Still an important part of performance management.
Although the rewards from a job for an individual can be numerous, the salary or wage earned is obviously a key issue. Frederick Herzberg’s research on motivation suggests if we don’t get it right, all the other actions we take to encourage and motivate people are largely wasted.
To ensure this key area is managed to the satisfaction of the business, and the employees, we need a system that makes sense to employees as well as meets our business objectives.
A system that is consistent, open and based on some firm principles will stand a very good chance of being perceived as being fair by most employees. They may still have a desire for more money, but they will generally be satisfied that their particular level of pay was arrived at in reasonably logical way.
To achieve this we need to establish some key objectives.
Objectives of a Pay SystemThe objectives of a pay system can be defined as:
- To provide correct internal relativities
- To provide correct external relativities
- To provide motivation (or eliminate demotivation)
- To provide consistent administration
We will look at each stage of developing a salary system to see how these objectives can be achieved without being unnecessarily complex.
Internal RelativitiesFixing internal relativities is simply deciding the pecking order of jobs in the organisation based on the value of each job to the company. Many more complaints about pay come from internal comparisons: "She gets more than I do and I work harder!", than from those outside the organisation. In small organisations it is often quite simple to determine the rank order of jobs but as the business grows it becomes slightly more complex. The key steps to doing this are to define the jobs in terms of
Key Results Areas and Measures and assess each job by its value to the organisation. We are only dealing with jobs at this stage, not people.
Any system you use should have a reasonable level of acceptability and there are ways of achieving this without being overcome with an administrative burden.
External Relativities – the MarketEstablishing how much we pay these jobs is obviously important but equally important is some logical way of doing it. Employees have a reasonable right to expect that there is some logic to how their rate of pay is established plus you are going to have to do this on a regular basis so it makes sense to follow some kind of system.
Defining the market you wish to compare your organisation with is a necessary first step and then determining where you need to be in that market. You don’t have to pay top salaries if you have a number of other attractive features in your organisation.
MotivationIt is often difficult to achieve a system that motivates everybody, we all have different needs, but at least we should do our best to stop it being demotivational.
It should be linked to the performance of the individual. Up until this stage, we have only dealt with jobs – determining their value to the organisation and their market value. A system linked to a performance management system should ensure that an individual’s salary moves according to their performance.
Consistent AdministrationAll of the above can be achieved and linked together in a system that can be operated fairly and consistently by management without undue complexity. If it is seen to be operating this way, and is understood by employees, a major source of dissatisfaction encountered by many organisations will have been removed and replaced with something which provides a true reward for performance based on sound business principles.
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Effective Performance Management