Ch 15 Pay levels

Introduction

the pay level is the average wage paid to employees.

Pay levels within organizations

Pay levels and systems within organizations and the rates of pay for individual jobs are affected by: the external labour market the internal labour market; the value of the job; the value of the person
internal relativities; the financial circumstances of the organization; trade union influence; the minimum wage

Determinants of pay
1.

2. 3. 4. 5. 6. 7.

The nature of the external and internal labour market Classical economic theory The labour theory of value Human capital theory Efficiency wages theory Agency theory The effort bargain

1.The nature of the external and internal labour market

Markets consists of buyers and seller similarly labour market consists of buyers ( employer ) and sellers ( employees ). And there would exist internal market( organization )and external market ( environment ) Here company will decide the pay level by considering both internal and external market.

2. Classical economic theory

Classical wages theory states that the external labour market has buyers (employers) and sellers (employees). If the supply of labour exceeds the demand, pay levels go down; if there is a scarcity of labour and demand exceeds the supply, pay goes up. Pay stabilizes when demand equals supply at the market clearing or market equilibrium wage. This is sometimes known as theory of equalizing differences.

3. The labour theory of value

The value of goods and services is determined by the amount of labour that goes into them (Karl Marx). It is not the market place that sets prices. Thus the content of labour determines the price of the labour.

4. Human capital theory

Levels of pay are influenced by the value of human capital in terms of the skills and expertise people possess. Developing and training people cost should be considered as investment.

5. Efficiency wages theory

Higher the wage their productivity increases, as till will give better living and will increase loyalty to the company. Firms will pay more than the market rate because they believe that high levels of pay will contribute to increases in productivity.

6. Agency theory

In most firms there is a separation between the owners (the principals) and the agents (the managers). Because the principals may not have complete control over their agents the latter may act in ways that may not be in accordance with the wishes of those principals. To overcome this problem, principals may install a system of incentives to motivate and reward acceptable behaviour.

7. The effort bargain

Workers in effect strike a bargain on the amount of work to be done for a wage.

Constraints in reward choices

External pay level policy

Labour market Demand supply

Product market Competition Product demand

Organization Strategy profitability

Factors affecting pay levels

Trade union pressures Investment in human capital policies Internal relatives Inherent value of the job

Supply and demand

Individual contribution

Financial circumstances of organization

Individual pay levels

Pay stance of the organization

Pay policy
Factors affecting pay policy 1. It can be with alignment with market 2. It can be with alignment with market and average (median rates ). 3. It can be more than market rate. 4. Between median and upper quartile.

Pay systems

Pay systems within organizations cover the ways in which pay is structured or unstructured and the methods used to determine the value of jobs and the relativities between them. Most organizations have defined pay levels for jobs set out in the form of a pay structure, which may cover the whole organization, or groups of related occupations (job families).

Tournament theory

Tournament theory explains the basis of pay dispersion. It describes a process of increasing the engagement of high-quality staff by offering lucrative prizes (ie pay) for a small number of people who are promoted to higherlevel jobs, with the highest prize of all given to the person who wins the tournament by getting the top job

Pay dispersion

It is used by economist an inequality within the labour market. Pay or wage dispersion is most commonly expressed in terms of the ratio of the 90th and 10th percentile of the wage distribution in a given national economy. Pay dispersion takes place when the differentials between successive levels in a grade and pay hierarchy widen progressively

Establishing pay rates

1.

2.
3. 4. 5.

Conduct salary survey. Determine worth of each job Group similar jobs Price each pay grade Fine tune pay rates.

Prepared by : Ms. Shirufi Daruwala