4. The ability to pay is closely linked to reward productivity.

Discuss this
statement in relation to the criteria used in determining pay structures. [25]

This discussion seeks to highlight the different criterion used to determine pay
structures in organisations. Several factors both internally and externally that affect
the determination of pay structures in organisations will be discussed citing relevant
example from Zimbabwe. The discussion will also examine how ability to pay is
closely linked to reward productivity and how in turn these influence the
determination of pay structures.

There are various factors that are used by organisations to determine pay structures.
these include: the organisations ability to pay; Supply and demand of labour; the
prevailing market wage rate; the cost of living; Productivity; Trade unions bargaining
power; productivity; Job requirements; Managerial attitudes and Levels of skills
available in the market. This discussion will look at how a combination of the above
factors including the use of internal job evaluation techniques helps organisations
establish pay structures. Pay structure is defined by Khan, (1996) as the differential
remuneration packages for different employees within an organisation which is
determined by various factors such as, but not limited to ones level of education, the
wages paid by other organisations and the ability of the organisation to pay.

The establishment of pay structures as highlighted above depends on a number of

factors and these differ based on what policies an organisation adopts. Some
organisations choose to pay the minimum necessary to attract the required number
of kind of labour. Often, these units pay minimum wage rates required by labour
legislation, and recruit marginal labour (Manning 2003). Other organisations contrary
to the above notion choose to pay well about going rates in the labour market. Such
organisation by doing so will be trying to attract and retain the highest calibre of
employees. They feel that, by paying high wages, they would attract better workers
who will produce more than average worker in the industry.

Job evaluation is one tool that organisations use in trying to establish internal fair
differentials in salary levels based upon differences in job contents. According to
Grobler, (2005) job evaluation is part of a host of internal factors that affect pay
levels in organisations. Pay levels in such organisations are generally determined
using a system, which first analyses the content of the various and specific jobs. The
purpose is to collect sufficient data that will be used to describe the jobs that were
analysed (job content). According to Armstrong and Stephens (2005), the Job
Evaluation process determines the relative worth or money value of the jobs and it
may be defined as a process of determining the relative worth of the jobs, ranking
and grading them by comparing the duties, responsibilities, requirements like skills,
knowledge, and attitude, with a view to fixing a compensation payable to the
concerned job holders. As such, if the worthiness of jobs to one another is
established it makes the process of attaching monetary rewards to these jobs easier.
Jobs that are regarded as more worth than the other obviously are bound to receive
more in terms of remuneration than those regarded as less worthy.

Armstrong (2010) identified employees skills, experience and performance as the

basic determinant of the pay levels among employees in an organisation. The skills
possessed by the employees are the entry-level criterion for determining pay scales
for employees. For example when employees join the organisation, usually they are
graded according to the skills they possess hence this determines the amount of pay
they are offered initially. While in the organisation, the employees performance over
the course of employment may have an impact on their appraisal which might form
the basis for a salary hike and the bonus given to them. The point here is that when
a person is hired, there is no way to determine whether he or she would fit within the
company or would perform according to or exceed expectations. Hence, the skills
and experience are used to determine the pay and subsequently the performance is
used to hike the salary.

Productivity which is directly linked to employees performance as earlier mentioned,

is another factor determining pay structures for organisations. Basically here the
criterion is to measure productivity in terms of output per man hour. Increasingly
there is a trend towards gearing wage increases to productivity increases.
Productivity is the key factor in the operations of organisations, conversely high
wages and low costs are possible only when productivity increases appreciably.
Thus productivity has an influence on wage rates and pay structures of
organisations. An individual employees performance may be a determining factor in
separating individual pay levels in organisations. According to Robbins et al (2013),
Rewarding performance motivates the employees to do better and this is the reason
why most managers prefer performance to affect pay increases but workers prefer
performance to influence pay increase.

According to Boxall and Purcell (2011), another criteria linked to productivity used to
determine pay structures is the organisations ability to pay. Companies that have
good sales and, therefore, high profits tend to pay higher than those which run at a
loss or are earning low profits because of higher costs of production or low sales.
Thus employers pay levels are determined by whether the organisation is making
profits or losses. For examples during the time of prosperity, organisations can pay
high wages to carry on profitable operations and because of their increased ability to
pay. But during the period of depression, wages are cut because the funds are not
available.

When designing an organisations pay structure, it is important that an organisation

obtain information on wages being offered by other firms through various means of
sampling. These can take the form of formal compensation surveys or informal
information gathering. Using this information, an organisation can set a benchmark
from where it will also determine its wages for similar positions For example in
Zimbabwe, it is common for employers in the same field to pay wages that are
almost similar for similar posts. Example of such companies are those in the
telecommunication industry, banking sector and private education sector. This is also
influenced by the fact that if the firm is marginal and cannot afford to pay competitive
rates, its employees will generally leave it for better paying jobs which are normally
with its competitors (Hamel and Prahalad 2013).

In relation to the above findings, Manning (2003) argues that, an organization

compensation policy generally tends to conform to the wage rate payable by the
industry and the community. The reasons being that, competition demand that
competitors adhere to the same relative wage level this is meant to avoid poaching
of skills by rivalry organisations. Collective bargaining at various levels such as at
National Employment councils also affect pay structures since organisations would
be bound by legislation to pay the wages agreed through bargaining. Such
instruments also ensure the adoption of uniform wage rates and pay rates across
organisations.

Another determining factor in setting pay structures is the Supply and demand of
labour. According to Manning (2003), the labour market conditions of supply have an
influence on organisational pay structure and level. For example, if the demand for
certain skills is high and supply is low, the result is a rise in the price to be paid to
these skills. This is the case for most high paying jobs like Engineers and Doctors.
These demand and supply forces normally affect how these skills are rewarded and
classified when organisations draw their pay structures. Thus organisations tend to
pay higher wages if the labour supply for a certain skill is scarce; and lower wages
when it is excessive. An example in Zimbabwe is how teachers (whose skills are not
scarce) receive lower wages when compared to people like engineers whose skills
are scarce.

In conclusion, the discussion the criteria used to determine pay structures in

organisations and how productivity is related to reward and setting of pay structures.
The discussion highlighted various factors both internal and external to the
organisation which combine to influence the setting of pay structures. Some of the
internal factors identified include job evaluation exercises; organisations ability to
pay and some of the external factors identified include; wages by other firms, the
labour market, general economic conditions and the cost of living and legislative
factors. Though all of the above play a role in determining pay, it is through a
combination of a number of these factors that organisations can come up with an
equitable fair pay scale.
Reference List

MB Ahmed Khan, 1996. Understanding Management Through Cases. Discovery

Publishing House.
Manning, A., 2003. Monopsony in motion: Imperfect competition in labor markets.
Princeton University Press.
Grobler, P.A., 2005. Human resource management in South Africa. Cengage
Learning EMEA.
Armstrong, M., 2010. Armstrong's handbook of reward management practice:
Improving performance through reward. Kogan Page Publishers.
Robbins, S., Judge, T.A., Millett, B. and Boyle, M., 2013. Organisational behaviour.
Pearson Higher Education AU.
Boxall, P. and Purcell, J., 2011. Strategy and human resource management.
Palgrave Macmillan.
Hamel, G. and Prahalad, C.K., 2013. Competing for the Future. Harvard Business
Press.