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Payment Systems: Philosophy, Importance, and Trends in Pay Policy

Explore the philosophy behind compensation, the importance of pay, different payment systems, and current trends in pay policy. Learn about the contingencies that affect choice of payment system and debunk common myths about pay.

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Payment Systems: Philosophy, Importance, and Trends in Pay Policy

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  1. Chapter 7Payment Systems

  2. Scope of Chapter 7 • Philosophy toward pay • Importance of pay • Different payment systems • Contingencies relevant to choice of payment system • Myths about pay • Current trends in pay policy

  3. A Matter of Philosophy Compensation? – for what is given up to the organization Reward? – for achievement

  4. Pay “Wine gladdens life, but money meets every need” Ecclesiastes. Why is pay important for most people, whatever the level and type of job they have?

  5. What do you think? An airline is seeking to compete in the low-cost, low-frills segment of the market, where, for obvious reasons, labour productivity and efficiency are crucial for competitive success. The company pays virtually no one on the basis of individual merit or performance. Does it stand a chance of success? Compare your response with the policies followed by Southwest Airlines

  6. Different Payment Systems [See Table 7.1, Chapter 7]

  7. Contingencies Relevant to Choice of Payment System • Competitive strategy – what success criteria does it emphasize? • Technology – what human contributions are required (e.g. physical or mental effort) • Ability to measure people’s performance - if poor, performance-related pay may not be feasible • Labor markets - tight or loose? • Quality of labor relations - if poor, avoid aggravation of performance-related pay

  8. Myths about Pay Pfeffer: Dangerous Myths about Pay • Confusing labor rates with labor costs • Labor costs can be lowered by cutting labor rates • Labor costs are significant % of total costs • Low labor costs are a potent competitive strategy • Individual incentive pay improves performance • People work for money Is Pfeffer right? Source: Jeffrey Pfeffer, ‘Six Dangerous Myths about Pay’, Harvard Business Review, May-June 1998: 109-119

  9. Current Trends in Pay Policy (1) Moves toward • Market-driven pay • Performance-related pay • Broadbanding • Competence-based pay • Flexible benefits • Non-financial (intrinsic) rewards • Harmonization & consolidation

  10. Current Trends in Pay Policy (2) Moves away from • Incremental pay systems • Inflation linked increases • Traditional job evaluation • Annual pay reviews • Allowances and add-ons

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