more slowly, taking off early or simply being absent. If an employee believes that he/she is overpaid, he/she is likely to work harder or for longer hours.

There are several dimensions of equity to consider when looking at pay equity.

  • Internal equity – this concerns what an employee is being paid for doing a given job compared to what other employees in the same organization are being paid to do their jobs.
  • External equity – This deal with what employees in other organizations are being paid for performing similar jobs.
  • Individual equity – this addresses the issue of rewarding individual performance. It is closely related to pay-for-performance.
  • Organisational equity – this concerns how profit are divided up within the organisation i.e. organizations profits are fairly distributed.
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