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Performance related Pay - Essay Example

In the neo-classical market, the state can intervene to avoid imperfections such as labour monopolist and monopsonist. In the state regulation, there are two main forces to influence the wages. One is the direct forces in laws such as the National Minimum Wage (NMW) and Anti-discrimination. The other is the indirect forces through control over public sector and the knock on effect (Domino effect) into the private sector.

According to the official website of Department of Trade & Industry (DTI), the national minimum wage is an important government strategy which aims to provide employees with decent minimum standards and fairness in the workplace. With the protection of NMW, employers can not give the pay below the hourly rates of NMW. Therefore, it can avoid the monopsony power to pay less than the minimum wage of the law in the labour markets. In addition, the laws of anti-discrimination also affect the wages of employees. They regulate the equality at work.

According to Torrington, Hall, Haylor, and Mayers (1992: 238), “The main groups experiencing discrimination and for whose benefit anti-discrimination legislation has been introduced are women and different racial groupings”. Therefore, there are Sex Discrimination Act 1975 and Race Relations Act 1976 to legislate against discrimination at work. Besides, there is also Equal Pay Act 1970 to attempt to end pay discrimination against women (Rose, 2004:207). Therefore, through the Equal Pay Act female employees can be protected from the unfair discrimination. It can also eliminate the discriminatory rates of payment for women.

Furthermore, the indirect forces in state regulation are public sector and the knock on effect (Domino effect) into the private sector. According to Millward et al (2000: 194-196), in 1984, collective bargaining is the main type of pay determination of a majority of employees in 94 per cent of public sector workplaces and in the majority of these, multi-employer negotiations are in 82 per cent in setting pay. In 1990, the proportion of the type of pay determination by collective bargaining in public sector workplaces fell from 94 per cent to 71 per cent.

This is because that the government ended collective bargaining over pay for many health professionals through the introduction of a pay review body. In 1987, a similar situation happened in the education sector. Though multi-employer bargaining was the dominant form of pay determination among public sector workplaces, it also fell from 82 per cent to 58 per cent in 1990. In contrast, the proportion of pay determination without negotiation but with some reference to an external body (e. g. by central government via a pay review body) rose from 3 per cent in 1984 to 16 per cent in 1990.

The same trends continued in the 1990s. The proportion of pay determined by collective bargaining fell again from 71 per cent in 1990 to 63 per cent in 1998. The multi-employer bargaining also fell from 58 per cent in 1990 to 39 per cent in 1998. However, the proportion of pay determination without negotiation but with pay review body rose from 16 per cent in 1990 to 29 per cent in 1998. Therefore, in public sector, collective bargaining remained the most common type of pay setting, but other activities became more prevalent, especially the review body recommendations replaced multi-employer agreements.

Since in public sector collective bargaining and multi-employer negotiation declined, there is some extent knock on effect (Domino effect) into the private sector. In 1984, the proportion of pay determination of private sector by collective bargaining is in 36 per cent. It fell to 29 per cent in 1990. By 1998, only 14 per cent of a majority of employees with trade unions negotiated the pay by collective bargaining in private sector. The trend of multi-employer negotiations also has the same situation. The proportion fell from 17 per cent in 1984 to 3 per cent in 1998.

It is obvious that the multi-employer agreements declined and followed by an increase in unilateral, organization-wide decision-making without collective bargaining in the 1990s in private sector (Millward et al, 2000: 190-193). Therefore, “In private service industries, unilateral forms of pay determination by management were already dominant in the early 1980s, but their importance grew steadily so that by 1998 nearly nine in every ten workplaces had their pay set without reference to trade unions. Multi-employer agreements all but disappeared. Enterprise-level pay setting largely replaced joint regulation” (ibid: 221).

Inside the Firm There are two main forces to cause the wage differentials inside the firm. One is the pay structures and the other is the payment systems. Every organization has a hierarchical pay structure. It is set by job analysis, an essential element of job evaluation. According to Torrington, Hall, and Taylor (2005:619), “Job evaluation is the most common method used to compare the relative values of different jobs in order to provide the basis for a rational pay structure”. Here is the definition of job evaluation from ACAS. “Job evaluation is concerned with assessing the relative demands of different jobs within an organization.

Its usual purpose is to provide a basis for relating differences in rates of pay to different in-job requirements. It is therefore a tool which can be used to help in the determination of a pay structure”(ACAS 1984, cited in Torrington, Hall, and Taylor, 2005:619). According to Armstrong and Murlis (1998: 87), there are two main types of job evaluation methods: non-analytical methods, where the whole jobs are accessed and compared, without being analyzed into their elements-and analytical methods, where jobs are analyzed into their elements, each of which is individually assessed and ranked.

Here is the survey from IRS (January 2004: 8) that indicates “analytical schemes are used by the overwhelming majority of employers-around 86% … because analytical schemes can enhance objectivity in valuing jobs and can be particularly helpful in protecting employers against equal pay claims”. In the analytical scheme, jobs can be analyzed and graded under a typical selection of factors in the factor plan (Burchill, 1997: 177). 1. Skill, which would include sub-factors, like experience, training and educational qualifications required.

Responsibility, which could include sub-factors, like responsibility for supervision, responsibility for decisions with financial implications, responsibility for materials and so on. 3. Physical effort. 4. Mental effort. 5. Working conditions. In the following, there is the example of job evaluation from NHS pilot scheme in IRS (January 2004: 9). “This scheme is of interest because of the wide range of jobs contained within the service-from the obvious clinical and medical roles to managerial and administrative functions and just about every other job in between.

The NHS scheme covers 16 separate factors: communication and relationship skills; knowledge, training and experience; analytical skills; planning and organisation skills; physical skills; responsibility-patient/client care; responsibility-policy and service; responsibility-financial and physical; responsibility-staff/HR/leadership, training; responsibility-information resources; responsibility-R&D; freedom to act; physical effort; mental effort; emotional effort; and working conditions. ”

In addition, another force to cause the wage differentials inside the firm is the payment systems. According to Burchill (1976:71), “A payment system can be seen basically as a set of rules and procedures which determines the size and kind of reward which will be received by a worker or group of workers as a consequence of the effort he or they contribute to production”. Payment systems are usually designed explicitly or implicitly to motivate employees to achieve objectives of the organization.

They are sometimes classified according to how closely payment is related to output. They may also be classified according to the immediacy of payment, such as payment per hour, per week, per month and so on. The combination of the two classifications may also be attempted. For example, the payment is directly related to output and paid per hour (ibid). In the following, there two major payment systems introduced. One is Payment by Results (PBR). The other is Performance Related Pay (PRP).

Payment by Results systems are usually applied to the manual (blue-collar) workers because it is easier to measure the units of output of employees. According to paragraph 8 of the National Board for Prices and Incomes’ Report, No. 65 (Burchill, 1976: 71), “Payment by Results may be broadly interpreted to mean any system of wages or salaries under which payment is related to factors in a worker’s performance other than time spent at his employer’s disposal.

However, the term is most commonly applied in a more restricted sense to payment systems which attempt to establish a formal relationship between pay and output or effort. Such systems have one main underlying assumption: namely, that where the worker can vary his output according to the effort he puts into his work and this can be related to his earnings in a way he can understand, the prospect of increased earnings will induce him to work harder”. Moreover, another major payment system is Performance related Pay.

PRP is usually applied to the managerial and white-collar workers. According to Armstrong and Murlis (1998: 280), PRP is related to pay progression to a performance or competence rating. It is sometimes called merit pay which normally provides for an increase in base pay. PRP is usually applied to individuals, but sometimes applied to groups. Some organizations encourage developing good teamwork by concentrating more on team pay which is through group bonus scheme. In the following, there are major objectives of PRP (Armstrong and Murlis, 1998: 281).