The Pay Model and Pay Strategy

1 The Pay Model and Pay Strategy The term pay, also known as compensation, is representative of the relationship between employees and their employer, the organization. There is a symbiotic relationship between the two, where each of them gives something in exchange for something else. The employee gives their time, skills, qualifications and effort in exchange for monetary and non-monetary compensation from the employer. In the past, the compensation the employee received was solely determined by the employer and this created room for irregularities and inequity in pay.

However, in the modern competitive environment, there are various factors that determine employee pay, and it is no longer solely the employers’ discretion. Organizations use pay to attract and retain well-qualified employees, and to benchmark themselves from their competitors.

The pay model of compensation is a strategy used to create an organized compensation system.

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Objectives of the Pay Model The three main objectives of a pay model are equity, efficiency and compliance with the internal and external rules and regulations. Equity refers to the ability of the pay system to offer a fair reward to the employee for their performance and satisfy their needs. For example, the pay system is considered equitable when it is ahead of the inflation rate, matches the market rates for similar jobs and is able to offer the employee a decent living standard. The pay should also increase with an increase in the prosperity of the organization (Martocchio, 2015).

Efficiency in relation to the pay model begins with employees feeling that their work matters and they are valued. This increases their motivation, job satisfaction and loyalty.

Efficiency takes the form of higher productivity, better performance, lower labor costs since the number of employees needed reduces, and satisfied customers. Loyalty plays a crucial role in organizational performance because the longer people stay with the company, the more knowledge they attain and the more efficient and productive they become.

Additionally, for the pay model to be considered viable, it is required to comply with the laws and regulations of the state. The minimum pay an organization can offer its employees for any position should not fall below the state-enforced pay requirement. The law considers factors such as the allowable living standard and rate of economic inflation when deciding the minimum amount of pay for employees. It is illegal to pay employees an excessively low pay. The attainment of these objectives enables the organization to attract and maintain employees of the required qualifications and caliber (Martocchio, 2015).

How the Objectives of the Pay Model Set the Standards to Judge Success

3 The majority of employers understand that attracting, retaining and motivating employees with the right qualifications and skills requires providing the right mix of compensation and benefits. A good pay model has the potential to enhance employee motivation, which in return, improves the success of the organization. The objectives of the pay model set the standard to judge success. The effectiveness and success of the pay model can be judged in a variety of ways. These include; increased employee productivity and motivation, attracting top talent, enhanced employee loyalty, job satisfaction, and higher profitability.

Increasing Employee Motivation and Productivity A crucial indicator of an effective pay model is a boost in the motivation and productivity of employees. When employees are well-compensated, they feel valued, and when they feel valued, they are more motivated to perform effectively at their job. This is a focal point to the success of both the employees and the organization.

Employee Loyalty and Low Turnover The three main reasons that employees are attracted to an organization are good compensation and benefits, work that challenges them, and personal and professional development. It is the employers’ duty to offer a pay package that sends the message that they are valuable to the company and they are part of the process of helping it achieve its mission. A good pay model is a crucial factor to employees’ longevity in the organization. When employees are paid properly, they are more likely to stay longer with their employer (Martocchio, 2015).

This loyalty is beneficial to the organization because it means that there will be fewer resources spent on recruiting and training new employees.

Increased Motivation and Productivity

4 Pay is a reward for people’s time, effort, skills and qualifications. When employees are well compensated, it shows that the employer values these factors, and as a result of feeling valued, they will be more productive. An effective pay model creates a workplace where the employees are intrinsically motivated. The employees will need less supervision and coercion to work, and will utilize the organization’s resources effectively.

Increased Productivity Profit The main objective of an organization’s pay program is the increase in the net operating income that is directly attributable to the employee’s efforts rather than the capital assets of the organization. When employees are paid properly, they become more motivated and perform their jobs better. An important indicator of the effectiveness of a pay program is that the rewards offered to employees become self-financing. That is, the profits accrued from the employees’ productivity is adequate to finance their pay. The pay model and pay strategy, should, therefore, yield value to the organization.

Why a Company Will Have Different Pay Objectives for Different Business Units The pay objectives within the organization may differ with the different business units.

The objectives of the pay system take into consideration factors such as the qualifications and skills required for the role, the length of employment and the comparative pay within the industry. Business units whose role is more critical to the achievement of the organizational objectives will have a more competitive pay package than those that play less critical roles.

The value of the business unit to the organization determines the pay objective. For instance, the pay objectives for executive positions are higher than lower cadre positions. To establish the most appropriate compensation objectives, it is essential to perform an audit of the value that the position has on the organization (Milkovich, Newman, & Gerhart, 2016).

5 The compensation objective should be aligned with the overall objective of the organization and the role that the business unit plays in the achievement of the objective. The compensation objectives should be flexible enough to accommodate change as the business grows and changes. A company will have different pay objectives for its different business units.

In one business unit for example, the objective may be to have high quality staff that are well trained and experienced to handle specific tasks. These may include technical staff, management and executives. This cadre of employees will obviously receive a more substantial pay due to the crucial nature of their roles. Another pay objective might be to attract and retain employees especially if the cost of recruiting and replacing new staff will have a significant consequence to the economic position of the organization.

Some business units have employees that are essential to the effective running of the organization, thus, will be awarded a higher pay in order to motivate them to be loyal to the business. Other business units are less essential to the overall objectives of the organization, thus the objective might simply be to ensure that the organization complies with the law. In this case, their pay will be lower. Thus, different business units have varying pay objectives because of their different values and worth to the organization.

In order to determine the value of a business unit to the organization, a job evaluation is performed. Once the business units are audited and its worth to the organization is determined, they are then ranked in order of their value. The important business units have a high ranking, and the pay objectives will be to attract and maintain top-quality personnel into these positions.

The positions that have medium to low importance to the attainment of the organization’s goals will also have different pay objectives. These may include to motivate their productivity and to comply with the law.

6 Policy Choices in the Pay Model The four policy choices in the pay model are management of the pay system, employee contribution, external competitiveness and internal alignment. Management of the pay system refers to the role of the employer in ensuring that the right employees are recruited into the right roles and receive pay that is commensurate with their value. Employee contributions refer to the value that the employee adds to the position and the organization (Milkovich, Newman, & Gerhart, 2016). Ideally, the employee’s pay should match their performance and their productivity profit should be sufficient to cover their pay. External competitiveness refers to the amount that organizations in the industry or the market pay their employees for the same job.

The organization will decide if it will pay at par, or higher than its competitors. It is unadvisable to pay below the market rate because it communicates to potential employees that the organization does not value its employees.

The internal alignment policy states that employees who possess similar skills and perform similar roles should be placed in the same pay category. The organization should adjust an employee’s pay when they earn extra certifications or possess a higher level of experience and skills. These policies facilitate the attainment of the objectives of the pay model; which are; compliance and ethics, efficiency and ethics. An organization that seeks to remain competitive in the modern fast-paced business environment should ensure that it adheres to the policies.

Conclusion The main objective of a pay model is to establish a fair compensation system that enables employers to attract, retain and motivate the right cadre of employees. The employees benefit from an equitable and livable wage, where they are properly compensated for their time, qualifications and effort. Businesses that seek to remain competitive in the global business

7 environment must factor the compensation needs of their employees when developing a suitable pay structure.

References Martocchio, J. (2015). Strategic Compensation: A Human Resource Management Approach.

Pearson Education Limited.

Milkovich, G., Newman, J. & Gerhart, Dr. B (2016). Compensation. McGraw-Hill Higher Education.