Question

Which pay theory do you think is the most important when developing your pay system? Why?

Answer 1

Pay Theory:-

The pay theory is the portion of economic theory that attempts to explain the determination of the payment of the labour. It includes remuneration such as paid vacations, holidays and sick leaves, allowances, perquisites etc. It includes the Equity Theory which helps to explain that people values fair treatment which motivates them to keep the fairness maintained within the relationship of their co workers and organization. It has the following benefits:-

1. Individual seek to maximise their outcomes.

2. Groups can maximize collective rewards.

3. When the individual participates in inequitable relationships, they become distressed.

4. Eliminate the distress by restoring equity.

Pay System:-

A pay system is the method used to determine the amount earned by a person. It takes into consideration a person's experience, knowledge and the skills necessary to complete a job. It also provides a fare and a consistent method for determining a pay rate. For example:- If a new employee starts a company, then a pay system will help him to determine a persons skill and years of experience to find out a fair pay rate as compared to what other employees are earning.

Types of Pay Systems:-

There are several pay systems which includes pay grade levels, pay grade scales, going rate model and the management fit model etc. They are described as under:-

1. Pay grade level:- The pay grade level is commonly used by the government. Apart from the basic pay, the government employees received grade pay which depends on the category or the class of an employee. The sum of the basic pay and the grade pay is used to calculate dearness allowance and other allowances. It also determine levels and pay rates at each level based on measurable and concrete facts. For example:- Persons education, year of experience and test results.

2. Pay grade scales:- A pay grade scale is a structured pay format where new employees are placed at a given pay level, based on their level of education and work experience related to the job. Each job within the organization is placed at a specific pay grade in an effort to balance both internal and external equities. There are steps allocated within the grades and a person climbs up a step on the scales for an annual pay increase. They stay within the grade levels until they are promoted.

3. Going rate model:- This model is a part of the compensation and benefit structure of an organization where the focus is on how the employees are being paid. They are paid according to the industry standards, or the rules followed by other companies in that region. It is a part of competitive compensation for any employees.

4. Management fit model:- They specialize in offering reliable and professional fit models. They mostly excel in fashion industries. In this model, each manager makes a decision to pay the remuneration to the person hired.

5. Skill based pay:- In this system, salary level are based on employee skills.

6. Competency based skill:- In this system, the employees trait or characteristics are focussed on. It emphasizes on what employee can become ignoring their acquired skills.

7. Broad Banding:- In this system all jobs in a particular category are assigned a specific pay category.

8. Variable Pay System:- Thiis type of system provides employees with a pay basis linked with the attainment of certain goals or achievements directly related to their job.

Most Important development of my Pay System:-

According to my views, equity theory is the most important theory when developing a pay system. The pay grade system is also equally important as it is easier to administer the individual ranges. It also allows for decisions relating to internal allignment and the placement of jobs in the same cader is also possible. It helps the organization to position the appropriate pay range based on its allignment with comparable jobs within my organization.