FACTORS INFLUENCING REMUNERATION PACKAGE
Remuneration packages are subject to major influences internal and external to the job. These factors or what might be called “facts of life” for both employer and employee are as follows: –
Labour Market Conditions.
Include the prevailing market rates for the cost of certain calibres of labour. Here organizations compare a job with similar jobs elsewhere in the market. It looks at what other people or organizations pay for the same or similar competency or job.
The labour market, like all other markets has buyers (employers) and seller (employees). It is in the external market that the economic determinants of pay levels operate. Pay levels in the labour markets are determined by supply and demand considerations. If supply exceeds demand the pay levels go down; if demand for labour exceeds supply at the market clearing or market equilibrium wage. This is known as the theory of equalizing differences.
In the internal market, the firm, pay progression may relate to the length of service and an annuity approach to apply increments (i.e. pay that goes up but does not come down – the sticky wage) and this may lead to higher internal rates. Pay in the internal market will also be affected by decisions on which individuals should be rewarded for their particular contribution, specialized expertise, irrespective of the market rate for their job.
The internal and external labour markets are concerned with, apart from supply and demand, the efficiency wage theory, human capital theory and agency theory.
The efficiency wage theory, proposes that firms will pay more than the market rates since they believe high levels of pay contribute to increase in productivity by motivating the worker, attracting better candidates, reducing turnover and persuading workers that they are treated fairly. The theory is also known as the ‘Economy of high wages’.
The Human Capital theory, states that investment in people adds to their value to the firm. The theory encourages the use of skill-based or competence related pay as a method of reward.
It also advocates the concept of individual market worth-that individuals have their own value in the market place which they acquire and increase through investments by their employer and themselves in gaining extra expertise and competence through training, developments and experience. Their market rate may be higher than the market rate for their jobs, and if not rewarded accordingly, they may market their talents elsewhere.
- Ability to Pay/Business Performance. An organisation can only honour its promises concerning pay if it is able to pay. Adequate pay is only possible on a healthy financial base. Employees need to understand a company’s financial position if their demands care to be realistic. Policies on salary reduction are common in a depressed economy. Hefty pay increases are only possible where the organisations financial performance is excellent. Organizations vary in their ability to meet their wage and salary commitments. Those, which have profitability and have a good cash flow, find it easier to be generous. Those that are struggling find it hard to meet even their minimum obligations.
- Pay levels will be determined by internal and external comparability. The remuneration paid out should be comparatively fair to what other jobs are getting in the organisation and outside.
- Bargaining strength of the Trade Union. Trade unions enter into agreements with employers and these agreements involve remuneration of the workers. Such agreements are contained in the CBA’s. They stay in force till the next round of negotiations. The ability of the trade union to influence pay decisions depends very much on its bargaining power. If the employer’s need for labour is desperate, or the skill required scarce, then the unions strength will be strong and may be enough to divert financial resources elsewhere to resent wage and salary demands. Where labour is plentiful or the organization is reducing its labour force via redundancies, the union strength is at its weakest.
- Cost of living Adjustments (COLA). This comes in the form of increased allowances to employees (COLA). It is a move to adjust the employee’s purchasing power against economic realities. Where COLA is given, it does not constitute or affect the basic salary, nor the schedules date for salary increment. Where an economy is under inflation, salaries for some organisations are increased by a factor of the inflation rate.
- Government action/legislation. These affect remuneration through; taxation and government policies on wages and employment. The higher the salary the more the taxation. Tax exemptions also affect remuneration. Wage guidelines set by the government state what are the minimum wages for employees. The upper limit is at the discretion of the employer. Some employers use this guideline to deny workers more remuneration. Government has relied on fiscal measures (taxation, interest rates, and exchange rates) to influence wage rates.
- Productivity of the company and the economy in general will have a bearing on the levels of salaries to be given to employees. Highly productive companies remunerate their workers well and the opposite is true. As long as there are markets (i.e. buyers) for goods and services, it is the efficiency with which these items are produced that determines whether prosperity can be received. Higher wages are possible to apply if there are improvements in productivity – improved output in relations to inputs.
- Existing differentials / custom and practice. In some companies remuneration levels continue to be determined by the existing differentials or the organisations culture, custom and practice. Wage-differentials are established on the basis of job evaluation, and may be as a response to the pressures of particular groups. Existing differentials and custom and practice are great influences to pay. Custom and practice refers to pay practices that have evolved over time and have come to be accepted.
- Organisational/technological change. Organisational processes such as BPR do influence remuneration levels by bringing into force new patterns of remuneration. Some hitherto poorly remunerated jobs may all of a sudden gain prominence and begin to command more remuneration. Other jobs may get downgraded and command less remuneration.
- An organization, which is in a stable condition, both internally and in relation to its external environment, is able to implement its pay and salary policy with relative ease. An organisation undergoing massive change, perhaps due to market pressures or technological change, will probably find that it has to completely restructure its payments system. Technology has led to a demand of renew skill s and new job definitions, while reducing the demand for many farmer skills and jobs.
- Individual’s performance. This is practiced where pay is tied to performance (performance related pay) and allows for increment based on performance.
- Company policy on remuneration.
A policy of seeking to be a market leader will see a company also adopt market leader remuneration styles. In such a company remuneration will always remain above the market rates. Such policies may be based on the need to attract and retain the best, achieve internal consistencies in pay, pay and performance and external consistencies