There is debate in literature over the issue of how pay
affects the performance of firm’s human resource. Some say pay affects
motivation and hence has positive influence. Others have a different view. Pay
level, pay form and pay structure define how remuneration is provided. Pay
level refers to organisation’s pay position with respect to industry benchmark
or other competitors. It can be leading, lagging or level. Pay form defines how
pay is given and what part is fixed and what is incentive or performance based.
Pay structure refers to whether it is hierarchical or flat.
Several theories like agency theory, reinforcement theory,
goal-setting theory, expectancy theory etc. support the fact that incentive
structure affects the employee performance positively. While Cognitive
evaluation theory says that it can be harmful due to effect on intrinsic task motivation.
Incentive or reward system is extrinsic motivation. But most literatures agree
that there is no negative effect of reward on motivation. How much positive
effect it has may vary. Gain sharing plans, or group incentives, ESOPs etc,
have been found to enhance employee motivation, leaning and involvement and
hence their performance. There is also “sorting” effect on performance. Sorting
into different pay conditions is required to study the effect. Sometimes group
incentive system may suffer from the “free rider effect” and “1/n effect” and
performance may not increase as much as expected with incentive. But this again
can be mitigated by monitoring and peer pressure so that performance of group
does not go down because of some non-performers and hence those who are capable
and high performing exert pressure on low performers to catch up so that they
do not loose on incentives.
Effects of Pay
structure
“Inequality, rather
than want, is the cause of trouble.”
- Pay structure has two aspects
- Pay dispersion
- Pay basis
Pay dispersion has again been studied in different contexts
by many and has been said to have positive as well as negative effect on
performance. This is sometimes related to tournament theory where players
perform for the trophy. This is usual practice for the pay of top executives .The
pay is usually greater than their marginal contribution. Pay dispersion among the
same level can be due to experience, qualification etc.
Pay basis is defined in terms of whether the pay is job based
or person based. Job based pay is usually related to job and evaluation of job.
It is graded and hierarchical. Both internal and external evaluation of job and
activities is done to price the job. While person based pay is on the
performance and work of individual.
Pay level effect is generally not significant. It is widely
accepted practice to reach at a market stabilised rate of payment or wages but
it is not necessarily true that higher than market rate of wage may translate
into higher performance due to employee retention.
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गुड्डू रंगीला
Knowledge Partner,
Charcha Kendra
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