Arab Open University

Faculty of Business Studies

B203-B

Business functions in context II

Prepared By Dima Hachem
Chapter 23
Setting Pay
Learning outcome
The elements of payment
The importance of equity

List and explain the

elements of payment

Prepared By Dima Hachem

The elements of payment
1. Basic Rate: the irreducible minimum rate of pay is the basic.
2. Plussage: sometimes the basic has an addition to recognize an aspect
of working conditions or employee capability. Payments for educational
qualifications and for supervisory responsibilities are common.
3. Benefits: Extras to the working conditions that have a cash value are
categorized as benefits and can be of great variety. (company cars,
subsidized meals, childcare vouchers, health insurance, etc..)
4. Premia: where employees work at inconvenient times- night shifts,
they receive a premium payment as compensation for the
inconvenience.
5. Overtime: it is customary for employees working more hours than
normal to be paid for those hours at an enhanced rate.
6. Incentive: Incentive is an element of payment linked to the working
performance of an individual as a result of prior arrangement.
7. Bonus: a bonus is a gratuitous (complimentary) – payment by the
employer that is not directly earned by the employee.
Equity theory
Equity theory holds that employees are very concerned
that rewards or 'outputs' equate to their 'inputs', defined as
skill, effort, experience, qualifications. And that these are
fair when compared with the rewards being given to others.

The importance of equity

Where employees feel that they are not being fairly rewarded, they
show signs of 'dissonance' or dissatisfaction which leads to absence,
voluntary turnover, on-job shirking and low-trust employee
relations. It is therefore important that an employer not only treats
employees equitably in payment but is seen to do so too.
Perceived inequity in payment matters can be highly damaging to an
organization. A determinant of satisfaction at work is the extent to
which employees judge pay levels and pay increases to be distributed
fairly.
4 Clear principles for equity
A standard approach for the determination of pay (basic
rates and incentives) across the organization.
As little subjective or arbitrary decision making as feasible.
Maximum communication and employee involvement in
establishing pay determination mechanisms.
Clarity in pay determination matters so that everyone
knows what the rules are and how they will be applied.
It is important that an employer not only treats
employees equitably in payment but is seen to do
so too. Explain what is meant by the equity theory
and the importance of equity within the
organization. Name FOUR clear principles that are
possible to be employed in applying the equity
theory in the workplace.