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Why Is Pay Such a Contentious Issue for Organisations? Essay Sample

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Why Is Pay Such a Contentious Issue for Organisations? Essay Sample

How can work organisations ensure that they have an equitable approachto pay in the current economic environment? Why pay and the total reward system can be a source of competitive advantage for firms. Gunnigle et al (2006) states that pay refers to the ‘basic wage or salary that an employee receives’.‘It is a way of gaining understanding, acceptance and commitment of what people can do to help make a company a success’ (Zingheim and Schuster, 2000).’ It is a complex, multi faceted issue that serves as both a tangible and intangible motivator offering both intrinsic and extrinsic rewards’. (Gunnigleet al 2006).

Pay is a much debated topic in human resource literature, with many contrasting views in the research findings. This essay will firstly examine what I believe are the main contentious issues faced by organisations today with regards to pay; namely cost, culture and motivation. Each of these issues will be examined in depth, drawing from relevant and prominent authors on the subject matter. In the second half of the essay I will discuss the options available to organizations with regards to ensuring that they have an equitable approach to pay in the current economic environment. Here I will draw on the recent literature with regards to alternative methods of reward whilst also looking in detail also at the total reward system which organisations should adopt given contemporary global economic trends. Finally I will draw my conclusions with regards to how best firms can deal with the issue of pay structure in the current economic environment. Cost

According to an Irish Business and Employers Confederation (IBEC) HR update report from autumn 2012 ‘pay and benefitstypically represent a significant proportion of business costs with base pay generally being the most costly reward element’. The report goes on further to say that’ 69% of organisations will freeze pay in 2012, 1% will decrease and only 30% expect to see an increase’ (IBEC HR Update Autumn 2012). Noe et al (2009) state that some companies spend ‘40% or more of their revenue on paying employees’ and as a result of this ‘managers must weigh the importance of cost of pay to arrive at a structure for compensation and levels of pay for different jobs’. However, according to Torrington et al (2011) in setting base pay employers ‘enjoy rather less freedom when making this decision than is the case when deciding how the total package should be made up’. This according to Torrington et al (2011) is as a result of minimum wage restrictions and the need to remain competitive. In the current economic climate many firms believe that cutting costs is the only method for them to remain a viable entity. According to Pfeffer (1998) ‘labour rates are a convenient target for managers who want to make an impact’ as they are highly visible. They also appear to be’ a company’s most malleable financial variable’.

This need to restrain labour costs is a particularly hot topic of debate in the public sector as governments;none more so than in Ireland have cut their expenditure in the aftermath of the recession and subsequent sovereign debt crisis in an attempt to reduce the public debt. In Ireland, wages and salaries for public sector workers comprise of 70% of the national income. In order to get the country’s finances into a stable condition with particular interest being put on the inefficiencies within the public sector, the Croke Park Agreement was set up between the Irish government and various public sector unions.

According to the implementation body as of March 2012 headcount has been reduced by 28,000 and the annual pay bill has been reduced by 3.1Bn euro (http://implementationbody.gov.ie/progress-and-delivery/). Many commentators have questioned however whether the pay freezes agreed under the agreement are in anyway sustainable given the state of the public finances and in particular now that there is external factors/influences on agenda setting from the Troika. It is evidently a very contentious issue for many organisations as many of them feel rightly or wrongly that pay is the only variable in which they can compete on. Perhaps organisations should look more in-depth at the productivity of their employees as only then will they see labour costs as an investment in human capital. According to Pfeffer (1998) for successful firms ‘the issue isn’t what these employees cost, it’s what they can do’ Motivation

Its role as a motivator and whether it alone can motivate employees are other contentious issues which organisations face with regards to pay. Evidence from the literature shows that reward packages should be designed so as to motivate employees. Torrington et al (2011) state that it is necessary that the reward package which employees are given serves to’ motivate positively and doesn’t demotivate’. Schuler (1995) describes a number of core objectives underlying an organizational reward package. One of these is that it should ‘serve to motivate employees’. Whether pay alone can motivate employees is a contentious issue. Herzberg (1968) states that ‘pay produces movement but not motivation’. Kohn (1993) argues the same is true of rewards, stating that ‘punishment and rewards are two sides of the same coin’. Some feel that using pay alone may actually produce counter-intuitive effects. Gunnigle et al(2006)state that ‘managers manipulate their subordinates by making bonus contingent on certain behaviours’.

However the ‘employees experience of being controlled is likely to assume a punitive quality over time’. According to Pfeffer (1998) one of the six dangerous myths about pay is that the most effective way to motivate people to work productively is through individual incentive compensation. This line of argument is furthered by Bill Strusz-director of industrial relations at Xerox who states that ‘people want more out of their jobs than just money’. Pfeffer (1998) concludes by stating that ‘extrinsic rewards diminish intrinsic motivation’ and in tasks which require creativity and innovation ‘large extrinsic reward can actually decrease performance’. On the other side of the argument are those who feel that pay can in fact be used as a motivational tool by organizations. According to Gerhartet al (2004) ‘people are more likely to underreport the importance of pay as a motivational factor in most situations’.

Locke et al (1980) concluded that ‘money is the crucial incentive…no other incentive or motivational technique comes even close to money with respect to instrumental value’. Gerhartet al (2004) concluded that ‘far from being a mere low motivator, pay can assist in obtaining virtually any level on Maslow’s hierarchy’. The evidence from the literature shows what a contentious issue pay is for organizations with regards to motivation. The resounding evidence from both sides however shows that pay alone cannot motivate employees unless it is linked to a total reward system which is contingent on employee performance. According to Gunnigleet al (2006) from a motivational perspective payment systems should have the following characteristics :be ‘objectively evaluated, clarify the performance level required and finally recognize that financial incentives are only one source of motivation and so jobs should be designed to ensure employees can satisfy other needs through their work’.

The idea of linking pay to performance is furthered by Locke (2004) who states that ‘one method for combining goal setting with incentives is to motivate by goals but pay for performance’. This method takes account of the full context in which the goal is pursued thus allowing managers a degree offlexibility with regards to payment. Gerhart et al(2004) recommend that ‘multiple motivators be used in conjunction with one another’. They draw on the examples of Microsoft and General Electric (GE) where performance based pay and challenging work is used to motivate employees. For Gerhart et al (2004)the aspect of pay that will most directly motivate performance will be ‘the extent to which pay is contingent on performance’ Culture

According to Cullen et al (2005) ‘strong cultures were those where the commitment of all employees to the same set of cultural values would result in higher levels of organisational performance’. The role of pay in establishing and reinforcing an organisation’s culture is a contentious one. Zingheim et al(2000) state that pay ‘is a valuable communicator of values and directions…pay should communicate and align with the most important messages the enterprise needs to deliver’. Perhaps it is the whole reward system and not just one facet of it; pay that helps establish an organizations culture. This message is reinforced by Gunnigle et al (2006) who state that a reward system and not just pay ‘is a powerful indicator of its philosophy and approach to people management’.

Establishing one’s culture can be a difficult task for firms. Establishing what is valued and the means by which these values can be achieved are important mechanisms which a firm must portray effectively to its employees. For some firms their pay and reward structure are the only mechanisms used to establish their culture whilst at the other extreme are those organisations who use every means but pay in order to do so. In Tandem Computers, forexample, they do not even tell you your salary before expecting you to accept a job. The company has a simple philosophy ‘if you come for money, you would leave for money’ (Pfeffer, 1998). As a result Tandem wants employees who are there because they ‘like the work, the culture and the people’ (Pfeffer, 1998). According to Gunnigle et al(2006) ‘the corporate approach to compensation should complement the organisation’s strategic business goals, HR philosophy and other activities’.

The huge influx of U.S. multinationals to Ireland over the last twenty years has completely changed the management landscape on these shores as they brought with them a new outlook on work practices and in particular organisation culture. Successive research has shown the ‘prevalence of linking pay to performance in order to establish a company’s culture’ (Gunnigleet al, 2006). In Intel which is one of the top five firms in terms of performance and productivity they pay below the average for their base pay. They do however incentivise their workforce by rating individual performance. In companies where a high level of innovation and creativity is required very often it is the non financial rewards which help establish the organisations culture.

Company’s such as Facebook, 3M and Google aim to create an environment where innovation can flourish, they ‘emphasize innovation as a cornerstone of their culture; innovation is emphasized as a value throughout the organisation (Cullen et al, 2005). However it must also be recognised that pay does have substantive and symbolic components as according to Pfeffer (1998) ‘ in signalling who and what in an organisation is valued, pay both reflects and helps determine the organisations culture’. Linking pay to performance and creating an environment and a culture in a firm which employees are proud of appears to be crucial as according to Zingheim et al (2000) ‘all the total pay in the world will not result in a positive work experience’. Equitable approaches to pay in the current economic climate

The second part of this essay will discuss ways in which organisations can ensure that they have an equitable approach to pay in the current economic environment. According to Beardwell et al( 2010) ‘In an economic downturn there is evidence to suggest that employers tighten their belts where pay is concerned and look to minimize or avoid pay increases’. In light of the global economic crisis, it is common to find wage freezes as organisations fight to survive in the tough climate. The recent IBEC HR update 2012 report states that 69% of organizations will freeze their pay in 2012. Further to this, 35% of organizations had no bonus arrangement in place for 2012, whilst 18% had just one form of bonus scheme in place (IBEC, 2012). The most popular type of bonus was a company performance bonus. Torrington et al (2011) states that ‘there has been relatively few years in which new approaches to the management of pay have been tried out, established and subsequently evaluated’. This means that it is only relatively recently that managers have had the opportunity to manipulate reward systems in their organizations so as to seek to achieve organizational objectives. Some of the contemporary trends in reward management systems include single pay spines, performance related pay and total reward.

Pay spines are a fixed incremental salary point reflecting all jobs from the highest paid through to the lowest paid incorporated in the structure. ‘Pay spines are common in the public service sector’ (Beardwell et al 2010). They are perceived to be excessively rigid and extremely costly. Given the need to restrain labour costs particularly in the public sector this option no longer seems a viable entity. Another contemporary trend is performance related pay(PRP) schemes. PRP links individual pay progression with employee performance (Beardwell et al, 2010). PRP schemes ebb and flow in popularity and have been the subject of much controversial debate in the recent literature. Kessler and Purcell (1992) argue that’ linking assessments of performance to pay can induce tunnel vision whereby employees concentrate on those aspects of their job that trigger pay increases and ignore other parts of their job’. This has been clearly evident in the banking sector where there has been evidence of ‘disproportionate increases in executive pay in the face of poor organisational performance (Pfeffer 1998).

Many commentators blame the pursuit of performance related pay strategies for the excessive risk taking which took place within the financial services sector. Recent developments show that the banking sector is now moving away from PRP towards a more transparent and equitable form of reward system. For example the banking group Lloyds is considering radically reforming its method of compensating banks. The firm may propose to eliminate annual bonuses in favour of longer-term incentives. Many individuals and policy think tanks have advocated a shift away from cash bonuses to a different model, where bankers pay is tied to how the business performs over a defined period. This design is intended to better align the interest of bankers with those of the shareholders (Adou, 2012). The final contemporary trend and the method which I believe is the most equitable is the notion of ‘total reward’ (Lawler 1990, 1995, 2000 and Zingheim 1992). The four components of total reward are individual growth, compelling future, total pay and a positive workplace.

The key ingredients include a greater helping of variable pay, a move away from rigid payment structures to fluid flexible ones and pay centred on the person and not on the job (Beardwell et al 2010). According to Torrington et al(2011) it is ‘one way in which organizations can reduce their cost whist retaining or improving the level of quality they achieve over the longer term’. Rather than wasting financial resources in the form of PRP schemes, ‘total reward’ creates an environment in which intrinsic motivation thrives. There is evidence of firms which utilise the elements of total reward to their full effect. This is done in order to have an equitable reward system which is linked to the ongoing success of the organization. One example is the Brazilian manufacturer Semco which during the recessionary period of the late 1980’s increased its profits eleven fold.

According to the CEO, Ricards Semler, this achievement was due to the emphasis on intrinsic motivation of the workforce whereby employee empowerment and enrichment were prioritized (Carter, 2001). Closer to home Lily O Brien’s chocolates are an example of a firms which with the help of enterprise Ireland simply told its employees the difficulties it found itself in and proposed methods in which to ‘involve the rest of the company in working together to achieve even greater efficiencies’(Enterprise Ireland: Becoming Lean: Practical steps to build competitiveness, 2012). The focus was to quantify ‘incidences of particular issues and make them visual…every issue was supported with data so people had to acknowledge the problem and explain or come up with a solution’ (EI, 2012). It is estimated that this approach of ‘full employee buy-in’ has saved in excess of 500,000 euro in labour costs. As a result the focus should be to decouple performance management from compensation management and instead focus on other means to develop and engage employees in order to improve business performance.

The global economic climate has induced a much more acute focus on pay and the total reward systems within organizations. Firms are scaling back their operations across industries and with pay appearing on the surface at least to be the most malleable financial variable managers are mistakenly assuming it is the one which has the most leverage. In this essay I have covered what I believe are the contentious issues of pay which organizations face, namely cost, motivation and culture. In terms of cost now more so than ever firms are focusing on the cost of labour however, I feel that a more rounded look at the overall contribution of the employee in terms of productivity is what’s needed. In terms of motivation, the research has shown that it alone cannot motivate employees unless it is linked toa total reward system where multiple motivators are used simultaneously in order to promote the desired results.

Finally in terms of culture it appears that it is the whole reward system and not just pay which helps establish it. Linking pay to performance and creating an environment where job enrichment and job empowerment are encouraged appears to be crucial. There is no clear answer as to what is the most equitable reward system. However in the current economic environment and drawing on firms which have utilised it effectively it appears that a ‘total reward’ system is the most effective. It creates an environment where intrinsic motivation thrives and one where employee empowerment and enrichment are at the forefront. Overall we can conclude that it may be that the simplest and most effective reward strategy may in fact also be the least costly. I believe Pfeffer (1998) sums it up well by saying that ‘where leaders have the courage necessary to break with common practice, pay practices actually contribute rather than detract from building high-performance management systems’.


* Ardou, B. (2012). Bonus reform proposals at Lloyds.’The Bull’ Dublin University’s Financial Newspaper,Vol 2, (Issue 2) * Thompson, A. And Ryan, A. (2010) employee reward in Human Resource Management A Contemporary Approach, Beardwell, J. And Claydon, T. (6th ed), Pretince Hall, Essex, pp 490-531 * Carter, S. (2001). Renaissance Management: the rebirth of energy and innovation in people and organizations. Kogan Page Publishers. New York. * Cullen, J. And Farrelly, M. (2005) Best Practice HR in
Ireland, (1st ed), Oak Tree Press, Dublin * Enterprise Ireland (EI) (2012) ‘Becoming Lean: Practical steps to build competitiveness’, Ireland * Gerhart, B., Minette, K. And Rynes, S. (2004). The importance of pay in employee motivation, Human Resource Management Journal, Vol.43, (Issue 43) * Gunnigle, P., Heraty, N. And Morley, J. (2006) Human Resource Management in Ireland (3rd ed), Gill & Macmillan, Cork, pp 162-186 * Herzberg, F. (1968) One more time: how do you motivate employees?, Harvard Business Review, Sep-Oct (1987) * Implementation Body (2012) Public Service Agreement 2010-2014, Second Progress Report, Ireland * Irish Business and Employers Confederation (IBEC) (2012) HR Update Autumn 2012, Ireland * Kessler, I., Purcell, J. (1992). Performance related pay: objectives and application, , Human Resource Management Journal,Vol.2, (Issue 3) * Kohn, A. (1993) Why incentive plans cannot work., Harvard Business Review, Sep-Oct (1993) * Lawler, E. (1990,1995, 2000) The New Pay: A Strategic Approach, California * Locke, E., Shaw, K., Sari, L., Latham, G. (1980) ‘Goal setting and the task performance 1969-1980’, Psychological Bulletin (1981),Vol.90 (Issue 1) * Locke, E. (2004) Linking goals to monetary incentives, Academy of Management Executive,Vol.18(Issue 4) * Pfeffer, J. (1998) ‘Six dangerous myths about pay’, Harvard Business Review, May-Jun (1998) * Schuler, R. (1995) Managing Human Resources (5th ed), West Pub.Co, Minneapolis * Torrington, D., Hall, L., Taylor, S., Atkinson, C. (2011) Human Resource Management (8th ed), Pearson Education Limited, Essex, pp513-591 * Zingheim, P. And Schuster, J. (1992) The New Pay: Linking Employee and Organizational Performance, Jossey-Bass * Zingheim, P. And Schuster, J. (2000) Pay People Right!, Jossey-Bass

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