Jayendra Rimal

Traditional Bases for Pay: Seniority and Merit

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.

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.

Merit PayThis 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.

Performance AppraisalAs 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.

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

Strengthening the Pay-for-Performance Link

Link performance appraisal to business goals

Analyze jobs

Communicate

Establish effective appraisals

Empower employees

Differentiate among performers

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

Any questions?