Organizational Approaches To Design Of Pay And Pay back Systems


In the first human source management (HRM) model produced by Fombrun et al. , (1984) the HR insurance plan is made up four key components, that happen to be selection, appraisal, development and rewards. Also, the Harvard model of four HR insurance plan areas provided by Ale et al. (1984) comprise human resource move, reward system, employee influence, work system. Furthermore, reward is discovered as a key lever in Storey's style of HRM (Storey, 1992). Therefore, it is essential that organisations should develop pay and pay back systems properly, that reward personnel fairly in conditions of these performance.

In order to explore the inner and external factors that effect the look of pay and incentive system, firstly, it's important to review the definition and types of reward and pay. In pay system, pay level, pay structure, and pay form are fundamental elements. Then, with knowledge of some fundamental inspiration ideas, it is better to identify the factors have an impact on in pay and compensation system design. The exterior factors are demand and offer and the segmentation of the labour market, the federal government involvement and the regional price level. The internal factors are employers themselves and the type of jobs. It is well worth noting that besides pay, extrinsic rewards should coincide with financial rewards.

Definitions and Types of Reward

Reward is one of the four HRM insurance plan areas in both HRM models developed by Fombrun et al. , (1984) and Ale et al. , (1984). Storey (1992) mentions in his model that praise is an integral lever in taking care of human resources. The reward system in managerial context emphasizes a facet of the employment romance, which constitutes an economic exchange. Simply, the employees take a specific amount of works from employers and make profit for them, in return, receiving repayment and reward. John Bratton (2003) described praise as: 'praise refers to every one of the financial, non-monetary and psychological payments an organization provides for its employees in trade for the work they perform'.

These rewards can take various forms. Organisations can offer intrinsic and extrinsic prize for employees. Intrinsic praise is a mental satisfaction and personal fulfilment produced from undertaking his or her paid work, and satisfying 'higher-level' needs for personal esteem and self-development. (Kessler, 2005; Bratton, 2003) For instance, the intrinsic reward could be training and career development opportunities, gaining respect and identification, job satisfaction, high quality of working life, versatile working time for employees and etc. Extrinsic praise refers to economic payment that satisfy the essential needs of employees for survival, security and acceptance and non-monetary payment in the guise of pay or other profit (Kessler, 2005). In terms of extrinsic praise, sometimes, called 'settlement' in the us, it gets the forms of pay, pension or other indirect paid profit, such as coverage of health, life insurance and sociable welfare programs. Bratton (2003) argued that the pay back system constitutes of both intrinsic and extrinsic rewards, where, the economic and financial factor being called pay system.


Pay, the financial element of reward, is an important form in prize system; in the end, it is the main reason why people work. Within a pay system design, the fundamentally compensation insurance plan issues are pay level, pay structure, and pay form (Guthrie, 2007). Pay level identifies pay position of the organisation weighed against other rivals in labour market. In short, it refers to 'how much' employees are paid. Organisations can lag, lead, or match the market. Pay structure refers to a framework within which an company packages different pay levels for jobs or sets of jobs. In some organisations, it reveals as pay marks. Pay varieties are ways of rewarding people for their attempts to the organisation and influence worker inspiration and performance.

There are two types of pay-fixed pay and changing pay. Predetermined pay is contractual settlement that regularly paid and will not vary regarding to performance or results achieved. Changing pay is contingent on performance or results with varying amount and usually discretionary. Fixed amount is to meet employees' dependence on income stability, as the varying pay is to compensate and encourage great contributions. The resolved pay may be paid in different forms, such as basic salary, compensatory allowance, dearness allowance and house hire allowance. It really is worth clarifying that although dearness allowance varies with the purchase price index, it is an integral part of resolved pay as it is not linked to performance. Also, the changing pay can be paid in the forms of bonus, incentive, overtime, fee, and it can be linked to different performance indicators place by the organisations.

Base pay is fixed pay paid to employees for specific job responsibilities. Normally, employee platform pay is determined with a variety of varieties when hired. For instance: time founded pay, service or seniority structured pay, status position structured pay, etc. Notwithstanding, employee's basic pay can be changed through his/her career in lots of ways. For instance, changes in job, no matter campaign, demotion or lateral copy. Because whatever advertising or demotion is supported with changes in work assignment and job duties, changes in job will lead to bottom pay changes. And, in the same way, base pay can be changed through change salaries predicated on their career ladder system. In order to establish the level of foundation pay, there are two methods- market costs and job analysis. Market pricing is based on the 'heading price' for a certain job in the labour market, and job analysis is a organized process to determine pay composition. (Armstrong, 1998)

On the contrary, 'varying pay is identified firmly as pay which will not become a long term part of basic pay. ' (Armstrong, 1999) In today's business world, changing pay can be an increasingly popular method of compensation used by employers because of its overall flexibility. Furthermore, 'varying pay facilitates worker- organisation collaboration by linking the fortunes of both gatherings' (Schuster and Zingheim, 1992). Variable pay is sometimes described performance pay. Performance pay has various forms as: 1) performance-related pay destined up payment to performance. 2) Incentive pay refers to payments associated with the success of prior-set goals. 3) Commission is usually offered to sales people. 4) Team compensation is to rewards to individual employees for their team work. 5) Merit pay is obligations offered to distinguishing past performance. 6) Skill-based pay is offered to employees with skills and can use effectively. 7) Company performance pay is payment to employees predicated on the organisation's earnings. (Bratton and Platinum, 2003)

In addition to bottom part pay or performance pay, some worker benefits paid indirectly are also contained in the total reward package, such as pension, coverage of health, life insurance and sociable welfare programs.

Financial reward apparently influences extrinsic inspiration, while non-financial reward enhances intrinsic motivation. Non-financial rewards possess the types of autonomy, civilised treatment, employer commitment, task, trust, and etc. (Ryan and Pointon, 2007). Extrinsic rewards can sometimes be more effective than economic rewards because they are immediately related to employees' achievement and are less inclined to be considered as unfair. Intrinsic rewards are more likely to affect employees in a longer-term because they're inherent.

Theoretical Foundations

Reward system was created to stimulate employees performance to meet the employer's strategic aim for. Therefore, it is significant to understand the underlying ideas on incentive so that people can realize why rewards work and how to design a reward system to meet both employers' and employees' need.

In conditions of economics and managerial framework, the Firm Theory points out the agency issue come up under conditions of asymmetric and imperfect information when a primary (owners or managers who delegate responsibilities) hires an agent (professionals or employees who deal with firm property for owners or other principals) to, persumably, follow its interets, like the problem of turmoil of interst or potential moral hazard (Eisenhardt, 1989). Various mechanisms enable you to align the hobbies of the agent with those of the main, in which, linking payment to performance is best approach.

Pay is consider as a 'hygiene factor' in terms of psychoogy. That is, if you own it, you may not be happy, but if you don't have it, you will definitely be disappointed. In Federick Herzberg's motivator-hygiene theory, he argued that cleanliness factors would not motivate employees to exert effort, but only prevent them from being dissatisfied. Besides, intrinsic compensation is also important in his motivator-hygiene Theory. he stated that people are motivated by the degree a job is challeging and the extend to which employment shows reputation. (Roath and Schutt, ???) This theory implies that the determination through popularity and home- fulfillment should coincide with interacting with economic needs.

Victor Vroom (1964) argued in his Expectancy Theory that people tend to exhibit those work behaviors business lead to most respected rewards and outcomes. He consider the perfomance-reward marriage and the prize- personal progress relationship are key componets in this theory as related to rewards. Thus, the idea implies the value of performance- encourage website link and that the prize should be attractive enough for making the most of employees' performance. Furthermore, Robbins and Judge (2007) suggest in Reinforcement Theory a rewards system is predominant in creating the desired behavior.

Adams (1965) asserted in Equity Theory that individuals seek to keep equity both internal, assessing inputs they bring to the job and the outcomes they receive from the organisation; and external, contrasting to the people around him, called referents. Clearly, if pay allocation is recognized to be good, thus, the praise motivation is suffered. However, if employees consider themselves underpaid, they will seek justice, in end result, the work motivation is disrupt. Alternatively, if employees consider themselves overpaid, the inefficiency problem occurs. This theory implicates that the internal and external tension do are present in pay equity (Kessler, 2005), therefore, the prize system head should monitor inside pay framework and position in the labour market for steadiness.

These motivational ideas contribute to better knowledge of how rewards inspire employees. And, it is obviously that that intrinsic rewards are as significant as extrinsic rewards.

The Exterior Factors

Labour market price

Smith (1983) identified labour markets is an area that employers recruiting labour make and employees seeking work. Dual labour market theory come up the idea of primary and secondary labour market. In the principal labour market, it is common that careers are seen as a high salaries, stableness of job, good working conditions and good profession prospects. Plus the employees in this sector are well certified, with skills and highly efficiency. On the other hand, in the supplementary labour market, jobs are in low wages, poor working conditions, insufficient any prospects and high turnover. Evidently, the workers working in secondary sector tend to be including women, teenagers and ethnic minorities, because the employees are confined to the supplementary labour market by insufficient education, residence, training and skills and discrimination. (Craig et al. , 1982)

For firms, it is necessary to consider about which position the organisation is in this market or industry and which labour market the employees are recruited from. For instance, if an company is in a leading position in its market or industry, the pay level in this organisation should also maintain a relevant higher level than other product and labour market competitors. The 'efficiency wage hypothesis' (Akerlof and Yellen, 1986) described why pay above-market wage may improve company performance. First, since employees want to keep employment using their employer if indeed they can pay above-market, it is less possible the employees will have performance problems. Second, above-market salary can help by lowering turnover. Third, employees may enhance their performance out of a sense of equity. Fourth, organisations using above-market pay level may enjoy an advantage in terms of appealing to more talented job seekers. (Guthrie, 2007)

If the organisation recruits people from major labour market, the pay of these should have differentiation with those who find themselves recruited form supplementary sector. The underlying rationale is Collateral Theory produced by Adam (. . . ), which implicates that individuals seek to maintain equity both internal and exterior. It is just when employees consider the pay is equity in their brain, the pay and reward system drive is suffered. Also, the overview pay level in an industry or a region should be studied into consideration when design a pay and praise system. Therefore, the company could better design an incentive system as a comparative progress in recruitment or performance motivation.

Supply and demand of labour market

The equilibrium in the labour market is other factor that influences pay level. As talked above, labour market is a market like any other product market, including resource and demand--employees and employers. Therefore, in some classical wage theory, Resource and Demand Theory can also pertains to pay, in labour market. The assumption of classical wage theory is that the supply of labour is set, therefore as the demand (at least in the short term). Hence, supply and demand are assumed to converge within an equilibrium price for a certain kind of labour, which is the pay rate (Wootton, 1962). In result, organisations should be concern of source and demand changes in labour market to change their pay level appropriately. However, Wootton also remarked that the accomplishment of equilibrium point of supply and demand in labour market has demonstrated difficult in practice.


Robinson (1970) developed implemented model and offer the essence of this model as 'the action of managements in every the companies and of the government and the trade unions jointly determine who gets applied where, and on what conditions and conditions'. In fact, the pay persistence in the business now appears to get interventions of authorities and institutions rather than the economic theory. Federal government is an important acting professional in remuneration system as employers of your important part of the nation's labour market, and moreover, pay influences the macro-economic environment. Associated with that the pay level can affect the blood circulation of money in the national market, the level of use and demand, the level of inflation, attacks. (Smith, 1983)The focus on intervention is becoming concerned with social areas of labour market segments, justice, and collateral. For example, minimum wage legislation, equivalent pay and pay control programs. In addition, administration can affect pay setting up process indirectly through actions affecting resource and demand of labour market.

Through successive pay plans, the governments have influenced pay back system not only for their own employees in public areas sector, but also in private sector. The organisations should follow the guidelines in a country as they operating in this country. Therefore, when design pay and incentive system, one should consider about relevant legislations in the operating country.

Regional price level

The primary reason employees work is basically because pay is the source of these living. Pay means, for employees, purchasing vitality, standard of living, fairness or relativity and position' (Smith, 1983). In some country, the government authorities setting the least income legislation is to safeguard the essential living standard for low income workers. The company should take living cost and price level in to bank account when design the pay and prize system. For example, in assumption that a company pieces two similar positions both in UK and India, certainly, the pay for these two positions will not be the same. In cases like this, it generally does not suggest inequity, for the living standard and living cost in UK is much higher than it in India. Corresponding to CIA data, the GDP- per capital (purchasing power parity) in India is 3, 400 dollars in 2010 2010, while that in UK is 35, 100 dollars this year 2010. If the organisation placed the pay degree of the position according to the price level in UK and use it in the same position in India, maybe it's internal inequity relating to Collateral Theory, this means the employee will consider the pay is a lot more than his/her source according to the living standard. Thus, this compensation system has achieved the needs of the employees but loses inspiration and vice versa. In outcome, the pay level should match the regional price level when design pay system.

Internal Factors


It is obviously that there is a romantic relationship between reward and company performance. The pay back system should be designed reasonable in a concern with coverage and strategies so that can get, retain and encourage employees to go after the same goals as the firms. However, for most companies, incentive system, especially pay system, represents a large element of cost added in expense of creation in many companies. In producing, the prize system, including pay and other benefits can be considered a major factor in determination of profitability. Thus, the problem between chasing after maximum profit and encourage employees' and organisational performance is out there in reward system design. It is common to find that an organisation copies pay and incentive framework from other companies. The explanation for this phenomenon is that management's wanting to continue to be its competitiveness in appealing to and retaining people. However, inescapable, the structures easily fit into one organisation may not fit for the other. Therefore, for pay and incentive system design, it is necessary to consider about a company's capabilities on the price tag on labour. Admittedly, pay above market price is an excellent way to retain and motivate employees. However, if this cost is not within the business's capability, the business will lose profit in a long run. Additionally, for a few companies, it will lead to deficit and a vicious circle. Moreover, the company should take its industry and business strategy into consideration. For example, investment financial loan company or consultant companies mainly use changing pay composition, while manufactory companies mainly use basic pay structure. Subsequently, pay and incentive system should be affordable to a business in an initial place and will fit its industry and business strategy.


'The website link between pay and job, thought as a stable configuration of organizational jobs and tasks, has typically been the foundation of grading structures. '(Kessler, 2005) Kessler argued that pay determined by the job position in a few kind of grading hierarchy, which grouped by job value. In creating job value, a variation should be attracted between external equity and internal equity. (Evans, 2003)

External job well worth depends on status of the outside articles in the labour market. Organisations wish to consider about the supply and demand of this job in the labour market, the 'heading rate' for similar careers as a guide, through a level of sources including survey studies from relevant organisations, pay research undertaken by consultants. (Kessler, 2005)

In terms of establishing internal job worth, the principal device is job research and job analysis. Job analysis is described by Bratton and Yellow metal (2003) as 'the systematic process of collecting and analyzing information about the jobs, obligations and the context of a particular job. ' Job research contains the information of the type of a specific job, more specifically, the major responsibilities, the outcomes that are expected, and the associations to other careers. (Milkovitch and Newman, 2002) For job research, the two steps from it are collecting data and using the data to develop job information, job requirements and job performance specifications.

Job evaluation can be explained as 'a organized process made to determine the comparative worth of jobs within an individual work organisation. ' (Bratton and Gold, 2003) job analysis aims to attain internal collateral by preparing a hierarchy of careers in the organisation, which can be used to allocate pay rates to careers. After gathering data, selecting compensable factors, evaluating the job, the end product is a hierarchy of careers grouping related to their value for the organisation. And the previous step in job analysis process is assign pay to this hierarchy, simply, price the pay structure. Job evaluation supplies the basis for a graded pay system which is equitable, and fits equal pay requirements. Significantly, the proper use of your analytical job evaluation scheme will protect and decrease the risk of equal pay boasts.

In effect, allocating pay composition, should bottom on job evaluation and job analysis. The pay would be related to the type of the job, the requirement of skill, effort, responsibility, the working conditions, initiatives and knowledge.


Reward system is important in regions of Human Tool Management. Reward identifies all the financial and non-monetary repayment provided to employees for his or her efforts to organisations. Generally, there are two varieties of praise, including intrinsic and extrinsic. Intrinsic compensation is a subconscious satisfaction and personal fulfilment of employees, usually being the varieties of non-financial acceptance, e. g. autonomy, civilised treatment, employer commitment, task, trust, and etc. pay is predominant form of extrinsic compensation, besides other benefits such as pension, medical health insurance etc. Pay gets the forms of foundation pay (set pay), performance pay (variable pay) and indirect pay. Basic pay related to job responsibilities and the amount of foundation pay could be established by marketing charges and job evaluation. Performance pay destined up obligations to performance. In terms of creating a pay system, pay level, pay framework, and pay form are fundamental components in pay system.

Pay levels are dependant on many factors. Firstly, pay levels are dependant on internal and exterior markets, as market price can influence the amount of base pay. Since labour market is similar as other product market, according to provide and Demand Theory, source and demand is assumed to converge within an equilibrium price in a certain job market, which is the pay rate. Focusing on exterior competitiveness, organisations would pay equal or exceed market costing to catch the attention of and keep more skilled employees. Above-market pay is under the explanation of effective income theory, which implicates that higher level of pay will improve worker performance and in causing, increase efficiency. Second, federal intervene pay level by direct legislation and indirect control. Such as for example minimum wage legislation, identical pay. Third, pay level should starting on the local price level to meet up with the basic living standard of employees. Fourth, within the work evaluation scheme, setting pay level should be consider about the nature of the work, the requirement of skill, work, responsibility, the working conditions, attempts and knowledge.

In terms of allocating pay structure, job evaluation and job analysis strategies will group careers in a grading hierarchy and assign pay to this hierarchy, which related to pay framework. Job evaluation supplies the basis for a graded pay system which is equitable, and satisfies equivalent pay requirements.

The business type of an company and business strategy will determine the pay form. For instance, investment financial loan company or consultant companies mainly use changing pay framework, while manufactory companies mainly use bottom pay framework. Especially, incentive buildings related to organisational performance are used for managers in large organizations to motivate and align the passions of organizations with those of the shareholders, corresponding to Company Theory.

According to herzberg's motivator-hygiene theory, extrinsic rewards can often be far better and lasts in a longer-term because they are inherent. In an incentive system, the motivation through non-financial praise should coincide with reaching economical needs.

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