Traditional Bases for Pay: Seniority and Merit

1. Traditional Bases for Pay: Seniority and Merit Jayendra Rimal

2. Seniority and Longevity Pay • This type of pay rewards employees with increase in base pay according to the length of service. • This type of pay rewards employees for acquiring and refining their skills as indicated by seniority. • Organizations assume that employees become valuable with time and may choose to leave if they do not have an idea that their pay will progress over time. • In unionized organizations where collective bargaining is undertaken, seniority usually is a criterion when transfer or promotion are considered. • Seniority is usually prevalent in government jobs as it essentially provides automatic pay increase and performance assessment tends to be subjective rather than objective.

3. Seniority and Longevity Pay, contd… • This type of pay is opposed by the private sector (unlike government) as they have to face increasingly competitive markets. • Other influences like technology and skill deficit is forcing companies to have strategic orientation towards compensation. • Seniority pay rewards job tenure through permanent increase in base pay but employees also reach maximum pay rates for their jobs over a certain period of time. • Longevity rewards employees who have consumed all grades and have reached the maximum pay limit. It could be as a percentage of base pay, flat amount or step increase. This is use as an incentive. • Advantages of tenure based pay are that employees perceive they are treated fairly. • For employers it facilitates administration of pay. Employers are less likely to offend employees by showing favoritism because seniority is an objective measure.

4. Merit Pay • This assumes that compensation over time should be determined by differences in job performance. • This rewards excellent performance, motivates for future performance and help retain valued employees. • This type of practice is prevalent in the private sector. • Based on subjective and objective appraisals by evaluating how well workers perform relative to set standards. • For it to succeed, employees must know that meeting standards will result in pay raise. • Job requirements must be realistic and employees must have the required skills. • In addition to commitment from top management, jobs must be designed in such a manner that performance can be measured accurately vis-à-vis set standards.

5. Performance Appraisal • As effective performance appraisals drive effective pay programs, there has to be a clear link between them. • It is also important that appraisals are administered successfully while professional skills should used in designing and implementing them. • Some performance appraisal plans: • Trait system asks raters to evaluate traits such as quality of work, quantity of work, appearance, dependability, cooperation, initiative, judgment, leadership, creativity etc. • Comparison system evaluates an employee’s performance against the performance of other employees through various methods. e.g. comparison system, forced distribution and paired comparison. • Behavioral system rate objective job performance behaviors, e.g. critical incident, BARS and behavioral observation scales (BOS). • Goal oriented system – possibly the most effective performance appraisal method as supervisors and employees determine objectives that the employee is supposed to meet.

6. Essentials of Pay-for-Performance(From Management Techniques by Michael Armstrong) • It should fit the culture of the organization • The reward is clearly linked to the effort • The reward follows the accomplishment which generated it • Employees can influence performance by changing behaviors • Employees are clear about targets and performance standards • They can track performance against these targets/standards • Fair means are available for measuring performance • The reward is closely linked to and proportionate to the effort • Employees expect that high performance will lead to rewards • The PFP is carried out through a easily understood formula • Provisions should exist to amend the formula when required • Constraints are built into the scheme whereby employees cannot receive inflated rewards not related to performance • The scheme is properly designed installed and maintained • Employees are involved in the development and operation of scheme

7. Strengthening the Pay-for-Performance Link • Link performance appraisal to business goals • Analyze jobs • Communicate • Establish effective appraisals • Empower employees • Differentiate among performers

8. Limitations of Merit Pay Programs • Failure to differentiate among performers • Poor performance measures • Supervisors’ biased rating of employee performance • Lack of open communication between management and employees • Undesirable social structures • Factors other than merit • Undesirable competition • Little motivational value

9. Any questions?