Managers should implement pay systems

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RewardsIn the 1970’s in unionised Britain, pay was the core subject of dispute, resolved only with a raise and a promise from the unions of better productivity and increased flexibility. Then, pay negotiations were done collectively. Now, with the exception of a small number of unionised professions, pay is a discussion between manager and employee.

Managers should implement pay systems to retain and get commitment from their staff.

Today, society has broadened the discussion to embrace complex concepts like job satisfaction. But despite a growing desire for people to be employed in something they believe in, pay is still instrumental. We all need money to fund our lifestyle; to pay the rent or mortgage, to visit the supermarket and fund the holidays.

Few SMEs Have Pay Systems

For managers, pay is complex. At one level, it’s something that’s agreed when an employee starts in the firm, and with luck, it’s rarely discussed. The employee eventually leaves and the cycle begins again. On another level, it’s the thing that drags the firm down and threatens its existence.

Almost universally, SMEs do not have pay systems. They use what’s known as a ‘spot’ pay or salary system. Each employee is on a unique pay (and associated benefits and conditions) and only the MD knows the rationale for this.

Pay is given as the reason for many business ills: high staff turnover, inability to recruit good staff and low staff commitment. So what’s pay all about and how do managers come to understand it and tackle some of these issues?

Economics View

Economics is an old science. It ruled society’s understanding of life for decades until psychology slowly infiltrated thinking in the 1980s and 90s. Despite that recent input of behavioural realism, economic models dominate much management teaching.

Economics tells us that there’s an equilibrium wage for every job. It’s the pay needed to meet both supply and demand in the labour market. This contends that mangers must sense that labour market to determine that equilibrium pay. Often that’s done by asking the recruitment agency when hiring. This of course brings in huge distortions and bias, likely leading to a wrong decision that can’t be corrected for some time.

If economists alone are to believed, employees all behave rationally. That is to say that they will make simple comparisons between their current pay and their assumptions about the equilibrium pay and elect to stay or leave. Whilst there’s an element of truth there, it’s not the whole story.

And economics also teaches that we’re all rational money grabbers who will always work harder for more pay. This has been dispelled by common sense and decades of research.

Pay, and the way employees think of pay, is full of contradictions.

Staff Think a Lot About Pay

Economists would have it that we discount our views of the future – we’d really prefer to have it all now, and have a low enthusiasm for ‘jam tomorrow’. Despite this, interns accept minimal wages in return for experience and the promise of a well-paid job later. Training has also been shown to help retain staff, even when wages are below the ‘market rate’ – another example of staff prepared to  invest in the future.

Even when choosing a career, some will select teaching or nursing, with their relatively low pay compared to, for example, software engineering. In fact, no market – let alone the labour market – behaves predictably. There’s more to it than rational laws and even economists have accepted now that psychology plays a significant part.

Psychology is the science that considers the way people think about things like pay. And people do think about pay. Remember that there’s no pay secrecy in a firm – every employee knows what every other is paid, even if their knowledge is incomplete and their assumptions inaccurate.

Psychological theories and evidence suggest that employees have a high sense of justice. If pay is insufficient or unfairly awarded compared to colleagues, they will be motivated to take action. That action might be to reduce their commitment and give attention to other aspects of their life. It might also be to quit and find a firm that pays more. Neither state is good for managers aiming to get the best out of their people.

So managers must take care when deciding pay.

Pay is a personal thing – it’s idiosyncratic. Collective bargaining is out because employees have their own idiosyncratic view of what is and is not fair. Today, employees are free to decide what to do. They are empowered and will take individual, unique action. One person will leave, a second will put up with the unfairness and reduce their effort and commitment while a third will kick up and complain.

Managers Should Implement Pay Systems to Retain and Get Commitment

The solution to this mess is to develop a pay system that tackles each and every one of these issues and more.

Pay systems comprise two elements: a pay structure and pay policies. The structure ensures that the pay for each job meets the market rate, that there is a logic and fairness behind the reasoning and that staff can see where on the scale they fit. The structure can be published – though not the actual pay of individuals – that’s still private between them and their manager. Policies then give the rules that managers use when deciding how much to pay and when awarding promotion.

Staff can then be appointed on a pay, and will be able to see how they might progress as their career evolves and as they gain skills, knowledge and experience. Even in the smallest firm, a pay system works to reassure staff of their future with that one firm.

Complex but Beneficial

Developing a pay system is complex. There’s deciding the size of each job – since jobs of similar sizes must be paid similarly – that’s the law. Then there’s sensing the labour market to decide on competitive pay for each job. And there’s determining how each job is positioned relative to all others.

Pay systems also sit with systems of benefits such as training and development, pensions and healthcare. For example, people become teachers, on relatively lower pay, because of the lengthy 13 weeks’ holiday and generous pensions. Pay and benefits must be treated together as total reward.

Introducing pay systems is also legally complex. Staff will already be on a pay and the new system may suggest a change to that. Changing any individual’s terms and conditions of employment must be done correctly.

But despite the complexity, there is only benefit for everyone. Staff will have certainty and will feel that they are being treated fairly. And management will be able to justify any pay decisions, without actually having to say a thing!

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