- Advice and Guidance
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- Advisory booklet - Pay systems
- Why have different types of pay systems?
Why have different types of pay systems?
Key Points:
- Basic rate schemes, while clear, may not offer incentives for increased or improved performance or quality, nor for recruitment and retention of workers
- Incentive schemes may be individual or group based, short or long term
- Productivity or efficiency gains may be required if a scheme is to be 'self-financing'
- Organisations may use a combination of systems to meet their particular requirements
Basic rate schemes
Basic rate schemes tend to be job-based (ie the rate for the job). A grading structure may be developed through a job evaluation scheme which is used to put jobs into an appropriate grade or band in the organisation. Pay increases may then depend on moving up a scale, skill development, promotion to another grade, or a general uprating of pay levels.
Incentive schemes
Incentive schemes may be short- or long-term. Schemes based on individual performance, such as weekly or monthly production bonuses or commission on sales, generally offer a short-term incentive. Longer-term schemes such as profit sharing and share option schemes may not provide as much incentive to individual workers as schemes based on personal performance. They can, however, help to generate in workers a long-term interest in the success of the organisation.
Pay is not the only factor that might produces enhanced performance. As well as the job-related factors mentioned earlier, additional payments, non-contributory pension schemes, and non-cash benefits such as cars, life insurance, and assistance towards child care (eg workplace nurseries/crèches) may all play a part. Nevertheless, the prospect of higher pay for increased output/quality often provides an incentive and many schemes are introduced in the clear expectation that performance will thereby be improved.
Increases in pay are often linked to productivity or 'self-financing' pay schemes, especially where organisations have no 'new' money to put into the pay rates. In such systems the results of increases in productivity and efficiency can be shared between the employer and workers to their mutual benefit. There is an increasing trend for organisations to build a quality factor into incentive scheme calculations, offering additional payments for reductions in waste, more good quality goods or services and increased customer satisfaction. Productivity and efficiency schemes can be based on individual, group or organisation performance dependent upon the needs of the organisation and the availability of suitable performance measures.
Organisations often use a combination of systems to provide greater flexibility in the pay package to address particular needs. For instance they may have a basic rate for the job, with a top-up increase that is self-financing, and an element for individual performance.
This has been particularly common in the public sector and the privatised ex-public sector/agencies.
