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 Pay
This 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--vis set standards.

Performance Appraisal
As 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 employees 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?